Treasury Secretary Lew today presented FSOC’s 2015 report (see Client Report FSOC16) to the House Financial Services Committee, reiterating FSOC’s risk list and the lack of any specific new initiatives to address any of them. Doubtlessly anticipating a barrage of criticism from Committee Republicans as well as some Democrats over growing illiquidity in the bond market, Mr. Lew indicated that FSOC will issue a report later this summer on the October flash crash. Regulation does not, he believes, play a significant role in recent market volatility and illiquidity, citing instead current interest rates, the business cycle, and the growing role of high-frequency trading (HFT). FSOC is also looking at HFT as a source of possible systemic risk—several Members noted worries here—but there are no current plans to recommend any actions to limit it. Mr. Lew continues to support a change in the SIFI threshold for smaller BHCs as long as it is well below $500 billion, and provides FSOC the authority to designate any as risky. The only ground the Secretary gave to critics was on the role that the leverage rule plays in adding cost to holding margin accounts and, thus, to clearing.
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