As part of its longstanding work with the Financial Stability Oversight Council (FSOC) to construct the U.S. systemic-regulatory framework, the Federal Reserve has finalized a key criterion for systemic designation for nonbank financial companies. This definition sets the tests by which the FSOC is to judge the extent to which a nonbanking company is “financial” and, thus, potentially subject to systemic regulation under all the other criteria mandated in the Dodd-Frank Act. The proposed revision expands the class of activities that would be measured as “financial in nature,” thus increasing the likelihood that U.S. and foreign nonbanking companies operating here could be deemed systemic and, then, made subject to all of the rules required for systemically-important financial institutions (SIFIs). However, the conditions applicable to each business line can be complex, meaning that some activities may remain effectively exempt from designation while others – e.g., insurance – will need to measure themselves carefully against the final definitions to see if they exceed the stipulated designation thresholds.

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