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Fed approves rule criteria to be used in FSOC’s nonbank designations

126px-US-FederalReserveSystem-Seal.svgThe Federal Reserve Board announced on Wednesday the approval of a final rule that establishes criteria to determine when a firm is “predominantly engaged in financial activities,” .

Under Dodd-Frank, the Financial Stability Oversight Council can designate a nonbank for supervision by the Federal Reserve if it is “predominantly engaged in financial activities”—if 85 percent or more of the company’s assets are related to activities defined as financial activities under the Bank Holding Company Act.

The final rule, which will take effect on May 6, largely follows the original proposal with a few exceptions, including that engaging in physically settled derivatives will not be considered a financial activity, which was changed from the original proposal. The rule also defines “significant nonbank financial company” and “significant bank holding company.” The FSOC must examine a firm’s transactions and relationships with other companies to determine whether it should be subject to increased supervision.

If designated for enhanced oversight, firms are required to submit reports to the Fed, FSOC and FDIC regarding credit exposure to other nonbank firms and significant bank holding companies. A firm is considered significant if it has $50 billion or more in consolidated assets or has been designated by the FSOC as “systemically important.”

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