FSOC End of Year Meeting, Approval of 2021 Annual Report

In mid-December, the Financial Stability Oversight Council (FSOC) held an open meeting to approve its 2021 Annual Report covering risks and vulnerabilities in the financial system. Other topics discussed during the open meeting include the approval of the newly created “Climate-Related Financial Risk Committee” and a brief discussion on the LIBOR transition. In her opening statement, Treasury Secretary Janet Yellen (and FSOC Chair) stated she was pleased with the SEC rule proposal on money market funds and noted the FSOC’s working group on open-end funds is “assessing the risks posed by these types of firms, and will evaluate whether actions are necessary to address their vulnerabilities.” In his introductory remarks, SEC Chair Gary Gensler stated the SEC “learned a number of things with respect to both money market funds and open-end bond funds in 2020.” He added the SEC is going to address vulnerabilities in these funds based on “economic analysis and input from the public.” The annual report addresses vulnerabilities in the financial sector related to climate change, leverage in the nonfinancial corporate sector, the LIBOR transition, market impact of a central counterparty default, cybersecurity, digital assets, and certain parts of the financial market structure, among other issues. It details the FSOC’s concerns with redemption pressures on money market funds and includes a section on registered investment companies and investors’ shift from actively managed funds to more passively managed ETFs and index-based products. The report states the Open-End Fund Working Group will continue to evaluate whether “additional action is necessary.” When examining potential reforms with MMFs, the repo market, and other short-term funding markets, the FSOC plans to keep in mind “the interconnectedness of financial institutions and markets.” Regarding the LIBOR transition, Gensler voiced his support for Secured Overnight Financing Rate (SOFR) as an alternative reference rate to LIBOR and expressed concern regarding the use of the Bloomberg Short-Term Bank Yield (BSBY) Index as a reliable benchmark. Gensler also noted the SEC is focused heavily on the crypto markets and stated, “there could be instability that comes from the growing crypto markets.”