CFPB Director Raises Concern on Bigtechs, Digital Assets & Hedge Funds

The statement of CFPB Director highlights key issues in the FSOC annual report of 2022 regarding risks posed by the financial sector’s increasing reliance on bigtech cloud service providers. The statement highlights that financial institutions are looking to move more data and core services to the cloud in coming years, as a result, the operational resilience of these large technology companies could soon have financial stability implications. Thus, FSOC should evaluate whether certain existing tools, like the Dodd-Frank Act’s systemically important financial market utility authority, could enhance the oversight of these massive cloud providers. The statement discusses FSOC’s work on digital assets and highlight the risks of intertwining the crypto ecosystem and the traditional financial system. The statement suggests that FSOC should decide next year on whether to proceed with a designation process for stablecoin activities under the Dodd-Frank Act Title VIII authority, which would subject financial institutions engaging in stablecoin activities to greater regulatory oversight. Finally, with regard to hedge funds, the statement highlights that the average leverage for certain major fund strategies is over 25-to-1. These funds may control hundreds of billions of dollars of assets and have trillions of dollars in derivatives exposures. They face no leverage limits or direct supervision and are deeply interconnected with global systemically important banks. These funds are increasingly behaving like hedge funds and can be massive. The statement recommends that FSOC should coordinate with the Office of Financial Research to close this data gap.

The proposed rule on loan participation and eligible obligations aims to remove certain prescriptive limitations and other qualifying requirements relating to eligible obligations and provide credit unions with additional flexibility to purchase eligible obligations of their members. The proposed rule would also provide credit unions with additional flexibility to participate in loans acquired through indirect lending arrangements, allowing federally insured credit unions to utilize advanced technologies and opportunities offered by the fintech sector. The proposal would also make other conforming changes and technical amendments in other sections of the NCUA's regulations. The Board believes that by removing certain prescriptive limits and other qualifying conditions, and replacing them with risk-focused, principles-based requirements, the proposal would advance the agency's efforts to strike an appropriate balance between mitigating risk to the National Credit Union Share Insurance Fund, protecting credit union members and fostering growth and stability in the credit union system.

The final rule on LIBOR Act identifies benchmark replacements based on Secured Overnight Financing Rate (SOFR) selected by the Board for LIBOR contracts that will not mature prior to the LIBOR replacement date and do not contain clear and practicable benchmark replacements. The final rule establishes benchmark replacements for contracts governed by U.S. law including the overnight, one-month, three-month, six-month, and 12-month tenors of U.S. dollar LIBOR, and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023. Consistent with the LIBOR Act, the final rule also expressly indicates that a determining person may select the Board-selected benchmark replacement for the relevant type of LIBOR contract, with any applicable benchmark replacement conforming changes. The final rule will come in effect from February 27, 2023.

Related Links

• Statement on FSOC Annual Report
• FSOC Annual Report (PDF)
• Proposed Rule on Loan Participations
• Final Rule on LIBOR Act