Remarks of Secretary Lew at an Open Session of the Financial Stability Oversight Council



As delivered


WASHINGTON - Let me call this open meeting of the Financial Stability Oversight Council to order, and thank everyone for joining us.  We have three items on the agenda today. 


Today’s meeting will begin with an update on two key areas identified in the Council’s 2014 annual report—cybersecurity and interest-rate risk.  Today I have asked our presenters to focus on these two critical areas, discuss recent developments, and highlight plans going forward.  The Council and its staff continually focus on potential emerging threats to financial stability in all corners of the market.  We are committed to providing the public with updates on our work, and today’s discussion will provide a current status of our ongoing efforts.


Next, we will hear from the Office of Financial Research about its recent annual report and its updated Financial Stability Monitor. 


Finally, I will provide an update on the Council’s review of potential risks in the asset management industry, and the Council will vote on an important effort to engage with stakeholders and gather additional information for this review. 


Before turning to today’s agenda, I wanted to say a word about the actions Congress took last weekend.  As you know, Congress acted to modify the so-called Swaps Push-Out provision of the Dodd-Frank Act, an action which the Administration opposed as it pares back an element of the Dodd-Frank Act aimed at reducing taxpayer exposure to derivatives activities within banks.  It was a step in the wrong direction.  Despite this change, the new and comprehensive architecture for swaps regulation in Title VII of the Dodd-Frank Act remains largely intact, and we have a duty under the law to fully implement these critical reforms.  These reforms are already transforming the derivatives market, providing increased central clearing and transparency, which are critical to reducing risks to financial stability.


Well beyond derivatives, we have been working together vigorously to implement Dodd-Frank since it was enacted in 2010, and the law represents the most comprehensive set of reforms to the financial system since the Great Depression.  The financial crisis revealed the need for these reforms – to provide regulatory tools and resources to keep pace with evolving financial markets – and demonstrated why we must always be vigilant to potential emerging threats to financial stability.  The President and I are committed to defending the Dodd Frank Act, and nothing has changed that resolve.  I will note the importance of Dodd-Frank implementation has been a core recommendation in the Council’s annual report for the past four years, and I continue to urge that we press forward with the important work Congress mandated us to do, which is to implement these reforms and continue to use our tools to protect taxpayers from risks to financial stability.  


Which leads me to our next item on the agenda, the Council’s 2014 annual report.


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Next, I want to provide an update on the Council’s ongoing assessment of potential risks in the asset management industry.  The Council has been working over the past year to analyze risks associated with the asset management industry and whether any such risks could affect U.S. financial stability. 


This work included holding a public conference earlier this year on the industry and its activities.  At the conference, CEOs, corporate treasurers, and risk officers as well as academics and other professionals confronted a variety of critical topics related to the industry.  Following the conference, the Council directed staff in July to assess potential risks associated with the asset management industry by focusing on industry-wide products and activities. 


Based on these and other efforts, certain areas of interest have been highlighted as warranting further review and analysis, and so the Council today will vote on a request for public comment to be published in the Federal Register.  We are requesting information about risks associated with four areas: liquidity and redemption, leverage, operational functions, and resolution. 


Investment risk is inherent in capital markets, representing a normal part of market functioning.  The Council’s focus on the asset management industry is directed at assessing whether the structure or mechanics of certain asset management products or activities could create, amplify, or transmit risk more broadly in the financial system in ways that could affect U.S. financial stability. 


This request for comment will enable us to engage in a targeted manner with the public.  I believe this engagement should give us greater insight into whether and how asset management products and activities could create risks to U.S. financial stability.  


Finally, I want to note that there are no predetermined outcomes here.  This request for comment is just one step of our process and our work will not end here.  For an effective evaluation of potential risks, we need high-quality data.  As part of our broader effort, we will also be assessing whether sufficient data are available to evaluate potential risks in the asset management industry, or whether there might be areas where additional data would be helpful to the Council, as well as to market participants.  Each of these efforts will inform our overall analysis and potential policy options to address any identified risks. 




I think it’s important to remember that the work that the Council does, does not take place in a vacuum.  It’s in the context of questions that are being asked by regulators, industry and stakeholders about a broad range of topics in the marketplace.  We see many examples of risks that are new and changing. We discussed two of them earlier with regard to our 2014 annual report. And I know that market participants have expressed concern for some time now about the evolving structure of parts of the financial markets, including the growing role of investment funds in those markets, and whether there might be risks during periods of turbulence.  Our markets are constantly being tested, and that’s why we constantly have to be asking the kinds of questions that are being framed in this Federal Register Notice.


It is the job of the Council to make sure that we’re alert to these risks and that, when necessary, if necessary, we respond with the appropriate policy tools.  I think it’s important that comments come in. It’s important for all of us and for parties outside to know that there is no predetermined view of what the conclusion is, but that it’s very important that we determine whether or not there’s a need for action, and if there is, as Director Cordray said, to take action in a meaningful period of time.  I want to thank the staff and all the members of the Council for the collaborative work that has gone into producing this Federal Register Notice.  It’s a complicated topic. It’s a complicated piece of business. And I think the risks, as outlined in the Notice, elicit comment on the concerns that we have, and that we’ll inform any decisions that we individually or collectively make going forward.


And with that, I would ask for motion to publish the Federal Register Notice.



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