#designation

In the fog in which FSOC chooses to nestle, it was easy to miss an important indication briefly mentioned in the meeting’s readout:  the Council is “reviewing” current financial-market utility (FMU) designations.  Firm-specific and activity-and-practice designations usually get all the airtime.  So it was again on Friday, when FSOC also decided to back off its plan just last November (see Client Report FSOC29) to designate nonbank mortgage banking.  The Council in fact mostly backs off much of what it promises – no wonder Rohit Chopra calls it a “book-report club.”  Precedent thus suggests the FMU threat is idle, but I’ll bet it’s not.

Why?  The FMUs the Council is reviewing were made in 2012 very shortly after Dodd-Frank was enacted in 2010 and told it to do so.  FMUs are to supplement firm designation because one clear lesson of the 2008 crisis is that market infrastructure matters at least as much as very big banks and a nonbank or two.  FMU designations are thus designed to ensure proper functioning of the “clearing and settlement of payment, securities, and other financial transactions” (see FSM Report PAYMENT11). Designated payment companies are subject to Federal Reserve systemic supervision and securities and derivatives entities fall under either the SEC or CFTC.  Unlike the Council’s extremely-controversial designation at about the same time of four systemically-important financial institutions, the FMU designations then and ever since have drawn little scrutiny and no political dispute.  Indeed, when Donald Trump’s Treasury led a 2019 rewrite of the …