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FIN A NC I A L S TA BI L I T Y OV ERSIG H T C OU NC I L

1500 PENNSYLVANIA AVENUE, NW | WASHINGTON, D.C. 20220

2021 ANNUAL REPORT

F I N A N C I A L S TA B I L I T Y
OVERSIGHT COUNCIL

2021
ANNUAL REPORT

F I N A N C I A L S TA B I L I T Y OV E R S I G H T C O U N C I L

Financial Stability Oversight Council
The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes:
1.

To identify risks to the financial stability of the United States that could arise from the material
financial distress or failure, or ongoing activities, of large, interconnected bank holding
companies or nonbank financial companies, or that could arise outside the financial services
marketplace.

2.

To promote market discipline by eliminating expectations on the part of shareholders, creditors,
and counterparties of such companies that the U.S. government will shield them from losses in
the event of failure.

3.

To respond to emerging threats to the stability of the U.S. financial system.

Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five nonvoting
members and brings together the expertise of federal financial regulators, state regulators, and an
insurance expert appointed by the President.
The voting members are:
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the Secretary of the Treasury, who serves as the Chairperson of the Council;
the Chair of the Board of Governors of the Federal Reserve System;
the Comptroller of the Currency;
the Director of the Consumer Financial Protection Bureau;
the Chair of the Securities and Exchange Commission;
the Chairman of the Federal Deposit Insurance Corporation;
the Chairman of the Commodity Futures Trading Commission;
the Director of the Federal Housing Finance Agency;
the Chairman of the National Credit Union Administration; and
an independent member having insurance expertise who is appointed by the President and
confirmed by the Senate for a six-year term.

The nonvoting members, who serve in an advisory capacity, are:
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the Director of the Office of Financial Research;
the Director of the Federal Insurance Office;
a state insurance commissioner designated by the state insurance commissioners;
a state banking supervisor designated by the state banking supervisors; and
a state securities commissioner (or officer performing like functions) designated by the state
securities commissioners.

The state insurance commissioner, state banking supervisor, and state securities commissioner serve twoyear terms.

Fina nc ia l Sta b ility Ove rsig ht C ounci l

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Statutory Requirements for the Annual Report
Section 112(a)(2)(N) of the Dodd-Frank Act requires that the Council’s annual
report address the following:
i. the activities of the Council;
ii. significant financial market and regulatory developments, including
insurance and accounting regulations and standards, along with an
assessment of those developments on the stability of the financial system;
iii. potential emerging threats to the financial stability of the United
States;
iv. all determinations made under Section 113 or Title VIII, and the
basis for such determinations;
v. all recommendations made under Section 119 and the result of such
recommendations; and
vi. recommendations—
I. to enhance the integrity, efficiency, competitiveness, and stability
of United States financial markets;
II. to promote market discipline; and
III. to maintain investor confidence.
		

Approval of the Annual Report
This annual report was approved unanimously by the voting members of the
Council on December 17, 2021.
Abbreviations for Council Member Agencies and Member Agency Offices
• Department of the Treasury (Treasury)
• Board of Governors of the Federal Reserve System (Federal Reserve)
• Office of the Comptroller of the Currency (OCC)
• Consumer Financial Protection Bureau (CFPB)
• Securities and Exchange Commission (SEC)
• Federal Deposit Insurance Corporation (FDIC)
• Commodity Futures Trading Commission (CFTC)
• Federal Housing Finance Agency (FHFA)
• National Credit Union Administration (NCUA)
• Office of Financial Research (OFR)
• Federal Insurance Office (FIO)

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Table of Contents
1 Member Statement ...................................................... 7
2 Executive Summary...................................................... 9
3 Financial Developments.............................................. 19
3.1. Household Finance................................................................................19
3.2.Nonfinancial Business Finance...............................................................23
3.2.1 Corporate Debt ................................................................................................23
3.2.2 Small Business Debt.........................................................................................27
3.2.3 Equities ............................................................................................................28

3.3.Government Finance..............................................................................31
3.3.1 Treasury Market...............................................................................................31
Box A: IAWG Work on Treasury Market Resilience........................................... 35
3.3.2 Municipal Bond Market.................................................................................... 36

3.4.Financial Markets .................................................................................39
3.4.1 Wholesale Funding Markets: Unsecured Borrowing...........................................39
3.4.2 Wholesale Funding Markets: Secured Borrowing..............................................41
3.4.3 Derivatives Markets......................................................................................... 48
3.4.3.1 Futures................................................................................................ 48
3.4.3.2 Exchange-Traded Options.................................................................... 53
3.4.3.3 OTC Derivatives................................................................................... 55
3.4.3.4 Derivatives Intermediaries and Platforms.............................................57
3.4.4 Commodities Market.........................................................................................59
3.4.5 Residential Real Estate Markets....................................................................... 64
3.4.5.1 Residential Housing Finance................................................................. 64
Box B: The Rapid Rise in House Prices.............................................................69
3.4.5.2 Government-Sponsored Enterprises and the Secondary
		 Mortgage Market.................................................................................71
3.4.6 Commercial Real Estate Market........................................................................74

3.5.Financial Institutions............................................................................. 77
3.5.1 Bank Holding Companies and Depository Institutions....................................... 77
3.5.1.1 Bank Holding Companies and Dodd-Frank Act Stress Tests ................ 77
3.5.1.2 Insured Commercial Banks and Savings Institutions............................. 86
3.5.1.3 U.S. Branches and Agencies of Foreign Banks..................................... 88
3.5.1.4 Credit Unions ...................................................................................... 89
3.5.2 Nonbank Financial Companies......................................................................... 93

Ta b le o f C ont ent s

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3.5.2.1 Securities Broker-Dealers................................................................... 93
3.5.2.2 REITs.................................................................................................. 94
3.5.2.3 Money Market Funds........................................................................... 95
3.5.2.4 Registered Investment Companies...................................................... 98
Box C: Nonbank Financial Intermediation & Council Initiatives........................102
3.5.2.5 Alternative Funds...............................................................................105
Box D: Failure of Archegos Capital Management............................................109
3.5.2.6 Pension Funds.................................................................................... 111
3.5.2.7 Insurance Companies......................................................................... 112
3.5.2.8 Specialty Finance............................................................................... 114

3.6.Financial Market Structure, Alternative Reference Rates,
and Financial Innovation...................................................................... 116
3.6.1 Market Structure: Central Counterparty Clearing............................................ 116
Box E: LIBOR Transition..................................................................................120
3.6.2 Financial Innovation .......................................................................................123
3.6.2.1 Digital Assets......................................................................................123
3.6.2.2 Peer-to-Peer Payments .....................................................................124
3.6.2.3 Digital Lending ..................................................................................124
3.6.2.4 Use of Technology in Financial Services.............................................124
3.6.2.5 Reliance of Financial Institutions on Third-Party Service Providers.....125

3.7.Global Economic and Financial Developments......................................126
3.7.1 Foreign Exchange Market...............................................................................126
3.7.2 Advanced Economies......................................................................................127
3.7.3 Emerging Market and Developing Economies..................................................132

4 Council Activities and Regulatory Developments.... 137
4.1. Council Activities.................................................................................137
4.1.1 Risk Monitoring and Regulatory Coordination..................................................137
Box F: Climate-Related Financial Risk.............................................................137
4.1.2 Determinations Regarding Nonbank Financial Companies and
		 Activities-Based Approach..............................................................................140
4.1.3 Operations of the Council................................................................................140

4.2.Safety and Soundness.........................................................................141
4.2.1 Enhanced Capital and Prudential Standards and Supervision..........................141
4.2.2 Dodd-Frank Act Stress Tests and Stress Capital Buffer...................................143
4.2.3 Resolution Planning and Orderly Liquidation...................................................144
4.2.4 Insurance........................................................................................................144

4.3.Financial Infrastructure, Markets, and Oversight..................................147
4.3.1 Derivatives, Swap Data Repositories, Regulated Trading Platforms,
		 and Central Counterparties.............................................................................147
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4.3.2 Securities and Asset Management..................................................................149
4.3.3 Accounting Standards.....................................................................................151
4.3.4 Bank Secrecy Act/Anti-Money Laundering Regulatory Reform........................152

4.4.Mortgages and Consumer Protection ..................................................152
4.4.1 Mortgages and Housing Finance.....................................................................152
4.4.2 Consumer Protection......................................................................................154

4.5.Data Scope, Quality, and Accessibility..................................................154
4.5.1 Data Scope.....................................................................................................154
4.5.2 Data Quality....................................................................................................155

5	Potential Emerging Threats, Vulnerabilities,
and Council Recommendations.................................157
5.1. Climate-Related Financial Risk.............................................................157
5.2.Nonfinancial Business: Corporate Credit...............................................157
5.3. Financial Markets...............................................................................158
5.3.1 Short-Term Wholesale Funding Markets..........................................................158
5.3.2 Residential Real Estate Market.......................................................................160
5.3.3 Commercial Real Estate Market......................................................................161

5.4.Financial Institutions............................................................................161
5.4.1 Large Bank Holding Companies......................................................................161
5.4.2 Investment Funds...........................................................................................162

5.5.Financial Market Structure, Operational Challenges,
and Financial Innovation......................................................................163
5.5.1 Central Counterparties....................................................................................163
5.5.2 Alternative Reference Rates............................................................................165
5.5.3 Financial Market Structure..............................................................................167
5.5.4 Cybersecurity.................................................................................................168
5.5.5 Data Gaps and Challenges..............................................................................170
5.5.6 Financial Innovation........................................................................................171
5.5.6.1 Digital Assets.....................................................................................171
Box G: Stablecoins.........................................................................................173
5.5.6.2 Use of Technology in Financial Services............................................. 174

5.6. Managing Vulnerabilities amid Uneven and Volatile Global Growth.......175

6 Abbreviations............................................................ 177
7 Glossary..................................................................... 183
8 List of Charts ............................................................ 193



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1

Member Statement

The Honorable Nancy Pelosi
Speaker of the House
United States House of Representatives

The Honorable Kamala D. Harris
President of the Senate
United States Senate

The Honorable Kevin McCarthy
Republican Leader
United States House of Representatives

The Honorable Charles E. Schumer
Majority Leader
United States Senate
The Honorable Mitch McConnell
Republican Leader
United States Senate

In accordance with Section 112(b)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, for the reasons outlined in the annual report, I believe that additional actions, as described below,
should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect
the economy: the issues and recommendations set forth in the Council’s annual report should be fully
addressed; the Council should continue to build its systems and processes for monitoring and responding
to emerging threats to the stability of the U.S. financial system, including those described in the Council’s
annual report; the Council and its member agencies should continue to implement the laws they
administer, including those established by, and amended by, the Dodd-Frank Act, through efficient and
effective measures; and the Council and its member agencies should exercise their respective authorities
for oversight of financial firms and markets so that the private sector employs sound financial risk
management practices to mitigate potential risks to the financial stability of the United States.

Janet L. Yellen
Secretary of the Treasury
Chairperson, Financial Stability Oversight Council

Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System

Michael J. Hsu
Acting Comptroller of the Currency
Office of the Comptroller of the Currency

Rohit Chopra
Director
Consumer Financial Protection Bureau

Gary Gensler
Chair
Securities and Exchange Commission

Jelena McWilliams
Chairman
Federal Deposit Insurance Corporation

Rostin Behnam
Acting Chairman
Commodity Futures Trading Commission

Sandra L. Thompson
Acting Director
Federal Housing Finance Agency

Todd M. Harper
Chairman
National Credit Union Administration

Thomas E. Workman
Independent Member Having Insurance Expertise
Financial Stability Oversight Council
Me mb e r S t at ement

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2

Executive Summary

The United States economy has continued to
rebound over the past year from disruptions related
to the COVID-19 pandemic, supported by monetary
and fiscal policy, substantial progress in vaccination,
and broadly accommodative financing conditions.
The acute financial crisis that occurred at the onset
of the pandemic in 2020 has moved farther into
the rear-view mirror, though the Council continues
to focus on vulnerabilities in the financial system
induced or made more salient by that episode.
Financing conditions have been accommodative
for nonfinancial firms, commercial real estate
(CRE) borrowers, and municipalities borrowing
in the capital markets. Similarly, households have
had relatively strong access to consumer credit and
residential mortgage loans. However, somewhat
tight conditions have continued to prevail for small
businesses and bank-dependent CRE borrowers
as a result of pandemic-induced uncertainties. In
addition, residential real estate borrowers with
low credit scores or undocumented incomes have
relatively more difficulty accessing credit, in line
with pre-pandemic standards.
The normalization of financial conditions since
spring 2020 in part reflected the effectiveness
of extraordinary measures taken by the Federal
Reserve to support the functioning of a wide range
of financial markets and institutions. By the end of
2020, the take-up of many of the Federal Reserve’s
lending facilities had fallen to very low levels, and
the Federal Reserve ceased new operations of most
of these facilities in late 2020 and early 2021.
The financial condition of households and
businesses has been bolstered significantly by the
substantial direct monetary support and forbearance
on federally backed mortgages and student loans
provided for by the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act) and American
Rescue Plan Act of 2021 (ARP Act). Recently,
however, many households that rent their residences
have come under pressure following the end of

the Center for Disease Control (CDC) eviction
moratorium in August, and homeowners and
student loan borrowers may come under pressure in
coming months as forbearance arrangements expire.
Additionally, households with members employed
in sectors particularly hard-hit by the pandemic
continue to face significant stresses. On the business
side, credit quality has broadly remained strong
over the past year, though delinquencies remained
elevated on certain types of CRE loans, particularly
loans on properties located in central business
districts. The outlook for small businesses has
improved over the past year, but compared to larger
firms they remain more vulnerable, particularly to
pandemic-driven disruptions.
Asset valuation pressures have grown in several
markets over the past year amidst an improvement
in the macroeconomic outlook and low interest
rates. Broad equity market indexes have reached
record highs and corporate bond spreads remain at
low levels by historical standards. In the residential
real estate market, rapid price gains also reflect very
strong demand. Looking forward, the evolution of
asset prices will depend on investor risk appetite,
the outlook for inflation, continued progress in
containing the virus, and the pace of the ongoing
economic recovery.
The rapid pace of the economic recovery this year
was accompanied by growing pains, evidenced by
supply chain problems or rising prices in many
markets. Amid the national vaccination campaign,
demand for many goods and services grew faster
than supply in the short run. As a result, commodity
markets and associated derivatives recorded
volatile prices. Inflation has risen, and inflation
compensation measures rose in financial markets.
Lastly, supply chain bottlenecks and materials
shortages affected a number of sectors.
Some episodes in financial markets this year
generated unusually high volatility. A surge of
interest by retail investors in certain equities such
Exe c utive S ummary

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as GameStop Corp. that were widely discussed on
social media led to elevated volatility in equity,
options, and securities lending markets at the
beginning of the year. This episode highlighted
evolving considerations related to financial
innovations that have eased access to these markets.
Digital assets have also seen a surge of interest
since the onset of the pandemic, and the values
of those assets have been highly volatile over the
past year. Another episode involved the failure
of the family investment fund Archegos, which
led to large losses for some banks. This episode
highlighted the importance of counterparty credit
risk management practices and relatively limited
visibility into the activities of highly levered private
investment vehicles. In February, the Treasury
market experienced a sudden drop in liquidity
conditions that only slowly reversed. This episode
underscored the importance of inter-agency efforts
to improve the resilience of Treasury markets.
Finally, cyberattacks affected two major firms in
commodity markets, though the effects of these
attacks on markets were ultimately limited.
In addition, the toll of climate change has continued
to mount. According to the National Oceanic and
Atmospheric Administration’s National Centers for
Environmental Information, 2020 was a “historic
year of extremes” for the United States. The year
2020 witnessed 22 billion-dollar-or-greater weather
and climate disasters, a record number of such
events, which caused a combined $95 billion in
damages. Physical harm caused by such events and
the process of transitioning to a low greenhouse
gas economy together are an emerging threat to
economic activity and to the U.S. financial system.
President Biden issued Executive Order 14030,
Climate-Related Financial Risk, on May 20, 2021,
directing the Secretary to engage with Council
members on climate-related financial risks and
report on the Council’s activities.

Council Initiatives
A key goal of the Council and its member agencies
is to monitor vulnerabilities to U.S. financial
stability so that abrupt and unpredictable changes
in economic or financial conditions—“shocks”—do
not disrupt the ability of the financial system to meet
the demand for financial services. Vulnerabilities
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include structural weaknesses in the financial system
and its regulatory framework. Vulnerabilities in the
financial system can amplify the impact of an initial
shock, potentially leading to substantial disruptions
in the provision of financial services, such as the
clearing of payments, the provision of liquidity, and
the availability of credit.
Regulatory reforms after the 2008 financial crisis
strengthened the ability of the financial system
to withstand a shock or an economic downturn.
However, risks to U.S. financial stability today
are elevated compared to before the pandemic.
The outlook for global growth is characterized
by elevated uncertainty, with the potential for
continued volatility and unevenness of growth across
countries and sectors. The financial crisis in March
2020 at the onset of the pandemic has also made
some vulnerabilities more salient. That experience
showed that asset liquidation pressures can be
amplified by liquidity mismatches and the leverage
of certain nonbank financial intermediaries such as
hedge funds. That episode also demonstrated that
pressures on dealer intermediation can limit the
availability of liquidity during times of market stress.
This year, the Council has identified a set of
priorities for addressing risks and vulnerabilities in
the U.S. financial system.
One priority is climate change. The Council first
discussed climate-related financial risks at its March
2021 meeting, at which members highlighted
a broad set of initiatives being undertaken at
individual agencies and organizations. The Council
views climate-related financial risks as an emerging
threat to the financial stability of the United States.
The Council and its members have the responsibility
to assess the magnitude of these risks and take
appropriate measures to ensure the resilience of
the financial system. The Council issued a Report
on Climate-Related Financial Risk on October 21,
2021 that identified steps the Council and financial
regulators can take to promote the resilience of the
financial system to climate-related financial risks.
These steps include expanding capacity, improving
data and measurement, enhancing disclosure of
climate-related risks, assessing the scale of potential
vulnerabilities, and making appropriate adjustments
in regulatory and supervisory tools.

Another priority is addressing vulnerabilities in
nonbank financial intermediation. Intermediation
by nonbanks provides essential funding that
underpins the United States economy. However,
the acute financial market stress that occurred in
March 2020 highlighted the potential for liquidation
pressures to be amplified by prime money market
funds (MMFs) and open-end mutual funds because
of the liquidity risk in their business models, and
by hedge funds because of their use of leverage.
Over the past year, the Council has established an
open-end fund working group and re-established a
hedge fund working group, in order to better share
data and identify risks associated with both kinds of
nonbanks. The structural vulnerabilities of MMFs
were the subject of a statement by the Council on
June 11, 2021, which emphasized the importance of
reforms to improve the resilience and functioning of
short-term funding markets. The Council expressed
support for the SEC’s engagement on this critical
issue and will continue to monitor this initiative.
Resilience of the U.S. Treasury market is an
additional key priority. A deep and liquid Treasury
market is essential for a strong U.S. economy, is
critical to the entire financial system, supports the
U.S. dollar as the world’s reserve currency, and is the
benchmark for asset classes globally. Through the
Inter-Agency Working Group for Treasury Market
Surveillance (IAWG), and in close coordination
with the Council, federal agencies are working to
understand the deterioration in the liquidity of the
Treasury market in March 2020 and commonalities
with other recent episodes of stress. As discussed
in the November 2021 Staff Progress Report, the
IAWG is analyzing specific policy steps that could
improve the Treasury market’s resilience, including
improving data quality and availability, bolstering
the resilience of market intermediation, evaluating
expanded central clearing, and enhancing trading
venue transparency and oversight.
Of course, these priorities are not the only
challenges to financial stability. It is critical that
the Council continue to identify and address other
vulnerabilities. For example, the rapid growth of
digital assets, including stablecoins and lending and
borrowing on digital asset trading platforms, is an
important potential emerging vulnerability. Other

significant vulnerabilities reviewed regularly in
recent annual reports include the LIBOR transition,
cybersecurity risks, the growth of nonfinancial
corporate credit, and the importance of large banks
and central counterparties in the U.S. financial
system.

Summary of Risks and Vulnerabilities
Climate-Related Financial Risk
In assessing the risks to the financial system, this
year the Council has focused on financial risks
related to climate change. These risks can be
grouped into two broad categories: physical risks
and transition risks.
Physical risks refer to the harm to people and
property arising from acute climate-related disaster
events, as well as longer-term chronic phenomena
such as higher average temperatures and sea level
rise. Physical risks have direct effects on households,
businesses, and other entities located where those
risks are realized, as well as to the set of financial
institutions and investors connected to those
impacted. These effects create climate-related
financial risks in several ways. Increased legal and
operational risks may also occur. In response,
creditors may pull back from impacted regions,
potentially amplifying the initial impact of a natural
disaster and creating further financial and economic
strain.
Transition risks refer to stresses to certain
institutions or sectors arising from the shifts
in policy, consumer and business sentiment, or
technologies associated with the changes necessary
to limit climate change. As countries fulfill their
commitments and transition to a low-greenhouse
gas economy, changes in public policy, the adoption
of new technologies, and shifting consumer and
investor preferences all have the potential to impose
costs on some firms and communities even as they
reduce overall climate risks. As a result, the ability
of impacted firms to meet their financial obligations
may decrease. Therefore, the economic effects
associated with a transition may transmit through
the financial sector and the economy in ways that
weaken the resilience of financial institutions or the
financial sector. The impact of these changes is likely
to be more sudden and disruptive if the changes

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occur in a disorderly way owing to substantial delays
in action or abrupt changes in policy.
The Council recognizes the critical importance of
taking prompt action to improve the availability
of data and measurement tools, enhance
assessments of climate-related financial risks
and vulnerabilities, and incorporate climaterelated risks into risk management practices and
supervisory expectations for regulated entities,
where appropriate. In addition, financial regulators,
consistent with their mandates and authorities,
should also promote consistent, comparable, and
decision-useful disclosures that allow investors
and financial institutions to take climate-related
financial risks into account in their investment and
lending decisions. Through these actions, financial
regulators can both promote financial-sector
resilience and help the financial system support
an orderly economy-wide transition to net-zero
emissions. The Council provided more detailed
recommendations to Council members in its Report
on Climate-Related Financial Risk.

Corporate Credit
The average leverage of nonfinancial corporations
is elevated relative to historical standards. Since
the onset of the pandemic, many firms increased
their leverage but have subsequently retraced those
increases. However, in some industries leverage
remains elevated compared to pre-pandemic
averages, including the airline, hospitality and
leisure, and restaurant sectors.
The potential risks to financial stability from
nonfinancial business borrowing depend in part on
the ability of businesses to service their obligations,
the ability of the financial sector to absorb losses
from defaults and downgrades, and the continued
willingness of market participants to provide
intermediation during times of stress.
Elevated leverage has been accompanied by rising
valuations in U.S. equities and corporate bonds.
These valuation pressures make these markets
vulnerable to a major repricing of risk, increased
volatility, and weakening balance sheets of financial
and nonfinancial businesses. Sharp reductions in
the valuations of different assets could heighten debt
rollover risk.
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The Council recommends that member agencies
continue to monitor levels of nonfinancial business
leverage, trends in asset valuations, and potential
implications for the entities they regulate in
order to assess and reinforce the ability of the
financial sector to manage severe, simultaneous
losses. Regulators and market participants should
also continue to assess ways in which leveraged
nonfinancial corporate borrowers and elevated asset
prices may amplify stresses in the broader market in
the event of a rapid repricing of risk or a slowdown
in economic activity.

Short-Term Wholesale Funding Markets
Wholesale funding markets provide essential shortterm funding to businesses, local governments, and
financial intermediaries. Developments in these
markets can have implications for financial stability
and the implementation of monetary policy.
Certain MMFs can amplify stress in short-term
funding markets by liquidating assets in those
markets to meet redemptions. The gap between the
liquidity of prime and tax-exempt MMF assets and
the availability of daily redemptions contributes to
a so-called first mover advantage. Investors have an
incentive to be the first to redeem in order to avoid
losses, which would be borne by the remaining
investors.
In repurchase agreement (repo) markets, recent
episodes of stress have included large spikes in repo
rates in September 2019 and in March 2020. The
2019 episode has been attributed to technical and
seasonal factors, while the 2020 episode came at the
onset of the pandemic amidst intense selling in the
cash Treasury market. Reliance on repo funding
by leveraged investors, such as hedge funds and
mortgage real estate investment trusts (mREITs),
can amplify stress in short-term funding markets in
response to deleveraging pressure, because many
of the assets sold at declining prices are the same
types of assets used as collateral in repo funding.
The complexity of interactions involving leveraged
participants raises concerns regarding their role in
amplifying funding stresses.
The Council commends steps taken over the past
year by member agencies to understand the nature
of structural vulnerabilities of MMFs and potential

reform options, including the release of a report by
the President’s Working Group on Financial Markets
(PWG) in December 2020 and the request for
public comment by the SEC in February 2021. The
Council recommends that regulators continue to
consider these structural vulnerabilities, including
the vulnerability to large-scale redemptions in prime
and tax-exempt MMFs and the vulnerabilities posed
by leveraged investors relying on short-term funding,
and take appropriate measures to mitigate these
vulnerabilities.

Residential Real Estate Market
Nonbank mortgage companies have come to play a
large role in residential mortgage markets but are
often subject to key vulnerabilities. Many nonbank
mortgage companies rely on short-term funding
and therefore remain vulnerable to adverse market
conditions. In addition, many mortgage companies
have limited loss-absorbing capacity in the face of
adverse economic shocks. Disruption to nonbank
mortgage companies could interrupt mortgage
servicing operations, especially for nonperforming
loans, and might have knock-on effects on these
servicers’ mortgage originations in the residential
real estate market.
The Council commends steps taken by the
Government National Mortgage Association
(Ginnie Mae) and the Conference of State Bank
Supervisors over the past year to understand options
for standards and regulations for nonbank mortgage
companies to address these vulnerabilities. The
Council recommends that relevant federal and state
regulators continue to coordinate closely to collect
data, identify risks, and strengthen oversight of
nonbank companies involved in the origination and
servicing of residential mortgages.

Commercial Real Estate Market
The COVID-19 pandemic continues to substantially
weigh on CRE properties in central business districts
(CBDs). Depending on the course of the pandemic
and the long-run demand for CBD properties,
if acute stress were to emerge in CRE markets,
asset sales from financially distressed individual
properties could lead to a cycle of lower valuations
and more distress. Defaults on CRE loans would
result in losses to banks, which hold a sizable

portion of CRE loans, and potentially lead to tighter
credit availability.
The Council recommends that regulators continue
to monitor CRE asset valuations, the level of CRE
concentration at banks, and the performance
of CRE loans. The Council recommends that
regulators continue to encourage banks and other
entities to bolster, as needed, their loss-absorption
capacity by strengthening their capital and liquidity
buffers commensurate with the levels of CRE
concentration on their balance sheets.

Large Bank Holding Companies
The 2008 financial crisis demonstrated that
financial distress at a large, complex, interconnected
bank holding company (BHC) has the potential
to affect global financial markets and amplify
tightening of credit conditions. Since then, large
and complex U.S. financial institutions have built up
stronger capital and liquidity positions and become
significantly more resilient. Today, some uncertainty
regarding the outlook of credit quality at banks
remains, given the unknown path that the pandemic
will take, and the ongoing economic recovery. Banks
could also once again face challenges to their ability
to build capital through retained earnings, given the
current low interest rate environment. In addition,
the failure of Archegos this past year highlighted the
importance of maintaining adequate counterparty
credit risk management practices.
The Council recommends that financial regulators
continue to require that the largest financial
institutions maintain sufficient capital and liquidity
to enhance their resilience against economic and
financial shocks. The Council also recommends
that regulators continue to monitor and assess
the impact of rules on financial institutions and
financial markets— including, for example, on
market liquidity and capital—and ensure that BHCs
are appropriately monitored based on their size,
risk, concentration of activities, and offerings of
new products and services. In addition, the Council
recommends that regulators continue to review
counterparty credit risk management and capital
practices at financial institutions.

Exe c utive S ummary

13

Investment Funds
Investment funds play a critical intermediary
role in the U.S. economy, promoting economic
growth through efficient capital formation.
While recognizing these benefits, the Council
has identified certain vulnerabilities related to
redemption risk in certain open-end funds. Since
some fixed-income markets have limited liquidity,
particularly during periods of market stress, openend mutual funds holding mostly fixed-income
instruments may be vulnerable to run risks. The
Council has focused in particular on whether the
structure of open-end funds results in greater selling
pressure than if investors held the fixed-income
instruments directly.
The Council has also identified a vulnerability
related to the use of leverage by investment funds,
which is most widespread among hedge funds,
depending on their sizes and investment strategies.
Leverage can allow investment funds to hedge risk
or increase exposures, depending on the activities
and strategies of the fund. However, in a period of
stress, leverage can magnify losses or lead to margin
calls, which can cause funds to liquidate assets at a
size and speed that disrupt the underlying markets.
The Council plans to review the findings of the
hedge fund and open-end fund working groups as
they are developed. The Council supports initiatives
by the SEC and other agencies to address risks in
investment funds. The Council also supports data
collection and analytical work by member agencies
aimed at the identification of potential emerging
risks. The Council recommends that the SEC
and other relevant regulators consider whether
additional steps should be taken to address these
vulnerabilities.

Central Counterparties
Although central counterparties (CCPs) provide
significant benefits to market functioning and
financial stability, they can also introduce strains
to the financial system. While CCPs have multilayered provisions in their rulebooks to address
default and plans for recovery from events that
threaten their ability to maintain critical services as
a going concern, the inability of a CCP to meet its
obligations arising from the default of one or more
clearing members or from non-default losses could
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2 0 2 1 F S O C / / Annual Report

strain the surviving members of the CCP and, more
broadly, the financial system. At the same time,
CCPs’ rulebooks and internal risk management
frameworks are designed to reduce these risks by
imposing liquidity and resource requirements on
clearing members that can increase with market
volatility. In addition, both the CFTC and SEC
maintain active risk surveillance programs of
CCPs’ and intermediaries’ risk management and
receive daily or weekly reports on positions, risk
measures, margins, collateral, and default resources.
Supervisory stress tests involving multiple CCPs can
also be, and have been, an important tool in the
assessment of risks.
The Council recommends that the CFTC, Federal
Reserve, and SEC continue to coordinate in the
supervision of all CCPs designated by the Council
as systemically important financial market utilities
(FMUs). Relevant agencies should continue to
evaluate whether existing standards for CCPs are
sufficiently robust to mitigate threats to financial
stability from both default and non-default losses.
These agencies should pay particular attention
to, and seek to balance, the tradeoff between
counterparty risk and liquidity risk. Agencies that
regulate clearing members should continue to assess
those firms’ liquidity risk management practices
and capabilities. The agencies should continue to
assess the effectiveness of guidance or standards
on managing margin payments and exposure to
CCPs. Finally, the Council encourages regulators
to continue to advance recovery and resolution
planning for systemically important FMUs and to
coordinate in designing and executing supervisory
stress tests of multiple systemically important CCPs.

Alternative Reference Rates
After years of planning and preparation, the
transition away from LIBOR is entering a critical
stage. The Council has identified certain risks
for this transition period. One risk relates to the
selection of new reference rates. The Council advises
market participants to conduct a comprehensive
evaluation of the market depth and design of
any alternative reference rate and notes the
recommendation of the Secured Overnight
Financing Rate (SOFR) by the Alternative Reference
Rates Committee (ARRC). A rate based on small

transaction volume, especially if much lower than
the volume of instruments that reference a given
rate, could introduce risks if the rate is susceptible
to volatility and disruption during times of market
stress. A second risk relates to the possibility of
continued issuance of instruments that create
or extend LIBOR exposure, which would be
inconsistent with guidance from U.S. regulators and
unnecessarily increase exposures to a rate that will
soon cease. A third risk relates to legacy contracts
without robust fallback provisions in the event of
LIBOR’s cessation, which will create risks for market
participants if they do not take feasible actions to
transition these contracts.
End dates for LIBOR have now been set, and U.S.
regulators have issued guidance on the LIBOR
transition, most recently in October 2021. Market
participants should act with urgency to address
their existing LIBOR exposures and transition
to robust and sustainable alternative rates. The
Council commends the efforts of the ARRC and
recommends that it continue to facilitate an orderly
transition to alternative reference rates. Member
agencies should determine whether regulatory relief
is necessary to encourage market participants to
address legacy LIBOR portfolios. Member agencies
should also continue to use their supervisory
authority to understand the status of regulated
entities’ transition from LIBOR, including their
legacy LIBOR exposure and plans to address that
exposure.

Financial Market Structure
Advances in information and communications
technologies, as well as regulatory developments, have
altered the structure of financial markets over the
past decade. The Council and member agencies are
closely monitoring how changes in market structure
have affected the robustness and efficiency of capital
markets and the stability of the financial system.
Interlinkages among dollar funding markets:
Since the 2008 financial crisis, new regulations on
bank capital and liquidity, structural reforms in
MMFs, and a new operating environment for bankaffiliated broker-dealers have fundamentally altered
how market participants interact and the various
interlinkages among the federal funds market,
the repo market, and the Eurodollar market.

There are benefits from interdependencies among
markets, including enhanced price discovery and
more options for hedging risks. At the same time,
interdependencies create transmission risks from
volatile or inaccurate pricing that have the potential
to amplify market shocks across different markets.
Pressures on dealer intermediation: Traditionally,
market-making and arbitrage mechanisms involving
securities dealers have helped in the orderly
functioning of the secondary market for Treasuries
and mortgage-backed securities (MBS). However,
issuance volumes have increased, especially for
Treasury securities. In addition, with large banks
having taken action to limit balance sheet growth in
light of capital requirements designed to constrain
leverage, major bank-affiliated broker-dealers
have reduced the portion of their balance sheet
that is allocated to trading and repo transactions.
Together, these developments may have contributed
to episodes of illiquidity in Treasury, MBS, and
corporate bond markets in March 2020.
Role of non-traditional market participants: Nontraditional market participants, including principal
trading firms, play an increasingly important role
in securities and other markets. These firms may
improve liquidity and investor outcomes under
normal circumstances, but they may also introduce
new potential risks. For instance, the trading
strategies that non-traditional market participants
employ and the incentives and constraints that
they operate under may not be as well understood,
leading to uncertainty about how these firms might
behave during periods of market stress.
Disruptive events in securities markets: An episode
of stress in the Treasury market in February is a
recent example of occasional abrupt disruptions
to asset prices and liquidity conditions that have
occurred in securities markets. These episodes may
signal a vulnerability regarding the resilience of key
financial markets, rooted in the financial structure
of trading in these markets.
Consideration of central clearing in the U.S.
Treasury market: Significant parts of the Treasury
market are not centrally cleared. Expansion of
central clearing could have a range of benefits,
including reducing chains of settlement failures
Exe c utive S ummary

15

and counterparty risk concerns, and increasing
the provision of dealer liquidity. Expanded
central clearing could also have a number of costs,
necessitating careful study to understand whether
more widespread central clearing would benefit
Treasury market resilience.
The Council recommends that member agencies
continue to review market structure issues that
may contribute to market volatility in key markets,
including short-term funding, Treasuries, MBS, and
corporate bond markets, and study the interlinkages
between them. Market participants should also
regularly assess how market developments affect
the risk profile of their institutions. The Council
recommends that financial regulators continue to
monitor and evaluate ongoing changes that might
have adverse effects on markets, including on
market integrity and liquidity, or that might underlie
flash events. In the Treasury market, the Council
recommends that agencies consider whether an
increase in central clearing would enhance the
resilience of the market, taking into consideration
the factors limiting central clearing to date, and
assess the likely impact on liquidity of such an
increase.

Cybersecurity
The financial sector, like other critical sectors,
is vulnerable to ransomware and other malware
attacks, denial of service attacks, data breaches, and
other events. A destabilizing cybersecurity incident
could potentially threaten the stability of the U.S.
financial system by disrupting a key financial service
or utility, causing a loss of confidence among a
broad set of customers or market participants, or
compromising the integrity of critical data.
The implementation of teleworking strategies
using virtual private networks, virtual conferencing
services, and other technologies can increase
cybersecurity vulnerabilities, insider risks, and other
operational exposures. At the same time, financial
institutions have increased their reliance on thirdparty service providers for teleworking tools and
services. The interdependency of these networks
and technologies supporting critical operations
magnifies cyber risks, threatening the operational
risk mitigation capabilities not just at individual

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2 0 2 1 F S O C / / Annual Report

institutions, but also of the financial sector as a
whole.
The Council recommends that federal and state
agencies continue to monitor cybersecurity risks
and conduct cybersecurity examinations of financial
institutions and financial infrastructures to ensure,
among other things, robust and comprehensive
cybersecurity monitoring, especially in light of
new risks posed by the pandemic, ransomware
incidents, and supply chain attacks. The unique
and complex threats posed by cyber risks also
require the public and private sectors to cooperate
to identify, understand, and protect against these
risks. The Council supports the continued use
and enhancement of public-private partnerships
to identify and mitigate cybersecurity risks. The
Council also supports agency efforts to increase
the efficiency and effectiveness of cybersecurity
examinations across relevant agencies.

Data Gaps and Challenges
Episodes of acute financial stress in 2008 and 2020
have exposed several major gaps and deficiencies in
the range and quality of data available to financial
regulators to identify emerging risks in the financial
system. These gaps and shortcomings include
firm-level structure and ownership information,
transaction data in certain important financial
markets, and limitations in financial statement
reporting for certain types of institutions. Often,
the usefulness of data is limited by institutional or
jurisdictional differences in reporting requirements.
Gaps and legacy processes may inhibit data sharing.
The Council recommends that regulators and
market participants continue to work together to
improve the coverage, quality, and accessibility
of financial data, as well as improve data sharing
among relevant agencies. These partnership efforts
include implementing new standardized or digital
identifiers; developing and linking data inventories;
and implementing industry standards, protocols,
and security for secure data sharing. The Council
also recommends that member agencies support
adoption and use of standards in mortgage data,
including consistent terms, definitions, and data
quality controls, which will make transfers of loans
or servicing rights less disruptive to borrowers and
investors. The Council recommends that member

agencies continue to work to harmonize domestic
and global derivatives data for aggregation and
reporting and ensure that appropriate authorities
have access to the trade repository data needed to
fulfill their mandates.

Financial Innovation
Financial innovation can offer considerable benefits
to consumers and providers of financial services
by reducing the cost of certain financial services,
increasing the convenience of payments, and
potentially increasing the availability of credit. But
innovation can also create new risks that need to be
understood.

Digital Assets
Digital assets are a prominent example of financial
innovation that present potential benefits and risks.
Regulatory attention and coordination are critically
important in light of the quickly evolving market for
these assets. Because speculation appears to drive
the majority of digital asset activity at this time, the
price of digital assets may be highly volatile. Digital
assets may also be subject to the risk of operational
failures, fraud, and market manipulation. For
example, though stablecoins are marketed with the
claim that they will maintain a stable value, they
may be subject to widespread redemptions and asset
liquidations if investors doubt the credibility of that
claim. In addition, digital assets pose risks through
direct or indirect connections with banking services,
financial markets, and financial intermediaries.
For instance, the potential for the increased use of
stablecoins as a means of payment raises a range
of prudential concerns. If stablecoin issuers do not
honor a request to redeem a stablecoin, or if users
lose confidence in a stablecoin issuer’s ability to
honor such a request, runs on the arrangement
could occur that may result in harm to users and
the broader financial system. Finally, digital assets
also pose risks related to illicit financing, national
security, cybersecurity, privacy, and international
monetary and payment system integrity.
The Council recommends that federal and state
regulators continue to examine risks to the financial
system posed by new and emerging uses of digital
assets and coordinate to address potential issues that
arise from digital assets. The Council has reviewed
the Report on Stablecoins published by the PWG,

the FDIC, and the OCC on November 1, 2021 (PWG
Report on Stablecoins), and recommends that
member agencies consider the recommendations
in that report. The Council will further assess
and monitor the potential risks of stablecoins and
recommends that its members consider appropriate
actions within each member’s jurisdiction to
address those risks while continuing to coordinate
and collaborate on issues of common interest. The
Council will also be prepared to consider steps
available to it to address risks outlined in the PWG
Report on Stablecoins in the event comprehensive
legislation is not enacted.

The Use of Technology in Financial Services
Financial firms’ rapid adoption of technological
innovations in recent years may increase operational
risks, including those associated with financial
institutions’ use of third-party service providers. For
example, if critical services are outsourced, financial
or operational failures or faults at a key service
provider could disrupt the activities of multiple
financial institutions or financial markets.
Technology has increasingly enabled retail investors
to participate at higher rates in U.S. equity markets,
as evidenced by the growth in self-directed trading.
Innovations that democratize access to trading
markets can offer positive outcomes, such as
increasing the diversity of market participants.
However, vulnerabilities may also emerge, including
increased price volatility and the manipulation
of markets driven by social media, which existing
policy and enforcement tools may not be designed to
address.
The Council encourages agencies to continue to
monitor the effects of new financial products and
services on consumers, regulated entities, and
financial markets, and evaluate their potential
effects on financial stability. The Council
encourages continued coordination among federal
and state financial regulators to support responsible
financial innovation and competitiveness, to
promote consistent regulatory approaches, and to
identify and address potential risks that arise from
such innovation.

Exe c utive S ummary

17

Managing Vulnerabilities amid Uneven and Volatile
Global Growth
The outlook for global growth is characterized
by elevated uncertainty, with the potential for
continued volatility and unevenness of growth
across countries and sectors. Risks include the
possibility of higher-than-expected inflation leading
to higher interest rates, causing losses at some
financial institutions, higher borrowing costs, and
the global economic recovery to lose momentum;
the possibility that financial vulnerabilities in
China could lead to a hard landing and weigh on
the global economy; and the possibility that the
ongoing pandemic could continue to cause volatility
in economic activity, including economic shutdowns
and reopenings.
Volatile or uneven global growth could affect
the U.S. financial system in a few ways. Losses at
financial institutions in advanced foreign economies
could spill over to the U.S. financial system through
direct exposures and counterparty risks. The direct
consequences of a Chinese hard landing for U.S.
financial stability appear manageable since direct
U.S. exposures to the Chinese financial sector are
more limited. However, U.S. economic performance
could be affected indirectly if developments in
China or other countries weigh on the global
economy or global market confidence.
The Council recommends that member agencies
ensure that the financial institutions they oversee
are attentive to the risks posed by uneven or volatile
global growth, including higher levels of inflation
and interest rates, stress at foreign financial
institutions including banks and nonbanks, and
changes in global economic activity and market
confidence. Supervisors should review in particular
the risks faced by large banks with global footprints
and trading operations. Market regulators should
review available steps that could be taken in
anticipation of increased stress in funding markets if
global funding flows become more volatile.

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3

Financial Developments

3.1 Household Finance
Stresses on households have moderated
significantly over the past year, aided by
extraordinary policy actions, improving
economic conditions, and some lessening
in the severity of the COVID-19 pandemic.
Government policies—including enhanced
unemployment insurance and direct stimulus
payments—have supported household balance
sheets, helping many households build up a
buffer of liquid assets. Credit growth remains
concentrated among borrowers with prime
credit scores, and the share of mortgages and
consumer loans in delinquency or forbearance
has declined steadily. Nonetheless, some
households, such as those still in forbearance or
delinquency and those with members employed
in sectors particularly hard-hit by the pandemic,
continue to face significant stresses.
Household debt has grown at a moderate pace
over the past decade, reaching a total of $17
trillion in the second quarter of 2021. While
this is a record level of debt in nominal terms,
the corresponding ratio of household debt to
disposable personal income is well below its
2007 peak and is slightly below pre-pandemic
levels (Chart 3.1.1). This ratio moved up and
down notably over the course of the pandemic,
driven by changes in incomes, some of which
came from federal aid programs. The personal
savings rate, which spiked in April 2020 and
March 2021 following the disbursement of
household stimulus payments, remained well
above its long-term average through much of
2021 before returning to its long-term average
in September 2021 (Chart 3.1.2).

3.1.1 Household Debt as a Percent of Disposable Personal Income
3.1.1 Household Debt as a Percent of Disposable Personal Income
Percent
160

120

As Of: 2021 Q2

Percent
160

Other Household Credit
Consumer Credit
Mortgages

120

80

80

40

40

0
1995

1998

2001

2004

2007

Source: BEA, Federal
Reserve, Haver Analytics

2010

2013

2016

2019

0

Note: Other Household Credit includes
debts of both households and nonprofits.

3.1.2 Household Personal Savings Rate

3.1.2 Household Personal Savings Rate
Percent
35

As Of: Sep-2021

Percent
35

30

30

25

25

20

20

15
10

15

1990–Present
Average

10
5

5
0
2015

2016

Source: BEA, FRED

2017

2018

2019

2020

2021

0

Note: Ratio of personal saving to
disposable personal income.

In the years leading up to the pandemic, the
household debt service ratio remained at fairly
low levels, which can be attributed to rising
incomes and years of relatively low interest
rates. Since the onset of the pandemic, this
ratio has declined to record lows as interest
Fina nc ia l De vel opment s

19

3.1.3 Household Debt Service Ratio

3.1.3 Household Debt Service Ratio
Percent

As Of: 2021 Q2

Percent

14

14

12

12

10

10

8

8

6
1990

1994

1998

2002

2006

2010

2014

6

2018

Note: Ratio of debt service payments to
disposable personal income. Seasonally
adjusted. Gray bars signify NBER recessions.

Source: Federal Reserve,
Haver Analytics

3.1.4 Owners’ Equity as Share of Household Real Estate
3.1.4 Owners’ Equity as Share of Household Real Estate
Percent
80

As Of: 2021 Q2

Percent
80

70

70

60

60

50

40
1990

1990–Present
Average

1994

50

1998

2002

Source: Federal Reserve,
Haver Analytics

2006

2010

2014

40

2018

Note: Gray bars signify NBER recessions.

3.1.5 Components of Consumer Credit

3.1.5 Components of Consumer Credit

Billions of US$
1750

As Of: 2021 Q3

1500

1000

Billions of US$
1750

1500

Student Loans

1250

1250
Credit Card Debt

Auto Loans

750

500

Other Household Debt

250
0
2003

250
2006

2009

Source: FRBNY Consumer Credit
Panel/Equifax, Haver Analytics

20

1000
750

500

2 0 2 1 F S O C / / Annual Report

2012

2015

2018

rates fell further and federal relief programs
raised disposable personal incomes (Chart
3.1.3). Aided by strong house price growth, the
share of owners’ equity in household real estate
continued to increase from its lows in 2012 and
has recently exceeded the range that prevailed
in the early 2000s (Chart 3.1.4). The increase
in house prices over the past year has been
particularly notable, with annualized growth
rates exceeding 20 percent in recent months
(see Box B).

2021

0

Note: Other includes consumer finance and
retail loans. Gray bars signify NBER recessions.

Household net worth has increased notably in
the last decade, driven by stock market and real
estate gains; this has been particularly true for
high-net-worth and high-income households.
However, household net worth declined by
5.6 percent in the first quarter of 2020 as the
stock market fell sharply. Household net worth
has since rebounded to all-time highs, as stock
prices recovered from initial pandemic-related
economic and financial market uncertainty and
as house prices grew rapidly.
Consumer credit—which consists primarily of
credit card debt, auto loans, student loans, and
installment loans—has grown over the past
decade to account for about one-quarter of
total household debt. This faster pace of growth
compared to mortgage debt has been driven by
student and auto loans. Since the onset of the
pandemic, credit card balances have declined,
while student loan and auto loan balances have
increased (Chart 3.1.5).
Over the past decade, borrowers with prime
credit scores have accounted for almost all
the growth in loan balances. This trend has
continued through the pandemic, as the steady
growth in mortgages for prime borrowers has
more than offset their notable declines in
credit card balances. By contrast, after holding
steady in the years prior to the pandemic, total
loans for subprime borrowers have decreased
in 2020 and 2021, with mortgages, auto loans,
and credit card debt all contributing to the
decline. This decrease is largely attributable to
relatively tight lending standards for subprime
borrowers over the past decade. However,

COVID-19 relief programs may have also led to
a reduction in the number of borrowers being
classified as subprime. For example, the CARES
Act provision requiring loans in forbearance
programs to be reported as non-delinquent to
credit bureaus may have led to an upward shift
in credit scores at the bottom of the credit score
distribution.
Credit standards have generally eased over the
past year, increasing market access for some
households. According to the July 2021 Senior
Loan Officer Opinion Survey (SLOOS), banks
have, on net, eased standards on credit cards
and auto loans over the second quarter of 2021.
After tightening at the start of the pandemic,
standards for consumer loans and mortgages
are now close to or below their pre-pandemic
levels for prime borrowers and generally
somewhat tighter than their pre-pandemic
levels for subprime borrowers.​

3.1.6 Percentage of Mortgages in Forbearance
3.1.6 Percentage of Mortgages in Forbearance
Percent
10

As Of: 26-Sep-2021

8

Percent
10
Nonbanks
Banks
Total

8

6

6

4

4

2

2

0
0
Mar:2020 Jun:2020 Sep:2020 Dec:2020 Mar:2021 Jun:2021 Sep:2021

Source: Mortgage Bankers Association

The economic impact of COVID-19 on
household finances was mitigated by several
government actions, including enhanced
unemployment benefits, direct stimulus
payments, loan forbearance, and the federal
eviction moratorium. The share of mortgages
in forbearance increased sharply in the second
quarter of 2020 and has declined steadily
thereafter (Chart 3.1.6).

Fina nc ia l De v el opment s

21

3.1.7 Transition to Delinquency (30+Days) by Loan Type

3.1.7 Transition to Delinquency (30+ Days) by Loan Type
Percent
16

12

As Of: 2021 Q3

Percent
16

Student Loans

Credit Card Debt

Auto Loans

Other Household Debt

12

8

8

4

4

0
2003

2006

2009

Source: FRBNY Consumer Credit
Panel/Equifax, Haver Analytics

2012

2015

2018

2021

0

Note: Four-quarter moving sum. Student loan
data are not reported prior to 2004 due to uneven
reporting. Other includes consumer finance and
retail loans. Gray bars signify NBER recessions.

Credit record data show notable decreases
in the delinquency rates of major forms of
household credit during the pandemic (Chart
3.1.7). Forbearance programs likely contributed
to these declines, as loans in these programs
are reported as non-delinquent to credit
bureaus upon enrollment. Notably, student
loan delinquency rates declined sharply,
which can be attributed to the Department of
Education’s decision to suspend interest and
monthly payments on all federally held loans
and report all student loans eligible for CARES
Act forbearances as current. Federal, state, and
local policy interventions, which counteracted
to some degree the income and employment
shocks stemming from the pandemic, also likely
helped lower these delinquency rates.
Nonetheless, the share of mortgages in
some form of non-payment remains elevated
compared to the years immediately preceding
the COVID-19 pandemic. Mortgage forbearance
is scheduled to expire at the end of 2021 for
about 50 percent of mortgages currently in
forbearance. These mortgage borrowers show
signs of being under some financial strain. They
are more likely to have suffered income losses in
the past year, to work in industries particularly
hard-hit by the pandemic, and to have belowaverage credit scores at origination. The
expiration of extended unemployment benefits
and mortgage forbearance programs may
lead to an increase in mortgage delinquency
rates. Eviction rates, which fell sharply in 2020,
may increase meaningfully in the coming
months with the lifting of the federal eviction
moratorium and as state moratoria roll off.
According to the Census Bureau’s Household
Pulse Survey, approximately 15 percent of
renters were in arrears in October with around
42 percent of these renters expecting to be
evicted in the next two months. Similarly,
borrowers in auto loan forbearance may be
vulnerable to the expiration of extended
unemployment insurance.

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3.2 Nonfinancial Business Finance
3.2.1 Corporate Debt
Many indicators of corporate balance sheet
health have improved since the onset of the
COVID-19 pandemic. Low interest rates,
coupled with the strong rebound in earnings,
helped improve corporate debt servicing
indicators, leverage metrics, and overall credit
quality. Nevertheless, business leverage remains
elevated relative to historical standards and
firms in sectors particularly hard-hit by the
pandemic continue to show strain.
For several years before the pandemic,
nonfinancial corporate debt grew more
quickly than nominal gross domestic product
(GDP). In the first half of 2020, corporate debt
increased further while GDP fell, causing the
corporate-debt-to-GDP ratio to spike to an
all-time high. This ratio has since declined as
GDP has recovered and debt growth has slowed
(Chart 3.2.1.1). Corporate debt levels relative
to earnings also increased sharply early in
the pandemic before declining more recently
(Chart 3.2.1.2).

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP
Percent
60

As Of: 2021 Q2

Percent
60

50

50

40

40

30

30

20
1980

1985

1990

1995

Source: Federal Reserve,
Haver Analytics

2000

2005

2010

2015

2020

20

Note: Gray bars signify NBER recessions.

3.2.1.2 Corporate Leverage: Debt / EBITDA
3.2.1.2 Corporate Leverage: Debt / EBITDA
Ratio
6

As Of: 2021 Q2

Ratio
6

5

5

High-Yield
4

3

2
2000

4

3

Investment Grade

2005

Source: Bloomberg, L.P.

2010

2015

2020

2

Note: Ratio of debt-to-EBITDA for companies included
in Bloomberg Barclays Investment Grade and HighYield Indices. Gray bars signify NBER recessions.

Fina nc ia l De v el opment s

23

3.2.1.3 Interest Coverage Ratios
3.2.1.3 Interest Coverage Ratios
Ratio
10

As Of: 2021 Q2

Ratio
10

Investment Grade

8

8

6

6

4

4

High-Yield

2

2

0
2000

2005

2010

2015

2020

0

Note: Ratio of earnings-to-interest expenses for companies
included in Bloomberg Barclays Investment Grade and HighYield Indices. Gray bars signify NBER recessions.

Source: Bloomberg, L.P.

3.2.1.4 Nonfinancial Corporations Liquid Assets
3.2.1.4 Nonfinancial Corporations Liquid Assets
Percent of Total Assets
9

As Of: 2021 Q2

Percent of Total Assets
9

8

8

7

7

6

6

5

5

4

4

3

3

2
1980

1985

1990

1995

Source: Federal Reserve,
Haver Analytics

2000

2005

2010

2015

2020

2

Note: Liquid assets includes foreign deposits, checkable deposits and
currency, time and savings deposits, money market fund shares,
security repurchase agreements, debt securities, and mutual fund
shares. Gray bars signify NBER recessions.

3.2.1.5 U.S. Corporate Defaults
3.2.1.5 U.S. Corporate Defaults
Billions of US$
200
160

Total Defaulted Debt
(left axis)

Default Rate (right axis)

12

80

8

40

4

2009

2011

Source: Moody's
Investors Service, OFR
2 0 2 1 F S O C / / Annual Report

2013

In 2020 an increasing number of high-yield
firms defaulted on debt obligations, with the
trailing four quarter default rate peaking at
8.8 percent in the third quarter of 2020 (Chart
3.2.1.5). While this increase represented the
highest default rate in over ten years, it was well
below forecasts made at the onset of the pandemic, when the three major rating agencies
projected the U.S. high-yield corporate default
rate would peak at between 12-15 percent in early 2021. The pace of defaults has since declined
considerably, with U.S. corporate defaults
totaling just $10 billion in the first nine months
of 2021 compared with $159 billion for the
full-year 2020. Consistent with the more favorable outlook, ratings upgrades have outpaced
downgrades in recent quarters, and in the first
three quarters of 2021, the number of upgrades
at Moody’s exceeded downgrades by a record
factor of 2.5 to one.

16

120

0
2007

24

Percent
20

As Of: 2021 Q3

Although corporate debt growth has been
outpaced by GDP or earnings growth since the
early months of the pandemic, overall debt and
leverage levels are still elevated. However, a
number of factors such as continued low interest rates and recovering earnings partially mitigate the burden of this debt. As of the second
quarter of 2021, the interest coverage ratio—
the ratio of earnings to interest expense—is
near the middle of its historical distribution for
publicly traded corporations (Chart 3.2.1.3).
Additionally, the share of debt due within one
year is at a moderate level, as many firms have
refinanced debt to lower interest rates and
extend maturities. Firms continue to maintain
significant holdings of liquid assets, which serve
as a buffer against future drops in revenue or
interest rate increases (Chart 3.2.1.4).

2015

2017

2019

2021

0

Note: Issuer weighted 12-month trailing default
rate for speculative grade U.S. corporates.

Despite the more optimistic outlook, some
firms still face difficulties servicing their debt.
Moreover, debt levels relative to earnings
have remained elevated for firms in sectors
particularly hard-hit by the pandemic such
as airlines, hotels, restaurants, and leisure.
However, elevated debt levels in these sectors
may partly be attributed to firms issuing

As Of: 2021 Q3
Percent
100
Large and Middle-Market Firms
75
Small Firms
50

50

25

25

0

0

-25

-25

-50
1992

1996

2000

2004

Source: Federal Reserve Senior
Loan Officer Opinion Survey

2008

2012

2016

2020

Easing

75

Tightening

Percent
100

-50

Note: Represents net percentage of banks reporting
tightening standards for C&I loans. Large and middlemarket firms are those with annual sales of $50 million
or more. Gray bars signify NBER recessions.

3.2.1.7 Investment Grade Corporate Bond Spreads
3.2.1.7 Investment Grade Corporate Bond Spreads
Percent
10

As Of: 30-Sep-2021

Percent
10

BBB US Corporate Index
Single-A US Corporate Index

8

8

AA US Corporate Index

6

6

4

4

2

2

0
2005

2007

2009

2011

Source: ICE Data Indices,
ICE BofA US, FRED

2013

2015

2017

2019

2021

Hundreds

After surging in March 2020 to levels not seen
since the 2008 financial crisis, investmentgrade corporate bond spreads declined
steadily and are now slightly below their prepandemic levels (Chart 3.2.1.7). Spreads
on high-yield corporate bonds have likewise
declined significantly since the market stress
in March 2020 and are now at very low levels
(Chart 3.2.1.8). These low spreads reflect in
part the more favorable credit outlook. Market
conditions early in the pandemic improved
following the announcement of the Federal
Reserve’s Primary Market Corporate Credit
Facility and Secondary Market Corporate Credit
Facility (Corporate Credit Facilities).

Tightening

The Federal Reserve’s SLOOS indicates
that banks’ willingness to lend to businesses
has increased so far this year, with the net
percentage of respondents reporting an easing
of standards reaching its highest level ever in the
July 2021 survey (Chart 3.2.1.6). This reflects a
sharp reversal in credit conditions from mid2020, when respondents reported a significant
tightening of standards for loans disbursed
outside of the Small Business Administration’s
Paycheck Protection Program (PPP).

3.2.1.6 Bank Business Lending Standards
3.2.1.6 Bank Business Lending Standards

Easing

additional debt to build their liquidity buffers
given the uncertain outlook.

0

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the
calculated spreads between a computed OAS index of all
bonds in a given rating category and a spot Treasury curve.

3.2.1.8 High-Yield Corporate Bond Spreads
3.2.1.8 High-Yield Corporate Bond Spreads
Percent
25

As Of: 30-Sep-2021
Percent
25
Single-B US Corporate Index
BB US Corporate Index
20

20

15

15

10

10

5

5

0
2005

2007

2009

2011

Source: ICE Data Indices,
ICE BofA US, FRED

2013

2015

2017

2019

2021

0

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the
calculated spreads between a computed OAS index of all
bonds in a given rating category and a spot Treasury curve.

Fina nc ia l De v el opment s

25

3.2.1.9 Gross Issuance of Corporate Bonds
3.2.1.9 Gross Issuance of Corporate Bonds
As Of: Sep-2021
Trillions of US$
2.5
High-Yield
Investment Grade
2.0

Trillions of US$
2.5
2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

2006

2008

Source: Refinitiv,
SIFMA

2010

2012

2014

2016

2018

2020

0.0

Note: Includes all non-convertible corporate debt, MTNs, and
Yankee bonds, but excludes all issues with maturities of one
year or less and CDs. 2021 figures are through September.

Consistent with generally accommodative
financing conditions following the market
turmoil of early 2020, issuances of investment
grade corporate bonds have been robust, over
the past year, with investment grade companies
issuing a record $1.9 trillion of corporate bonds
in 2020 and a further $1.2 trillion in the first
nine months of 2021. Additionally, issuances of
high-yield bonds have been robust as financing
conditions remain substantially accommodative.
In the first nine months of 2021, high-yield
bond issuances have totaled a record $408
billion on top of the record $424 billion issued
in 2020 (Chart 3.2.1.9).
A substantial fraction of this issuance has
been used to refinance debt at more favorable
rates, as borrowing rates are near-record-low
levels. Firms have also used issuance proceeds
to increase their cash buffers and to pay down
their substantial credit line draws from the first
half of 2020. As of the second quarter of 2021,
nonfinancial corporate holdings of cash and
cash-like instruments were 38 percent higher
than year-end 2019.

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2 0 2 1 F S O C / / Annual Report

3.2.2 Small Business Debt
Small businesses were hit hard by the
pandemic, especially in service industries
such as restaurants and entertainment. Many
small businesses had to close, in some cases
permanently, due to the economic disruptions
caused by COVID-19. However, easing of social
distancing measures, expansion of vaccine
distribution, advances in therapeutics, and
support from government policies improved
the economic outlook for surviving small
businesses. Nonetheless, small businesses
remain more vulnerable relative to larger firms.

Percent
12.5

As Of: 30-Sep-2021

Percent
12.5

10.0

10.0

7.5

7.5

5.0

5.0

2.5
2011

2013

2015

2017

2019

2021

Hundreds

3.2.1.10 Leveraged Loan Spreads
3.2.1.10 Leveraged Loan Spreads
Hundreds

Institutional leveraged loan issuance came
to a halt in March 2020 as spreads widened
significantly. Since then, spreads have tightened
to the low levels seen before the pandemic
(Chart 3.2.1.10). Even as spreads tightened in
the second half of 2020, issuance of leveraged
loans remained subdued (Chart 3.2.1.11).
However, issuance rebounded to record pace
through the first nine months of 2021, with 31
percent of institutional issuances consisting
of refinancing transactions. Demand from
collateralized loan obligations (CLOs), the
main purchaser of syndicated loans, has
been robust in the first nine months of 2021,
with year-to-date issuance exceeding the
previous record set in 2018. After peaking in
September 2020, the leveraged loan default
rate has steadily declined to below 1 percent in
September 2021. Similarly, the monthly number
of loan downgrades in September reached its
lowest level since 2012.

2.5

Note: Spread-to-maturity for syndicated loans
included in the S&P LCD Leveraged Loan Index.

Source: S&P LCD

3.2.1.11 Leveraged Loan Issuance
3.2.1.11 Leveraged Loan Issuance
Billions of US$
750
Institutional
Pro-Rata
600

As Of: 30-Sep-2021

Billions of US$
750
600

450

450

300

300

150

150

0

2006

2008

Source: S&P LCD

2010

2012

2014

2016

2018

2020

0

Note: 2021 figures are through September.

The Small Business Administration’s PPP,
supported by the Federal Reserve’s Paycheck
Protection Program Liquidity Facility, provided
multiple rounds of support to small businesses,
totaling over $270 billion in 2021 and almost
$800 billion overall. These funds were crucial
to the survival of many small businesses as
economic activity dropped precipitously at the
onset of the pandemic. As of September 26,
2021, 61 percent of all PPP loans have been fully
or partially forgiven and it is projected that a
large majority of PPP loans will ultimately be
forgiven.

Fina nc ia l De v el opment s

27

3.2.3.1 Performance of U.S. Stock Indices
3.2.3.1 Performance of U.S. Stock Indices
Percent
100
75

Percent
100

As Of: 30-Sep-2021
Nasdaq Composite
S&P 500
Russell 2000

75

50

50

25

25

0

0

-25
-50
Jan:2020

-25

Jul:2020

Source: Bloomberg, L.P.

Jan:2021

Jul:2021

-50

Note: Indexed to 31-Dec-2019.

Aided by PPP loans, lending to small businesses
rebounded after declining sharply at the
onset of the pandemic. Despite the continued
vulnerability of many small businesses, lending
remains at roughly pre-pandemic levels. For
instance, the PayNet Small Business Lending
Index in September 2021 was at levels similar to
those observed in summer 2019. Loan demand
remains weak. According to the National
Federation of Independent Business Small
Business Economic Trends Survey, the percent
of small business owners borrowing on a
regular basis fell from 29 percent in December
2019 to 20 percent in September 2021.
After rapidly deteriorating during the first
half of 2020, small business loan performance
has improved in recent months, supported
by PPP funding, other government support,
and improving economic conditions. PayNet’s
measure of short-term delinquencies has
declined steadily since the summer of 2020
and is now below its pre-pandemic levels. The
PayNet longer-term delinquency rate has also
declined considerably. The share of Census
Small Business Pulse Survey respondents
reporting that they expect to need financial
assistance within the next six months has
decreased so far in 2021, with particularly
notable declines in the accommodation and
food services sector.

3.2.3 Equities
U.S. equity prices have increased significantly
over the past year (Chart 3.2.3.1). The gains
have been driven by strong earnings results,
reassessments of the potential for future
earnings growth, historically low interest rates,
supportive monetary and fiscal policies, and a
more positive economic outlook. The strong
pace of initial public offerings (IPOs), including
the increased use of special purpose acquisition
companies (SPACs), also signals increased
investor risk appetite in U.S. equity markets.
Starting in November 2020, positive vaccine
news and the potential for further fiscal
stimulus prompted market participants to
revise their outlook for the U.S economy, which
drove cyclicals and small caps to outperform
28

2 0 2 1 F S O C / / Annual Report

companies with longer-duration cash flows,
such as major tech companies. This rotation
accelerated in the first quarter of 2021, when
longer-dated Treasury yields rose sharply, as
investors adopted a more optimistic view of
the U.S. economic recovery amid additional
government support, successful vaccine
distribution efforts, and continued business
reopenings. By September 30, 2021 the S&P
500 was up 15 percent since the beginning of
the year. Recently, the spread of the COVID-19
Delta variant has weighed on investor sentiment
at times but has been offset by positive
developments in COVID-19 caseloads among
advanced economies and the Food and Drug
Administration’s full approval of the Pfizer
vaccine.
Earnings estimates have improved over the
year. Nearly nine in ten firms beat consensus
profit forecasts throughout the first and second
quarters, and full-year 2021 earnings per share
estimates have been revised sharply upwards.
Meanwhile, in qualitative corporate earnings
commentary, companies have generally adopted
an optimistic stance on the U.S. economic
recovery, while identifying some headwinds,
including higher input costs, labor shortages,
and global supply chain disruptions. Amid the
rosier outlook for corporate profits, the S&P
500’s 12-month forward price-to-earnings ratio
remained elevated relative to its pre-pandemic
average (Chart 3.2.3.2).

3.2.3.2 S&P 500 Forward Price-to-Earnings
3.2.3.2 S&P 500 Forward Price-to-Earnings
P/E
30

As Of: 30-Sep-2021

P/E
30

25

25
Forward Price-to-Earnings

20

10-Year Average

15

10
2017

20

15

2018

2019

2020

2021

10

Source: Bloomberg, L.P.

3.2.3.3 S&P 500 Volatility
3.2.3.3 S&P 500 Volatility
Index
100

As Of: 24-Sep-2021

Index
100

80

80

60

Realized Volatility

Implied Volatility

60

40

40

20

20

0
2006

2008

2010

Source: Bloomberg, L.P.

2012

2014

2016

2018

2020

0

Note: 30-day realized and implied volatility.

Realized equity market volatility has largely
stayed within typical pre-pandemic levels over
the past year (Chart 3.2.3.3). However, optionimplied volatility has remained elevated relative
to pre-pandemic levels through the first nine
months of 2021, a potential sign of forwardlooking uncertainty by investors. Even as
aggregate realized volatility has receded, several
stocks that were the subject of social-media
attention (such as GameStop Corp. and AMC
Entertainment Holdings Inc.) have experienced
extreme movements in their share prices. On
June 7, 2021, the SEC announced that “in light
of the ongoing volatility in certain stocks,” it is
monitoring “if there have been any disruptions

Fina nc ia l De v el opment s

29

3.2.3.4 SPAC Issuances
3.2.3.4 SPAC Issuances
As Of: 2021 Q3

Billions of US$
120

Deal Value (left axis)

Count
300

Deal Count (right axis)

100

250

80

200

60

150

40

100

20

50

0

2016

2017

2018

2019

2020

2021

0

Source: Bloomberg, L.P.

3.2.3.5 Returns in Selected Equities Indices
3.2.3.5 Returns in Selected Equities Indices
As Of: 30-Sep-2021
YTD

Since YE 2019

5 Year (Annualized)

U.S. Indices
S&P 500
Nasdaq Composite
Russell 2000

14.7%
12.1%
11.6%

33.3%
61.0%
32.1%

14.7%
22.1%
12.0%

Other Major Indices
Topix
FTSE 100
Euro Stoxx 50
DAX

12.5%
9.7%
13.9%
11.2%

17.9%
-6.0%
8.1%
15.2%

8.9%
0.5%
6.2%
7.7%

Emerging Markets
MSCI Emerging Market Index
Brazil (Bovespa)
India (S&P BSE Sensex)
MSCI China
Onshore China (CSI 300)
Taiwan (TAIEX)
South Korea (KOSPI)

-3.0%
-6.8%
23.8%
-17.4%
-6.6%
14.9%
7.2%

12.4%
-4.0%
43.3%
4.6%
18.8%
41.2%
39.6%

6.8%
13.7%
16.2%
7.3%
8.4%
13.1%
8.5%

Source: Bloomberg, L.P.

30

2 0 2 1 F S O C / / Annual Report

of the market, manipulative trading, or other
misconduct.” Additionally, on October 14, 2021,
the SEC published its Staff Report on Equity
and Options Market Structure Conditions in
Early 2021, which focused on the January 2021
trading activity of GameStop Corp.
One sign of strong investor appetite for risk
in U.S. equity markets has been the recent
growth of SPAC IPOs, which raised a record
$92 billion in the first quarter of 2021
(Chart 3.2.3.4). SPAC IPOs slowed in the
second and third quarters of 2021 after the
SEC released communications highlighting
investor protection issues, liability risks for
sponsors and managers, and considerations
on the accounting treatment of warrants.
While SPACs provide a structure for increased
participation in private company acquisitions,
they are inherently speculative investments.
Companies going public via SPACs are subject
to limited due diligence, financial reporting,
and disclosure requirements (see Section
3.5.2.8). SPACs have generally underperformed
the broader market, with the IPOX SPAC Index
trailing the S&P 500 by 24 percentage points
year-to-date through September 30, 2021.
Outside the United States, global bourses
have also generally rallied over the past year.
Significant disparities in index composition,
political developments, and COVID-19
vaccination efforts and related activity
restrictions were key factors differentiating
performance (Chart 3.2.3.5). Major indices
in other advanced economies rallied in the
first nine months of 2021 but continue to
underperform U.S. indices. Within emerging
markets, Chinese equities have notably
underperformed in 2021, with the MSCI
China Index and the Shanghai-Shenzhen
CSI 300 Indices declining by 17 percent and
6.6 percent year-to-date, respectively. The
underperformance of Chinese equities can
be partly attributed to the broader regulatory
clampdown in China and increased regulatory
scrutiny in the U.S., including the 2020 Holding
Foreign Companies Accountable Act, enhanced
disclosure requirements, and the potential for
delistings.

3.3 Government Finance
3.3.1 Treasury Market
Since early 2020, Congress has enacted several
rounds of fiscal assistance to help mitigate
the impact of COVID-19 and enable a robust
recovery. These programs, which totaled $5.8
trillion through September 2021, have pushed
the primary deficit and the amount of public
debt outstanding to recent highs ( Charts
3.3.1.1, 3.3.1.2). In July 2021, the Congressional
Budget Office projected that public debt would
rise to 106 percent of GDP in 2031 as compared
to 103 percent of GDP in 2021 and 66 percent of
GDP in 2011. While the credit ratings for U.S.
sovereign debt published by Standard & Poor’s
(S&P), Moody’s, and Fitch have remained
unchanged at AA+, Aaa, and AAA, respectively,
Fitch revised its outlook from stable to negative
in 2020, citing the deterioration in U.S. public
finances and the absence of a credible fiscal
consolidation plan.

3.3.1.1 Federal Budget Surplus/Deficit
3.3.1.1 Federal Budget Surplus/Deficit
Percent of GDP
10
5

Percent of GDP
10

Projected
Historical

5

0

0

-5

-5

-10

-10

-15

-15

-20

1980

1990

2000

Source: CBO, Haver Analytics

2010

2020

2030

-20

Note: Data for fiscal years. Years after
2020 are projected as of July 2021.

3.3.1.2 Federal Debt Held by the Public
3.3.1.2 Federal Debt Held by the Public
Percent of GDP
150
125

Historical

100

Percent of GDP
150
CBO July 2021
Baseline Projection

125
100

75

75

50

50

25

25

0
0
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
Source: CBO, Haver Analytics

Note: Data for fiscal years.
Years after 2020 are projected.

Fina nc ia l De v el opment s

31

3.3.1.3 Net Issuance of Treasury Securities
3.3.1.3 Net Issuance of Treasury Securities
As Of: 2021 Q3
Billions of US$
3000
Bills
Notes and Bonds
Net
2000

Billions of US$
3000

2000

1000

1000

0

0

-1000

2015

2016

2017

2018

2019

Source: U.S. Department of the
Treasury, Bureau of the Fiscal
Service, SIFMA, Haver Analytics

2020

2021

-1000

Note: Includes marketable
securities only.

3.3.1.4 Treasury General Account Balance
3.3.1.4 Treasury General Account Balance
Billions of US$
2000

As Of: 29-Sep-2021

Billions of US$
2000

1750

1750

1500

1500

1250

1250

1000

1000

750

750

500

500

250

250

0
2015

2016

2017

2018

2019

Source: Federal Reserve, Haver Analytics

2020

2021

0

At the beginning of the COVID-19 pandemic,
Treasury issued a record amount of Treasury
securities, with net issuance totaling $2.8
trillion in the second quarter of 2020 (Chart
3.3.1.3). The increase in net issuance came
primarily in the form of Treasury bills, which
lowered the weighted average maturity of
marketable debt from 69 months in March 2020
to 62 months in June 2020. At the same time,
the Treasury General Account at the Federal
Reserve increased significantly, as Treasury
maintained a higher cash balance given the
considerable uncertainty regarding the timing
of COVID-19 related outlays relative to more
normal periods (Chart 3.3.1.4). Net issuance
of Treasury securities tapered off between the
third quarter of 2020 and the third quarter of
2021. During this period, bill supply declined
by $1.4 trillion and coupon supply increased by
$3.2 trillion, as Treasury termed out its debt,
which pushed the weighted average maturity of
marketable debt to a multi-decade high of 72
months as of September 2021.
The decline in Treasury bill supply came in
anticipation of the reinstatement of the debt
ceiling in August. In the fall, the yields on
certain Treasury bills—maturing just past
the date at which the Treasury estimated it
would exhaust its extraordinary measures—
were modestly elevated for a time, as investors
reduced exposures to securities that could be at
risk for delayed payments.
Between September 2020 and September
2021, foreign holdings of U.S. sovereign
debt increased by 6.8 percent to $7.6 trillion.
European countries accounted for the majority
of the increase in Treasury holdings. Over
the past year, the European Union (EU),
the United Kingdom (UK), and Switzerland
increased holdings of Treasury securities by
$153 billion, $138 billion, and $41 billion,
respectively. Japan continues to be the largest
foreign holder of U.S. sovereign debt, with
$1.3 trillion in holdings as of September 2021.
China, the second largest foreign holder of U.S.
Treasury securities, has maintained its holdings
at approximately $1.0 trillion.

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2 0 2 1 F S O C / / Annual Report

Longer-dated U.S. Treasury yields, which
remained at historically low levels through
2020, rose in the first quarter of 2021, as
investors adopted a more optimistic view of
the U.S. economic recovery while pricing in
higher expected inflation over the longer-term.
Between December 31, 2020 and March 31,
2021, the yield on the 10-year Treasury rose by
81 basis points (Chart 3.3.1.5). Longer-dated
Treasury yields largely stabilized in the second
quarter before declining steadily, given reduced
optimism on the pace of the economic recovery
due to the spread of the COVID-19 Delta
variant and Federal Reserve communication
about the outlook for monetary policy. By
September 30, 2021, the 10-year yield had fallen
to 1.49 percent, a decline of 48 basis points
from March 31, 2021. Shorter-dated Treasury
yields remained anchored at or near the zero
lower bounds since the start of the pandemic,
with the yield on the 2-year Treasury standing at
0.28 percent as of September 30, 2021.
Real yields, which fell to historically low levels
in 2020, were little changed on a year-overyear basis through September 2021 (Chart
3.3.1.6). The historically low yield on Treasury
Inflation Protected Securities (TIPS), coupled
with the increase in nominal yields, pushed the
10-year breakeven inflation rate to a multiyear
high of 2.53 percent on May 11, 2021. The
breakeven inflation rate has since declined to
below 2.4 percent, as the decline in nominal
yields over the summer outpaced the decline
in real yields. While the breakeven rate can
provide information about investors’ inflation
expectations, it is an imperfect indicator
given that the breakeven inflation rate is also
influenced by the risk premium.

3.3.1.5 U.S. Treasury Yields
3.3.1.5 U.S. Treasury Yields
Percent
5

As Of: 30-Sep-2021

Percent
5

4

4
10-Year

3

3

2

2

1

1

2-Year

0
2010

2012

2014

2016

2018

2020

0

Source: U.S. Department of the Treasury

3.3.1.6 10-Year TIPS Yield and Breakeven
3.3.1.6 10-Year TIPS Yield and Breakeven
Percent
4

As Of: 30-Sep-2021

3

Percent
4
3

10-Year Breakeven

2

2

1

1

0

0

-1

Treasury InflationProtected Securities

-1

-2
-3
2016

-2
2017

2018

Source: U.S. Department
of the Treasury

2019

2020

2021

-3

Note: Breakeven represents the difference
between the nominal and TIPS yield.

Fina nc ia l De v el opment s

33

3.3.1.7 Intraday Volatility for 10-Year Treasury Yields
3.3.1.7 Intraday Volatility for 10-Year Treasury Yields
Basis Points
40

30

As Of: 24-Sep-2021

40

99th Percentile
95th Percentile

30

Intraday Volatility

20

20

10

10

0
Jan:2020

Jun:2020

Source: Bloomberg, L.P.

34

Basis Points

Nov:2020

Apr:2021

0
Sep:2021

Note: Intraday volatility calculated as daily high yield
minus daily low yield on 10-year Treasury notes.
Percentiles based on January 2005–September 2021.

2 0 2 1 F S O C / / Annual Report

Broadly speaking, U.S. Treasury market
liquidity conditions have been relatively
stable since the stress observed in the spring
of 2020. However, on February 25, 2021,
the Treasury market experienced an abrupt
decline in liquidity conditions in conjunction
with record high trading volumes, as market
participants were reportedly repositioning.
On the afternoon of the 25th, market liquidity
deteriorated, and yields sharply spiked
following a disappointing Treasury auction
(Chart 3.3.1.7). While the event was shortlived, market depth did not fully recover for
several weeks. Similar to previous episodes
of diminished Treasury market liquidity, the
February 25 event raised concerns regarding
Treasury market resilience.

Box A: IAWG Work on Treasury Market Resilience

The Treasury market is the deepest and most liquid
fixed income market in the world. In recent years there
have been several episodes in which liquidity abruptly
deteriorated. These events are important to consider
given the Treasury market’s growing size and its critical
importance for both the official and private sectors. For
example, by issuing Treasury securities, the Treasury
Department seeks to finance the government at the
lowest cost to the taxpayer over time. The Federal
Reserve uses the Treasury market to implement
monetary policy and seeks efficient and effective
transmission of its actions to the broader financial
system. Treasury securities also support the broader
financial system by serving as a source of safe and liquid
assets that support the efficient, stable flow of capital and
credit, and by establishing a benchmark credit-risk-free
yield curve. To ensure that the Treasury market continues
to reliably fulfill its crucial roles, the agencies responsible
for overseeing the market are pursuing a program of
analysis and policy reform to strengthen the resilience of
Treasury market structure.
The Treasury market has multiple segments, including
cash securities, repo, and derivatives. Different agencies
have different regulatory responsibilities for the Treasury
market and the agencies collaborate to ensure effective
surveillance and coordinated policymaking in a group
called the Inter-Agency Working Group for Treasury
Market Surveillance (IAWG), which consists of staff from
the Treasury, Federal Reserve, FRBNY, SEC, and CFTC.
The joint staffs are analyzing specific policy steps that
could strengthen the market. On November 8, 2021, the
IAWG published a Staff Progress Report on the areas of
focus.
While the Treasury market has experienced several
recent episodes of stress, the market disruption in
March 2020 in particular has been well documented,
including in the Council’s 2020 annual report. March
2020 was unique and unprecedented in nature, but
has some commonalities with other recent market
disruptions, including the October 2014 flash rally and
the September 2019 repo market disruption. In February
2021, a similar disruption occurred amid a sudden and
sizeable shift in investor positioning. The February 2021
liquidity disruption was relatively short-lived and did not
require official sector intervention, but it shared common
characteristics with the previous episodes including:

•

A sudden decline in market depth and
intermediation capacity;

•

Abnormally high trading volumes associated with a
shift in crowded investor positioning; and

•

Lack of visibility by both the official sector and the
broader market in terms of the flows that were
driving the market disruption at the time.

The IAWG staffs have looked across these episodes and
created principles that should guide public policy when
pursuing improvements in Treasury market resilience
including:
•

Resilient and elastic liquidity;

•

Transparency that fosters public confidence, fair
trading, and a liquid market;

•

Prices that reflect prevailing and expected economic
and financial conditions;

•

Economic integration across cash, funding, and
derivatives markets;

•

Financing that does not pose a significant threat to
financial stability; and

•

Infrastructure that operates effectively and efficiently.

With these established principles as a guide, the IAWG
has identified workstreams for further study and policy
considerations to improve Treasury market resilience
and work towards better meeting the principles laid out
above. These workstreams are considering:
•

Improving data quality and availability;

•

Improving resilience of market intermediation;

•

Evaluating expanded central clearing;

•

Enhancing trading venue transparency and
oversight; and

•

Examining effects of leverage and fund liquidity risk
management practices.

The IAWG plans to take a comprehensive and
collaborative approach to exploring these workstreams
and evaluating potential next steps. These efforts will
complement the Council’s work on open-end mutual
funds and hedge funds as well as align with the
broad agenda laid out by the Financial Stability Board
regarding core bond markets and nonbank financial
intermediation.

Fina nc ia l De v el opment s

35

3.3.2 Municipal Bond Market

3.3.2.1 Municipal Bond Issuance
3.3.2.1 Municipal Bond Issuance
As Of: Sep-2021

Billions of US$
600

Billions of US$
600

General Obligation
Revenue

500

500

400

400

300

300

200

200

100

100

0

2006

2008

2010

Source: Refinitiv,
SIFMA

2012

2014

2016

2018

2020

0

Note: Excludes maturities of less than 13
months. 2021 figures are through September.

3.3.2.2 Municipal Bond Mutual Fund Flows
3.3.2.2 Monthly Municipal Bond Mutual Fund Flows
Billions of US$
30

Billions of US$
30

As Of: Sep-2021

20

20

10

10

0

0

-10

-10

-20

-20

-30

-30

-40

-40

-50
2010

2012

2014

Source: ICI, Haver Analytics

2016

2018

2020

-50

Note: Net fund flows.

Municipal bond issuers have taken advantage
of strong market conditions over the past year
to issue debt at or near record high volume.
Accommodative financing conditions were
supported by the improvement in the economic
outlook, inflows to municipal bond funds, and a
low interest rate environment.
Municipal debt issuance reached $359 billion
during the first nine months of 2021, following
a record annual issuance of $485 billion in 2020
(Chart 3.3.2.1). New money issuance totaled
$236 billion in the first nine months of 2021, up
20 percent.compared to the first nine months
of 2020. The shift toward new money bonds
came as increased federal aid and improved
revenue forecasts led state and local authorities
to greenlight new projects, including projects
to address aging critical infrastructure. The
issuance of municipal bonds as taxable debt has
increased significantly over the past few years,
reaching a high of 31 percent of municipal
bonds issued in 2020, partly attributable to
changes to the tax code in 2017 that prohibited
tax-exempt advance refunding. While still at
historically high levels, during the first nine
months of 2021, taxable debt issuance dropped
to 24 percent of all new municipal offerings,
likely due in part to the shift toward new money
bond issues as well as increased use of forward
delivery tax-exempt debt to effect refinancings
as an alternative to taxable advance refundings.
The strong pace of municipal bond issuance
has been supported by municipal bond funds,
the largest institutional buyer of municipal
securities. These funds have seen robust inflows
since mid-2020, following very large but shortlived outflows at the onset of the pandemic.
Cumulative net inflows totaled $75 billion
in the first nine months of 2021, the highest
level in over 15 years, following $39 billion
in cumulative net inflows over 2020 (Chart
3.3.2.2).
Municipal borrowing costs have fallen, and
spreads fell to historically low levels through
the first nine months of 2021. The ratio of 10year AAA-rated general obligations to 10-year

36

2 0 2 1 F S O C / / Annual Report

Treasury yields, which spiked to 340 percent in
March 2020, was reported at 74 percent as of
September 30, 2021 (Chart 3.3.2.3). The sharp
tightening of spreads can be partly attributed to
steps taken by the Federal Reserve that helped
restore investor confidence, including the
announcement that it would expand the Money
Market Mutual Fund Liquidity Facility (MMLF)
and the Commercial Paper Funding Facility
(CPFF) to accept certain short-term municipal
securities as eligible collateral, and that it
would create the Municipal Liquidity Facility
(MLF). In light of the significant improvement
in borrowing conditions, participation in
the MLF was ultimately limited and the MLF
ceased purchasing notes on December 31, 2020.
Only the state of Illinois and the Metropolitan
Transportation Authority of New York accessed
the facility.
Municipal revenue growth has rebounded
sharply through the second quarter of 2021
(Chart 3.3.2.4). Revenue had contracted in the
second quarter of 2020 amid delayed tax filings
and an abrupt contraction in economic activity.
Over the past year, expectations for continued
negative fiscal impacts from COVID-19 have
significantly subsided, in light of the vaccine-led
economic reopening and federal fiscal support
for households from the CARES and ARP Acts.
Higher property values have also lifted revenues
through greater property tax intakes. Revenue
losses were also ultimately limited partly by the
pandemic’s disproportionate impact on lowerwage earnings and services consumption, which
tend to account for a smaller share of state and
local revenue.

3.3.2.3 Municipal Bonds to U.S. Treasuries
3.3.2.3 Municipal Bonds to U.S. Treasuries
As Of: 30-Sep-2021

Percent
400

350
300

Percent
400

2005–Present Average
10-Year AAA

350
300

250

250

200

200

150

150

100

100

50

50

0
2015

2016

2017

Source: Municipal Market
Advisors, Bloomberg, L.P.

2018

2019

2020

2021

0

Note: Percentage of municipal yields against equivalent Treasury
yields. Bloomberg's BVAL AAA Benchmark replaced MMA as the
provider for municipal yields on September 1, 2010.

3.3.2.4 Changes in State and Local Government Tax Revenues
3.3.2.4 Changes in State and Local Government Tax Revenues
Percent

As Of: 2021 Q2

Percent

25

25

20

20

15

15

10

10

5

5

0

0

-5

-5

-10
1998

2001

2004

Source: U.S. Census
Bureau, Haver Analytics

2007

2010

2013

2016

2019

-10

Note: Data represents year-over-year percentage
change. Revenue measures includes revenues from
property, individual income, corporate income, and sales
taxes. Gray bars signify NBER recessions.

Aggregate reserve fund balances have declined
only slightly through fiscal year 2021 compared
to the record high reached in 2019, according
to the National Association of State Budget
Officers. States were able to keep reserve funds
relatively stable in aggregate by relying on
unassigned surpluses, spending cuts, hiring
freezes, and support provided by the CARES
Act to offset pandemic spending needs. The
ARP Act also included $350 billion of direct
aid to state, local, territorial, and tribal
governments.
Fina nc ia l De v el opment s

37

Downgrades in the municipal sector have been
limited, in light of the relatively steady reserve
fund balances and the rapid recovery in revenue.
The relatively slow pace of rating downgrades may
also be partly attributed to the forward-looking
nature of credit ratings. In 2020, downgrades
represented 4 percent of Fitch’s credit reviews,
while S&P downgraded approximately 4 percent
of its municipal ratings universe. Rating agencies
have reversed the negative ratings outlook for most
municipal sectors. While the recent rebound in
invested asset prices supported improved pension
funding ratios, longer-term challenges around
pension and retiree health care liabilities remain a
concern in the market. In addition, the pandemic
and the emergence of the Delta variant continue
to raise uncertainty about commuting patterns,
hospitality, and tourism.
Public sector employment declined sharply
despite the rebound in revenues. State and local
employment fell by 1.4 million people, or 6.9
percent, from February 2020 to February 2021, due
to pessimistic budget forecasts and reduced hiring
needs. Social distancing restrictions and school
closures disproportionately impacted workers in
the education sector, including K-12 schools and
higher education institutions. While state and local
employment has since rebounded, it remains below
pre-pandemic levels through September 2021.
Despite initial concerns regarding pension funding
at the onset of the COVID-19 pandemic, most state
and local employers met their pension contribution
requirements. According to the Pension Plan
Database, approximately three-quarters of funds
have met or exceeded their actuarially determined
employer contribution requirement in fiscal year
2020.

Puerto Rico
The fiscal crisis of Puerto Rico remains distinctive
in a sector with few defaults historically. The Puerto
Rico debt adjustment process has continued over the
past year.
The Puerto Rico Oversight, Management, and
Economic Stability Act (PROMESA), enacted in
June 2016, established the Financial Oversight
and Management Board for Puerto Rico (FOMB).
38

2 0 2 1 F S O C / / Annual Report

The FOMB has the authority to designate Puerto
Rico instrumentalities to be subject to its oversight.
Further, the FOMB has the authority to file
and litigate bankruptcy-like cases on behalf of
the Commonwealth or any covered territorial
instrumentality. Debt restructuring cases filed
under Title III of PROMESA remain pending for
the Commonwealth and certain other Puerto Rico
instrumentalities.
The FOMB has filed a number of proposed
Plans of Adjustment to adjust the debts of the
Commonwealth of Puerto Rico, including
a proposed resolution of Puerto Rico’s
pension liabilities during the pendency of the
Commonwealth’s PROMESA Title III case. The
FOMB filed a Modified Eighth Amended Plan of
Adjustment for the Commonwealth on November
7, 2021. This Modified Eighth Amended Plan
of Adjustment includes a post-debt adjustment
debt sustainability analysis for Puerto Rico. If
approved, it would reduce over $33 billion of
Commonwealth and instrumentality debt claims
to approximately $18 billion of cash payments and
new debt instruments, in addition to payments from
contingent value instruments.
The PROMESA Title III case of the Puerto Rico
Electric Power Authority (PREPA) also remains
pending as of September 2021. PREPA’s 2021 Fiscal
Plan requires it to transfer management of its
main operating assets to private service providers.
A service contract for PREPA’s transmission and
distribution system began in June 2021 by LUMA
Energy, a consortium of U.S. and Canadian private
corporations. PREPA is currently engaged in the
selection process for a private operator for some of
its generation assets.
The Commonwealth’s 2021 Fiscal Plan, certified by
the FOMB, projects real economic growth to average
0.4 percent annually over the next eight years, mostly
due to various forms of federal assistance. This
projected economic growth, in combination with
required fiscal measures and structural reforms, are
expected to contribute to an average annual predebt service surplus of $1.3 billion over the next five
years, up from an expected $578 million in the 2020
Fiscal Plan.

General fund collections by the Commonwealth
fell sharply at the onset of the pandemic but
have since rebounded. General fund collections
were 2.6 percent higher in fiscal year 2021
(ended June 30, 2021) compared to 2019. The
2021 Fiscal Plan forecasts that outmigration,
rising healthcare costs, and the phase-out of
federal aid will lead to annual deficits starting
in 2036—five years later than projected in the
2020 plan.

3.4 Financial Markets
3.4.1 Wholesale Funding Markets: Unsecured
Borrowing
Commercial Paper

3.4.1.1 CP Outstanding by Issuer Type
3.4.1.1 CP Outstanding by Issuer Type
Trillions of US$
2.5

As Of: Sep-2021

Trillions of US$
2.5

Other
Foreign Nonfinancial
Foreign Financial
Domestic Nonfinancial
Domestic Financial
ABCP

2.0
1.5

2.0
1.5

1.0

1.0

0.5

0.5

0.0
2004

2008

Source: Federal Reserve,
Haver Analytics

2012

2016

2020

0.0

Note: Not seasonally adjusted. Domestic includes
CP issued in the U.S. by entities with foreign parents.

The commercial paper (CP) market is an
important source of unsecured funding for
financial and nonfinancial companies to meet
current operating needs. CP is a financial
instrument with maturity up to 270 days,
with approximately 80 percent of CP having
a maturity of less than 21 days. Firms relying
on the CP market for funding are susceptible
to changing market conditions during the
rollover period. In mid-March 2020, the U.S. CP
market was severely disrupted amid economic
uncertainty arising from the COVID-19
pandemic. Federal Reserve actions, including the
establishment of the Commercial Paper Funding
Facility (CPFF) on March 17, 2020, helped
stabilize the CP market, and firms have since
been able to roll-over debt at favorable terms.
The size of the CP market declined in the
months following the initial COVID-19 market
shock, with total CP outstanding falling by $88
billion, or 8.4 percent, between year-end 2019
and September 2020 (Chart 3.4.1.1). Issuances
have since picked up, and by September 2021,
the total amount of CP outstanding totaled $1.1
trillion, up 12 percent from September 2020 as
investors’ appetite for CP improved.
Since year-end 2019, there has been a
significant shift in the composition of CP
outstanding. The share of CP outstanding
issued by domestic nonfinancial companies
steadily declined from 19 percent at year-end
2019 to 11 percent as of September 2021. In
Fina nc ia l De v el opment s

39

3.4.1.2 CP Investors
3.4.1.2 CP Investors
Percent
100

As Of: 2021 Q2

Percent
100

Other

80

80
State & Local Governments
Nonfinancial Corporates

60

60

Funding Corporations

40

40
Money Market Funds

20
0
1990

1994

1998

2002

2006

20

2010

2014

2018

0

Source: Federal Reserve, Haver Analytics

3.4.1.3 3-Month CP Interest Rate Spreads

3.4.1.3 3-Month CP Interest Rate Spreads
Percent
4

3

As Of: 30-Sep-2021

Percent
4

A2/P2-Rated Nonfinancial
AA-Rated ABCP
AA-Rated Financial
AA-Rated Nonfinancial

3

2

2

1

1

0

0

-1
Jan:2020

Jul:2020

Source: Federal Reserve,
Bloomberg, L.P.

Jan:2021

Jul:2021

-1

Note: Spread to 3-Month
Overnight Index Swap (OIS) rate.

contrast, foreign financial companies, which
are the largest issuers of CP, saw their share of
the CP outstanding increase from 31 percent
to 40 percent over the same period. This
reflects a longer-term trend of foreign financial
companies increasing their usage of the U.S.
CP market to meet their dollar funding needs.
For comparison, foreign financial companies
accounted for 9.1 percent of the CP market at
the end of 2005. The share of CP market issued
by other participants has remained fairly stable
over the past two years, and as of September
2021, asset-backed commercial paper (ABCP),
domestic financial, and foreign nonfinancial
issuers accounted for 24 percent, 19 percent,
and 5.6 percent of the CP market, respectively.
The CP investor base is diverse, with financial
and nonfinancial corporations, state and
local authorities, MMFs, and other investment
vehicles all participating in the CP market
(Chart 3.4.1.2). While MMFs’ share has
declined considerably since the implementation
of MMF reforms in 2016, they are still among
the largest investors in the CP market. In
March 2020, prime MMFs sought to reduce CP
holdings and raise cash in response to realized
and expected investor redemptions (see Section
3.5.2.3). After the establishment of the CPFF
and the MMLF, conditions among prime MMFs
stabilized. Funds have maintained a fairly stable
share of assets invested in CP.
Ample liquidity conditions, particularly for
financials, and strong investor demand are
reflected in the low spreads of the 90-day
CP rate to the overnight index swap (OIS)
rate (Chart 3.4.1.3). Over the past year,
the quarterly average spreads on 90-day AA
Nonfinancial CP declined from 3 to -3 basis
points, spreads on 90-day A2/P2 Nonfinancial
CP declined from 24 to 11 basis points, and
spreads on 90-day AA Financial CP narrowed
from 6 to 2 basis points.

Bank Deposits
Deposits can be a stable source of funding for
banks, although the stability of different types
of deposits can vary. Rate sensitive deposits,
40

2 0 2 1 F S O C / / Annual Report

such as brokered certificates of deposit (CDs),
listing service deposits, and large-denomination
deposits, are considered riskier sources of
funding than retail deposits because balances
can be volatile if customers find more appealing
rates elsewhere. Credit sensitive deposits, such
as uninsured deposits and municipal deposits,
may also be a riskier source of funding because
balances can be volatile if customers have
concerns about the credit quality of the bank.
Since the start of the pandemic, total deposits
at U.S. commercial banks have grown
significantly. Total deposits at U.S. commercial
banks increased by $2.9 trillion in 2020 and
a further $1.4 trillion in the first nine months
of 2021 to stand at nearly $18 trillion as of
September 2021. Much of the increase in bank
deposits was driven by insured retail deposits
and operational corporate deposits, which are
relatively stable sources of funding. In contrast,
large time deposits, which include wholesale
CDs, declined by over 11 percent on a yearover-year basis through September 2021 (Chart
3.4.1.4). The increase of bank deposits, coupled
with the shift in the composition of bank
deposits, has likely resulted in a more stable
funding base.

3.4.1.4 Commercial Bank Deposit Growth

3.4.1.4 Commercial Bank Deposit Growth
Percent
30

As Of: Sep-2021

20

Percent
30
20

Total Deposits

10

10

0

0

-10
-20

-10
-20

Large Time Deposits

-30
2007

2009

2011

Source: Federal Reserve

2013

2015

2017

2019

2021

-30

Note: Year-over-year percentage change.

3.4.2 Wholesale Funding Markets: Secured
Borrowing
The repo market is an important source
of secured financing for dealers and other
financial institutions and is an important venue
for the implementation of monetary policy.
Well-functioning repo markets support liquidity
and price discovery in cash markets, helping
to improve the efficient allocation of capital
and to reduce the funding costs of firms in the
real economy. However, firms reliant on repo
financing may be vulnerable to funding shocks,
particularly during periods of market stress.
Repo borrowing, as reported in the Financial
Accounts of the United States, totaled $4.8
trillion as of the second quarter of 2021, up
from $4.1 trillion a year earlier. The market
consists of two main segments: tri-party repo,
in which settlement occurs within the custodial
accounts of a clearing bank, and bilateral
Fina nc ia l De v el opment s

41

3.4.2.1 Repo Volumes
3.4.2.1 Repo Volumes
Billions of US$
1500
1200

As Of: 30-Sep-2021

Billions of US$
1500

SOFR

1200

900
600

900
600

TGCR

300
0
Apr:2018

300

Apr:2019

Apr:2020

Apr:2021

0

Note: TGCR = Tri-Party General Collateral Rate;
SOFR = Secured Overnight Financing Rate.

Source: FRBNY

3.4.2.2 Sponsored Repo Activity
3.4.2.2 Sponsored Repo Activity
As Of: Sep-2021
Billions of US$
700
Repo Borrowing
Repo Lending
600
Aggregate

600

500

500

400

400

300

300

200

200

100

100

0
Jul:2019
Source: DTCC

42

Billions of US$
700

Jan:2020

Jul:2020

Jan:2021

Jul:2021

0

Note: Average daily volume. Breakdown of repo lending
and repo borrowing unavailable prior to April 2020.

2 0 2 1 F S O C / / Annual Report

repo, which typically refers to all activity not
settled within the tri-party system, including
bilateral repo transactions cleared through
the Fixed Income Clearing Corporation
(FICC) and bilateral repo that is not centrally
cleared. Primary dealers, which are trading
counterparties of FRBNY, are active in both
segments of the market, and often act as
borrowers in the tri-party segment, and both
borrowers and lenders in the bilateral segments.
SOFR and Tri-party General Collateral Rate
(TGCR) volumes, which temporarily spiked
at the onset of the pandemic, have remained
relatively steady over the past year (Chart
3.4.2.1).1 Similarly, the total volume at FICC’s
sponsored repo service, which is a subset of
SOFR volume, has declined from its March
2020 peak and is now below pre-pandemic
levels (Chart 3.4.2.2). Sponsored repo
allows cash lenders, such as MMFs, and repo
borrowers, such as hedge funds, to participate
in the FICC-cleared bilateral segment. The
service also allows sponsoring members to
minimize balance sheet usage by netting their
repo lending and borrowing. While clearing
sponsors guarantee sponsored members
obligations, the growth of sponsored repo
increases overall market exposure to FICC as a
central counterparty.

Primary dealer cash borrowing in the repo
market stood at $2.4 trillion as of September
29, 2021, largely unchanged from the previous
year (Chart 3.4.2.3). Of this borrowing, over
90 percent was collateralized by Treasuries
or agency MBS (Chart 3.4.2.4). Focusing on
the aggregate tri-party market, where primary
dealers are the main borrowers, 86 percent of
repo transactions were backed by Treasuries
or agency MBS at the end of September 2021.
Median haircuts on collateral used in tri-party
repo transactions were relatively flat for the year
across most collateral classes.

3.4.2.3 Primary Dealer Repo Agreements
3.4.2.3 Primary Dealer Repo Agreements
Trillions of US$
3.5
3.0

As Of: 29-Sep-2021

Trillions of US$
3.5

Overnight/Continuing
Term

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2014

2015

2016

2017

2018

2019

2020

2021

0.0

Source: FRBNY, Haver Analytics

3.4.2.4 Primary Dealer Repo Collateral
3.4.2.4 Primary Dealer Repo Collateral
Trillions of US$
As Of: 29-Sep-2021
3.5
Agency Debt
Other
Agency MBS
Equities
3.0
U.S. Treasuries
Corporates
2.5

Trillions of US$
3.5
3.0
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2014

2015

2016

2017

Source: FRBNY, Haver Analytics

2018

2019

2020

2021

0.0

Note: U.S. Treasuries includes
TIPS. Other includes ABS.

Fina nc ia l De v el opment s

43

3.4.2.5 Primary Dealer Reverse Repo Agreements
3.4.2.5 Primary Dealer Reverse Repo Agreements
Trillions of US$
As Of: 29-Sep-2021
3.0
Overnight/Continuing
Term
2.5

Trillions of US$
3.0
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2014

2015

2016

2017

2018

2019

2020

2021

0.0

Source: FRBNY, Haver Analytics

3.4.2.6 Repo Borrowing of Qualifying Hedge Funds
3.4.2.6 Repo Borrowing of Qualifying Hedge Funds
Billions of US$
1500

As Of: 2021 Q1

1250

1250

1000

1000

750

750

500

500

250
2014

2015

2016

Source: SEC Form PF
Statistics Report

44

Billions of US$
1500

2 0 2 1 F S O C / / Annual Report

2017

2018

2019

2020

250

Note: Repo borrowing as reported on
Question 43 of Form PF.

Similarly, cash lending by primary dealers in
the repo market (reverse repo) was unchanged
over the past year, totaling $1.9 trillion on
September 29, 2021 (Chart 3.4.2.5). However,
the share of primary dealer reverse repo that is
lent overnight has continued to increase, and
as of the end of September 2021, overnight
repo lending accounted for 51 percent of
outstanding reverse repo agreements compared
with 39 percent five years prior. Primary dealers
typically lend to leveraged investors, such as
hedge funds, in the segment of the bilateral
repo market that is not centrally cleared. Hedge
fund repo borrowing declined from its prepandemic peak, but remained elevated in the
aftermath of the March 2020 market stress. As
of the first quarter of 2021, hedge funds’ repo
borrowing totaled $1.0 trillion (Chart 3.4.2.6).

Over the past year, repo market rates were
low and stable, in part because of the ample
liquidity in funding markets (Chart 3.4.2.7).
Participation at the Federal Reserve’s Overnight
Reverse Repurchase Agreement Facility (ONRRP) has been high, with take-up in excess
of $1.6 trillion on September 30, 2021 (Chart
3.4.2.8). The increase in participation has
largely been driven by MMFs, as the facility
provides an alternative investment vehicle for
MMFs amid the declining supply of Treasury
bills and low money market rates.
On July 28, 2021, the Federal Reserve
announced a Standing Repo Facility (SRF)
and a permanent repo facility for foreign and
international monetary authorities (FIMA repo
facility), which are intended to support the
effective implementation of monetary policy
and smooth market functioning. The SRF
allows primary dealers and eligible depository
institutions to borrow in overnight repo backed
by Treasury or agency securities. In March of
2020, the U.S. Treasury market experienced
extraordinary volumes of selling by a broad
range of investors, including foreign official
accounts. To address global funding pressures
that may affect U.S. financial conditions, the
FIMA repo facility allows foreign central banks
and international accounts to raise funds
against their holdings of Treasury securities
maintained in custody at the FRBNY. Both
facilities will operate similar to the temporary
operations that helped stabilize market
functioning at the onset of the pandemic. The
facilities should act as backstops in money
markets to dampen upward pressures in repo
markets that may spill over to the federal funds
market, as was the case in September 2019.2

3.4.2.7 Repo Rates
3.4.2.7 Repo Rates
Percent
6
SOFR
5 TGCR

As Of: 30-Sep-2021

Percent
6
5

4

4

3

3

2

2

1

1

0
Jan:2019

Jul:2019

Jan:2020

Jul:2020

Jan:2021

Jul:2021

0

Note: TGCR = Tri-party General Collateral Rate;
SOFR = Secured Overnight Financing Rate.

Source: FRBNY

3.4.2.8 ON-RRP Participation

3.4.2.8 ON-RRP Participation

Billions of US$
1800

As Of: 30-Sep-2021

Billions of US$
1800

1500

1500

1200

1200

900

900

600

600

300

300

0
2017
Source: FRBNY

2018

2019

2020

2021

0

Note: Overnight Reverse
Repurchase Agreement Facility.

Wholesale Funding Markets: Securities Lending
Securities lending plays an important role
in financial market functioning. Securities
lending transactions involve the temporary
transfer of a security by one party (the lender)
to another (the borrower) in exchange for
cash or non-cash collateral. In addition to
broker-dealers using rehypothecated securities
from customers’ margin accounts for lending,
Fina nc ia l De v el opment s

45

3.4.2.9 Value of Securities on Loan
3.4.2.9 Value of Securities on Loan
Trillions of US$
As Of: 30-Sep-2021
3.5
Foreign Markets
3.0
U.S. Market

Trillions of US$
3.5
3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2015

2016

2017

Source: Markit

2018

2019

2020

2021

0.0

Note: Data is based on a
survey of agent-based lenders.

other lenders consist of large institutional
investors, including mutual funds, pension
plans, and insurers. Initial borrowers of
securities are typically broker-dealers or
banks. They generally do not retain borrowed
securities, but re-lend them to the ultimate
borrowers of securities, which include hedge
funds, derivatives traders, and market makers.
Lenders generally use a securities lending
agent to facilitate loans, although some may
lend securities directly to a borrower. Banks
that specialize in providing custodial services
for securities are the most common lending
agents, and some asset managers also perform
this function. For lenders, securities lending is
generally used to enhance income. Lenders can
generate additional income by receiving a fee
from the transactions’ borrowers or reinvesting
the cash collateral if the borrower posts cash
collateral. Most security lending arrangements
allow the borrower to return the borrowed
securities on short notice in exchange for the
collateral posted.
Centralized monitoring of securities lending
activities is difficult due to the lack of
comprehensive, standardized statistics on
securities lending activities. Instead, data on the
securities lending market is based on surveys.
According to the Markit survey of agent-based
lenders, the estimated value of securities on
loan globally was $3.1 trillion at the end of
September 2021, up from $2.5 trillion at the
end of September 2020 (Chart 3.4.2.9). Most
of the growth during the period occurred in
the last quarter of 2020 and the first quarter
of 2021, as equity markets experienced short
squeezes and the demand for borrowing
government bonds rose. U.S. securities continue
to account for the majority of global securities
on loan, accounting for 58 percent of global
securities on loan as of the end of September
2021.
Equities and government bonds continue to
account for most of the estimated value of
securities on loan in the United States. As of
September 30, 2021, government bonds totaled
$811 billion or 46 percent of securities on loan

46

2 0 2 1 F S O C / / Annual Report

while equities totaled $646 billion or 36 percent
of the total amount of securities on loan (Chart
3.4.2.10). Notably, borrowers’ use of cash
collateral rose in 2021 after reaching a new low
at the end of 2020. The estimated share of cash
posted as collateral to borrow securities globally
has stabilized slightly above 35 percent as of the
end of September 2021 (Chart 3.4.2.11).
In the U.S., reinvestment of cash collateral
from securities lending was estimated to be
$747 billion at the end of the second quarter of
2021, up from about $649 billion at the end of
the second quarter of the previous year (Chart
3.4.2.12). The mean and median weighted
average maturity of cash reinvestment portfolios
were reported at 70 days and 63 days in the
second quarter of 2021, respectively.

3.4.2.10 Value of U.S. Securities on Loan
3.4.2.10 Value of U.S. Securities on Loan
Trillions of US$
As Of: 30-Sep-2021
2.5
Other
ETFs
Corporate Bonds
2.0
Equities
Government Debt
1.5

Trillions of US$
2.5
2.0
1.5

1.0

1.0

0.5

0.5

0.0
2015

2016

2017

2018

2019

2020

0.0

2021

Note: Data is based on a
survey of agent-based lenders.

Source: Markit

3.4.2.11 Securities Lending Cash Collateral
3.4.2.11 Securities Lending Cash Collateral
Percent
50

As Of: 30-Sep-2021

Percent
50

45

45

40

40

35

35

30

30

25
2015

2016

2017

2018

2019

2020

25

2021

Note: Data is based on a
survey of agent-based lenders.

Source: Markit

3.4.2.12 U.S. Securities Lending Cash Reinvestment
3.4.2.12 U.S. Securities Lending Cash Reinvestment
Trillions of US$
As Of: 2021 Q2
2.4
Total Cash Reinvestment
(left axis)
2.0

Days
300

250

1.6

200
Mean WAM (right axis)

1.2

Median WAM (right axis)

150

0.8

100

0.4

50

0.0
2005

2007

2009

Source: The Risk
Management Association

2011

2013

2015

2017

2019

0
2021

Note: Data is based on a
survey of agent-based lenders.
Fina nc ia l De v el opment s

47

3.4.2.13 U.S. Securities Lending Cash Reinvestment Collateral

3.4.2.13 U.S. Securities Lending Cash Reinvestment Collateral
As Of: 2021 Q2

Percent of Total

100

Percent of Total

100

Other
Commercial Paper
Bank Deposits

80

80

Money Market Funds

60

60

Government Repo

40

40

Corporate Securities

20

20

0
2012

Nongovernment Repo
2014

2016

Source: The Risk Management
Association, OFR

2018

2020

0

Note: Nongovernment repos have collateral of whole
loans, equity, and corporate debt. Other includes ABS,
funding agreements, other funds, and other vehicles.
Data is based on a survey of agent-based lenders.

3.4.3 Derivatives Markets
3.4.3.1 Futures

3.4.3.1 U.S. Futures Markets Volume
3.4.3.1 U.S. Futures Markets Volume
Billions of Contracts
6

As Of: 2021 Q3

Billions of Contracts
6

5

5

4

4

3

3

2

2

1

1

0

2016

2017

Source: CFTC

2018

2019

In terms of the composition of cash
reinvestment portfolios, the estimated share
allocated to repos backed by non-government
collateral was 29 percent at the end of the
second quarter of 2021, up from 26 percent
at the end of the second quarter of 2020.
This increase is mainly due to the rise of repo
backed by equity and non-investment grade
corporate collateral. The share of bank deposit
and government repo fell to 15 percent and 9.2
percent, respectively, from 16 percent and 9.8
percent one year earlier. The estimated share
of cash reinvestment portfolios allocated to CP
declined to 8.0 percent at the end of the second
quarter of 2021 from 8.7 percent at the end of
the second quarter of 2020 (Chart 3.4.2.13).

2020

2021

0

Note: 2016–2020 figures represent full year
volumes. 2021 figure represents year-todate volume through September 30, 2021.

The U.S. futures markets attract broad
participation from domestic and international
market participants seeking to hedge or
manage risk and invest or speculate in U.S.
markets. Commercial participants routinely use
the commodity markets for hedging and risk
management activities. Financial intermediaries
and other non-commercial participants, who
provide liquidity and order book depth in
U.S. futures markets, have increased their
participation.
In 2020, a record 4.5 billion futures contracts
were executed across all U.S. exchanges (Chart
3.4.3.1). 2021 volumes are on a similar pace,
with 3.4 billion contracts traded through
the first nine month of 2021. Interest rate
futures continued to account for a large
share of futures market activity, comprising
approximately 38 percent of contracts traded
to date in 2021. Equity index futures comprised
17 percent of total volume, and energy futures
comprised 20 percent, notably in crude oil,
gasoline, and natural gas. Agriculture, base
metals, and industrial metal futures were each
approximately 10 percent of total volume.
But using another measure of market activity,
open interest, defined as the total notional
amount of outstanding contracts, activity
declined in 2020 (Chart 3.4.3.2). This decline

48

2 0 2 1 F S O C / / Annual Report

in open interest can be largely attributed to
reduced open interest in short-term interest rate
futures, which account for a disproportionate
share the total notional amount outstanding.
Between year-end 2019 and year-end 2020, open
interest in Eurodollar futures declined by $1.8
trillion. Open interest in Eurodollar futures
and the broader futures market increased
slightly in 2021 but remain below 2019 levels.
Volatility levels were elevated in 2021 for certain
commodity futures. Realized volatility levels for
agricultural futures, such as corn and soybean
futures, were particularly elevated as these asset
classes saw a record run-up in prices followed
by fairly significant mean reversion (Chart
3.4.3.3). In contrast, realized volatility in S&P
500 futures was subdued relative to the past five
years on average.

3.4.3.2 U.S. Futures Markets Open Interest
3.4.3.2 U.S. Futures Markets Open Interest
Trillions of US$
30

As Of: 30-Sep-2021

Trillions of US$
30

25

25

20

20

15

15

10

10

5

5

0

2016

2017

2018

2019

2020

0

2021

Note: Open interest as of
September 30 for all years.

Source: CFTC

3.4.3.3 Futures 60-Day Historical Volatility
3.4.3.3 Futures 60-Day Historical Volatility
Percent
70

Percent
70

As Of: 30-Sep-2021
5-Year Average
9/30/2021

60

60

2021 Range

50

50

40

40

30

30

20

20

10

10

0

Gold

Crude Oil S&P 500

Corn

Silver

Soybean

0

Source: Bloomberg, L.P.

Fina nc ia l De v el opment s

49

3.4.3.4 Micro Futures Contracts Open Interest
3.4.3.4 Micro Futures Contracts Open Interest
Billions of US$
As Of: 30-Sep-2021
5
Treasuries
Stock Indices
Metals
4
Energy
Currencies

Billions of US$
5
4

3

3

2

2

1

1

0

2016

2017

Source: CFTC

2018

2019

2020

2021

0

Note: Open interest as of September 30 for all years.

3.4.3.5 Futures Transaction Volume – Leaderboard
3.4.3.5 Futures Transaction Volume – Leaderboard
Futures Contract
1.

3-Month Eurodollars

439 Million

2.

10-Year Treasury Notes

357 Million

3.

E-Mini S&P 500 Stock Index

300 Million

4.

5-Year Treasury Notes

209 Million

5.

WTI Crude Oil

183 Million

6.

Micro E-Mini NASDAQ 100

174 Million

7.

Micro E-Mini S&P 500 Index

161 Million

8.

E-mini NASDAQ 100 Index

103 Million

9.

U.S. Treasury Bonds

10. 2-Year U.S. Treasury Notes
Source: CFTC

50

Number of
Contracts (YTD)

86 Million

82 Million

Note: Total futures volume through September 30, 2021.

2 0 2 1 F S O C / / Annual Report

Smaller-sized “micro” futures have expanded
significantly since 2018, particularly futures
on stock indices, such as the S&P 500, Nasdaq
100, Dow Jones Industrial Average, or Russell
2000 indices (Chart 3.4.3.4). The Micro
E-Mini S&P 500 and the Micro E-Mini Nasdaq
100 are now among the most actively traded
futures contracts (Chart 3.4.3.5). However,
when adjusted for contract size, micro futures’
trading volumes are still significantly lower
than their larger E-mini counterparts. Dollar
volumes for Micro E-Mini S&P 500 and Micro
E-mini Nasdaq 100 futures were approximately
5.3 percent and 17 percent of E-mini contracts
through the first nine months of 2021,
respectively.

3.4.3.6 U.S. Treasury Futures Open Interest: Asset Manager
3.4.3.6 U.S. Treasury Futures Open Interest: Asset Manager
Billions of US$
1000

As Of: 28-Sep-2021

12/29/2015

12/29/2016

12/29/2017

12/29/2018

Billions of US$
1000

12/29/2019

12/29/2020

30-Year
10-Year
5-Year
2-Year

750
500

750
500

250

250

0

0

-250

-250

-500

-500

-750

-750

-1000
2016

2017

2018

2019

2020

-1000

2021

Note: Note: Net notional amount of open interest. 10-Year
includes 10-Year and 10-Year Ultra Treasury Note Futures; 30Year includes Treasury Bond and Ultra Treasury Bond Futures.

Source: CFTC,
Haver Analytics

3.4.3.7 U.S. Treasury Futures Open Interest: Leveraged Funds

750
500

30-Year
10-Year
5-Year
2-Year

8/31/2021

7/31/2021

6/30/2021

5/31/2021

4/30/2021

3/31/2021

Billions of US$
1000

1/31/2021
2/28/2021

12/31/2020

11/30/2020

10/31/2020

9/30/2020

8/31/2020

7/31/2020

6/30/2020

5/31/2020

4/30/2020

3/31/2020

2/29/2020

1/31/2020

12/31/2019

11/30/2019

10/31/2019

9/30/2019

8/31/2019

7/31/2019

6/30/2019

5/31/2019

4/30/2019

3/31/2019

1/31/2019
2/28/2019

12/31/2018

11/30/2018

10/31/2018

9/30/2018

8/31/2018

7/31/2018

6/30/2018

5/31/2018

4/30/2018

3/31/2018

1/31/2018
2/28/2018

12/31/2017

11/30/2017

As Of: 28-Sep-2021

10/31/2017

9/30/2017

8/31/2017

7/31/2017

6/30/2017

5/31/2017

4/30/2017

3/31/2017

1/31/2017
2/28/2017

12/31/2016

11/30/2016

10/31/2016

9/30/2016

7/31/2016

6/30/2016

5/31/2016

4/30/2016

3/31/2016

2/29/2016

Billions of US$
1000

8/31/2016

3.4.3.7 U.S. Treasury Futures Open Interest: Leveraged Funds
1/29/2016

In U.S. Treasury futures, asset managers and
leveraged funds have significantly changed
their positions over the past year (Chart 3.4.3.6,
3.4.3.7). Asset managers, including pension
and other long-only unleveraged funds, have
historically been long futures across the
Treasury curve, while leveraged funds have
been short futures across the curve. However,
since the onset of the COVID-19 pandemic,
asset managers have reduced their net long
positions and in early 2021, these investors
became net short in the 10-year for the first
time since 2017. Similarly, leveraged funds have
reduced their net short positions, and were net
long the 10-year contract for much of 2021.
For asset managers, one potential explanation
for the positioning change is that with interest
rates at the zero-lower bound, hedging demand
has fallen. The decline in leveraged funds’ net
short positions can be partly attributed to an
unwinding of the cash-futures basis trade since
March 2020. Ample liquidity in the financial
system has diminished the profitability of this
trading strategy.

12/29/2015

Positioning in Treasury Futures

750
500

250

250

0

0
-250

-250

-500

-500

-750

-750

-1000
2016
Source: CFTC,
Haver Analytics

2017

2018

2019

2020

2021

-1000

Note: Net notional amount of open interest. 10-Year includes
10-Year and 10-Year Ultra Treasury Note Futures; 30-Year
includes Treasury Bond and Ultra Treasury Bond Futures.

Fina nc ia l De v el opment s

51

Digital Asset Futures

3.4.3.8 CME Bitcoin Futures Open Interest
3.4.3.8 CME Bitcoin Futures Open Interest
As Of: 30-Sep-2021

Thousands of Bitcoin
90

Thousands of Bitcoin

75
60
45
30
15
0
Jan:2019

Jul:2019

Jan:2020

Jul:2020

Jan:2021

Jul:2021

Note: Includes Bitcoin Futures and Micro Bitcoin
Futures contracts. Open interest converted into Bitcoin
equivalents using respective futures contract units.

Source: Bloomberg, L.P.

3.4.3.9 Bitcoin Futures and Reference Index Volume

3.4.3.9 Bitcoin Futures and Reference Index Volume
Thousands of Bitcoin

As Of: Sep-2021

Thousands of Bitcoin
100

100
80

CME CF Bitcoin Real-Time Index
CME Futures Volume

60

60

40

40

20

20

0
Jan:2019

Jul:2019

Jan:2020

Source: Bloomberg L.P.,
Bitcoinity.org

52

80

2 0 2 1 F S O C / / Annual Report

Jul:2020

Jan:2021

Jul:2021

0

Note: Average daily volume. Incudes CME Bitcoin and Micro
Bitcoin volumes converted into bitcoin equivalents. Spot volumes
are Bitcoin/USD pairs from underlying spot exchanges referenced
by the CME CF Bitcoin Real-Time Index.

U.S.-regulated digital asset futures and options
markets have expanded over the last several
years, both in terms of open interest and
volumes as well as in terms of the number of
product offerings. However, open interest in
Chicago Mercantile Exchange (CME) Bitcoin
futures generally declined over the first nine
months of 2021 (Chart 3.4.3.8). Similarly, CME
Bitcoin futures volumes declined over the same
period, with levels comparable to spot exchange
volumes reported by underlying exchanges
that determine the CME CF Bitcoin Real-Time
Index, to which the futures contracts settle
(Chart 3.4.3.9). Volatility in bitcoin futures
markets remains elevated relative to other asset
classes.

Emission & ESG Futures
During the past few years, emission and
environmental, social, and governance (ESG)
derivatives markets have grown rapidly as
several state and regional carbon cap-and-trade
markets have been established and investors
have sought ESG products (Chart 3.4.3.10).
Designated contract markets (DCMs) have
listed over 100 emissions futures contracts and
the number is expected to continue to increase.
Another significant development is the growth
of ESG index futures. As of September 2021,
ESG index futures exceeded $3.1 billion in
notional value (Chart 3.4.3.11).

3.4.3.10 Growth of USD ESG and Emissions Derivatives Markets
3.4.3.10 Growth of USD ESG and Emissions Derivatives Markets

Billions of US$
25
Swaps
Index
Options
20
Futures

As Of: 30-Sep-2021

Billions of US$
25
20

15

15

10

10

5

5

0

2008

2010

2012

2014

2016

2018

2020

0

Source: CFTC

3.4.3.2 Exchange-Traded Options
Equity Options
There are sixteen registered national securities
exchanges that list and trade standardized
equity options. Transactions in securities-based
standardized options are all centrally cleared
by the Options Clearing Corporation, which is
the issuer and guarantor of each standardized
options contract. Because Options Clearing
Corp. generally only accepts exchange-traded
contracts for clearing, standardized options
only trade on exchanges. In addition to
standardized options, bespoke options trade
over-the-counter (OTC) on a bilateral basis, but
generally are not centrally cleared.
The volume of activity in exchange-traded
equity options has been volatile over the
past year. Average daily volume of exchangetraded equity options peaked early in the year,
reaching a record high of 31 million contracts
in January 2021 (Chart 3.4.3.12). Some reports
indicate that the increase in volume was
driven, in part, by an increase in retail investor
participation. Broker-dealers enhanced options
trading offerings, including mobile app-based
trading, and lowered or eliminated trading
commissions. Some of the increase in volume
was also attributable to options on “meme
stocks” that attracted considerable social media
attention in January and February 2021, with
many experiencing elevated trading volume and
increasing share prices that exceeded broader
market movements.

3.4.3.11 Growth of the ESG Indices Futures Markets

3.4.3.11 Growth of the ESG Indices Futures Markets

Billions of US$
3.5

As Of: 30-Sep-2021

Billions of US$
3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

Dec:2019

Dec:2020

Mar:2021

Jun:2021

Sep:2021

0.0

Source: CFTC

3.4.3.12 Exchange-Traded Equity Option Volume

3.4.3.12 Exchange-Traded Equity Option Volume
Millions of Contracts
35
30

As Of: Sep-2021

Millions of Contracts
35

Put Options
Call Options

30

25

25

20

20

15

15

10

10

5

5

0
Jan:2019

Jul:2019

Jan:2020

Source: Options Clearing Corp.

Jul:2020

Jan:2021

Jul:2021

0

Note: Average daily volume. Includes
FLEX, excludes index and ETF options.
Fina nc ia l De v el opment s

53

While overall volume has stabilized during
the first nine months of 2021, it remains
significantly above pre-pandemic levels.
Total exchange-traded equity option volume,
excluding options on ETFs and index options,
was 255 percent higher in the first nine months
of 2021 compared to the first nine months
of 2019. As of July 30, 2021, there were over
4,200 equity securities underlying exchangetraded equity options and over 4,300 series
listed for trading. Options Clearing Corp.
required approximately $116 billion in total
initial margin as of the second quarter of 2021,
compared to $76 billion in the second quarter
of 2020.

3.4.3.13 Options on Futures: Open Interest
3.4.3.13 Options on Futures: Open Interest
Trillions of US$
60

Trillions of US$
60

As Of: Sep-2021

50

50

40

40

30

30

20

20

10

10

0

2016

2017

2018

2019

2020

0

2021

Source: CFTC

Options on Futures
3.4.3.14 Options on Futures: Volume
3.4.3.14 Options on Futures: Volume
As Of: Sep-2021
Millions of Contracts
1500
Other Options
Eurodollar Options
1250

Millions of Contracts
1500

1250

1000

1000

750

750

500

500

250

250

0

2015

2016

2017

2018

2019

2020

0

2021
YTD

Source: CFTC

3.4.3.15 3-Month Implied Volatility for Select Commodities Options
3.4.3.15 3-Month Implied Volatility for Select Commodities Options

Percent
70
5 Year Average
9/30/2021

60

1 Year Range

60

2 0 2 1 F S O C / / Annual Report

Silver

10

Gold

10

Copper

20
WTI

20
Lean Hogs

30

Cotton

30

Sugar

40

Soybean

40

Wheat

50

Corn

50

Source: Bloomberg, L.P.

54

Percent
70

As Of: 30-Sep-2021

Over the past five years, open interest for U.S.
options on futures averaged approximately $37
trillion on a non-delta adjusted basis (Chart
3.4.3.13). Notional exposures to options on
futures are concentrated in the highly liquid
benchmark CME 3-month Eurodollar interest
rate contract. Options on futures volumes fell
in 2020, which can be primarily attributed to a
decline in Eurodollar futures amid prospects
for a continued low-rate environment. Volumes
are on pace to be slightly higher in 2021 but
Eurodollar option volumes remain subdued
given the low-rate environment (Chart
3.4.3.14).
The implied volatility in agricultural
commodity options was slightly elevated but
within historic norms despite weather and
supply chain disruptions over the past year
(Chart 3.4.3.15). The range of implied volatility
for silver contracts was unusually wide due
to the spike in retail trading in February and
March of 2021.

3.4.3.3 OTC Derivatives
Global OTC Derivatives Markets
As of June 2021, the notional amount of global
OTC derivative positions totaled $610 trillion,
a 0.5 percent increase compared to June
2020 (Chart 3.4.3.16). At the same time, the
gross market value of OTC derivatives, which
measures the amounts at risk, fell to $13 trillion
as of June 2021, an 18 percent decrease over the
year. Interest rate derivatives, which accounted
for 80 percent of derivatives on a notional
basis and 71 percent of derivatives on a gross
market value basis, saw the largest decrease
in gross market value. Gross credit exposures,
which adjust gross market values for legally
enforceable bilateral netting agreements (but
not for collateral), also decreased, from $3.2
trillion in June 2020 to $2.7 trillion in June
2021.
Global OTC options decreased slightly to
around $58 trillion as of June 2021. Interest
rate option contracts represent the bulk of that
figure, totaling approximately $42 trillion in
notional outstanding. The notional amount
of OTC equity options as of June 2021 was
approximately $3.7 trillion, remaining below
the peak of $8.5 trillion in June 2008.
As discussed in Box D, equity-linked total
return swaps allow market participants to
obtain synthetic exposures to individual
equity securities. While there are limited, high
frequency data on these swaps, the Bank for
International Settlements’s Semiannual OTC
Derivatives Report provides insight into the size
of the global OTC equity derivative market.
Over the past ten years, the notional amount
of equity-linked OTC derivatives has remained
fairly stable, totaling $7.5 trillion as of June
2021 (Chart 3.4.3.17). Nevertheless, there has
been a significant shift in the composition of
equity-linked OTC derivatives, with derivatives
referencing U.S. equities becoming increasingly
popular. As of June 2021, the notional amount
of OTC derivatives referencing U.S. equities
totaled $3.6 trillion, nearly double the amount
outstanding as of year-end 2010.

3.4.3.16 Global OTC Positions
3.4.3.16 Global OTC Positions
Trillions of US$
1000

As Of: 2021 Q2

Trillions of US$
40

Notional Amounts
(left axis)

800

600

Gross Market Values
(right axis)

30

Gross Credit Exposures
(right axis)

20

400
10

200
0
2000

2003

2006

2009

2012

2015

2018

2021

0

Source: BIS, Haver Analytics

3.4.3.17 Global OTC Equity Derivatives Outstanding
3.4.3.17 Global OTC Equity Derivatives Outstanding
Trillions of US$
12
10

As Of: 2021 Q2

Trillions of US$
12

Other Equities
U.S. Equities

10

8

8

6

6

4

4

2

2

0
2000

2003

2006

Source: BIS, Haver Analytics

2009

2012

2015

2018

0
2021

Note: Gross notional amounts outstanding.

Fina nc ia l De v el opment s

55

Interest Rate and Credit Default Swaps

3.4.3.18 Derivatives Notional Volume
3.4.3.18 Derivatives Notional Volume
Trillions of US$
Trillions of US$
As Of: 24-Sep-2021
1.0
15
Credit Default Swaps
Interest Rate Swaps
(left axis)
(right axis)
0.8
12

0.6

9

0.4

6

0.2

3

0.0
2015

2016

2017

Source: CFTC, ISDA

2018

2019

2020

0

2021

Note: 12-week moving-averages. Excludes securitybased swaps. ISDA adjusted numbers since Nov 2020.

3.4.3.19 Derivatives Notional Amount Outstanding
3.4.3.19 Derivatives Notional Amount Outstanding
Trillions of US$
10

Trillions of US$
500

As Of: 24-Sep-2021

8

Interest Rate Swaps
(right axis)

6
4

0
2014

2015

2016

300
200

Index CDS
(left axis)

2

400

100

2017

2018

2019

2020

2021

0

Note: Weekly Swaps Report not issued between Dec. 22,
2018 and Jan. 26, 2019 due to a lapse in government
funding. Excludes security-based swaps.

Source: CFTC

3.4.3.20 Commodity Swaps: Open Interest
3.4.3.20 Commodity Swaps: Open Interest
Billions of US$
700

As Of: Sep-2021
Agricultural
Energy

600

Soft
Metals

600

500

500

400

400

300

300

200

200

100

100

0

2016

2017

Source: CFTC

56

Billions of US$
700

2 0 2 1 F S O C / / Annual Report

2018

2019

2020

2021

0

Note: Estimated notional value.
Figures as of end of September.

The volume of activity in credit default swap
(CDS) markets, which peaked in the March
2020 market stress, has since declined to below
pre-pandemic levels (Chart 3.4.3.18). Interest
rate swap volumes, in contrast, rose significantly
in early 2021, amid an increase in British
Pound- and Euro-denominated swaps traded
in the United States due to Brexit. Since then,
interest rate swap volumes have returned to prepandemic, pre-Brexit levels.
Concurrently, the notional amount of OTC
derivatives outstanding rose during the
COVID-19 market stress but has since returned
to pre-pandemic levels (Chart 3.4.3.19). The
notional amount of index CDS outstanding
peaked at $5.7 trillion in the last week of March
2020, a nearly 50 percent increase from yearend 2019 while interest rate swaps outstanding
peaked at over $300 trillion in the first week of
March 2020, a 20 percent increase from yearend 2019. By the end of September 2021, the
notional amount of index CDS and interest rate
swaps declined to $5.1 trillion and $269 trillion,
respectively.

Commodity Swaps
The use of swaps referencing energy and other
commodities has seen notable growth this past
year (Chart 3.4.3.20). This activity reflects
changing commodity market conditions in
which demand for many commodities has
grown faster than supply, amid the reopening
of the economy. Additionally, exchange traded
product (ETP) participation in the commodity
swap market has also been increasing in
tandem with the growth of ETP assets under
management (AUM).
Energy swaps have driven much of the recent
growth in the commodity swaps market, as
crude oil and natural gas markets have rallied
significantly since they reached lows at the
onset of the COVID-19 pandemic. Similarly,
the notional value of swaps referencing gold
rose to over $50 billion between February and
March 2021 despite gold falling to a 52-week
low of $1,678 per troy ounce on March 8, 2021.
Other market segments, such as agriculture

swaps, have also seen increases in notional
value. Underlying prices in key markets such as
corn, soybeans, and wheat all saw large rallies in
the first half of 2021 due to anticipated supply
issues caused by drought and increased demand
amid the reopening of retail food and beverage
shops.
Similarly, the gross notional value of swaps
referencing commodity indices has also
increased over the last year. As of September
2021, the notional value of swaps referencing
commodity indices totaled $551 billion, up $151
billion from September 2020 (Chart 3.4.3.21).

3.4.3.4 Derivatives Intermediaries and Platforms

3.4.3.21 Commodity Index Swaps Gross Notional Value

3.4.3.21 Commodity Index Swaps Gross Notional Value

Billions of US$
700

As Of: Sep-2021

Billions of US$
700

600

600

500

500

400

400

300

300

200

200

100

100

0

2016

2017

2018

2019

2020

2021

0

Note: Estimated notional value.
Figures as of end of September.

Source: CFTC

Futures Commission Merchants
FCMs collect funds from customers to margin
centrally cleared futures, options on futures,
and swap transactions. In addition to managing
the deposit and withdrawal of customer margin
funds with CCPs, FCMs guarantee the financial
performance of their customers to the CCP.
The total amount of required client margin
funds held by FCMs has remained elevated over
the past year. The amount of margin held by
FCMs spiked in March 2020, due to increased
trading volumes and increases in CCP and FCM
margin requirements. While market volatility
has since subsided, the total amount of required
client margin held by FCMs remained elevated,
totaling $456 billion in September 2021 (Chart
3.4.3.22).

3.4.3.22 Customer Margin Funds Held at FCMs
3.4.3.22 Customer Margin Funds Held at FCMs
Billions of US$
As Of: Sep-2021
500
Swaps
Foreign Futures
U.S. Futures
400

Billions of US$
500
400

300

300

200

200

100

100

0
0
2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: CFTC

Note: Includes CFTC registered FCMs.

Over the last two decades, the number of
FCMs holding customer funds has declined
considerably, with the number of FCMs clearing
futures for clients falling from over 100 in 2002
to 49 as of September 2021; 22 of these are bank
affiliated. The number of FCMs that reported
holding segregated client funds for centrally
cleared swaps decreased from 23 at year-end
2014 to 15 as of September 2021; all of these are
bank affiliated. The pace of consolidation in
the FCM industry has slowed since 2015 and the
number of FCMs clearing swaps and futures for
customers remained relatively consistent over
the last several years.

Fina nc ia l De v el opment s

57

75

75

50

50

Between the first quarter of 2014 and the third
quarter of 2021, the top five FCM clearing
members at futures exchanges held between
48 and 60 percent of client margin for futures
products, and the top five FCM swap clearing
members held between 68 and 78 percent
of client margin for swaps products (Charts
3.4.3.23, 3.4.3.24).

25

25

Swap Dealers

3.4.3.23 FCM Concentration: Customer Futures Balances

3.4.3.23 FCM Concentration: Customer Futures Balances

Percent
100
Top 3

0

2014

Percent
100

As Of: 2021 Q3

2015

Top 10

Top 5

2016

2017

2018

2019

2020

0

2021

Note: Represents total amount of funds that an FCM is
required to segregate on behalf of customers who are
trading futures and options on futures at US exchanges.

Source: CFTC

3.4.3.24 FCM Concentration: Customer Swap Balances

3.4.3.24 FCM Concentration: Customer Swap Balances
As Of: 2021 Q3

Percent
100

Top 3

Percent
100

Top 10

Top 5

75

75

50

50

25

25

0

2014

2015

2016

2017

2018

2019

2020

0

2021

Note: Represents the amount of funds an FCM is required
to segregate for customers who trade cleared swaps.

Source: CFTC

3.4.3.25 Concentration of Swap Positions for Registered SDs

3.4.3.25 Concentration of Swap Positions for Registered SDs
Percent
70

As Of: 2021 Q3
Top 3

60

Percent
70
60

50

50

40

40

30

30

20

20

10

10

0

Q3
2014

Source: CFTC

58

Top 10

Top 5

Q3
2015

Q3
2016

Q3
2017

Q3
2018

Q3
2019

Q3
2020

Q3
2021

0

Note: Positions between two Swap Dealers (SDs) in the same
category (e.g., Top 3 or Top 5) are double-counted (i.e., a trade
between the #1 SD and #3 SD would be counted twice).

2 0 2 1 F S O C / / Annual Report

The number of registered swap dealers (SDs)
stood at 112 as of August 2021, an increase
from the 80 at the end of 2013. As of the third
quarter of 2021, the top three SDs accounted
for 28 percent of swap positions and the top ten
SDs accounted for 53 percent of swap positions
(Chart 3.4.3.25). Since 2017, the concentration
of swap contracts with the largest SDs has
declined slightly.

Swap Execution Facilities
The notional amount of interest rate swaps
executed on swap execution facilities (SEFs) fell
considerably in the second half of 2020 and by
December 2020, the average daily volume fell to
$216 billion. Since then, SEF trading volumes
have been robust and average daily volume
rose to nearly $600 billion in September 2021.
The share of interest rate swaps executed on
SEFs has trended upward in recent years, and
in September 2021 approximately 65 percent
of interest rate swaps were executed on SEFs
(Chart 3.4.3.26).
During the March 2020 market stress, the value
of index CDS traded on SEFs roughly doubled
to reach record levels. Index CDS SEF trading
has since returned to pre-pandemic levels,
averaging $42 billion in September 2021. The
share of index CDS swaps trading that occurred
on SEFs has remained relatively stable at around
80 percent (Chart 3.4.3.27).

3.4.4 Commodities Market
Commodity prices increased significantly
over the past year amid the manufacturingled global economic recovery (Chart 3.4.4.1).
Higher commodity prices likely fed into
elevated readings of the U.S. Producer Price
Index. Factors that drove higher commodity
price include significant weather events, China’s
engagement and disengagement in acquiring
large quantities of agriculture and metal
commodities, supply chain bottlenecks, and
labor shortages.

3.4.3.26 SEF Trading Volumes: Interest Rate Swaps
3.4.3.26 SEF Trading Volumes: Interest Rate Swaps
Billions of US$
1250

As Of: Sep-2021

On-SEF Interest Rate
Swap Volume (left axis)

1000

Percent
80

Share of Total Volume
(right axis)

70

750

60

500

50

250

40

0
Jan:18

Jan:19

Jan:20

30

Jan:21

Note: Average daily notional volume. Data have
been adjusted to correct a DDR data issue.

Source: CFTC

3.4.3.27 SEF Trading Volumes: CDS Index
3.4.3.27 SEF Trading Volumes: CDS Index
Billions of US$
100

80

As Of: Sep-2021
On-SEF CDS Index
Volume (left axis)

Share of Total Volume
right axis)

Percent
100

90

60

80

40

70

20

60

0
Jan:18

Jan:19

Jan:20

Jan:21

50

Note: Average daily notional volume. Excludes security-based
swaps. Data have been adjusted to correct a DDR data issue.

Source: CFTC

3.4.4.1 Relative Performance of Commodity Indices
3.4.4.1 Relative Performance of Commodity Indices
Index

As Of: 24-Sep-2021

Index

250

200

250
Agriculture & Livestock
Energy

Industrial Metals
Precious Metals

200

150

150

100

100

50
2016

2017

2018

Source: S&P GSCI, Haver Analytics

2019

2020

50

Note: S&P GSCI Spot Indices.
Indexed to 100 as of January 1, 2016.

Fina nc ia l De v el opment s

59

Precious and Industrial Metals

3.4.4.2 Relative Performance of Precious Metals
3.4.4.2 Relative Performance of Precious Metals
Index

As Of: 30-Sep-2021

Index

160

140
120

160
Silver
Gold
Palladium
Platinum

140
120

100

100

80

80

60
Sep:2020

Dec:2020

Mar:2021

Jun:2021

60
Sep:2021

Note: Indexed to 100 as of
September 30, 2020.

Source: Bloomberg, L.P.

3.4.4.3 Relative Performance of Industrial Metals
3.4.4.3 Relative Performance of Industrial Metals
Index

As Of: 30-Sep-2021

Index

180

160
140

180
Aluminum
Copper
Zinc
Nickel

160
140

120

120

100

100

80

80

60
Jan:2020

Jul:2020

Source: S&P GSCI, Haver Analytics

60

2 0 2 1 F S O C / / Annual Report

Jan:2021

Jul:2021

60

Note: S&P GSCI Spot Indices.
Indexed to 100 as of January 2, 2020.

Precious metals prices have been volatile
since the onset of the COVID-19 pandemic.
Silver, platinum, and palladium rallied in
late 2020 and early 2021 and then generally
retraced those gains. Gold remained relatively
range-bound over the past year, after having
experienced significant bouts of volatility in
2020 (Chart 3.4.4.2).
Precious metals with industrial applications
outperformed gold in late 2020 and early
2021 due to increased demand and supply
constraints. Platinum and palladium, which are
used in the production of catalytic converters,
rallied, as demand from auto manufacturers
increased with the global economic recovery.
Supply constraints, including the flooding of
two mines operated by Norilsk, the world’s
largest palladium producer, pushed palladium
prices to all-time highs in early May. Between
early May and the end of September 2021,
platinum and palladium prices declined by
approximately 20 percent and 36 percent,
respectively, as imbalances between supply and
demand receded.
Base metal prices rebounded over the past year
and are now generally above pre-pandemic
levels (Chart 3.4.4.3). On the demand side,
the rally in industrial metals prices has
been supported by the recovery in global
manufacturing, expectations for increased
infrastructure spending, strong Chinese
demand amidst its production-led recovery, and
a lower dollar. Downward pressure on supply
has come from logistic bottlenecks, rising
freight costs, and regional labor disruptions.
Tariffs also continue to weigh on supply, as
Russia has placed duties on aluminum exports,
and U.S. Section 232 import tariffs on steel and
aluminum remained in place. Decarbonization
efforts have also contributed to price increases,
as demand for copper has increased, and China
has committed to cut steel output. Finally, the
Chinese government has become increasingly
involved in the base metals market over the past
year, and has released state inventories with the
explicit goal of lowering prices and reducing
speculative activity.

Agriculture Markets
In the second half of 2020 and the first half of
2021, prices for many agricultural commodities
rose sharply: poor weather in the U.S. and
South America reduced supply and export
demand for U.S. products was strong (Chart
3.4.4.4). Corn, soybeans, and lean hog prices
have fallen from their June 2021 peaks, but
remain elevated relative to pre-pandemic levels.
Production in the U.S. agricultural sector
was diminished greatly over the past year
by drought, extreme heat, and wildfires.
According to the U.S. Drought Monitor, by
September 2021, 48 percent of the continental
U.S. was classified as experiencing moderate
to exceptional drought on the Palmer Index,
which measures the balance between moisture
demand and moisture supply (Chart 3.4.4.5).
The Condition Monitoring Observer Reports
system reported severe impacts from the
enduring drought to farming and ranching
operations. These impacts included increased
stress on plants and animals, water shortage,
increased fire risks, and poor air quality mostly
in the west and northern plains.
South America has also experienced poor
weather conditions, disrupting production of
crops including coffee, corn, sugarcane, and
oranges. Central and Southern Brazil have
experienced their worst drought conditions in
almost a century, resulting in crop losses, water
scarcity, and increased fires in the Amazon
rainforest and Pantanal wetlands.

3.4.4.4 Relative Performance of Agriculture Products
3.4.4.4 Relative Performance of Agriculture Products
Index

As Of: 24-Sep-2021

Index

200
175
150

200
Cotton
Wheat
Live Cattle
Coffee

Lean Hogs
Corn
Soybeans

175
150

125

125

100

100

75

75

50
Jan:2020

Jul:2020

Jan:2021

Jul:2021

50

Note: S&P GSCI Spot Indices.
Indexed to 100 as of January 3, 2020.

Source: S&P GSCI, Haver Analytics

3.4.4.5 U.S. Drought Conditions
3.4.4.5 U.S. Drought Conditions
Percent
80
70
60

As Of: 28-Sep-2021

Percent

Exceptional Drought
Extreme Drought

Severe Drought
Moderate Drought
Abnormally Dry

80
70
60

50

50

40

40

30

30

20

20

10

10

0
2016

2017

2018

2019

Source: University of Nebraska-Lincoln

2020

2021

0

Note: Limited to Continental U.S.

Lumber producers have struggled to meet
demand amidst these weather conditions.
Wildfires in Western Canada and the Pacific
Northwest have destroyed softwood timber
frequently used by mills that supply U.S.
homebuilders. In addition to wildfires, the
lumber supply chain has been challenged by
labor shortages over the past year. Meanwhile,
demand for lumber in housing and retail
markets has increased since the onset of the
pandemic. This surging demand, coupled
with lumber supply constraints, pushed
lumber prices to an all-time high of $1,686 per

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61

3.4.4.6 CME Lumber Futures

3.4.4.6 CME Lumber Futures
Contract Price, US$
2000

As Of: 30-Sep-2021

Contract Price, US$
2000

1500

1500

1000

1000

500

500

0
Jan:2019

Jul:2019

Dec:2019

Jul:2020

Source: CME, Haver Analytics

Dec:2020 Jun:2021

0

Note: US$ per 1,000 Board Feed.

3.4.4.7 U.S. Crude Oil Production & Inventories
3.4.4.7 U.S. Crude Oil Production & Inventories
Millions of Barrels
1500

1400

As Of: Aug-2021

Crude Oil Inventories
(left axis)

Millions of Barrels
16

Crude Oil Production
(right axis)

14

1300

12

1200

10

1100

8

1000

6

900
2010

2012

2014

Source: EIA, Haver Analytics

2016

2018

2020

4

Note: Crude oil production presented
as millions of barrels per day.

thousand board feet on May 7, 2021 before
falling to $628 as of September 30, 2021 (Chart
3.4.4.6). Plants and sawmills have increased
their capacities and multiple firms have
announced expansions or -new facilities, as the
higher priced products allow for additional and
easier financing.
Livestock prices have appreciated considerably
over the past year. At the onset of the pandemic,
demand for live cattle and hogs collapsed as a
result of packing plant closures and reduced
downstream demands from restaurants and
others. Since then, livestock prices have risen,
as animal producers have gradually adjusted
their inventories, packing plants increased
safety measures, and wholesalers, retailers,
and restaurants adjusted to shifts in consumer
preferences. Supply and demand fundamentals
have generally returned to pre-pandemic
patterns with two notable differences. First,
wholesale beef and pork prices are about 50
percent above pre-pandemic levels. Second,
China has significantly increased its demand for
pork imports.
The meat processing firm JBS S.A. was the
victim of a cyberattack impacting their internal
data network on May 30, 2021, resulting in the
closure of most JBS U.S. operations for nearly
two days. JBS is the largest meat processor in
the world; on the days that JBS was affected,
total daily U.S. hog slaughter was down 12
percent and cattle slaughter was down 20
percent. The closure caused CME Lean
Hog and Live Cattle prices to move sharply
lower. Prices rebounded when JBS resumed
operations.

Energy Markets
Increased demand amid the global economic
recovery pushed up energy prices significantly
in the first nine months of 2021. While U.S.
crude oil production has increased in the past
year, it remains below pre-pandemic levels
(Chart 3.4.4.7). Additionally, the Organization
of Petroleum Exporting Countries (OPEC) and
OPEC+ has been slow to restore production
following cuts in the spring of 2020. On July
62

2 0 2 1 F S O C / / Annual Report

14, 2021, after a long period of negotiations,
OPEC+ reached an agreement to increase oil
production, with an immediate increase of
400,000 barrels per day beginning in August
2021.
U.S. crude oil inventory levels have fallen
over the past year in order to meet short-term
demand. The slow return of supply has led to
higher prices and steep backwardation in crude
oil markets (Chart 3.4.4.8). In September 2021,
WTI crude oil was trading at its highest price
since 2018. Similar trends have materialized
in the U.S. gas market. Increased demand
coupled with depressed production led to steep
backwardation and a sharp increase in natural
gas prices (Chart 3.4.4.9).
U.S. energy markets experienced two major
bouts of volatility in 2021. First, a February
2021 winter storm brought extreme cold
temperatures to the mid-continent from
Minnesota to Texas. The storm strained
natural gas operations and electricity grids
that operate in market structures that
disincentivize excess capacity and redundancies
to address load surges. The high space-heating
demand combined with fuel disruptions to
power generators led to forced blackouts and
a disruption in power for more than four
million customers across Texas. The extreme
cold lasted about a week, so the impact on
the March natural gas contract was minimal.
However, natural gas spot prices rose sharply,
and regional basis spreads widened significantly
(Chart 3.4.4.10). By February 17, the Henry
Hub spot price rose to nearly $25 per MMBtu,
a 600 percent increase over the week, and in
Oneok, Oklahoma, natural gas reportedly
traded at $1,250 per MMBtu.
The second major event in energy markets
was the ransomware cyberattack on Colonial
Pipeline on May 6 and 7, 2021. The pipeline
is the largest pipeline system in the United
States and provides the east coast with around
45 percent of its fuel, a total of approximately
2.5 million barrels a day. The shutdown led to
long lines at gas stations, as drivers scrambled
to refill their tanks. Gasoline futures spiked

3.4.4.8 WTI Crude Oil Futures Curve
3.4.4.8 WTI Crude Oil Futures Curve
Price Per Barrel ($)
80

Price Per Barrel ($)
80

9/30/2021

70

70
60

60
9/30/2019

50
40
30

50
40

9/30/2020

1

7

13

19

25

31

37

43

49

30

55

Note: CME WTI Crude Oil Futures. X axis
represents the number of months until expiry.

Source: Bloomberg, L.P.

3.4.4.9 Natural Gas Futures Curve
3.4.4.9 Natural Gas Futures Curve
US$ Per MMBtu
6.5

5.5

US$ Per MMBtu
6.5
5.5

9/30/2021

4.5

4.5
3.5

3.5

9/30/2020

2.5

2.5
9/30/2019
1.5

1

6

11

16

Source: Bloomberg, L.P.

21

26

31

36

41

46

51

1.5

56

Note: NYMEX Henry Hub Natural Gas Futures. X
axis represents the number of months until expiry.

3.4.4.10 Natural Gas Spot and Futures Price
3.4.4.10 U.S. Natural Gas Prices
Contract Price, US$
25
20

As Of: 30-Sep-2021

Contract Price, US$
25

Front Month Future

20

Spot Price

15

15

10

10

5

5

0
Sep:2020

Dec:2020

Mar:2021

Jun:2021

0
Sep:2021

Source: Bloomberg, L.P.
Fina nc ia l De v el opment s

63

3.4.4.11 European & U.S. Natural Gas Prices

3.4.4.11 European & U.S. Natural Gas Prices
US$ Per MMBtu
30
Europe
25
United States

As Of: Sep-2021

US$ Per MMBtu
30
25

20

20

15

15

10

10

5

5

0
2000

2003

2006

2009

2012

2015

2018

2021

0

Source: World Bank Group, Bloomberg, L.P.

3.4.5.1 House Prices by Census Division
3.4.5.1 House Prices by Census Division
Index
600

500
400
300
200

As Of: Aug-2021

Index
600

Mountain
Pacific
West South Central
South Atlantic
West North Central
Total U.S.
New England
East South Central
Middle Atlantic
East North Central

500
400
300
200

100
0
1991

100

1995

Source: FHFA

1999

2003

2007

2011

2015

2019

0

Note: Purchase-only, seasonally adjusted, nominal,
constant-quality price index. Indexed to January 1991.

higher on Monday, May 9, but ended the day
off slightly from the prior business day’s close.
Oil, gasoline, and diesel prices fell sharply on
Thursday, May 13, 2021, after Colonial Pipeline
announced the schedule for operations to
restart.
In addition, European natural gas prices surged
in the fall of 2021, as a recovery in demand
and tight Russian supply has led to seasonally
low inventories (Chart 3.4.4.11). The recent
dynamics in European gas markets have raised
concerns of potential shortages in the winter,
which could amplify inflationary pressures,
curtail industrial production, and potentially
undermine the European recovery. In October,
the EU published a “toolbox” of measures for
national authorities to protect consumers and
industry amid the spike in energy prices.

3.4.5 Residential Real Estate Markets
3.4.5.1 Residential Housing Finance
House prices have risen rapidly, gaining 18
percent from August 2020 to August 2021
according to the seasonally adjusted, purchaseonly FHFA House Price Index® (HPI). Among
census divisions, gains were highest in the
Mountain division, which posted a 26 percent
increase over the same period (Chart 3.4.5.1).
The majority of the U.S., including nearly all
of the largest 100 metropolitan statistical areas,
experienced positive annual growth. Annual
gains appear to have reached their peaks in
most areas and although the pace of gains is
declining, price growth is still extremely high.
Box B discusses the rise in house prices, the
factors behind price increases, the state of
valuation pressures, and how housing finance
conditions compare to the 2000s housing
bubble.
The volume of home sales has been volatile over
the past two years. Existing home sales, which
fell to 4.0 million units on a seasonally adjusted,
annualized basis in May 2020 amid pandemicdriven lockdowns, rebounded sharply in the
second half of 2020. Existing home sales peaked
in October 2020 at 6.7 million units, the highest
level since 2006, and have since retreated to

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6.3 million units in September 2021 (Chart
3.4.5.2). New home sales have followed a similar
pattern. Overall, total home sales remain
elevated compared to pre-pandemic trends.
Single family housing starts, which fell sharply
at the onset of the COVID-19 pandemic,
rebounded in the second half of 2020 (Chart
3.4.5.3). Despite the increase in housing
prices, the growth in housing starts stalled
out in the first eight months of 2021, as the
shortage of labor and building materials limited
homebuilders’ ability to ramp up production.
Increasing new housing supply remains a
longstanding challenge for the U.S., as new
housing starts have not kept up with rising
household demand for many years.
According to the Census Bureau, the national
homeownership rate was 65 percent in the third
quarter of 2021, slightly above pre-pandemic
levels (Chart 3.4.5.4). The spike in the reported
homeownership rate in mid-2020 was largely
attributed to data collection challenges during
the COVID-19 pandemic. During this period,
in-person interviews were suspended and most
of the survey was conducted by telephone. In
the rental market, vacancy rates have declined,
falling from a five-year average of 6.8 percent
to 5.8 percent in the third quarter of 2021. The
pandemic has led to a rise in demand for single
family rentals, as households have reconsidered
their housing arrangements. In addition,
eviction moratoria have likely put downward
pressure on rental vacancy rates by keeping
some households in their existing rental units.

3.4.5.2 Home Sales
3.4.5.2 Home Sales
Millions of Units
1.5

As Of: Sep-2021

New Home Sales
(left axis)

1.2

Millions of Units
8.0

Existing Home Sales
(right axis)

7.0

0.9

6.0

0.6

5.0

0.3

4.0

0.0
2005

2008

2011

Source: NAR, Census Bureau,
Haver Analytics

2014

2017

3.0

2020

Note: Series are seasonally adjusted annual rates and
are expressed in millions of single-family housing units.

3.4.5.3 New Housing Starts and Price Changes
3.4.5.3 New Housing Starts and Price Changes
Millions of Housing Units
2.5
Housing Starts
(left axis)
2.0
1/1/2000

1/1/2003

As Of: Aug-2021

1/1/2006

1/1/2009

1/1/2012

Percentage Change
30

1/1/2015

1/1/2018

1/1/2021

20

House Price Changes
(right axis)

1.5

10

1.0

0

0.5

-10

0.0
2000

2003

2006

2009

Source: U.S. Census Bureau,
FHFA, Haver Analytics

2012

2015

2018

-20

2021

Note: Data are seasonally adjusted annual rates. House
Price Changes series is the year-over-year percentage
change of the FHFA National House Price Index.

3.4.5.4 Homeownership and Vacancy Rates
3.4.5.4 Homeownership and Vacancy Rates
Percent

As Of: 2021 Q3

Percent

69

8.5

68

8.0

67

7.5

66

7.0

65
64

6.5

Homeownership Rate
(left axis)

6.0

Rental Vacancy Rate
(right axis)

63
62
2015

2016

2017

2018

2019

Source: U.S. Census Bureau, Current
Population Survey/Housing Vacancy Survey

2020

2021

5.5
5.0

Note: Data are non-seasonally
adjusted quarterly percentages.

Fina nc ia l De v el opment s

65

Mortgage Originations, Servicing, and Loan
Performance

3.4.5.5 30-Year Fixed Rate Mortgage Rate and Spread

3.4.5.5 30-Year Fixed Rate Mortgage Rate and Spread
Percent
8

As Of: 24-Sep-2021

7

Percent
8
7

30-Year Fixed Rate
Mortgage Average

6

6

5

5

4

4

Spread to 10-Year
Treasury

3

3

2

2

1

1

0
2005

2007

2009

2011

2013

2015

2017

2019

0

2021

Source: Bankrate.com, Bloomberg, L.P.

3.4.5.6 Mortgage Originations and Rates
3.4.5.6 Mortgage Originations and Rates
Percent
As Of: 2021 Q1
Billions of US$
5.0
1500
Refinance (right axis)
30-Year Mortgage Rate
Purchase (right axis)
(left axis)
4.5
1200
4.0

900

3.5

600

3.0

300

2.5
2015

2016

2017

Source: NMDB®,
Bankrate.com

2018

2019

2020

0
2021

Note: Quarterly originations represent all 1-4 family
homes with first-lien, closed-end residential mortgages.

3.4.5.7 Purchase Origination Volume by Credit Score
3.4.5.7 Purchase Origination Volume by Credit Score
As Of: 2021 Q2

Percent of Originations
100

Percent of Originations
100

>780

80
60

80
60

661-780

40

40

601-660

20
0
2001

<601
2004

Source: NMDB®

66

20

2007

2010

2013

2016

2019

0

Note: Based on all-borrower VantageScore 3.0 for first-lien,
closed-end residential purchase mortgages; excludes territories.

2 0 2 1 F S O C / / Annual Report

The average rate on a 30-year fixed rate
mortgage fell sharply in the spring of 2020
and remained at historically low levels through
the first nine months of 2021 (Chart 3.4.5.5).
Throughout late 2020 and early 2021, the
spread between primary mortgage rates and
Treasury yields tightened to levels roughly in
line with pre-pandemic averages. Low rates
appear to have boosted refinancing activity.
Based on the National Mortgage Database
(NMDB®), refinance originations remained
robust into 2021, rising to $788 billion in the
first quarter of 2021, as mortgage rates reached
their lowest levels in decades (Chart 3.4.5.6).
This represents a 95 percent increase yearover-year compared to $404 billion in the first
quarter of 2020. Over the same period, home
purchase originations increased 35 percent
from $233 billion to $314 billion.
Credit quality of new purchase mortgages
remained relatively strong through the second
quarter of 2021 (Chart 3.4.5.7). 52 percent of
borrowers had scores in the middle of the credit
spectrum (VantageScore 3.0 scores between
661 and 780) stood at 52 percent in the second
quarter of 2021, similar to recent trends. Prior
to the COVID-19 pandemic the share attributed
to the highest credit quality group (borrowers
with scores at or above 781) was fairly stable
at below 30 percent. Their share increased
materially in 2020, as the highest quality
borrowers accounted for 38 percent of the
market as of the end of 2020 but decreased back
to 32 percent as of the second quarter of 2021.
The percentage of borrowers in the lowest score
categories (below 661) initially declined at the
onset of the COVID-19 pandemic but has since
returned to pre-pandemic levels.
Non-depository institutions have been
expanding their share of the mortgage
origination market in recent years. The
nonbank share of total originations reached
approximately 60 percent in 2020. Many of
these nonbank mortgage companies continue
to rely on short-term wholesale funding and

may have limited ability to absorb shocks.
Among depository institutions, larger
depository institutions—those with more than
$10 billion in assets—have increased their share
of originations in recent years compared to
smaller institutions.
Amid rapidly rising house prices, home equity
continued to strengthen. As of the second
quarter of 2021, 94 percent of active mortgages
had 20 percent or more of positive equity, and
nearly all mortgages had at least 5 percent of
positive equity, (Chart 3.4.5.8). Over the past
two decades, positive equity reached its lowest
point in the second quarter of 2012, with only
62 percent of borrowers holding equity of 20
percent or more. Before that, borrower equity
positions were at their strongest in the first
quarter of 2006, at the height of the housing
bubble.
Delinquency rates on residential mortgage
loans have remained low over the past year.
In response to the pandemic, federal and
state governments enacted a series of public
assistance policies, including through the
CARES Act in 2020 and the ARP Act in 2021.
These policies have supported household
incomes, suspended foreclosures and evictions,
and offered flexibility in home purchase
and mortgage acquisition processes. Under
the CARES Act, borrowers with a federally
backed mortgage have been able to request
temporary forbearance on mortgage payments.
If the loans were current when they entered
forbearance, servicers were required to report
these loans as current to credit bureaus.
Conversely, borrowers that entered forbearance
in arrears could cure delinquency status
by bringing their loans current during the
forbearance period. As a result, credit bureau
data show that the 30- or 60-day delinquency
rate dropped from 1.9 percent in the first
quarter of 2020 to 0.8 percent in the second
quarter of 2021 (Chart 3.4.5.9). Similarly,
the 90-to-180-day delinquency rate dropped
from 0.8 to 0.5 percent in the same period.
These credit bureau reports can differ from
other mortgage performance data depending

3.4.5.8 Shares of Mortgages by Equity Percentage
3.4.5.8 Shares of Mortgages by Equity Percentage
As Of: 2021 Q2

Percent
100

Percent
100

<0%

0 to <5%

80

80

5 to <20%
60

60

Percentage of mortgages with
20% or more equity

40

40

20

20

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: NMDB®

0

Note: Quarterly percentage of all mortgage
loans that are not closed or terminated.

3.4.5.9 Mortgage Delinquency
3.4.5.9 Mortgage Delinquency
Percent

As Of: 2021 Q2

Percent

6

6

5
4

30 or 60 Days
Past Due

5

90 to 180 Days
Past Due

4

3

2
1

3
In process of
foreclosure,
bankruptcy or
deed-in-lieu

2
1

0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: NMDB®

0

Note: Quarterly percentage of all mortgage
loans that are not closed or terminated.

Fina nc ia l De v el opment s

67

3.4.5.10 Forbearance Rates by Investor Type

3.4.5.10 Forbearance Rates by Investor Type
Percent
14
12

As Of: Aug-2021
FHA, VA, and RHS
GSE
Other (PLS, Portfolio, etc.) Total

Percent
14
12

10

10

8

8

6

6

4

4

2

2

0
Mar:2020 Jun:2020 Sep:2020 Dec:2020 Mar:2021 Jun:2021
Source: NMDB®

0

Note: Rates are the weekly percentage of servicing
portfolio volume in forbearance by investor type over time.

on how forbearance is treated. For example,
the Mortgage Bankers Association’s National
Delinquency Survey, based on reports from
mortgage servicers rather than credit bureau
data, estimated a 4.0 percent seriously
delinquent rate in the second quarter of 2021,
an increase of 2.3 percentage points from the
first quarter of 2021. Finally, the percentage of
loans in the process of foreclosure, bankruptcy,
or deed-in-lieu has also remained stable at 0.2
percent from the second quarter of 2020 to the
second quarter of 2021.
Forbearance rates remain elevated relative
to before the pandemic when forbearance
options were more limited. Total single-family
forbearance rates were 1.0 percent in March
2020, peaked at 6.7 percent in May 2020,
and have fallen to 2.3 percent as of August
2021 (Chart 3.4.5.10). Forbearance rates
were higher for certain loan types, including
Federal Housing Administration (FHA), U.S.
Department of Veterans Affairs (VA), and Rural
Housing Service (RHS) loans.
The credit scores of many mortgage borrowers
have improved during the pandemic from
several factors, including mortgage loan
forbearance, lower credit usage of credit lines,
and fiscal support to household incomes. The
median credit score of mortgage borrowers
continued to increase in 2021, rising 3 points
from December 2020 to July 2021, according
to Experian VantageScore 3.0 data. Only 11.5
percent of mortgage borrowers had their credit
scores decrease by 20 points or more during
that period.

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Box B: The Rapid Rise in House Prices

House prices have risen substantially since the onset
of the pandemic. The FHFA House Price Index®,
for example, has increased 18 percent from August
2020 to August 2021 (Chart B.1). In comparison,
from 2012 to 2019 prices increased by an average of
nearly 6 percent annually.
B.1 House Price Growth

B.1 House Price Growth
Percent
25

20

As of: Aug-2021

Percent
25

Case-Shiller Home Price Index

20

FHFA Home Price Index

15

15

10

10

5

5

0

0

-5

-5

-10
2012

2014

2016

Source: S&P CoreLogic Real Estate
Data, FHFA, Haver Analytics

2018

2020

-10

Note: Year-over-year
percentage change.

Overall, rising prices have been the result of a
significant increase in demand for homeownership,
while the supply of housing for sale has, overall, been
relatively inelastic. On the demand side, historically
low interest rates have reduced debt servicing
costs for households, shifting up the number of
households that are able to afford a given house
price. The pandemic has also increased the amount
of time that Americans spend at home, inducing
many households to consider homeownership or the
purchase of second homes.
The imbalance between supply and demand is
evident in the decline of total inventory, which fell
by nearly 50 percent between December 2019
and August 2021 (Chart B.2). The deficit in the
supply of housing is estimated to have risen rapidly
and reached 3.8 million units at the end of 2020,
according to a Freddie Mac study. After the onset of
the pandemic, the volume of houses actively listed
for sale declined rapidly and housing starts were
interrupted for a time, amid stay-at-home orders and

other pandemic-related concerns. Since then, new
listings have recovered and the number of homes for
sale has stabilized, but at a low level.
A number of factors may have contributed to
downward pressure on supply, including higher
prices for construction materials, forbearance
programs, and foreclosure moratoria which have
enabled some households to remain homeowners
and prevented houses from coming to market.
Research at the Federal Reserve has suggested that
the combination of high house price appreciation
and a tighter housing market has been driven largely
by the surge in demand.3 New for-sale listings would
have to expand by 20 percent for price growth to
return to a pre-pandemic pace. Given that the supply
of new listings, and particularly new construction, is
not easily expanded, the housing market will likely
remain tight in the short run.
B.2 Inventory of Homes Listed for Sale

B.2 Inventory of Homes Listed for Sale

Thousands
2500

As of: Aug-2021

Thousands
2500
2000

2000

Total Inventory
1500

1500
1000

1000

New Listings

500

500

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Redfin, Haver Analytics

0

Note: Seasonally adjusted.

Fina nc ia l De v el opment s

69

Box B: The Rapid Rise in House Prices (continued)

The most recent episode in which house prices
have increased at an elevated pace was the mid2000s housing bubble. This parallel naturally raises
questions about financial stability risks arising from
valuation pressures. One measure of valuation
pressure, the price-to-rent ratio, has risen significantly
since the beginning of the pandemic. How this
measure compares to its peak in 2006 depends on
the house price index used (Chart B.3). For example,
the price-to-rent ratio is high but remains below the
peak of this measure in 2006 using the S&P CaseShiller Index. The higher peak of the S&P Case-Shiller
Index in 2006 is likely caused by that index placing
more weight on higher-valued homes compared to
the FHFA House Price Index®, due to conforming
loan limits on mortgages purchased by the Federal
National Mortgage Association (Fannie Mae) and
Federal Home Loan Mortgage Corporation (Freddie
Mac) that underlie the FHFA index. In addition, the
price-to-rent ratio is not necessarily as elevated once
the low level of yields on Treasury securities is taken
into consideration.
B.3 Price-to-Rent Ratios

B.3 Price-to-Rent Ratios
Index
200
180

Index
200

As of: Aug-2021
Case-Shiller Home Price Index

180

FHFA House Price Index

160

160

140

140

120

120

100

100

80
1996

2001

2006

Source: S&P CoreLogic Real Estate
Data, FHFA, BLS, Haver Analytics

2011

2016

2021

80

Note: Seasonally adjusted; indexed
to January 1996. Rental data are
owners’ equivalent rent.

Valuation pressures raise the risk that house prices
may decline, as they did after the 2000s housing
bubble. In assessing the vulnerability of borrowers to
this risk, mortgage borrowers today are likely better
able to avoid defaulting after a house price shock
compared to borrowers after the housing bubble.

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Default by mortgage borrowers is often the result of
a double trigger consisting of both a decline in house
prices and a decline in income, so that a borrower
can neither afford mortgage payments nor repay
their debt in full by selling the property. The inability
of borrowers to make their payments after the 2000s
housing bubble was a reflection, in part, of the poor
underwriting standards and risky mortgages that
were prevalent at the time, in addition to widespread
unemployment. Obtaining mortgage credit was much
easier in that period for borrowers who had low
credit scores, difficult-to-document income, or high
debt payments relative to their incomes. Commonly
available risky mortgage products included pick-apay and negative amortization contracts. In contrast,
post-financial crisis reforms have required lenders
to make a reasonably good faith determination of
borrowers’ ability to repay their loans. An additional
distinction between the two episodes of house
price growth is the relatively smaller presence of
speculative activity over the past year. Further,
policies at the federal level have provided greater
stability to the housing market today, including active
policy outreach, improved consumer protections, and
quick responses when potential financial stress has
risen.
Going forward, the course of the pandemic will be a
key driver of household income and housing market
trends. The expiration of forbearance arrangements
may put stress on some households and cause more
houses to come on the market. Finally, obstacles
to new construction and affordability issues are
longstanding challenges that will continue to put
pressure on the financial positions of American
homebuyers.

3.4.5.2 Government-Sponsored Enterprises and the
Secondary Mortgage Market
The federal government continues to back
the majority of new mortgages either directly
through the FHA, the VA, and the RHS under
the United States Department of Agriculture,
or indirectly through Fannie Mae and Freddie
Mac (the Enterprises). The federal government
share of mortgage originations—which
averaged 82 percent over the past decade—
was 88 percent in the fourth quarter of 2020
(Chart 3.4.5.11). This share has increased since
the onset of COVID-19, as the government
stabilized markets with various financial actions
that helped provide liquidity to primary and
secondary markets.
New mortgages not securitized by the
Enterprises or into Ginnie Mae securities
continue to be held mostly in lender portfolios,
rather than securitized in private MBS known
as non-agency residential mortgage-backed
securities (RMBS). According to the Securities
Industry and Financial Markets Association
(SIFMA), non-agency RMBS issuance totaled
$74 billion in the first nine months of 2021
compared to approximately $200 billion for the
full-year 2020 (Chart 3.4.5.12). In comparison,
agency RMBS issuance was over $2.5 trillion
in the same period, exceeding total RMBS
issuance in any year during this century except
in 2003 and 2020.

3.4.5.11 Mortgage Originations by Product
3.4.5.11 Mortgage Originations by Product
Percent of Originations
100
Private Portfolio
and Securitized
80

As Of: 2020 Q4

Percent of Originations
100
80

60

60
GSE

40

40

20

20
FHA, VA & RHS

0
1998

2001

2004

2007

2010

2013

2016

2019

0

Note: Quarterly data for first-lien,
closed-end residential mortgages.

Source: NMDB®

3.4.5.12 RMBS Issuance

3.4.5.12 RMBS Issuance
Trillions of US$
4.0
Non-Agency
3.5
Agency

As Of: Sep-2021

Trillions of US$
4.0
3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
YTD
Source: FHLMC, FNMA, GNMA, NCUA,
Note: 2021 figures are
FDIC, Bloomberg, L.P., Dealogic,
through September.
Thomson Reuters, SIFMA

The federal government has continued to
support housing markets over the past year. The
FHFA, CFPB, and the Department of Housing
and Urban Development have continued to
work together to provide assistance under the
CARES and ARP Acts in the form of temporary
mortgage relief, payment suspensions,
protection for renters, remittance transfers,
and informational resources (see Section 4.5).
In addition, the Federal Reserve has continued
to purchase agency MBS to sustain the smooth
functioning of the market for those securities,
and to support progress toward the Federal
Reserve’s maximum employment and price
stability goals. The Federal Reserve’s agency
MBS purchases totaled approximately $1.4
Fina nc ia l De v el opment s

71

3.4.5.13 Cumulative MBS Purchases by the Federal Reserve

3.4.5.13 Cumulative MBS Purchases by the Federal Reserve
Trillions of US$
3.0
UMBS
GNMA
2.5

As Of: 24-Sep-2021

Trillions of US$
3.0
2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
Mar:2020

Jul:2020

Source: FRBNY

Nov:2020

Mar:2021

Jul:2021

0.0

Note: Cumulative purchases beginning in March 2020. Weekly series
are aggregated from daily Agency MBS operations in the TBA pool.

trillion through the end of 2020 and $2.4
trillion by the end of September 2021 (Chart
3.4.5.13).

Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac, which are in their
14th year of conservatorship, are an important
source of liquidity to the mortgage market and
stability to the housing market.
After the onset of the pandemic, FHFA
instructed the Enterprises to take a variety
of critical actions to support borrowers and
renters, such as suspending foreclosures and
evictions in Enterprise-backed properties in
forbearance. The Enterprises also initially
offered single-family borrowers 12 months of
forbearance, but the deepening impacts of
the pandemic required targeted actions to
stem growing concerns about borrowers who
would not be financially capable of resuming
their prior mortgage payments after the
standard forbearance period ends. As a result,
on February 25, 2021, FHFA announced,
on a limited basis, the availability of an
additional three-month extension of COVID-19
forbearance, up to a total of 18 months of
forbearance. FHFA had previously announced
on February 9, 2021 that the Enterprises would
offer one three-month extension.
To address borrowers’ needs after the
forbearance period ends, the Enterprises
have used two existing workout solutions,
Payment Deferral and Flex Modification,
in addition to reinstatement or repayment
plans, for borrowers who continue to have a
financial hardship. Under Payment Deferral,
the borrower resumes original payments, and
the forborne amounts are placed in a noninterest-bearing balloon until the loan prepays
or matures. COVID Payment Deferral has the
same terms as the existing Payment Deferral
option. Under Flex Modification, the monthly
loan payment is reduced by extending the term
to 40 years and, in some cases, the interest
rate may be reduced. On June 30, 2021 FHFA
announced that Flex Modification terms
would be adjusted for COVID-19 hardships to

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2 0 2 1 F S O C / / Annual Report

make interest rate reduction possible for eligible
borrowers, regardless of the borrower’s loanto-value ratio. Previously, only borrowers with
mark-to-market loan-to-value ratios greater than
or equal to 80 percent were eligible for a possible
interest rate reduction. If a borrower uses either
of these workout solutions, they become eligible
to refinance their mortgage after making three
on-time payments. These solutions will enable a
larger share of borrowers more time to resume their
monthly payment or receive a meaningful payment
reduction.
FHFA also continued support this year for
multifamily borrowers and tenants adversely
impacted by the COVID-19 pandemic. On July 28,
2021, FHFA announced that tenants of multifamily
properties with mortgages backed by the Enterprises
who are subject to eviction for nonpayment of rent
must be given a 30-day notice to vacate before
the tenant can be required to leave the unit. This
requirement applies to all Enterprise-backed
multifamily properties, regardless of whether the
loan is in forbearance.
On September 24, 2021, FHFA announced the
Enterprises will continue to offer COVID-19
forbearance to qualifying multifamily property
owners as needed, subject to the continued
tenant protections FHFA has imposed during
the pandemic. This is the fourth extension of the
programs, which were set to expire September
30, 2021. Property owners with Enterprise-backed
multifamily mortgages can enter a new or, if
qualified, modified forbearance for up to six months
if they experience a financial hardship due to the
COVID-19 emergency.
The Enterprises continued to be profitable through
the COVID-19 pandemic. Through the first half of
2021, the Enterprises have recorded over $19 billion
in net income, compared to about $5 billion in the
same period the year before. Income over the past
year was primarily driven by the surge in refinances
due to low interest rates and supported in part by
an Adverse Market Refinance Fee of 50 basis points
on mortgages with balances above $125,000. FHFA
announced that the Enterprises would implement
this fee on December 1, 2020, in order to cover
losses projected as a result of the pandemic. FHFA

announced the elimination of the fee as of August
1, 2021, in recognition of the success of policies
that had reduced the impact of the pandemic on
households.

Affordable Housing
In 2021, FHFA, in partnership with the other federal
agencies, began a targeted focus on increasing
the nation’s affordable housing supply. To support
underserved markets, FHFA announced that the
Enterprises may each invest up to $850 million
annually in the Low-Income Housing Tax Credit
(LIHTC) equity market. Previously, each Enterprise
was limited to $500 million of investment annually
in the LIHTC market. Within this $850 million
annual funding cap, any investments above $425
million in a given year are required to be in areas
that have been identified by FHFA as markets that
have difficulty attracting investors. This marks an
increase in the amount of investment under the
cap that must be made in targeted transactions that
either support housing in Duty to Serve-designated
rural areas, preserve affordable housing, support
mixed-income housing, provide supportive housing,
or meet other affordable housing objectives.

Credit Risk Transactions
Since 2013, FHFA has encouraged the Enterprises
to transfer a meaningful amount of credit risk to
private investors through credit risk transfer (CRT)
transactions. CRTs help to protect taxpayers from
potentially large credit-related losses in severely
stressful economic scenarios. From the inception
of the Enterprises’ single-family CRT programs
in 2013 through the end of 2020, Fannie Mae and
Freddie Mac have transferred a portion of credit risk
on $4.1 trillion of unpaid principal balance, with a
combined risk-in-force of about $137 billion.
In September 2021, FHFA published a notice
of proposed rulemaking that would amend the
Enterprise regulatory capital framework by refining
the leverage buffer and the risk-based capital
treatment of CRT transactions. These amendments
are intended to facilitate an environment where
leverage is not the binding capital constraint for
the Enterprises and where the Enterprises have
incentives to distribute acquired credit risk to
private investors through CRT rather than to buy
Fina nc ia l De vel opment s

73

and hold that risk. Through the first three quarters
of 2021, Freddie Mac has already transferred $12
billion of risk-in-force on $543 billion of unpaid
principal balance. Additionally, although it had not
entered into any new CRT transactions since the first
quarter of 2020, Fannie Mae resumed entering into
new CRT transactions in the fourth quarter of 2021.

Federal Home Loan Banks
The Federal Home Loan Banks (FHLBs) continue
to serve as an important source of liquidity for
financial institutions in the mortgage market and
to exhibit strong financial performance. The main
assets of the FHLBs are advances, loan products
FHLBs extend to their members to help them meet
short- and long-term liquidity and housing finance
needs. Advances reached a post-2008 peak of 807
billion in the first quarter of 2020, increasing by 26
percent from year-end 2020 as a result of members’
liquidity needs induced by the onset of the
pandemic. As market volatility subsided and liquidity
needs decreased, advances fell by 54 percent, to
$370 billion, by June 30, 2021.
Mortgage holdings purchased by the FHLBs from
their members have also decreased due to greater
prepayment activity and less attractive yields.
From March 31, 2020, to June 30, 2021, mortgages
decreased $18 billion to $57 billion. Reflecting the
lower holdings of advances and mortgages, total
assets at the FHLBs declined from $1,259 billion on
March 31, 2020 to $738 billion as of June 30, 2021.
The financial performance of the FHLBs remains
solid. The FHLBs reported aggregate net income
of $2.4 billion in the year ended June 30, 2021,
moderately down compared to $2.9 billion earned
in the previous four-quarter period, reflecting lower
asset holdings. Retained earnings continued to grow
at the FHLBs, increasing to $22 billion on June 30,
2021, an all-time high for the FHLB System.

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3.4.6 Commercial Real Estate Market
The CRE market is slowly recovering from
pandemic-induced disruptions. Increasing
vaccination levels and the lifting of pandemicimposed travel restrictions and social distancing
requirements have supported recovery of many
CRE properties. Significant uncertainties remain,
though, especially for properties that depend on
office workers or business travelers. Return to office
plans continue to evolve, particularly in light of the
COVID-19 Delta variant.

The volume of CRE transactions rebounded
in 2021, after a sharp decline at the onset
of the pandemic. According to Real Capital
Analytics, CRE deal volume totaled a record
$450 billion in the first three quarters of 2021,
with apartment and industrial property sales
driving volume during this period. CRE deal
volume remains subdued in the market for
office properties in central business districts.
Transaction volumes also remain below
pre-pandemic levels for retail and lodging
properties, many of which are also located in
central business districts and rely on office
workers or business travelers. In contrast, CRE
price growth has rebounded more evenly across
sectors, and price growth overall reached 16
percent for the twelve months ended September
2021, the fastest pace in over twenty years
(Chart 3.4.6.1). Nevertheless, prices for offices
in central business districts remained depressed
through September 2021.
Delinquency rates have declined from the peak
they reached in 2020, but remain elevated,
especially on lodging and hotel properties.
By September 2021, the overall rate of serious
delinquency (60+ days past due) on conduit
commercial mortgage-backed securities
(CMBS) had fallen to 5.2 percent after reaching
a high of 7.4 percent in July 2020 (Chart
3.4.6.2). Delinquency rates on lodging and
retail properties remained elevated at 13.9 and
8.0 percent, respectively. In contrast, industrial,
multifamily, and office properties had
delinquency rates of 0.7 percent, 1.9 percent,
and 2.2 percent, respectively.
CRE capitalization rates—the ratio of a
property’s annual net operating income to its
price—remained low by historical standards
through the first nine months of 2021 (Chart
3.4.6.3). However, the risk premia in CRE—
as measured by the spread between CRE
capitalization rates and the 10-year Treasury
yield—remained elevated relative to historical
standards. By this measure, CRE valuations do
not appear to be stretched on a relative basis.

3.4.6.1 Commercial Property Price Growth
3.4.6.1 Commercial Property Price Growth
Percent
30

20

As Of: Sep-2021
Retail
Industrial
National

Percent
30

Office: Central Business District
Apartment
Office

20

10

10

0

0

-10

-10

-20

-20

-30
2005

2008

2011

2014

Source: Real Capital Analytics,
Bloomberg, L.P.

2017

-30

2020

Note: Year-over-year price change.

3.4.6.2 Conduit CMBS Delinquency and Foreclosure Rate

3.4.6.2 Conduit CMBS Delinquency and Foreclosure Rate
Percent

As Of: Sep-2021

Percent

10
8

10
60+ Days
Delinquent

8

6

6

4

4
Foreclosure /
Real Estate
Owned

2
0
2005

2007

2009

2011

2013

2015

2

2017

2019

0

2021

Note: 60+ Days Delinquent includes
Foreclosure/Real Estate Owned.

Source: JPMorgan, Trepp

3.4.6.3 Average Capitalization Rates and Spreads
3.4.6.3 Average Capitalization Rates and Spreads
As Of: Sep-2021

Percent
12

Percent
12

10

10
National Cap Rate

8

8

6

6

4

4

National Cap Rate Spread

2
0
2001

2004

2007

Source: Real Capital Analytics,
Bloomberg, L.P.

2010

2013

2016

2

2019

0

Note: Dotted lines represent
2001–present averages.
Fina nc ia l De v el opment s

75

3.4.6.4 CMBS Issuance
3.4.6.4 CMBS Issuance
Billions of US$
400
Non-Agency
350
Agency

As Of: Sep-2021

Billions of US$
400
350

300

300

250

250

200

200

150

150

100

100

50

50

0

2004 2006 2008 2010 2012 2014 2016 2018 2020

Source: Inside
Mortgage Finance

0

Note: 2021 figures are through September.
Agency includes multifamily CMBS.

Outstanding CRE loans totaled $5.0
trillion as of the second quarter of 2021,
a 5.2 percent increase year-over-year and
equal to approximately 22 percent of GDP,
according to the Financial Accounts of the
United States. Fannie Mae, Freddie Mac,
and Ginnie Mae continue to be the most
significant players in multifamily lending, and
collectively hold 48 percent of total outstanding
multifamily mortgages either in portfolio or
in securitization pools of CMBS. The growth
of CRE loans held by banks and life insurance
companies has slowed over the past year, with
year-over-year CRE loan growth at banks
and insurance companies declining from 5.6
percent and 6.7 percent to 2.9 percent and 3.1
percent, respectively.
CMBS issuance has rebounded strongly, with
agency and non-agency issuances hitting a
record $321 billion through the first nine
months of 2021 (Chart 3.4.6.4). The increased
issuance of CMBS was particularly concentrated
in multifamily agency CMBS, where issuances
in the first nine months of 2021 already
exceeded the previous full-year record hit in
2020. Somewhat slower issuance of conduit
CMBS deals has been offset by a record pace
of relatively short-term floating rate CRE
securitization deals, such as CMBS deals backed
by single asset or single borrowers (which tend
to be highly rated and strongly underwritten),
and CRE collateralized loan obligations.
The CMBS issuance volume is an indication
of the improved economic outlook, strong
investor demand for yield, and confidence in
the recovery of CRE, even with the pandemicinduced risks that remain for many properties.

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3.5 Financial Institutions
3.5.1 Bank Holding Companies and Depository
Institutions
3.5.1.1 Bank Holding Companies and Dodd-Frank
Act Stress Tests
Bank holding companies (BHCs) are
companies that have control over any bank or
any company that is a BHC. BHCs may also
be financial holding companies. Subsidiaries
of BHCs may also include nonbanks such
as broker-dealers, investment advisers, or
insurance companies. Under the “tailoring
rules” issued by the federal banking agencies
in 2019, capital and standardized liquidity
requirements for BHCs increase with risk,
size, and complexity. The largest BHCs with
total consolidated assets above $100 billion fall
into four categories: U.S. global systemically
important banks (G-SIBs) (Category I); two
categories of large complex BHCs (Categories
II and III); and large noncomplex BHCs
(Category IV) (Chart 3.5.1.1). Other BHCs
with total consolidated assets less than $100
billion are not subject to supervisory stress test
requirements, the liquidity coverage ratio, or
the net stable funding ratio. Foreign banking
organizations (FBOs) with sizeable operations
in the United States must hold all non-branch
interests in U.S. subsidiaries in an intermediate
holding company (IHC).
As of the second quarter of 2021, BHCs in the
United States (excluding IHCs) held nearly
$22 trillion in assets. The eight U.S. G-SIBs
account for 66 percent of this total. Six large
complex BHCs account for 10 percent, and nine
large noncomplex BHCs account for 7 percent.
All other BHCs account for the remaining 17
percent (Chart 3.5.1.2).

3.5.1.1 Categorization of Large U.S. BHCs
3.5.1.1 Categorization of Large U.S. BHCs
Description

U.S. Domestic Banking Org.
Bank of America

JPMorgan Chase

Category I

Bank of New York Mellon

Morgan Stanley

(U.S. G-SIBs)

Citigroup

State Street

Goldman Sachs

Wells Fargo

Category II
Northern Trust

(Large complex, ≥$700b Total assets, or ≥
$75b in Cross-Jurisdictional Activity)

Capital One

Truist Financial

(Large complex, ≥$250b Total assets or ≥ $75b
in NBA, wSTWF, or Off-balance sheet exposure)

Charles Schwab

U.S. Bancorp

Category IV

American Express

KeyCorp

(Large noncomplex, other firms with $100b
to $250b Total assets)

Citizens Financial

M&T Bank

Discover

Regions Financial

Category III

PNC Financial
Ally Financial

Huntington

Fifth Third

Source: Federal Reserve

Note: Northern Trust is in Category II due to its cross-jurisdictional activity.
Synchrony Financial dropped out of Category IV in 2021:Q2 and did not participate
in the 2020 or 2021 stress tests.

3.5.1.2 Total Assets by BHC Type/IHC
3.5.1.2 Total Assets by BHC Type/IHC
Trillions of US$
16

As Of: 2021 Q2

Trillions of US$
16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

G-SIBs

Large
Complex

Large
Noncomplex

Other

IHCs

0

Source: FR Y-9C

Capital Adequacy
Adequate capital supports banks’ ability to
lend in an economic downturn by providing a
buffer to absorb loan losses, declines in market
value of securities and trading portfolios,
counterparty defaults, and operational
and legal costs. Due to regulatory reforms
introduced after the 2008 financial crisis,
BHCs entered the COVID-19 pandemic with
Fina nc ia l De v el opment s

77

3.5.1.3 Common Equity Tier 1 Ratios
3.5.1.3 Common Equity Tier 1 Ratios
Percent of RWA
16

As Of: 2021 Q2

Percent of RWA
16

Other
Large Noncomplex
Large Complex
G-SIBs

14
12

14
12

10

10

8

8

6

6

4
2001

2004

Source: FR Y-9C,
Haver Analytics

2007

2010

2013

2016

2019

4

Note: Tier 1 common capital is used as the numerator of the CET1 ratio
prior to 2014:Q1 for G-SIBs and large complex BHCs, and prior to
2015:Q1 for large noncomplex and other BHCs. The denominator is
risk-weighted assets (RWA). Shaded areas indicate NBER recessions.

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs
Percent of RWA
20
2021 Q2
2021 Q1
2020 Q2
16

As Of: 2021 Q2
2021 minimum including U.S.
G-SIB surcharge

Percent of RWA
20
16

12

12

8

8

4
0

4

BAC

BK

C

GS

JPM

MS

STT

WFC

0

Source: FR-Y9C

3.5.1.5 Payout Rates at U.S. G-SIBs

3.5.1.5 Payout Rates at U.S. G-SIBs

As Of: 2021 Q2
Percent of NIAC
200
Common Stock Cash Dividends
(left axis)
Stock Repurchases
150
(left axis)

150

100

100

50

50

0

2014

2015

2016

Source: FR Y-9C

78

Billions of US$
200
NIAC (right axis)

2 0 2 1 F S O C / / Annual Report

2017

2018

2019

2020

2021

0

Note: Net income available to common shareholders
(NIAC) is net income minus preferred dividends.
2021 data represents YTD data through Q2.

more than double pre-2008 financial crisis
levels of aggregate risk-based equity capital.
These higher capital levels allowed banks to
continue to lend to households and businesses
and to absorb significant increases in loan loss
provisions as the pandemic unfolded.
As of the second quarter of 2021, common
equity tier 1 (CET1) ratios surpassed prepandemic levels across all four groups of BHCs,
more than reversing the drop in the second
quarter of 2020 (Chart 3.5.1.3). The CET1
ratio, defined as the ratio of CET1 capital to
total risk-weighted assets (RWAs), is a risk-based
capital requirement. Capital positions have
improved as BHCs have released significant
portions of the loan loss provisions they booked
at the onset of the pandemic. In addition, RWAs
have decreased as businesses have repaid credit
lines they drew, and households have paid down
credit card balances. Despite significant stress
during the first half of 2020, U.S. G-SIBs have
exceeded Basel III standards for the minimum
risk-based capital requirement ratios, including
the G-SIB surcharge and stress capital buffer
(SCB) (Chart 3.5.1.4).
Stock repurchases have rebounded at U.S.
G-SIBs in 2021 as restrictions imposed at the
onset of the pandemic have rolled off (Chart
3.5.1.5). Aggregate payout rates, defined as
the sum of stock repurchases and common
stock dividends, increased leading up to 2020
and then decreased during the second half
of 2020 and the first half of 2021, relative
to pre-pandemic levels. In 2020, all U.S.
G-SIBs announced a voluntary suspension
of share buybacks, and the Federal Reserve
temporarily halted stock repurchases for banks
with more than $100 billion in total assets
and capped dividends payments for all BHCs
at 2019 levels as part of the June 2020 stress
test results. Following favorable stress test
results in December 2020, the Federal Reserve
announced it would permit BHCs to resume
share repurchases during the first quarter of
2021, allowing common stock dividends and
share repurchases that in aggregate did not
exceed the average quarterly profits during the

past year. In March 2021, the Board announced
that the temporary restrictions on distributions
would be lifted for firms that remained above
minimum risk-based capital requirements in
the 2021 stress test. Stress test results were
released in June 2021, and all BHCs subject
to the stress test maintained adequate poststress capital levels. As a result, temporary
restrictions on capital distributions were lifted
and distributions remain governed by the rules
set forth in the SCB framework.

3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs
3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs
Percent
10

Percent
10

Minimum
2021 Q2

2021 Q1
2020 Q2

8

8

6

6

4

4

2

2

0

U.S. G-SIBs’ supplementary leverage ratios
during the first half of 2021 were comparable
to pre-pandemic levels (Chart 3.5.1.6). The
supplementary leverage ratio (SLR) is a nonrisk-based capital adequacy measure defined
as the ratio of tier 1 capital to total assets,
plus certain off-balance sheet exposures. The
SLR applies to large complex BHCs and an
enhanced version of the SLR applies to U.S.
G-SIBs. Expanding balance sheets since the
start of the COVID-19 pandemic have put
downward pressure on SLRs. The Federal
Reserve introduced a temporary modification to
the SLR rule, which was subsequently extended
to depository institutions through a joint
interagency rulemaking, that allowed BHCs
to exclude Treasury securities and reserves at
the Federal Reserve from the denominator
of the ratio until March 31, 2021. Those
temporary modifications provided flexibility to
certain banks to continue to accept customer
deposits and provide credit to households and
businesses.

As Of: 2021 Q2

BAC

BK

Source: FR Y-9C,
Call Report

C

GS

JPM

MS

STT

WFC

0

Note: Enhanced SLR is only required for the G-SIBs. The ratio is equal to tier 1
capital divided by total assets plus off-balance sheet exposures. The ratio
excludes Treasury securities and reserves from the denominator during
2020:Q2 and 2021:Q1, reflecting a temporary change to the SLR rule to ease
strains in the Treasury market resulting from the COVID-19 pandemic.

3.5.1.7 Return on Assets
3.5.1.7 Return on Assets
Percent
3
Other
Large Noncomplex
Large Complex
2
G-SIBs

As Of: 2021 Q2

Percent
3

2

1

1

0

0

-1
2010

2012

Source: FR Y-9C

2014

2016

2018

2020

-1

Note: Quarterly, seasonally-adjusted annual rate. Return on
assets is equal to net income divided by average assets.

Profitability
Profitability is a key method for BHCs to
improve capital positions. Profitability
rebounded in 2021, driven in part by the
release of substantial amounts of the loss
provisions that BHCs had built in 2020 after
the onset of the pandemic (Chart 3.5.1.7).
Strong non-interest income, including from
trading and investment bank activity, also lifted
net income among large BHCs. However, net
interest margins have declined significantly
relative to pre-pandemic levels, attributable
in part to a decline in interest rates and to
Fina nc ia l De v el opment s

79

3.5.1.8 Net Interest Margins
3.5.1.8 Net Interest Margins
Percent
6

As Of: 2021 Q2

Other
Large Noncomplex
Large Complex
G-SIBs

5
4

Percent
6
5
4

3

3

2

2

1
2010

2012

2014

2016

2018

2020

1

Note: Quarterly, seasonally-adjusted annual rate. Net
interest margin is equal to net interest income divided
by the quarterly average of interest-earning assets.

Source: FR Y-9C

3.5.1.9 Sources of Funding at G-SIBs and Large-Complex

3.5.1.9 Sources of Funding at G-SIBs and Large-Complex

Percent of Total Liabilities
70

60

As Of: 2021 Q2

Short-Term Funding

Percent of Total Liabilities
70
Core Deposits

60

50

50

40

40

30

30

20

20

Long-Term Funding

10

10

0
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Source:
FR Y-9C

Note: ST funding: liabilities with maturities =< 1 yr, trading liabilities, repos, CP, and foreign deposits.
LT funding: other borrowed money, subordinated notes and large time deposits with maturities > 1
yr. Core deposits: demand deposits, noninterest-bearing balances, transaction accounts, money
market deposits and time deposits <$250,000. Gray bars signify NBER recessions.

3.5.1.10 Deposit Growth, All Commercial Banks
3.5.1.10 Deposit Growth, All Commercial Banks
Percent
25

As Of: Jun-2021

20

15

15

10

10

5

5

2004

2007

Source: Federal Reserve,
Haver Analytics

80

Percent
25

20

0
2001

2 0 2 1 F S O C / / Annual Report

2010

2013

2016

2019

compositional shifts in banks’ balance sheets
(Chart 3.5.1.8). Looking forward, though
profitability has rebounded in 2021, downside
risks include limited loan growth, a low interest
rate environment, and potential moderation in
trading and investment banking activity.

0

Note: Statistical Release H.8, “Assets and Liabilities of
Commercial Banks in the United States.” Seasonally adjusted
values. Year-over-year percentage change.

Funding Sources
BHCs continue to have fairly stable funding
sources. After the 2008 financial crisis, BHCs
reduced reliance on short-term wholesale
funding, which funding exposed them to
significant liquidity and solvency risks in the
event of disruptions in interbank markets. As
the use of short-term funding has declined,
more stable funding sources, such as core
deposits, have increased markedly (Chart
3.5.1.9). This more stable funding mix helped
BHCs avoid significant funding disruptions
during the onset of the COVID-19 pandemic.
Deposit growth has moderated in 2021 but
remains elevated relative to pre-pandemic
growth rates (Chart 3.5.1.10). Deposits
increased rapidly in 2020, as many corporate
firms drew down credit lines and deposited the
funds to establish bigger cash buffers. Fiscal
programs have bolstered retail deposit growth
through 2021. Deposits stand at $17.1 trillion as
of June 2021, about $4 trillion higher than prepandemic levels.

Deposit rates have remained at low levels in
2021, having fallen in 2020 with the decline
in short-term interest rates. G-SIBs continue
to have materially lower effective deposit rates
than large complex and large noncomplex
banks (Chart 3.5.1.11).

Asset Quality
Asset quality at BHCs has improved, despite
the challenges presented to businesses and
households by the pandemic. Fiscal relief,
forbearance, higher vaccination rates, and the
broad reopening of the economy mitigated
BHCs’ credit risk in the second half of 2020 and
the first half of 2021. Delinquency rates remain
subdued on residential and CRE loans relative
to recent business cycles, due in part to more
conservative underwriting practices and higher
lending standards in the mortgage market,
as well as legislative or voluntary forbearance
actions that have provided debt service relief to
some borrowers (Chart 3.5.1.12). Delinquency
rates on credit cards and auto loans stand near
their lowest historic levels, as the consumer
sector has benefited from fiscal stimulus. While
delinquency rates on commercial and industrial
(C&I) loans inched up in 2020, they fell in 2021
and remain significantly lower than in previous
business cycles (Chart 3.5.1.13).
Banks tightened standards after the onset of
the pandemic but have since unwound that
tightening at least partially. In July 2021, banks
reported in the SLOOS that their lending
standards had eased for all loan categories
relative to July 2020. Banks were also asked in
the SLOOS about the current level of lending
standards relative to the midpoint of the
range in standards since 2005, a period that
encompasses very tight standards after the 2008
financial crisis and very loose standards before
that crisis. Banks, on balance, reported that their
lending standards on C&I loans are currently
at the eased end of the range of standards
between 2005 and the present. In contrast, for
subprime consumer loans and most categories
of commercial or residential mortgages, banks
reported currently having relatively tighter
levels of lending standards on net.

3.5.1.11 Effective Deposit Rates by BHC Category
3.5.1.11 Effective Deposit Rates by BHC Category
Rates
1.50
1.25
1.00

As Of: 2021 Q2

Rates
1.50

Other
Large Noncomplex
Large Complex
G-SIBs

1.25
1.00

0.75

0.75

0.50

0.50

0.25

0.25

0.00
2010

2012

Source: Call Report

2014

2016

2018

2020

0.00

Note: Effective deposit rates are defined as the ratio of the
annualized quarterly-average interest expense on deposits and the
one-quarter lag of the quarterly-average deposit balances.

3.5.1.12 Delinquency Rates on Real Estate Loans
3.5.1.12 Delinquency Rates on Real Estate Loans
Percent
20

As Of: 2021 Q2

Percent
20

16

16
Residential
Real Estate

12

8

Commercial
Real Estate

12

8

4

4

0
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: FR Y-9C

Note: Includes all loans in domestic and foreign
offices. Gray bars signify NBER recessions.

3.5.1.13 Delinquency Rates on Selected Loans
3.5.1.13 Delinquency Rates on Selected Loans
Percent
8

6

As Of: 2021 Q2

Percent
8

Credit Card
Auto
C&I

6

4

4

2

2

0
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: FRY-9C,
Call Report

Note: Seasonally adjusted. Includes all loans in domestic
and foreign offices. Auto loans became available in 2011
Q1. Gray bars signify NBER recessions.

Fina nc ia l De v el opment s

81

3.5.1.14 Provisions to Loans Ratios at BHCs
3.5.1.14 Provisions to Loans Ratios at BHCs
Percent
12

As Of: 2021 Q2

Percent
12

Credit Cards
Other Consumer
Residential Real Estate
Commercial Real Estate
C&I

10
8
6

10
8
6

4

4

2

2

0
2013

2014

2015

2016

2017

2018

2019

2020

0

2021

Note: Excludes Barclays, Credit
Suisse, Deutsche Bank, and UBS.

Source: FR Y-9C

3.5.1.15 C&I Loan Growth, All Commercial Banks
3.5.1.15 C&I Loan Growth, All Commercial Banks
Percent
40

As Of: Jun-2021

Percent
40

30

30

20

20

10

10

0

0

-10

-10

-20

-20

-30
2001

2004

2007

2010

2013

2016

2019

-30

Note: Statistical Release H.8, “Assets and Liabilities
of Commercial Banks in the United States.” Yearover-year percentage change.

Source: Federal Reserve,
Haver Analytics

3.5.1.16 Loans to Nondepository Financial Institutions
3.5.1.16 Loans to Nondepository Financial Institutions
Percent of Total Loans
14
Other
12
Large Noncomplex
Large Complex
10
G-SIBs
8

Percent of Total Loans
14
12
10
8

6

6

4

4

2

2

0
2010

2012

2014

Source: FR Y-9C

82

As Of: 2021 Q2

2 0 2 1 F S O C / / Annual Report

2016

2018

2020

0

Loan loss provisions have been volatile over the
past two years. During the first three quarters
of 2020, banks provisioned for large loan
losses, more than doubling their pre-pandemic
allowances, though a significant part of this
increase is due to the current expected credit
losses (CECL) accounting change. Vaccine
development and broad-scale accessibility, along
with fiscal support and the broad reopening of
the economy, significantly improved the outlook
for loan losses and reduced uncertainty about
those losses. As a result, BHCs have reduced
their allowances for loan losses during the
fourth quarter of 2020 and first half of 2021
(Chart 3.5.1.14).
C&I loans outstanding have shrunk in recent
data amid repayment of credit draws taken out
at the onset of the pandemic and forgiveness of
PPP loans, though some of the weakness can be
attributed to substitution effects. The average
year-over-year growth of C&I loans exceeded
15 percent from April through December
2020, slowed to about 7 percent during the first
quarter of 2021, and fell to negative 15 percent
in the second quarter of 2021 (Chart 3.5.1.15).
U.S. G-SIBs’ lending to nondepository
financial institutions has significantly outpaced
commercial lending to nonfinancial firms since
2010, and now accounts for about 11 percent of
U.S. G-SIBs’ total loans (Chart 3.5.1.16).

Liquidity Management
Liquidity positions at BHCs have improved over
the past year. High-quality liquid assets reached
historically high levels during the first quarter
of 2021 as BHCs increased their holdings
of reserves, Treasury securities, and agency
mortgage-backed securities (Chart 3.5.1.17).
Levels decreased slightly in the second quarter
but remain high by historical standards. The
Federal Reserve’s asset purchase program
has increased the amount of reserves in the
banking system significantly since the onset of
the pandemic (Chart 3.5.1.18).
Inflows of relatively stable insured retail deposits
helped alleviate liquidity pressures from large
credit line drawdowns. U.S. G-SIBs maintained
liquidity coverage ratios (LCR) well above the
100 percent requirement as stress peaked during
the first half of 2020 (Chart 3.5.1.19). LCRs
remain similar to pre-pandemic levels, with U.S.
G-SIBs ranging between 4 and 38 percentage
points above the required 100 percent of net
outflows in the second quarter of 2021.

3.5.1.17 High-Quality Liquid Assets by BHC Type
3.5.1.17 High-Quality Liquid Assets by BHC Type
Percent of Assets
35
Other
Large Noncomplex
30
Large Complex
G-SIBs
25

As Of: 2021 Q2

Percent of Assets
35
30
25

20

20

15

15

10

10

5
2010

2012

2014

2016

2018

5

2020

Note: HQLA is estimated by adding excess reserves to an
estimate of securities that qualify for HQLA. Haircuts and
level 2 asset limitations are incorporated into the estimate.

Source: FR Y-9C

3.5.1.18 Selected Liquid Assets at All BHCs
3.5.1.18 Selected Liquid Assets at All BHCs
Percent of Assets
15
12

As Of: 2021 Q2

Percent of Assets
15

Reserve Balances
Fannie Mae and Freddie Mac MBS
Treasury Securities
Ginnie Mae MBS

12

9

9

6

6

3

3

0
2010

2012

2014

2016

Source: FR Y-9C, FR 2900

2018

0

2020

Note: Not seasonally adjusted.

3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs
3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs
Percent
200

150

As Of: 2021 Q2

Percent
200

2021 Q2
2021 Q1
2020 Q2

150

100

100

50

50

0

BAC

BK

C

Source: LCR Disclosures
from each banks’ websites

GS

JPM

MS

STT

WFC

0

Note: The solid line represents the
regulatory minimum.
Fina nc ia l De v el opment s

83

3.5.1.20 Held-to-Maturity Securities
3.5.1.20 Held-to-Maturity Securities
Percent of Investment
Securities
60
Other
Large Noncomplex
50
Large Complex
G-SIBs
40

Percent of Investment
Securities
60

As Of: 2021 Q2

50
40

30

30

20

20

10

10

0
2010

2012

2014

Source: Call Report,
Haver Analytics

2016

2018

2020

0

Note: Investment securities are held-to-maturity
securities plus available-for-sale securities.

3.5.1.21 Duration Gap
3.5.1.21 Duration Gap
As Of: 2021 Q2

Years
3.5

Years
3.5

Other
Large Noncomplex
Large Complex
G-SIBs

3.0

2.5

3.0

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2001

2004

2007

2010

2013

2016

2019

0.0

Note: Duration gap is the approximate weighted-average
time of cash inflows less the approximate weighted-average
time of cash outflows. Gray bars signify NBER recessions.

Source: Call Report,
Haver Analytics

3.5.1.22 Bank Stock Performance
3.5.1.22 Bank Stock Performance
Index
200

175

As Of: 29-Jun-2021
Large Noncomplex
Large Complex
G-SIBs

S&P 500
EU Bank Stock Index
Other

175

150

150

125

125

100

100

75

75

50
Jan:2019

Jun:2019

Source: Yahoo! Finance,
Bloomberg, L.P.

84

Index
200

Dec:2019

Jun:2020

Dec:2020

50
Jun:2021

Note: January 2, 2019 = 100. EU Bank Stock Index created from
stock prices for the following banks: BCS, BNPQY, CS, ACA, DB,
SAN, UBS. All indexes are created by equally weighting banks.

2 0 2 1 F S O C / / Annual Report

At the end of 2019, large complex and large
noncomplex BHCs significantly reduced the
share of investment securities classified as
held-to-maturity investment securities as the
tailoring rules went into effect. The tailoring
rules allowed most large complex and large
noncomplex BHCs to opt out of including
accumulated other comprehensive income
from available-for-sale accounts in their capital
calculation. As a result, most large complex
and some large noncomplex BHCs shifted
their entire holdings of securities from held-tomaturity into available-for-sale accounts, where
they remain today (Chart 3.5.1.20). In late 2020
and early 2021, the share of G-SIB investment
securities classified as held-to-maturity
increased markedly, as firms transferred a
significant portion of their available-for-sale
securities and deployed their significant deposit
inflow into longer term investments. The
preference for held-to-maturity securities by
G-SIBs reflects their desire to minimize the
impact that accumulated other comprehensive
income from available-for sale securities has
on the calculation of CET1 capital. Other
regulatory requirements that may incentivize
investment in held-to-maturity securities over
available-for-sale securities include the impact
that available-for-sale securities can have
on the G-SIB score calculation and on the
determination of the stress capital buffer.
The duration gap, which reflects the difference
between the timing of cash inflows from assets
and the timing of cash outflows from liabilities,
increased during the past year across all four
BHC categories as BHCs acquired long-term
Treasuries and agency MBS amid large deposit
inflows (Chart 3.5.1.21). The duration gap is a
measure of interest rate risk; a larger, positive
duration gap implies that if rates rise, assets will
lose more value than liabilities, thus pressuring
BHC capital.

Market Perception of Value and Risk
Market perceptions of BHC values have grown
over the past year (Chart 3.5.1.22). Large BHC
stock prices have mostly recovered from the
sharp declines in valuations that occurred in

March 2020. BHC stock prices have posted
similar cumulative gains to the broader S&P
500. Additionally, price-to-book ratios of U.S.
G-SIBs have trended higher over the past year,
after having declined materially during the first
quarter of 2020 (Chart 3.5.1.23).
Consistent with growth in their market valuations, market perceptions of risk at BHCs have
remained low over the past year. CDS spreads
of U.S. G-SIBs, a measure of default risk, have
almost returned to pre-pandemic levels. In
large part, the lower CDS spreads that prevailed
before the onset of the COVID-19 pandemic
reflect the strong liquidity and capital positions of BHCs (Chart 3.5.1.24). CDS spreads
of foreign G-SIBs performed similarly to U.S.
G-SIBs with the exception of Deutsche Bank,
which experienced the largest increase in CDS
spreads among foreign G-SIBs, exceeding 200
basis points (Chart 3.5.1.25).

Stress Tests and Capital Planning
The Federal Reserve’s stress tests are intensive
assessments of the capital adequacy of the
largest U.S. BHCs and U.S. IHCs of foreign
banking organizations. The Federal Reserve’s
stress testing framework includes supervisory
and company-run stress tests, the sizing of each
firm’s stress capital buffer requirement, and an
assessment of the practices that the firms use to
assess their capital needs. The supervisory stress
test is conducted by the Federal Reserve, and
the supervisory scenarios are designed by the
Federal Reserve. The Federal Reserve consults
with the FDIC and the OCC on these scenarios,
which are also used for company-run stress tests
by national banks, state nonmember banks, and
federal savings associations.

3.5.1.23 Price-to-Book for Select U.S. G-SIBs
3.5.1.23 Price-to-Book for Select U.S. G-SIBs
Percent
300

As Of: Jun-2021
Goldman Sachs
Citigroup
Bank of America

250

Wells Fargo
JPMorgan Chase
Morgan Stanley

250

200

200

150

150

100

100

50

50

0
2008

2010

2012

2014

2016

2018

2020

0

Note: Month-end values.

Source: SNL

3.5.1.24 5-Year CDS Premiums Select U.S. G-SIBs
3.5.1.24 5-Year CDS Premiums Select U.S. G-SIBs
Basis Points
500

As Of: Jun-2021
Goldman Sachs
Citigroup
Bank of America

400

Basis Points
500

Wells Fargo
JPMorgan Chase
Morgan Stanley

400

300

300

200

200

100

100

0
2010

2012

2014

2016

2018

2020

0

Note: Monthly averages.

Source: Markit

3.5.1.25 5-Year CDS Premiums Select Foreign Banks
3.5.1.25 5-Year CDS Premiums Select Foreign Banks
Basis Points
500

As Of: Jun-2021
Deutsche Bank
Société Générale
BNP Paribas

400

During the period of significant economic
uncertainty related to the pandemic, the
Federal Reserve took several actions to preserve
the resilience of the banking system and those
actions were informed by analysis stemming
from the Federal Reserve’s stress tests. In June
2020, the Federal Reserve required BHCs and
IHCs subject to stress testing requirements to
temporarily suspend share repurchases and

Percent
300

Basis Points
500
Santander
Credit Suisse
Barclays

400

300

300

200

200

100

100

0
2010

2012

Source: Markit

2014

2016

2018

2020

0

Note: Monthly averages.

Fina nc ia l De v el opment s

85

3.5.1.26 Initial and Stressed Capital Ratios

3.5.1.26 Initial and Stressed Capital Ratios
Percent of RWA
16
Post-Stress DFAST
Pre-Stress

Percent of RWA
16

Post-Stress CCAR
Regulatory Minimum

12

12

8

8

4

4

0

2013
18

2014
30

2015
31

Source: Federal
Reserve

2016
33

2017
34

2018
35

2019
18

2020
33

2021
23

0

Note: Regulatory minimum is 5% pre-2016 and 4.5% from 2016
onwards. For DFAST 2013-2015, bars show Tier 1 Common Capital
Ratio. DFAST 2016-2021 bars show Common Equity Tier 1 Ratio. The
x-axis labels represent the number of banks tested within a given year.

3.5.1.27 FDIC-Insured Failed Institutions
3.5.1.27 FDIC-Insured Failed Institutions
Number of Institutions
180

As Of: 2020

Percent
3.0

Number of Institutions (left axis)

150

Assets of Failed Institutions as a
Percent of Nominal GDP (right axis)

120

2.5

2.0

90

1.5

60

1.0

30

0.5

0
2005

2008

2011

Source: BEA, FDIC,
Haver Analytics

2014

2017

2020

Note: No FDIC-insured institutions
failed during 2005, 2006, and 2018.

0.0

limited dividend payouts to 2019 levels. In
addition, the Federal Reserve required large
banks to re-evaluate and resubmit their longterm capital plans in November 2020. Following
a second round of stress tests in December, the
Board limited firms’ capital distributions to
levels based on their average quarterly earnings
during the past year.
The Federal Reserve announced in June
2021 that none of the 23 BHC and IHCs that
were tested dropped below minimum capital
requirements on a post-stress basis. The
aggregate CET1 ratio among those tested
declined from 13.0 percent in the fourth
quarter of 2020 to its minimum of 10.6 percent
as part of the severely adverse scenario. The
aggregate CET1 ratio remains well above
the required minimum levels throughout
the projection horizon. (Chart 3.5.1.26).
Loan losses as a fraction of average loans
were comparable to loan losses in previous
annual stress testing exercises. The temporary
restrictions on dividends and share repurchases
were lifted following the announcement of the
2021 stress test results. Capital distributions
remain governed by the SCB framework, which
automatically limits capital distributions for
BHCs that fall below their capital requirements
in the stress scenarios.

3.5.1.2 Insured Commercial Banks and Savings
Institutions
As of the second quarter of 2021, the banking
industry included 4,953 FDIC-insured
commercial banks and savings institutions with
total assets of nearly $23 trillion. During 2020,
168 institutions were absorbed by mergers,
while eight new institutions were added. Ten
additional institutions opened in 2021 as of
September 30, 2021 and 28 institutions were
absorbed by mergers as of the second quarter of
2020. Failures of insured depository institutions
are down significantly since the 2008 financial
crisis. Although four institutions failed in 2020,
no banks failed through the second quarter of
2021 (Chart 3.5.1.27).
The FDIC’s ‘problem bank’ list included 56
institutions—slightly more than 1 percent of all

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institutions—at the end of 2020, in comparison
to 51 banks in the prior year. Banks on this
list have financial, operational, or managerial
weaknesses that require corrective action in
order to operate in a safe and sound manner.
Developments at insured commercial banks
and savings institutions were similar to the
developments at large BHCs. Total assets
increased by $1.6 trillion between the second
quarter of 2020 and the second quarter of
2021. Loans and leases declined by $134
billion during that period. Loan portfolios
that declined include C&I loans, 1-4 family
residential real estate loans, and credit
card loans, which were down $360 billion,
$36 billion, and $16 billion, respectively.
Loan portfolios that grew include nonfarm,
nonresidential CRE loans, and construction
and development loans, which increased by
$49 billion and $13 billion, respectively. The
decline in the C&I portfolio was driven by a
combination of repayments of lines of credit
by businesses and paydowns and forgiveness of
PPP lending. Banks increased their investment
securities portfolio by $1.2 trillion since the
second quarter of 2020. U.S. Treasury securities
balances were up by 41 percent and mortgagebacked securities were up by 28 percent
compared to the second quarter of 2020. Cash
and due from accounts also grew $635 billion,
or 22 percent, driven by a large inflow of
deposits, and now represent 15 percent of total
assets, up from 14 percent a year ago.

3.5.1.28 Commercial Bank and Thrift Net Income
3.5.1.28 Commercial Bank and Thrift Net Income
Billions of US$
1200

800

As Of: 2021 Q2

Billions of US$
1200
Realized Gains/Losses

Noninterest Income
Net Interest Income

800

400

400
0

0

-400

-400
-800
-1200

2006

Source: FDIC

2008

2010

2012

-800

Net Income

Provisions
Noninterest Expense
2014

2016

2018

2020

-1200

Note: Includes all commercial banks and
thrift institutions. All items are annualized.

Net income for all U.S. commercial banks and
savings institutions totaled $147 billion during
the first six months of 2021, a 297 percent
increase from the first six months of 2020,
driven by a decline in loan loss provisions (Chart
3.5.1.28). Net interest income fell by 4.0 percent
in the first half of 2021 due to interest income
declines outpacing interest expense declines.
Interest-earning assets grew 8.2 percent since
June 2020; however, many of these assets are lowyielding, such as cash and due froms.
The long-term trend of banking industry
consolidation continued in 2019 and 2020, as
the 10 largest and 100 largest institutions held
Fina nc ia l De v el opment s

87

3.5.1.29 Total Assets of Largest Insured Depository Institutions

3.5.1.29 Total Assets of Largest Insured Depository Institutions
Count (‘000s)
Trillions of US$
As Of: 2021 Q2
25
25
Top 10 IDIs (left axis)
Number of Insured
Top 11-100 IDIs (left axis)
Depository Institutions
20
20
(right axis)
Other IDIs (left axis)
15

15

10

10

5

5

0
1984

1989

1994

1999

2004

2009

2014

2019

0

Note: Fourth quarter data was used for years 19842020 and second quarter data was used for 2021.

Source: FFIEC Call Report

3.5.1.30 U.S. Branches and Agencies of Foreign Banks: Assets
3.5.1.30 U.S. Branches and Agencies of Foreign Banks: Assets
Trillions of US$
4

3

As Of: 2021 Q2

Securities Purchased with Repos &
Fed Funds Sold
Net Due from Related Institutions
Reserve Balances
Cash and Balances Due from
Depository Institutions (Excluding
Reserve Balances)

Other Assets

Trillions of US$
4

Non-C&I Loans
C&I Loans

3

2

2

1

1

0
2004 2006 2008 2010
Source: Federal Reserve,
Haver Analytics

2012

2014

2016

2018

2020

0

Note: Other assets includes government
securities, ABS, and other trading assets.

over 50 percent and 82 percent of total industry
assets, respectively (Chart 3.5.1.29). As of the
second quarter of 2021, the total number of
banks and savings associations decreased to
4,951, which is a historical low.

3.5.1.3 U.S. Branches and Agencies of Foreign
Banks
As of June 30, 2021, assets of U.S. branches and
agencies of foreign banks totaled $2.6 trillion,
accounting for roughly 11 percent of total
U.S. banking assets. Following a first quarter
increase, asset levels fell in the second quarter,
leaving them little changed year-over-year
(Chart 3.5.1.30).
Reserve balances for U.S. branches and
agencies of foreign banks totaled $794 billion
and comprised 31 percent of total assets as of
the second quarter of 2021. Reserve balances
increased $154 billion or 24 percent from the
prior year. While reserve balances decreased
after the first quarter, they remain elevated
compared to pre-pandemic levels.
Reverse repos and fed funds sold at U.S.
branches and agencies of foreign banks
decreased by $26 billion or 8.6 percent from
June 30, 2020 to June 30, 2021. Reverse repos
represented 11 percent of total assets at U.S.
branches and agencies of foreign banks,
compared to 12 percent of total assets one year
prior. The $26 billion reduction in reverse
repos was partly driven by the relative level of
repo rates versus interest on excess reserves,
creating an incentive for firms to leave excess
liquidity in reserves as opposed to reverse repo.
As of June 30, 2021, total loan balances
accounted for approximately 30 percent of total
assets at U.S. branches and agencies of foreign
banks. Non-C&I lending constituted a slightly
larger portion of overall lending than C&I
lending, reversing a historic trend. Compared
to June 30, 2020, C&I loans decreased $104
billion or 21 percent. The year-over-year C&I
loan decrease is a function of utilization rates
and funded balances normalizing from elevated
levels, reflective of customer pay downs. C&I
loan balances are now roughly in line with

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2 0 2 1 F S O C / / Annual Report

pre-pandemic trends. In addition, C&I loan
origination generally remains muted, likely due
to uncertainty in the economic outlook and
related efforts to reduce risk exposures.
Deposits and credit balances represent 45
percent of total liabilities for U.S. branches and
agencies of foreign banks as of June 30, 2021
(Chart 3.5.1.31). Deposits and credit balances
remain virtually unchanged year-over-year
but are elevated compared to pre-pandemic
levels. Net due to related depository institutions
decreased $31 billion or 5.9 percent from
June 30, 2020. The year-over-year decrease is
attributable to the elevated baseline level that
was driven in part by substantial borrowing by
foreign head offices at their central banks’ dollar
auctions, largely funded via the Federal Reserve’s
liquidity swap lines. These borrowings flowed
downstream to U.S. branches and agencies of
foreign banks during the initial pandemic stress
to support local operations and meet dollar
liquidity needs. Since then, funding from head
offices decreased substantially as conditions
improved. Securities sold with repos and federal
funds purchased increased $44 billion or 8.8
percent between June 30, 2020, and June 30,
2021. Repos totaled 21 percent of total liabilities
for U.S. branches and agencies of foreign banks
and remain unchanged year-over-year.

3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Liabilities
3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Liabilities
Trillions of US$
4

3

As Of: 2021 Q2

Other Liabilities
Securities Sold with Repos & Fed Funds Purchased
Deposits & Credit Balances
Net Due to Related Depository Institutions

Trillions of US$
4

3

2

2

1

1

0
2004

2006

2008

2010

Source: Federal Reserve,
Haver Analytics

2012

2014

2016

2018

2020

0

Note: Other liabilities includes transaction accounts,
non-transaction accounts, and other borrowed money.

3.5.1.4 Credit Unions
Credit unions are member-owned, not-forprofit, depository institutions. As of the second
quarter of 2021, there were 5,029 federally
insured credit unions with aggregate assets of
$1.98 trillion.
The credit union industry currently serves
just over 127 million members. The industry
is dominated in number by institutions with
relatively small financial footprints compared
to other depositories. Nearly two-thirds of
credit unions had assets under $100 million,
and 22 percent of credit unions had assets
under $10 million. There were 1,361 credit
unions with assets between $100 million and $1
billion, and 392 credit unions with assets over
$1 billion. These smaller institutions account
for the bulk of institutions but a very modest,
Fina nc ia l De v el opment s

89

3.5.1.32 Credit Union Income
3.5.1.32 Credit Union Income
Billions of US$
As Of: 2021 Q2
100
Noninterest Income
Net Income
Net Interest Income

Billions of US$
100

50

50

0

0

-50

-50

-100

Provisions
Noninterest Expense

2006

2008

2010

2012

Source: NCUA

Realized Gains/Losses
on Investments

2014

2016

2018

2020

-100

Note: Federally-insured credit
unions. Values are annualized.

and shrinking, share of assets and members.
For example, credit unions with less than $100
million in assets account for 65 percent of the
number of institutions but less than 5 percent of
industry assets, while credit unions with more
than $1 billion in assets account for 72 percent
of system-wide assets and 67 percent of credit
union members. Consolidation in the credit
union industry has continued, particularly
among smaller institutions, in line with longrunning trends among depository institutions.
The COVID-19 pandemic has presented the
credit union system with numerous challenges.
However, the data show that the industry has
remained on a relatively solid financial footing.
Net income at consumer credit unions summed
to $21 billion on an annualized basis in the
second quarter of 2021, a sharp increase from
just $9.4 billion over the same period in 2020
(Chart 3.5.1.32). Strong income gains have
been supported by sizeable declines in systemwide provisions for loan, lease, and credit loss
expenses in recent quarters. Interest income
declined $3.0 billion, or 4.9 percent, over the
year to $58 billion, reflective of compressed
margins due to continued low interest rates.
The net interest margin among credit unions
declined to 257 basis points from 288 basis
points a year earlier. In contrast, non-interest
income increased 24 percent over the year to
$27 billion, mainly due to growth in other
operating income, which includes income from
the sale of residential mortgages.
The amount of outstanding loans at credit
unions increased by a moderate 5.0 percent
over the year to nearly $1.2 trillion. That growth
is down somewhat from the 6.6 percent pace
recorded during the same period a year earlier.
The average outstanding loan balance for a
credit union member is currently $16,156.
Credit union real estate loans, which represent
roughly half of the credit union industry’s loan
portfolio, increased 6.1 percent in the most
recent four-quarter period, with a particularly
strong gain in fixed-rate first mortgages. Auto
loans, which represent one-third of the credit
union loan portfolio, grew 3.9 percent over

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2 0 2 1 F S O C / / Annual Report

the year ended June 30, 2021. Loans for new
autos edged down over that period, but loans
for used autos increased a solid 6.5 percent,
a result of strong nationwide demand for
preowned vehicles. Credit card loan balances
edged down by 1.7 percent over the past year as
many consumers, aided by government stimulus
payments during the pandemic, paid off credit
card debt.
Despite the ongoing economic stresses of
the pandemic, overall loan performance has
been quite strong and has largely mirrored
performance of consumer loan portfolios
at other credit institutions. The system-wide
delinquency rate stood at 46 basis points in
the latest quarter, down 12 basis points from
a year earlier. The delinquency rates on fixedrate real estate loans and auto loans stood at
36 basis points and 31 basis points, respectively.
The delinquency rate on credit cards, roughly
5 percent of total credit union loans, was just
77 basis points in the latest quarter, down 60
basis points from early 2020. Income support
from federal relief payments, enhanced
unemployment benefits, and loan forbearance
programs helped credit union members stay
current on loan obligations.
The credit union system experienced a return
on average assets (ROAA) of 112 basis points at
an annual rate in the second quarter of 2021,
double the return recorded a year earlier. That
strong rate of return is skewed toward the very
largest institutions. The median ROAA across
all federally insured credit unions was 46 basis
points.
Based on a number of standard measures,
smaller credit unions have continued to
underperform larger credit unions. ROAA
at the smaller institutions averaged just 33
basis points on an annualized basis in the
second quarter of 2021, while ROAA at credit
unions with more than $1 billion in assets was
127 basis points. At the same time, the loan
delinquency rate for smaller credit unions was
82 basis points in the second quarter of 2021,
compared to 46 basis points at the $1 billionplus institutions.
Fina nc ia l De v el opment s

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3.5.1.33 Loans as a Percent of Total Deposits
3.5.1.33 Loans as a Percent of Total Deposits
Percent of Total Assets
100

As Of: 2021 Q2

Percent of Total Assets
100

90

90

80

80

70

70

60

60

50
2006

2008

2010

2012

Source: NCUA

2014

2016

2018

2020

50

One hallmark of the pandemic for financial
institutions has been a surge in deposits due
to multiple rounds of government stimulus
payments and the sharp rise in the personal
saving rate resulting from curtailed spending
options stemming from COVID-19 restrictions.
Credit unions have been no exception to this
trend. Insured shares and deposits at credit
unions increased $224 billion, or 15 percent,
over the past year. With this influx of funds, the
loan-to-share ratio at credit unions stood at 70
percent in the second quarter of 2021, down
from 76 percent a year earlier (Chart 3.5.1.33).
The overall investment share of the asset side
of credit union balance sheets stood at 22
percent in the second quarter of 2021, up from
18 percent a year earlier. Cash and equivalents
(assets with a maturity of three months or less)
rose 23.8 percent from a year earlier. The asset
share of these liquid assets stood at 13 percent
in the latest quarter, up from 10 percent at the
onset of the pandemic. The increase in cash
and equivalents, along with the general rise
in share deposits, has fortified the liquidity
position of credit unions during the pandemic.
The industry-wide net worth ratio in the second
quarter was 10.17 percent, a decrease of 29 basis
points from a year earlier. A primary driver of
this decline has been elevated share growth.
However, the credit union industry remains well
capitalized; under statutory guidelines, a credit
union is considered “well capitalized” if it holds
a net worth ratio at or above 7 percent, and 95
percent of credit unions currently exceed this
threshold.
The pandemic remains ongoing, and the
economic outlook is still somewhat uncertain.
Despite very low delinquency rates, significant
deterioration in loan outcomes is a material
risk. In the past, macroeconomic shocks have
affected industry loan performance only after
a significant lag. Given the typical lag and
the fact that the labor market still remains
far from maximum employment, weakening
loan performance is a distinct risk for the year
ahead. Going forward, NCUA is focusing on
ensuring that the credit union system and

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the Share Insurance Fund are prepared to
weather any remaining economic fallout related
to the pandemic. The NCUA is encouraging
its regulated credit unions to focus on the
fundamentals of capital, asset quality, earnings
and liquidity, particularly as certain temporary
government assistance programs come to an end.

3.5.2 Nonbank Financial Companies
3.5.2.1 Securities Broker-Dealers
As of June 2021, there were approximately 3,500
securities broker-dealers registered with the
SEC, a decline of 1.6 percent from year-end
2020, reflecting a steady decline since 2009
(Chart 3.5.2.1).
Broker-dealer aggregate revenues declined
modestly in 2020 (Chart 3.5.2.2). Increases in
underwriting, fees, and trading were offset by
decreased interest income. However, declines in
expenses, including decreased interest expense,
led to an 85 percent increase in net income in
2020. Net income was robust in the first half
of 2021, totaling $52 billion compared to $85
billion for the full-year 2020.
Total assets in the U.S. broker-dealer industry
increased to $5.2 trillion as of the second
quarter of 2021 but were well below the peak
of $6.8 trillion in 2007 (Chart 3.5.2.3). The
U.S. broker-dealer sector remains relatively
concentrated, with the ten largest brokerdealers accounting for over 50 percent of
industry assets. Broker-dealer leverage, typically
obtained through the use of secured lending
arrangements such as repos and securities
lending transactions, has held relatively steady
since 2015.
Most large U.S. broker-dealers are affiliated
with U.S. BHCs, IHCs or FBOs. Among this
group of broker-dealers, aggregate assets for
BHC-affiliated broker-dealers have increased
steadily since 2015 (Chart 3.5.2.4). The
aggregate leverage ratio for large BHC-

3.5.2.1 Number of Broker-Dealers

3.5.2.1 Number of Broker-Dealers

Number of Firms
5000

As Of: 2021 Q2

Number of Firms
5000

4500

4500

4000

4000

3500

3500

3000

2009

2011

2013

2015

2017

2019

2021

3000

Source: FINRA

3.5.2.2 Broker-Dealer Revenues and Net Income
3.5.2.2 Broker-Dealer Revenues and Net Income
Billions of US$

As Of: 2021 Q2

Billions of US$

500

500
Net Income
Total Revenue

400

400

300

300

200

200

100

100

0

2009

2011

2013

2015

2017

2019

0

2021

Source: FINRA

3.5.2.3 Broker-Dealer Assets and Leverage
3.5.2.3 Broker-Dealer Assets and Leverage
Trillions of US$
As Of: 2021 Q2
8
Leverage (right axis)
Total Assets (left axis)

Ratio
25

6

20

4

15

2

10

0

2005

2007

Source: FINRA

2009

2011

2013

2015

2017

2019

2021

5

Note: Leverage is the ratio of total
assets to total regulatory capital.

Fina nc ia l De v el opment s

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3.5.2.4 Broker-Dealer Assets and Leverage by Affiliation

3.5.2.4 Broker-Dealer Assets and Leverage by Affiliation
Trillions of US$
5

As Of: 2021 Q2

FBO Total Assets (left axis)
BHC Total Assets (left axis)

4

Ratio

BHC Leverage (right axis)
FBO Leverage (right axis)

25
20

3

15

2

10

1

5

0

2009

2011

2013

Source: FINRA

2015

2017

2019

2021

0

Note: Data covers BHC and FBO-affiliated
broker-dealers that are among the 25 largest
broker-dealers by assets at year-end 2020.

3.5.2.5 mREIT Financial Assets
3.5.2.5 mREIT Financial Assets
Billions of US$
As Of: 2021 Q2
800
Other
Mortgages
Agency & GSE-Backed Securities
600

Billions of US$
800

600

400

400

200

200

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Federal Reserve,
Haver Analytics

0

affiliated broker-dealers rose from 13.5 percent
in the fourth quarter of 2019 to 14.2 percent in
the second quarter of 2021, while the aggregate
leverage ratio for large FBO-affiliated brokerdealers fell from 9.6 percent to 8.4 percent.

3.5.2.2 3 REITs
Real estate investment trusts (REITs) are
companies that own or finance incomeproducing real estate across a range of property
sectors. Broadly speaking, REITs can be broken
down into two major categories: equity REITs,
which typically own and operate incomeproducing real estate, and mREITs, which
provide financing for purchasing or originating
mortgages and MBS. mREITs can be further
divided into agency mREITs, which invest in
agency MBS, and non-agency mREITs, which
invest in a broad range of mortgage-related
assets.
mREITs tend to deploy significantly more
leverage than equity REITs, and the amount of
leverage used by mREITs is largely dependent
on the credit quality and liquidity of the
underlying investments. mREITs typically
fund their operations through the short-term
repo markets, and the combination of high
leverage and short-term borrowing can lead
to considerable funding risk. In addition to
funding risk, non-agency mREITs can be
exposed to credit and liquidity risks. In normal
market conditions, these risks typically do not
extend to agency mREITs.
mREIT financial assets, which fell sharply in the
first quarter of 2020, have remained fairly stable
over the past year (Chart 3.5.2.5). As of the
second quarter of 2021, mREIT financial assets
totaled $508 billion, with agency and GSEbacked securities accounting for 37 percent of
financial assets. mREIT repo borrowing, which
is often used to finance MBS spread trading,
totaled $211 billion in the second quarter of
2021, significantly below its pre-pandemic peak
of $379 billion as of the fourth quarter of 2019.

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During the walling by nearly 70 percent
between March 4 and April 3, 2020 (Chart
3.5.2.6). Improved liquidity conditions in
MBS markets have helped mREIT stock
prices partially retrace their March 2020
losses. Nevertheless, the recovery of mREIT
stock prices stalled in mid-2021, which can be
partially attributed to the flattening of the yield
curve. In contrast to mREITs, equity REITs
have retraced their pre-pandemic losses and, as
of September 2021, the FTSE NAREIT Equity
REITs Index was 6.5 percent above year-end
2019 levels. Industrial and apartment focused
REITs have led the recovery, while office,
lodging, and retail focused REITs generally
remain below pre-pandemic levels.

3.5.2.6 REIT Stock Performance
3.5.2.6 REIT Stock Performance
Index
175
150
125

As Of: 30-Sep-2021

Index
175

S&P 500
Financials
Equity REITs
mREITs

150
125

100

100

75

75

50

50

25
Jan:2020

Jun:2020

Source: NAREIT,
Bloomberg, L.P.

Nov:2020

Apr:2021

25
Sep:2021

Note: Indexed to 100 as of year-end 2019; mREITs represents the FTSE
Nareit Mortgage REITs Index; Equity REITs represents the FTSE Nareit
Equity REITs Index; Financials represents the S&P 500 Financials Subindex.

3.5.2.3 Money Market Funds
MMFs are a type of mutual fund that are
generally used by investors to manage their cash
needs. SEC rules distinguish between retail
MMFs, which are limited to individual investors,
and institutional funds, which do not require
investors to be natural persons. Retail MMFs
and government MMFs may price their shares at
a stable net asset value (NAV), while prime and
tax-exempt institutional MMFs are required to
price their shares at a floating NAV.
There has been a multiyear shift in assets from
prime and tax-exempt MMFs to government
MMFs since the implementation of MMF
reforms in October 2016. This trend became
more pronounced at the onset of the pandemic
due to a shift in risk preferences by investors.
While growth normalized over the rest of 2020,
government MMF assets rose in 2021, driven by
an increased preference for cash-like holdings
among investors. Government fund assets were
$4.1 trillion, or 81 percent of MMF assets as of
September 2021 (Chart 3.5.2.7).

3.5.2.7 MMF Assets by Fund Type
3.5.2.7 MMF Assets by Fund Type
Trillions of US$
6
Government
Tax-Exempt
5
Prime

As Of: Sep-2021

Trillions of US$
6
5

4

4

3

3

2

2

1

1

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0

Source: SEC

In contrast to government MMFs, prime
funds experienced large outflows in March
2020, as structural vulnerabilities contributed
to increased redemptions, while outflows
continued at a more measured pace over the
past year. Prime fund assets have declined
by $122 billion or 12 percent for the twelve
months ended September 2021. A major driver
Fina nc ia l De v el opment s

95

of this decline is the conversion of prime MMFs
to government MMFs. Challenges in maintaining
attractive yields in a low-rate environment, renewed
concerns about the riskiness of prime funds, and
the possibility of future regulatory changes may also
be contributing to declines in prime MMF assets.
The PWG released a Report on MMFs in December
2020 that presented several options to mitigate
the vulnerabilities of prime MMFs. In February
2021, the SEC issued a request for comment on
this report. At the international level, the Financial
Stability Board (FSB) released a report on policy
proposals to enhance MMF resilience in October
2021, which is intended to inform any jurisdictionspecific reforms of its members.
The asset composition of MMFs has shifted towards
repo holdings over the past year. Repo assets of
MMFs stood at $2.3 trillion in September 2021,
accounting for 45 percent of total assets, compared
to 21 percent of MMF total assets in September
2020. This increase in repo assets has come even as
MMFs have reduced their investments in sponsored
repos, which are centrally cleared by FICC, to $92
billion at the end of September 2021 from $272
billion at the end of 2019. MMFs have significantly
increased their investments in the Federal Reserve’s
Overnight Reverse Repurchase Agreement Facility
(ON-RRP). The ON-RRP is a supplementary policy
tool used by the Federal Reserve to set the floor for
money market rates and target the federal funds rate
within the range set by the FOMC. MMFs generally
place cash with the ON-RRP when better investment
opportunities are not available. MMF take-up of
the ON-RRP was around zero at the beginning of
the year when the rate paid on investments was
0.00 percent and reached a high of $1.4 trillion
on September 30, 2021 after the rate was raised to
0.05 percent in June. Recently, MMFs have received
significant inflows as some banks take steps to
limit deposit growth at the same time that a falling
supply of Treasury bills has created fewer investment
opportunities.
MMFs remain significant investors in Treasury bills,
despite low prevailing interest rates and decreased
supply since the debt ceiling’s reinstatement at the
end of July. As of the end of September 2021, MMFs

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directly held $1.7 trillion, or around 34 percent of
total industry assets, in Treasury securities.
Asset yields across all types of MMFs declined in 2021,
following the path of short-term rates. For example,
the average gross 7-day yield on prime institutional
MMFs dropped to 0.09 percent in September 2021
from 0.20 percent in September 2020. The difference
between the MMFs’ gross and net yields, which
represents total industry revenues, has declined
sharply amid the fall in interest rates. The decline in
revenues can be attributed to many MMF sponsors
waiving their fees and reimbursing fund expenses to
keep yields paid to investors above zero.

Daily and weekly liquid assets of prime MMFs
remained well above regulatory minimums,
though prime MMFs are nevertheless
susceptible to runs as demonstrated in March
2020. Prime institutional MMFs’ daily liquid
assets (the share of assets convertible to cash
within one business day) averaged 51 percent
of assets in the last week of September 2021,
around the same level reported in September
2020 and substantially above the 10 percent
required by SEC rules. Weekly liquid assets for
prime institutional MMFs averaged 63 percent
in September 2021, also at approximately the
same level reported in September 2020 and well
above the 30 percent minimum required under
SEC rules (Chart 3.5.2.8).
The sensitivity of funds to changes in market
interest rates, as measured by the weighted
average maturity (WAM) of fund assets, has
declined in 2021 after having risen amidst the
decline in interest rates at the onset of the
COVID-19 pandemic. The recent decline in
part reflects the change in the composition
of assets towards overnight repo assets. WAMs
remain well below the 60-day maximum
permitted under SEC rules (Chart 3.5.2.9).
One measure of the credit sensitivity of MMF
portfolios, the weighted average life (WAL) of
fund assets, has declined slightly over the past
year. While the WAM is based on the date of
the next interest repricing of each asset, the
WAL is based on the final maturity date of
assets. MMFs that have higher WALs are subject
to increased risk when spreads rise. Average
WALs have declined to 50 days in September
2021 from 59 days in September 2020 for prime
institutional funds, and from 101 days to 77 days
for Government funds over the same period.
These averages were well below the 120-day
maximum permitted under SEC rules.

3.5.2.8 Liquid Asset Shares of Prime MMFs
3.5.2.8 Liquid Asset Shares of Prime MMFs
Percent of Total Assets
70
60

As Of: Sep-2021

Percent of Total Assets
70
60

Weekly Liquid - Institutional

50

50

Weekly Liquid - Retail

40

40
Daily Liquid - Institutional

30
20

10
2017

30
20

Daily Liquid - Retail
2018

2019

2020

10

2021

Source: SEC

3.5.2.9 Weighted Average Maturities by Fund Type
3.5.2.9 Weighted Average Maturities by Fund Type
Days
60

As Of: Sep-2021

Days
60

Government
Prime
Tax-Exempt

50

50

40

40

30

30

20

20

10
2011
Source: SEC

2013

2015

2017

2019

2021

10

Note: Weighted by fund size.

Finally, the long-term trend towards
consolidation in the MMF sector has continued
in 2021. Over the last decade, the number
of MMFs declined from 673 in November
2010 to 314 in September 2021, including 189
government MMFs, 61 tax-exempt MMFs, and
64 prime MMFs. As of September 2021, the five
Fina nc ia l De v el opment s

97

3.5.2.10 Net Assets of the Investment Company Industry

3.5.2.10 Net Assets of the Investment Company Industry
Trillions of US$

Trillions of US$

As Of: 2021 Q3

35

35
UITs
Closed-End Funds
ETFs
MMFs
Bond/Hybrid Mutual Funds
Equity Mutual Funds

30
25
20

30

3.5.2.4 Registered Investment Companies

25

Mutual Funds

20

15

15

10

10

5

5

0

1980

1985

1990

1995

2000

Source: ICI, Federal Reserve, SEC

2005

2010

2015

2020

0

Note: Excludes non ’40 Act ETPs.

3.5.2.11 Monthly Bond Mutual Fund Flows
3.5.2.11 Monthly Bond Mutual Fund Flows
Billions of US$
200
Tax-Exempt
Taxable
100

Billions of US$
200

As Of: Sep-2021

100

0

0

-100

-100

-200

-200

-300
2017

2018

2019

2020

Source: ICI, Haver Analytics

2021

-300

Note: Net fund flows.

3.5.2.12 Monthly Equity Mutual Fund Flows
3.5.2.12 Monthly Equity Mutual Fund Flows
Billions of US$
50

As Of: Sep-2021

25

0

0

-25

-25

-50

-50

-75

-75

2018

Source: ICI, Haver Analytics

98

Billions of US$
50

25

-100
2017

2 0 2 1 F S O C / / Annual Report

2019

2020

2021

largest MMF complexes managed 54 percent of
total assets, up from approximately 46 percent
at year-end 2015.

-100

Note: Net fund flows.

Mutual funds are investment vehicles that pool
money from many investors, invest in a variety
of securities or assets, and give investors daily
redemption rights. As of September 30, 2021,
net assets of equity, bond, and hybrid mutual
funds totaled $21.4 trillion, or approximately 65
percent of total U.S. investment company assets.
Over the past year, bond mutual funds have
experienced steady inflows while equity
mutual funds have experienced outflows.
These developments are in line with trends
that were in place before the pandemic but
were interrupted in March 2020, when mutual
funds experienced large outflows, including a
record $255 billion from bond funds. Excluding
MMFs, U.S. mutual funds’ net assets increased
by 9.3 percent in the first nine months of 2021
after increasing 12 percent in 2020 (Chart
3.5.2.10). Overall, since April 2020, bond
mutual funds have taken in $796 billion while
equity funds experienced net redemptions of
$855 billion, through September 2021 (Charts
3.5.2.11, 3.5.2.12).
Bank loan mutual funds, which are a subset
of fixed income funds, offer investors daily
redemptions and hold assets with lengthy
settlement periods. Between November 2018
and December 2020, cumulative outflows from
bank loan mutual funds totaled $77 billion, or
more than 55 percent of AUM. Outflows from
bank loan funds surged dramatically in March
2020, as the early days of the pandemic raised
concerns that borrowers would be unable to
service their debt in an economic downturn.
During times of significant market stress, some
assets may take longer to sell and settle than the
redemption period offered to a fund’s investors.
In 2021, expectations of the likelihood of future
interest rate increases led to stronger interest
in floating rate notes. Bank loan funds took in
$26 billion in the first nine months of 2021 and

breaking the trend of outflows that had been
in place for 26 consecutive months through
December 2020. Meanwhile, high-yield bond
mutual fund flows strongly recovered after
March 2020 to post full-year 2020 net inflows of
$33 billion but saw $4.0 billion in net outflows
for the first nine months of 2021 (Chart
3.5.2.13).
Investors continued to move away from actively
managed equity mutual funds and towards
lower-cost, index-based equity funds and
exchange traded products (ETPs). According to
Morningstar, passively managed mutual funds
and ETPs represented 51 percent of equity fund
assets as of September 2021, up from 25 percent
at year-end 2009. Since 2016, inflows to passively
managed equity mutual funds and ETPs totaled
a combined $1.9 trillion, while their actively
managed counterparts saw outflows of $1.5
trillion (Chart 3.5.2.14). Passively managed
equity mutual funds, which saw steady inflows
between 2016 and 2019, have experienced
outflows since March 2020 with investors
favoring passively managed ETPs. Between
March 2020 and September 2021, passively
managed equity mutual funds recorded net
outflows totaling $116 billion while passively
managed ETPs recorded $611 billion of net
inflows.
In contrast to actively managed equity funds,
actively managed bond funds have continued
to experience inflows (Chart 3.5.2.15).
Nevertheless, passively managed funds continue
to gain market share and as of September
2021, passively managed bond mutual funds
and ETPs represented 31 percent of bond fund
assets, up from 12 percent at year-end 2009.

Exchange-Traded Products
Exchange-traded products include ETFs
registered under the Investment Company
Act of 1940 (Investment Company Act), ETPs
registered with the CFTC as commodity
pools that primarily hold commodities or
physical metals, and exchange-traded notes. By
September 2021, ETFs, which constitute most
ETP assets, accounted for 20 percent of U.S.

3.5.2.13 Monthly Bank Loan and High-Yield Mutual Fund Flows
3.5.2.13 Monthly Bank Loan and High-Yield Mutual Fund Flows

Billions of US$
20

As Of: Sep-2021

Billions of US$
20

High-Yield
Bank Loan

10

10
0

0
-10

-10

-20

-20

-30
2017

2018

2019

2020

Source: Morningstar, Inc.

-30

2021

Note: Net fund flows.

3.5.2.14 Cumulative Equity Fund Flows
3.5.2.14 Cumulative Equity Fund Flows
Billions of US$
As Of: Sep-2021
2000
Passively Managed ETPs
Actively Managed ETPs
Passively Managed Mutual Funds
1000
Actively Managed Mutual Funds

Billions of US$
2000

1000

0

0

-1000

-2000
2016

-1000

2017

Source: Morningstar, Inc.

2018

2019

2020

2021

-2000

Note: Cumulative net fund flows. Includes U.S.,
international, sector, and nontraditional equity funds.

3.5.2.15 Cumulative Fixed Income Fund Flows

3.5.2.15 Cumulative Fixed Income Fund Flows
Billions of US$
As Of: Sep-2021
1250
Passively Managed ETPs
Actively Managed ETPs
1000
Passively Managed Mutual Funds
Actively Managed Mutual Funds
750

Billions of US$
1250
1000
750

500

500

250

250

0
-250
2016

0

2017

Source: Morningstar, Inc.

2018

2019

2020

2021

-250

Note: Cumulative net fund flows. Includes
taxable and municipal bond funds.

Fina nc ia l De v el opment s

99

investment company assets, up from 12 percent
in 2015 and 7.6 percent in 2010.

3.5.2.16 ETP Assets by Category of Investment
3.5.2.16 ETP Assets by Category of Investment
Trillions of US$
8

As Of: Sep-2021

Trillions of US$
8

Other
Commodities
Fixed Income
Equity

6

6

4

4

2

2

0
2009

2011

2013

2015

2017

2019

2021

0

Source: Morningstar, Inc.

3.5.2.17 Monthly ETP Flows: Fixed Income Funds
3.5.2.17 Monthly ETP Flows: Fixed Income Funds
Billions of US$
40
Tax-Exempt
Taxable

Billions of US$
40

As Of: Sep-2021

20

20

0

0

-20

-40

2017

-20

2018

2019

2020

2021

-40

Note: Net fund flows.

Source: Morningstar, Inc.

3.5.2.18 Monthly ETP Flows: Equity Funds
3.5.2.18 Monthly ETP Flows: Equity Funds
Billions of US$
100

As Of: Sep-2021

60

60

20

20

-20

-20

-60

-60

-100
2017

2018

Source: Morningstar, Inc.

100

Billions of US$
100

2 0 2 1 F S O C / / Annual Report

2019

2020

2021

-100

Note: Net fund flows.

ETPs continue to grow at a faster pace than
many other SEC-registered investment vehicles.
After rising 24 percent in 2020, ETP assets rose
a further 21 percent over the first nine months
of 2021, settling at $6.6 trillion in September
2021 (Chart 3.5.2.16).
In contrast to mutual funds, both equity and
fixed income ETPs have experienced relatively
steady net monthly inflows over the last few
years. The most significant exception came at
the onset of the COVID-19 pandemic, when
fixed income ETPs experienced record monthly
outflows, totaling $21 billion or 2.3 percent of
assets. Following the immediate dislocation
caused by the COVID-19 pandemic, the market
stabilized and fixed income ETPs experienced
inflows totaling $356 billion between April 2020
and September 2021 (Chart 3.5.2.17). Despite
the March 2020 market turmoil, equity ETP
flows remained positive, totaling $16 billion in
March and $664 billion between April 2020 and
September 2021 (Chart 3.5.2.18).

Inflows to leveraged and inverse ETPs spiked
in March and April 2020 amid heightened
market volatility associated with the onset of the
COVID-19 pandemic and leveled off thereafter,
continuing into 2021 (Chart 3.5.2.19).
The industry remains concentrated, as the
three largest managers account for over 78
percent of ETP assets, and the top ten managers
account for 93 percent. Over the first nine
months of 2021, the number of available ETPs
increased 12 percent in addition to the 2.0
percent increase in 2020.
Actively managed ETPs are a small but growing
part of the industry. Active ETPs attracted
11 percent of all ETP inflows in the first nine
months of 2021, despite holding only 3.3
percent of all ETP assets as of year-end 2020.
During this period, sponsors launched 211 new
active ETPs, compared to 122 passive ETPs.

3.5.2.19 Monthly Inverse and Leveraged ETP Flows
3.5.2.19 Monthly Inverse and Leveraged ETP Flows
Billions of US$
10
Inverse
Leveraged

As Of: Sep-2021

Billions of US$
10

5

5

0

0

-5

-5

-10

2017

2018

Source: Morningstar, Inc.

2019

2020

2021

-10

Note: Net fund flows.

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101

Box C: Nonbank Financial Intermediation & Council Initiatives

Intermediation between borrowers and savers in
the U.S. economy occurs both through the banking
system and through a variety of nonbank financial
institutions (NBFIs). These intermediation activities
provide essential funding that underpins the U.S.
economy. However, the acute financial market stress
that occurred in March 2020 highlighted the potential
for NBFIs to amplify liquidity pressures in the financial
system. The Council is evaluating the vulnerabilities
posed by three types of NBFIs: MMFs, open-end
mutual funds, and hedge funds.
Money Market Funds
As a key participant in short-term funding markets,
MMFs provide funding for businesses, local
governments, and other market participants in
support of the U.S. economy. Stresses in shortterm funding markets can therefore impact other
economically significant borrowers and the broader
economy. Some types of MMFs may amplify stresses
in short-term funding markets because of the liquidity
transformation they engage in. Many MMF investors
have a low tolerance for principal losses and liquidity
restrictions and use MMFs as a cash management
tool. MMFs offer shareholder redemptions on
at least a daily basis, even though a potentially
significant portion of portfolio assets may not be
easily converted into cash within a day without a
reduction in value. If a MMF does sell portfolio assets
at a discount, the fund’s remaining shareholders
generally bear those losses. These factors can lead
to greater redemptions if investors believe they will be
better off by redeeming earlier than other investors—a
so-called “first mover” advantage—when there is a
perception that the fund may suffer a loss in value
or liquidity. While a fund’s board of directors can
generally impose fees or gates on redemptions if
weekly liquid assets comprise less than 30 percent
of total assets, approaching this threshold may itself
spark widespread redemptions.
In March 2020, in response to escalating concerns
about the economic impact of the pandemic,

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market participants liquidated risky assets in favor
of low-risk liquid holdings. These liquidity pressures
affected prime and tax-exempt MMFs through intense
redemption requests and a drop in assets under
management (see Section 3.5.2.3). Affected MMFs
experienced significant redemptions that, through
the sale of assets to meet redemptions, contributed
to dislocations in short-term funding markets.
While no MMFs imposed fees or gates or failed to
meet redemptions during this time, MMF outflows
contributed to a rapid deterioration of conditions in
short-term funding markets that prompted the official
sector to provide support. On March 18, 2020, the
Federal Reserve, with Treasury approval, established
the MMLF with $10 billion of credit protection from
Treasury’s Exchange Stabilization Fund. The facility
was designed to assist prime and tax-exempt MMFs
in meeting demands for redemptions and enhance
overall market functioning and the provision of credit
to households, businesses, and municipalities. In
part due to the establishment of this facility, outflows
from prime and tax-exempt MMFs subsided and
conditions in short-term funding markets improved,
supporting access to credit and the recovery in
market conditions and economic activity.
In response to this episode, the PWG released
the Overview of Recent Events and Potential
Reform Options for Money Market Funds (PWG
Report) in December 2020. The PWG Report on
MMFs described potential policy measures while
not recommending a specific course of action.
The PWG Report on MMFs emphasized that future
reforms should, individually or in combination,
address structural vulnerabilities in MMFs, improve
the resilience and functioning of short-term funding
markets, and reduce the likelihood that official-sector
interventions and taxpayer support will be needed
to halt future MMF runs and address stresses in
short-term funding markets more generally. The SEC
published a request for public comment on potential
policy measures and briefed the Council on the
comments it received. The Council is supportive of

Box C: Nonbank Financial Intermediation & Council Initiatives (continued)

the SEC’s engagement and will continue to monitor
this initiative in the broader context of efforts by
financial regulators to strengthen short-term funding
markets and support orderly market functioning,
including during periods of heightened market stress.
Open-End Mutual Funds
Open-end mutual funds may also pose a vulnerability
by amplifying asset liquidation pressures. Openend funds allow investors to redeem shares daily at
NAV, with payment of redemption proceeds required
within seven days, though settlement typically occurs
within two trading days. If these funds invest in assets
with less liquidity or longer settlement periods, they
are engaging in liquidity transformation. Open-end
funds process buy and sell orders at NAV as of the
next market close, a practice known as forward
pricing. This NAV may not consider all transaction
costs associated with a redemption, including
market impact and trading costs, if such costs have
not yet been incurred. Instead, these costs may be
passed on to the remaining investors in the fund
and could give rise to a first-mover advantage. This
effect may be more significant for open-end funds
invested in relatively less-liquid assets. As a result,
the vulnerability posed by open-end funds is that they
may amplify asset liquidation pressures when facing
large outflows.
At the onset of the pandemic, open-end funds,
particularly those focused on fixed income,
experienced significant outflows. While funds
generally managed their liquidity and no fund
suspended redemptions, their liquidity needs may
have contributed to broader market stress. Further
study is needed to understand how funds managed
their liquidity during this period.
The Council has established the Open-End Fund
Working Group, an interagency staff level working
group, to consider the risks posed to financial stability
arising from open-end fund liquidity and redemption
features. The group will evaluate whether additional

action is necessary and may formulate and present
recommendations to the Council as appropriate.
Hedge Funds
Hedge funds are not subject to regulatory liquidity
guidelines and therefore may invest in assets
of varying liquidity profiles, consistent with their
disclosures to investors. They may also restrict
investors’ ability to redeem, which may better align
investor liquidity with asset liquidity.
However, hedge funds are also not subject to the
leverage restrictions imposed on MMFs and openend funds. While actual risk exposure depends on
various factors, leverage can magnify the impact of
asset price movements on a fund’s net assets and
performance. If faced with collateral or margin calls
due to significant changes in asset prices, a hedge
fund may be forced to sell assets to satisfy those
demands. Assets purchased with borrowed shortterm funds may be particularly vulnerable to selling
pressure in stress conditions if short-term borrowing
becomes unavailable and positions need to be
unwound quickly. A disorderly liquidation of positions
could in turn have a significant price effect on assets,
and potentially impact previously unaffected market
participants. Additionally, the exposures created by
leverage establish interconnections to other market
participants through which financial stress could be
transmitted to the broader financial system.
Prior to the pandemic, borrowing and the use of
leverage increased among the most leveraged hedge
funds. At the same time, hedge funds increased
their exposures to U.S. Treasuries, as some funds
employed trading strategies designed to exploit
pricing discrepancies between products or securities
that tended to trade with very high correlation. In
March 2020, some funds sold assets in order to
reduce their leverage, which may have amplified price
declines in certain markets, including the Treasury
market. Overall, funds markedly reduced their
exposures to Treasuries and interest rate derivatives.

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103

Box C: Nonbank Financial Intermediation & Council Initiatives (continued)

Like other market participants, hedge funds likely
benefited from the extraordinary official sector
interventions to stabilize markets.
Partly in response to the March 2020 market turmoil,
the Council reestablished the Hedge Fund Working
Group (HFWG). A primary objective of the HFWG is
to update the Council’s assessment of potential risks

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to financial stability from hedge funds, their activities,
and their interconnections with other market
participants. The HFWG will also seek to establish a
risk monitoring framework to identify potential risks to
financial stability and communicate these risks to the
relevant regulatory agencies.

3.5.2.5 Alternative Funds
Hedge Funds
Approximately 1,850 hedge funds and 570
hedge fund advisers have enhanced Form PF
reporting requirements with the SEC. These
large, qualifying hedge funds have an aggregate
NAV of $3.7 trillion in the first quarter of 2021.
This represents a 28 percent increase from the
first quarter of 2020. The gross asset value (GAV)
of qualifying hedge funds—which reflects the
effect of leverage obtained through cash and
securities borrowing—totaled $7.1 trillion, a 14
percent increase year-over-year (Chart 3.5.2.20).
There are various measures of aggregated
leverage for hedge funds, including measures
of off-balance sheet exposures. GAV divided by
NAV, which stood at 2.2 in the first quarter of
2020, fell to 1.9 as of the first quarter of 2021.
The mean gross leverage ratio for qualifying
hedge funds, as measured by gross notional
exposure (GNE) divided by NAV, was 5.1 in the
first quarter of 2021, down from 5.2 in the first
quarter of 2020. When interest rate derivatives
are excluded, the mean qualifying hedge fund
GNE/NAV leverage ratio was 3.1, unchanged
from the first quarter of 2020.

3.5.2.20 Hedge Fund Gross and Net Assets
3.5.2.20 Hedge Fund Gross and Net Assets
Trillions of US$
As Of: 2021 Q1
10
Gross Assets (left axis)
Leverage: GAV/NAV
(right axis)
Net Assets (left axis)
8

Leverage
2.4
2.2
2.0

6

1.8

4

1.6
1.4

2
0
2013

1.2

2014

2015

2016

Source: SEC Form PF, OFR

2017

2018

2019

2020

2021

1.0

Note: Qualifying Hedge Fund gross and net assets
as reported on Form PF Questions 8 and 9.

The aggregate level of hedge fund borrowing
has increased significantly in recent years.
As of the first quarter of 2021, hedge fund
borrowing totaled $3.2 trillion, up from $2.1
trillion at year-end 2016. Over this same period,
repo borrowing grew from $0.7 trillion to $1.0
trillion while prime broker borrowing grew
from $1.1 trillion to $1.7 trillion.
Hedge funds deploy a wide range of strategies
and are invested in various products and asset
classes. As of the first quarter of 2021, qualifying
hedge funds’ GNE totaled $24 trillion, of which
$15 trillion, or 64 percent, were attributed to
rates products (interest rate derivatives, U.S.
government debt, repo, and other sovereign
debt) or foreign exchange (FX) products. Equity
and credit products accounted for 27 percent of
GNE, and all other asset classes accounted for
the remaining 9 percent of exposures.

Fina nc ia l De v el opment s

105

3.5.2.21 Private Equity AUM

3.5.2.21 Private Equity AUM

Billions of US$
3000

2500

As Of: 31-Dec-2020

Billions of US$
3000

Dry Powder
Unrealized Value

2500

2000

2000

1500

1500

1000

1000

500

500

0

2005

2008

Source: Preqin

2011

2014

2017

2020

0

According to eVestment data, which covers a
smaller percentage of the hedge fund industry
when compared to Form PF, the hedge fund
industry experienced net outflows of $59
billion, or roughly 2 percent of AUM in 2020
and net inflows of $30 billion, or 1 percent
of AUM, over the first nine months of 2021.
Outflows in 2020 were concentrated in macro,
directional credit, and long-short equity hedge
funds. These categories reported outflows of
approximately $48 billion in 2020 and a further
$15 billion in the first nine months of 2021.
After experiencing sizable outflows in 2019 and
2020, multistrategy funds saw $20.7 billion of
inflows in the first nine months of 2021. Eventdriven funds continued to experience strong
inflows, reporting inflows of $6.0 billion in the
first six months of 2021. Hedge fund returns, as
provided by the Hedge Fund Research’s HFRI
Fund Weighted Composite Index, stood at 11.8
percent in 2020 and 9.7 percent year-to-date
through September 30, 2021.

Private Equity
According to the SEC’s most recent Private
Funds Statistics Report, the GAV of private
equity funds in the United States totaled $4.8
trillion in the first quarter of 2021, a 27 percent
increase from the first quarter of 2021. The
funds’ NAV totaled $4.3 trillion, a 26 percent
increase over that same period. These figures
cover over 15,000 private equity funds, for
which over 1,400 private equity advisers filed
information on Form PF. Data from Preqin,
which covers less of the industry but provides
a longer time series for comparison, shows
the significant growth in the private equity
industry over the last several years (Chart
3.5.2.21). Between year-end 2015 and year-end
2020, private equity AUM roughly doubled, a
significantly higher growth rate relative to the
preceding five years when private equity AUM
grew by approximately 25 percent. The recent
growth of the industry can be largely attributed
to capital fundraising by private equity
managers. Between 2016 and 2020, managers
raised $1.4 trillion compared to $650 billion
between 2011 and 2015.

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The private equity industry remains
concentrated. Among private equity advisers
filing Form PF—which are defined as those
with $2 billion or more in AUM—large private
equity advisers made up 25 percent in first
quarter of 2021 and managed 76 percent of
gross assets. Pension funds are the largest
beneficial owners of funds managed by large
private equity advisers, accounting for 28
percent of net assets; other private funds
account for 20 percent, foreign official sector
investors account for 12 percent, and insurance
companies account for 5.8 percent.
Acquisition-related activity backed by private
equity trended upwards from 2015 to 2018,
peaking at $230 billion in 2018, before slowing
in 2019 to $150 billion (Chart 3.5.2.22). Private
equity merger and acquisition (M&A) activity
fell dramatically at the onset of the pandemic,
with sponsored M&A loan volume totaling
just $4 billion between March and May 2020
compared to $36 billion over the same period
in 2019. Private equity M&A activity has since
picked up considerably, totaling $217 billion
year-to-date through September 30, 2021.
Leveraged buyouts (LBOs) accounted for 68
percent of private equity M&A activity in 2021
compared to 62 percent of M&A activity over
the preceding ten years.

3.5.2.22 M&A Loan Volume for Private Equity-Backed Issuers

3.5.2.22 M&A Loan Volume for Private Equity-Backed Issuers

Billions of US$
250
Non-LBO
LBO
200

As Of: 30-Sep-2021

Billions of US$
250
200

150

150

100

100

50

50

0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
YTD

0

Source: S&P LCD

Private equity managers are major participants
in private debt markets, which primarily involve
direct lending to borrowers backed by private
equity sponsors. Private equity activity in private
debt markets also includes real estate loan
origination and asset-based lending. Between
year-end 2015 year-end 2020, global private
debt AUM roughly doubled to over $1 trillion.
The growth in private debt has been partly
fueled by the retreat of banks from certain
lending activities coupled with search for
yield by institutional investors. Private equity’s
increased involvement in private debt has been
a factor in its recent emergence and expansion
in the U.S. life insurance industry. Some
private equity firms are acquiring life insurers
or assuming life business (through owned
reinsurers), in order to access and leverage long

Fina nc ia l De v el opment s

107

term assets. In addition to supporting the private
credit business of their private equity firm owners
such arrangements may also generate investment
management fee income. This intersection may
increase interconnectivity among nonbank lenders,
insurers, and the broader financial sector while
exposing a growing investor base to lending activities
that may be subject to less regulatory scrutiny.

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Box D: Failure of Archegos Capital Management

Archegos Capital Management was a family office
that failed in March 2021, causing several large
financial institutions to incur material losses. While
Archegos’ failure did not pose a risk to financial
stability, potential spillovers might have been more
significant if the failure had occurred during a period
of market stress. The episode highlighted potential
deficiencies in counterparty credit risk management
and margining practices. In addition, the episode
highlighted gaps in transparency regarding the
security-based swap market, and also served as a
reminder of the limited visibility into the activities and
leverage of private investment vehicles.
Background
Archegos was established as a family office in
2012 to manage the assets of a former hedge fund
manager.4 In addition to holding long positions in
cash securities, Archegos gained exposure, and
additional turns of leverage, through the use of OTC
equity derivatives, including total return swaps. From
June 2020 leading up to its default, the office’s gross
market value grew rapidly amid strong performance
of the underlying securities. Its exposures were
concentrated in a limited number of U.S. and Chinese
technology and media companies.
D.1 Static Margin Model Example

D.1 Static Margin Model Example
US$
160

US$
160
Position size: $140

120

$40 variation
margin paid
Position size: $100

120

80

80
Financed: $80

Financed: $120

40

0

40
Initial margin
$20 = 20%
Share Price at Inception

Initial margin
$20 = 14.3%
$40 Increase in Share Price

Beginning on March 22, 2021, price declines in
certain stocks to which Archegos was exposed

0

triggered significant margin calls. Two days later,
Archegos notified its counterparties that it was unable
to meet additional margin calls.5 After negotiations
for an orderly wind down failed, Archegos’
counterparties issued notices of default and began
liquidating their separate positions. These largescale liquidations exacerbated the price declines in
a number of stocks, wiping out $35 billion in market
capitalization in a single day.
Archegos’ failure ultimately led to over $10 billion
in counterparty credit losses across multiple large
financial institutions. Losses were particularly
concentrated at Credit Suisse and Nomura, which
reported losses of $5.5 billion and $2.9 billion,
respectively. While Morgan Stanley avoided major
losses by unwinding some of Archegos’ positions
before the default event and thus materially reducing
its exposures to Archegos and the stocks in its
portfolio, it still reported a loss of nearly $1 billion.
Counterparty Credit Risk Management and Margining
Practices
Archegos’ failure highlighted potential deficiencies in
counterparty credit risk management and margining
practices at large financial institutions. Reports have
noted weak margining practices by at least one of
Archegos’ counterparties that allowed Archegos
to take on excessive leverage and amplify losses.6
Because of static margining at the firm, Archegos did
not have to increase its margin as the value and risk
of its position grew, even while it received variation
margin when the underlying value of the securities
increased. Figure D.1 provides an illustration: as the
value of a security increases from $100 to $140, the
holder of the swap receives $40 of variation margin
payments while its $20 of initial margin is unchanged.
The result is known as margin erosion, as the equity
position provided by the initial margin falls from 20
percent to 14.3 percent. In the case of Archegos, by
December 2020, its average swap margins at Credit
Suisse had fallen to just 6.9 percent under the static
margining method.7 While dynamic margining models

Fina nc ia l De v el opment s

109

Box D: Failure of Archegos Capital Management (continued)

might have provided better risk management, it is
important to note that dynamic models must also be
appropriately calibrated in terms of risk coverage and
severity.
The episode also highlighted that margining practices
should be accompanied by close monitoring
of a client’s aggregate portfolio composition,
concentration, and exposures to other firms.
According to earnings calls and news media reports,
some firms were not aware of the positions Archegos
had taken with other firms. These reports have also
suggested that a number of firms are reviewing
their stress testing methodologies in response
to the episode. Finally, at least at one firm, other
contributing factors included a lack of stature in
independent second line of defense risk management
functions, poorly defined communication channels or
escalation protocols, or red flags that were ignored
despite multiple and persistent breaches of shortfall
limits of counterparty stress tests.8 Notably, Archegos
also had a history of risky and improper behavior,
including insider trading charges relating to its key
official.
Security-based Swaps
At the time of Archegos’ failure, there was no
requirement to report security-based swaps to a
swap data repository (SDR). Consequently, there
was little reliable data available to counterparties or
regulators on the buildup of Archegos’ equity swap
positions. Additionally, the lack of public reporting
on security-based swaps meant that Archegos’
counterparties were unaware of the amount of swaps
written on a select number of equity securities.
The SEC had adopted rules related to securitybased swaps to increase transparency and reduce
risks in this market, but these rules had not been
fully implemented at the time of Archegos’ failure.
Security-based swap dealers and major securitybased swap participants began registering with
the SEC on October 27, 2021. The registration

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requirements include new counterparty protections,
requirements for capital and margin, and internal
risk management requirements. Additionally, new
post-trade transparency rules went into effect on
November 8, 2021 and require security-based swap
transaction data to be reported to an SDR. SDRs
will be required to disseminate data about individual
security-based swap transactions to the public by
February 22, 2022.
Family Offices
As a family office, Archegos was not subject to the
Investment Advisers Act of 1940 (Advisers Act) by
statute, and therefore did not make certain regulatory
filings. As a result, regulators have limited direct
insight into family offices’ portfolios, leverage, or
counterparty exposures, though firms that deal with
family offices can request such information in the
course of their business relationships. The Archegos
episode demonstrated the potential importance of
high frequency and granular information of this kind
in order to understand the activities and leverage
of private investment vehicles, including some
family offices. While the typical family office uses
leverage sparingly, the Archegos event highlighted
the potential for the accumulation and management
of large, complex, and highly leveraged portfolios to
occur with limited regulatory reporting.

3.5.2.6 Pension Funds

Single-Employer Private Plans

Defined benefit pension plans are significant
holders of financial assets. As of the second quarter
of 2021, total pension fund entitlements funded
by assets of U.S. private and public defined benefit
pensions were $11 trillion, 16 percent higher than
one year earlier. At the same time, defined benefit
pension fund entitlements rose to nearly $17 trillion,
a 2.7 percent increase compared to the second
quarter of 2020.

According to the Milliman Corporate Pension
Funding Study, the funded ratio of the 100 largest
single-employer private defined benefit plans rose to
88.4 percent as of year-end 2020, compared to 87.5
percent as of year-end 2019. The funded percentage
of a plan is its assets relative to the estimated value
of plan liabilities. Milliman estimates that the 100
largest corporate defined benefit pension plans in
the United States had an aggregate funded ratio of
97.2 percent at the end of September 2021.

Sponsors of pension plans strive to keep pace
with the benefits owed to beneficiaries. However,
sustained, low interest rates may decrease the
income produced by debt securities and increase the
present value of pension liabilities, generating large
funding deficits. Although sponsors may respond
to growing shortfalls by increasing contributions,
they often respond by increasing the risk profile of
their asset allocations. Already experiencing large
deficits in recent years, public pension plans have
significantly increased their allocations to illiquid
asset classes, such as hedge funds, private equity
funds, and real estate. While sudden redemptions
are generally rare as retirement cohorts are typically
more predictable, plans could be forced to sell assets
at depressed prices, further stressing their financial
position.
It is difficult to analyze the direct impact of the
COVID-19 pandemic on defined benefit pension
plans in the aggregate because the disclosure
requirements differ between single-employer private
plans, multiemployer plans, and public plans. For
example, disclosures concerning a defined benefit
pension plan’s return assumptions and investment
strategies may have a different level of granularity,
be in a different format, and cover a different period
than disclosures concerning similarly situated funds.
However, some indirect effects of the pandemic can
be seen in that some sponsors of public pension
plans have announced significant pension plan
contributions in 2021 and 2022 given the sponsors’
improved financial positions. Additionally, the
ARP Act of 2021 allows certain financially troubled
multiemployer plans to apply for special financial
assistance.

Multiemployer Plans
Milliman estimates that the aggregated funded
percentage of multiemployer private defined
benefit plans as of June 30, 2021 was 92 percent, up
from 88 percent at year-end 2020. While the 2019
Pension Benefit Guaranty Corporation (PBGC)
report estimated that PBGC’s Multiemployer
Program would likely become insolvent in fiscal year
2026, new projections that reflect the enactment
of the ARP Act and associated assistance now
estimate insolvency to occur outside of the ten-year
projection period, with a mean projection year of
2055.

Public Plans
According to Milliman, the aggregate funded
status of the 100 largest U.S. public defined benefit
plans in June 2021 was 82.6 percent, up from 71
percent in June 2020. In addition, public pension
fund sponsors are permitted to assume investment
returns based on their own long-run expectations by
the relevant accounting rules. Accordingly, pension
funds that do not meet their assumed return may
be overstating their current funded status. These
return assumptions may be higher than recent
average investment returns, and, in recent years,
several large public pension funds have revised longterm investment return expectations downward.
According to the Center for Retirement Research
at Boston College, the aggregate ratio of assets to
liabilities for public plans rose from 72.8 percent to
74.7 percent between June 2020 and June 2021. The
average actuarially determined contribution was
estimated to rise from 21.3 percent to 22.0 percent
of payroll in this same period.

Fina nc ia l De vel opment s

111

3.5.2.23 Public Plan Allocation to Alternative Assets
3.5.2.23 Public Plan Allocation to Alternative Assets
Percent
35

As Of: 2020

Percent
35

Other Alternative
Real Estate
Private Equity
Hedge Fund

30
25

30
25

20

20

15

15

10

10

5

5

0

2002

2005

2008

Source: publicplansdata.org

2011

2014

2017

2020

0

Note: Includes public plans that reported investment
allocations from 2002-2020. Simple average.

3.5.2.24 Insurance Industry Net Income
3.5.2.24 Insurance Industry Net Income
Billions of US$
100
Health
Life
80
P&C

As Of: 2020

Billions of US$
100
80

60

60

40

40

20

20

0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: NAIC

0

Underfunded public pension funds are a
significant source of fiscal pressure on several
U.S. states, territories, and municipalities.
Seventeen large pension funds were less than 60
percent funded as of June 30, 2021. To increase
expected returns and meet benefit obligations,
public pension funds have steadily increased
their exposure to alternative assets for years
(Chart 3.5.2.23).

3.5.2.7 Insurance Companies
The insurance industry provides an array of
important financial services to individuals
and businesses in the United States. The
U.S. insurance industry is composed of
approximately 4,500 operating insurance
companies, of which approximately 2,600
are licensed as property and casualty (P&C)
carriers, 1,200 are licensed as health insurers,
and 700 are licensed as life insurance
companies. Many of these are affiliated through
common ownership in the form of a holding
corporation or parent insurance company.
P&C and life insurance companies are
significant sources of capital for the economy
and are among the largest investors in several
key asset classes. According to the Financial
Accounts of the United States compiled by
the Federal Reserve, P&C and life insurance
companies are the largest investors in corporate
and foreign bonds. As of the second quarter
of 2021 they hold $4.2 trillion, or 27 percent,
of outstanding bonds. Insurance companies
are also major investors in mutual funds and
equities, with holdings of $1.8 trillion and $1.0
trillion, respectively.
All three industry sectors reported positive
net income in 2020, with results broadly
comparable to the previous year (Chart
3.5.2.24). The following sections provide an
overview of the performance of each insurance
sector in view of the COVID-19 pandemic.

U.S. Life Insurance Industry
The COVID-19 crisis negatively impacted
the operating performance of life insurance
companies, mainly through higher claims,
lower product sales, and, to a lesser extent, the
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effects of lower sustained interest rates that resulted
in spread compression and actuarial assumption
“true ups” of reserves for interest-sensitive products.
Credit conditions improved following the March 2020
market stress, largely due to Federal Reserve actions
that improved consumer and business confidence,
helping to stabilize credit markets and averting severe
funding strains and widespread losses.
On the asset side, anticipated credit impairments
did not occur in asset classes such as corporate
bonds, CRE, CLOs, and other alternative
investments. Although corporate bond downgrades
caused some deterioration in the quality of
insurance company investment portfolios, this
resulted in only modest changes in the composition
of insurance company bond portfolios.
On the liability side, the pandemic resulted in
increased reserves to reflect higher expected
mortality and morbidity rates. However, life insurers
benefitted from results of annuity, health, and longterm care products. Life insurers’’ dependence on
non-traditional liabilities, notably funding from the
FHLBs, has grown significantly since the onset of
the pandemic. The single largest FHLB client is now
a life insurance company.
The low interest rate environment continues to
present significant challenges to the U.S. life
insurance subsector. Over the past years some life
insurance companies have increased investments
in less liquid, more complex, and higher credit
risk assets in a “reach for yield.” As an example,
some life insurers have increased their exposure to
alternative investments such as private equity funds.
Low interest rates also affect a life insurer’s reserves
and, in turn, its capital. Persistently low rates could
continue to pressure life insurers’ earnings as
maturing bonds are reinvested at lower rates and
may spur increased investments in illiquid assets
with higher credit risk. Life insurance companies
hedge against changes in interest rates, but the
continuation of low interest rates may spur the exit
of more incumbent insurers from some lines of
insurance. Low interest rates have also contributed
to increased instances of private equity firms (which
generally have expertise in investing in higher
credit risk assets) acquiring U.S. life insurance
companies or assuming blocks of life insurance

business through reinsurance agreements. Such
business acquisitions align with the business models
of private equity firms, that is, seeking to create
incremental yield, leveraging in-house private
credit expertise, leveraging offshore reinsurance
operations, and generating investment fee income.

U.S. P&C Insurance Industry
The initial worst-case scenario loss estimates for
the P&C subsector as a result of the pandemic did
not materialize in 2020. P&C insurers experienced
pandemic-related losses in multiple lines, including
business interruption, event cancellation, travel,
workers’ compensation, and professional liability.
P&C insurance companies benefited from a
favorable loss experience in some personal and
commercial lines, in part resulting from reduced
economic activity. For example, a significant
reduction in auto claims drove strong underwriting
results in personal lines and prompted some auto
insurers to offer reduced premiums or credits in
response. This trend largely reversed in the first half
of 2021; loss ratios weakened at 14 of the 20 largest
auto insurers as a result of increased activity.
Numerous coverage disputes in connection with
COVID-19 business interruption losses have been
brought to court, and many remain pending. So far,
most courts have agreed with the insurers’ position
that coverage is precluded by the lack of COVID19-related physical damage at the policyholders’
premises, or by explicit virus exclusions in the
policies. However, the ultimate outcome of many of
these lawsuits remains to be seen.
The P&C subsector will likely benefit from
favorable market conditions in commercial lines
with premium pricing continuing to exceed loss
cost trends. However, additional losses related to
COVID-19 are expected to emerge in the longer tail
third-party liability lines, particularly in the director
and officers and general liability coverages.

U.S. Health Insurance Industry
The health insurance subsector significantly
outperformed expectations in 2020 amid the
COVID-19 pandemic, and posted particularly
strong financial performance, as individuals delayed
routine and elective medical care and procedures.

Fina nc ia l De vel opment s

113

3.5.2.25 Consumer Loans and Leases Outstanding

3.5.2.25 Consumer Loans and Leases Outstanding

Trillions of US$
2.0

As Of: Aug-2021

Trillions of US$
2.0

Commercial Banks

1.5

1.5

1.0

1.0

0.5

0.0
2001

0.5

Finance Companies

2004

2007

2010

2013

2016

2019

0.0

Note: Loans and leases owned and securitized. Series breaks
in December 2010 and December 2015 due to change in data
collection methodology. Gray bars signify NBER recessions.

Source: Federal Reserve,
Haver Analytics

However, those delayed claims could impact the
subsector as utilization returns to normal and
individuals seek medical care they previously
delayed.

3.5.2.8 Specialty Finance
Specialty finance companies are non-depository
institutions that provide loans to consumers and
businesses. The amount of financing activity by
specialty finance companies decreased modestly
over the past year. Specialty finance companies
held $758 billion of consumer loans and leases
and $328 billion of business loans and leases as
of August 2021 (Charts 3.5.2.25, 3.5.2.26).

4.0

4.0

3.0

3.0

While specialty finance companies account
for a relatively small share of overall consumer
lending, they have a significant footprint in
certain types of consumer lending activities
such as auto lending. Compared to banks,
which generally have more stable sources of
funding such as deposits, specialty finance
companies are more reliant on wholesale
funding and the securitization market.

2.0

2.0

Asset-Backed Securities

1.0

1.0

3.5.2.26 Business Loans and Leases Outstanding

3.5.2.26 Business Loans and Leases Outstanding
Trillions of US$

As Of: Aug-2021

Trillions of US$

Commercial Banks

0.0
2001

Finance Companies

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

2019

0.0

Note: Loans and leases owned and securitized. Series
break in December 2010 due to change in data collection
methodology. Gray bars signify NBER recessions.

3.5.2.27 AAA Securitization Spreads
3.5.2.27 AAA Securitization Spreads
Basis Points
As Of: 30-Sep-2021
350
Private Student Loan 3-Year
300
Equipment 3-Year
Subprime Auto 2-Year
250
Prime Auto 3-Year
Credit Card 3-Year
200

300
250
200

150

150

100

100

50

50

0
Jan:2018

Jan:2019

Source: JPMorgan

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Basis Points
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Jan:2020

Jan:2021

0

After the significant pandemic-induced market
disruption in March and April of 2020, the
asset-backed securities (ABS) market recovered
quickly, driven in part by the Federal Reserve’s
establishment of the Term Asset-Backed
Securities Loan Facility (TALF). Spreads
tightened significantly since the announcement
of TALF, and ABS issuance resumed. Since the
first half of 2020, spread tightening continued
for virtually all major ABS asset classes, and
senior tranche spreads of major ABS products
are at or near multi-year lows as of September
2021 (Chart 3.5.2.27). For instance, spreads
on AAA-rated tranches of 2-year maturity
subprime auto loan ABS tightened from 75
basis points in June 2020 to just 10 basis points
as of September 30, 2021.
Tight spreads of ABS created favorable funding
market conditions for specialty finance
companies, and issuance of ABS in 2021 is
running at a record pace and significantly
higher compared to the same period in 2020.
ABS issuance totaled $168 billion over the first

nine months of 2021, exceeding the $201 billion
issued over the full-year 2020 (Chart 3.5.2.28).
Of note, some of the ABS sectors particularly
hit by the pandemic-induced market disruption,
such as aircraft lease ABS and, to a lesser
degree, subprime auto ABS, have not only
resumed issuance but are experiencing robust
market demand.

Special Purpose Acquisition Companies
While special purpose acquisition companies
(SPACs) raised a record amount of capital in
2020, 2021 issuance through September 30,
2021 exceeded that level, with $137 billion
raised in 549 transactions; more than 90
percent of issuances occurred in the United
States. SPACs have driven the robust U.S. equity
primary market issuance over the past three
quarters, representing 53 percent of total IPO
issuances.

3.5.2.28 ABS Issuance
3.5.2.28 ABS Issuance
Billions of US$
350
300
250

As Of: Sep-2021
Equipment
Credit Card
Auto

Other
Student Loans

Billions of US$
350
300
250

200

200

150

150

100

100

50

50

0

2006

2008

2010

2012

Source: Thomson Reuters, SIFMA

2014

2016

2018

2020

0

Note: Figures are as of year end through 2020.
2021 figures are through September.

However, the pace of SPAC IPOs slowed
materially in the second and third quarters
of 2021 following a price correction among
pre-merger SPACs and SEC communications
that highlighted investor protection issues,
liability risks for sponsors and managers, and
accounting treatment of SPAC warrants.

Fina nc ia l De v el opment s

115

3.6.1.1 DTCC Clearing Fund Requirements
3.6.1.1 DTCC Clearing Fund Requirements
Billions of US$
60
NSCC
FICC: MBSD
50
FICC: GSD

Billions of US$
60

As Of: 2021 Q2

50

40

40

30

30

20

20

10

10

0

2016

2017

2018

Source: PFMI Quantitative
Disclosures, Clarus FT

2019

2020

2021

0

3.6 Financial Market Structure,
Alternative Reference Rates, and
Financial Innovation
3.6.1 Market Structure: Central Counterparty
Clearing
Cash Securities Clearing
In the United States, the Depository Trust &
Clearing Corporation (DTCC) is the dominant
provider of clearing services for cash securities
through its subsidiaries, the Fixed Income
Clearing Corporation (FICC) and National
Securities Clearing Corporation (NSCC).
FICC consists of two divisions, the Government
Securities Division (GSD) and the MortgageBacked Securities Division (MBSD). GSD
provides CCP services for its customers with
respect to the U.S. government securities
market, and MBSD provides CCP services to
the U.S. mortgage-backed securities market.
NSCC serves as a CCP for virtually all broker-tobroker trades involving equities, corporate and
municipal debt, ADRs, ETPs, and UITs.
DTCC clearing fund requirements, which
spiked at the onset of the COVID-19 pandemic,
remained elevated through the first quarter
of 2021. As of June 30, 2021, clearing fund
requirements across the three clearing services
totaled $44 billion, unchanged compared
to June 30, 2020 (Chart 3.6.1.1). In the
first quarter of 2021, MBSD’s clearing fund
requirement totaled $21 billion, up $10 billion
from the prior year. The increase in MBSD’s
clearing fund requirement can be primarily
attributed to the extension of durations in
members’ to be announced (TBA) portfolios.
Initial margin at MBSD has since declined,
totaling $14 billion as of June 30, 2021.

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The maximum backtesting deficiency, or
margin breach, at DTCC’s FICC clearing
services fell for the twelve months ended March
31, 2021 as market volatility observed in the
first quarter of 2020 rolled off (Chart 3.6.1.2).
In contrast, NSCC reported a backtesting
deficiency of $1.1 billion on January 22, 2021,
the largest since public disclosure began in the
third quarter of 2015. In its quarterly Principles
for Financial Market Infrastructures (PFMI)
disclosure, NSCC attributed the backtesting
deficiency mainly to a single security exhibiting
idiosyncratic risk.
During the week of January 25, 2021, NSCC
observed unusually high volumes and volatility
in GameStop Corp. and other securities that
had been popularized on internet message
boards. Activity in these “meme stocks” was
concentrated in certain clearing members
primarily serving retail investors. On January
27, 2021, NSCC made intraday margin calls
to 36 clearing members totaling $6.9 billion,
bringing the total required margin across all
members to $26 billion. Of the $6.9 billion,
$2.1 billion were intraday mark-to-market calls,
while the remaining $4.8 billion was an excess
capital premium charge.9 The capital premium
charge is intended to discourage clearing
members from taking on more risk in their
portfolios at NSCC than their capital levels can
reasonably support. Because clearing members’
ratios of excess risk versus capital were not
driven by individual clearing member actions,
but by extreme volatility in individual cleared
equities, NSCC waived the capital premium
charge for all clearing members.

3.6.1.2 Maximum Uncovered Exposure for DTCC
3.6.1.2 Maximum Uncovered Exposure for DTCC
Billions of US$
2.0

1.5

As Of: 2021 Q1

Billions of US$
2.0

2021 Q1
2020 Q1
2015 - 2019

1.5

1.0

1.0

0.5

0.5

0.0

DTCC GSD

PFMI Quantitative
Disclosures, Clarus FT

DTCC MBSD

DTCC NSCC

0.0

Note: Peak uncovered exposure for
preceding 12 months as reported on
question 6.5.4 of PFMI quarterly disclosures.

In February 2021, DTCC proposed settling
securities trades in one day instead of the
current market practice of two days. Reducing
settlement time will allow NSCC to reduce the
amount of margin it collects from its members;
DTCC estimated a 25 percent reduction. DTCC
noted it has the operational capability to settle
securities trades same-day but said market
participants were generally against it because of
the loss of netting benefits, an increase in failed
trades, and funding difficulties.

Fina nc ia l De v el opment s

117

3.6.1.3 Initial Margin: U.S. Exchange Traded Derivatives
3.6.1.3 Initial Margin: U.S. Exchange Traded Derivatives
Billions of US$
As Of: 2021 Q2
400
Options Clearing Corp.
ICE Clear US
CME
300

Billions of US$
400

300

200

200

100

100

On September 3, 2021, DTCC increased NSCC’s
minimum clearing fund deposit from $10,000
to $250,000. NSCC stated that the purpose of
the change was to address the risk that NSCC
becomes under-margined in circumstances
where a member is subject to the minimum
required fund deposit amount and experiences
an abrupt increase in clearing activity following
a period of low or no clearing activity.

Derivatives CCPs
0

2016

2017

2018

Source: PFMI Quantitative
Disclosures, Clarus FT

2019

2020

2021

0

Note: Initial margin required as reported in quantitative
disclosures; includes house and client accounts.

3.6.1.4 Initial Margin: Centrally Cleared OTC Derivatives

3.6.1.4 Initial Margin: Centrally Cleared OTC Derivatives

Billions of US$
As Of: 2021 Q2
400
Credit Default Swaps
Interest Rate Swaps

Billions of US$
400

300

300

200

200

100

100

0

2016

2017

2018

2019

2020

2021

0

Note: Initial margin required as reported in quantitative disclosures;
includes house and client accounts. Interest rate swaps margin
includes LCH Ltd. and CME. CDS margin include CME, ICC,
ICEU, and LCH SA). CME ceased clearing CDS in March 2018.

Source: PFMI Quantitative
Disclosures, Clarus FT

3.6.1.5 Initial Margin by Segregation Type

3.6.1.5 Initial Margin by Segregation Type

Billions of US$
800
House
Customer
600

Billions of US$
800

As Of: 2021 Q2

700
600
500
400

400

300
200

200

100

0

2016

2017

2018

Source: PFMI Quantitative
Disclosures, Clarus FT

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2019

2020

2021

0

Note: Initial margin required as reported in quantitative disclosures;
includes exchange-traded derivatives (Options Clearing Corp., CME,
and ICUS), interest rate swaps (LCH Ltd. and CME), and CDS (CME,
ICC, ICEU, and LCH SA). CME ceased clearing CDS in March 2018.

The vast majority of U.S. exchange-traded
derivatives are cleared through CME, ICE Clear
US, and the Options Clearing Corp. CME and
ICE Clear US provide clearing services for
futures and options on futures while Options
Clearing Corp. mostly provides clearing services
for exchange-traded equity options. Within
the OTC derivatives markets, most U.S. dollar
(USD) interest rate swaps are cleared through
LCH Ltd. or CME, while most CDS are cleared
through ICE Clear Credit, ICE Clear Europe, or
LCH SA.
On an aggregate basis, initial margin posted
against derivatives positions peaked at the
onset of the pandemic, totaling $619 billion
at the end of the first quarter of 2020. Initial
margin posted against derivatives has since
fallen slightly but remains elevated relative to
pre-pandemic levels (Charts 3.6.1.3, 3.6.1.4).
The size and speed of initial margin changes
is highly dependent on the relative shifts of
underlying product volatility, calibrations of
margin models relative to that volatility, and
changes in the size and composition of clearing
member portfolios. Over the last five years, the
share of initial margin attributed to clearing
members’ house accounts has slowly decreased,
from 35 percent in the second quarter of 2016
to 30 percent in the second quarter of 2021
(Chart 3.6.1.5).
Analysis continues on the events of March 2020,
including the impact of volatility upon margin
during the stressed period, as well as potential
interactions between margined markets and
the financial system as a whole. International
work on this topic was spurred by analysis by

the Financial Stability Board which, late in
2020, published a Holistic Review of the March
Market Turmoil and recommended further
work in a number of areas. Reports based on
this additional analysis are scheduled to be
released near the end of this year.

3.6.1.6 Average Clearing Rates for OTC Trading
3.6.1.6 Average Clearing Rates for OTC Trading
Percent
100
90

Percent
100

As Of: 2021 Q3
Interest Rate Swaps

Index CDS

90

80

80

70

70

60

60

Clearing Rates for OTC Derivatives
Clearing rates in the United States were broadly
similar to global clearing rates. In the third
quarter of 2021, 94 percent of new interest rate
swaps were centrally cleared, while 80 percent
of CDS on credit indexes were centrally cleared
(Chart 3.6.1.6). Central clearing has become
prevalent throughout the world as clearing
mandates have been introduced in a number
of jurisdictions for the most standardized
products, including interest rate swaps and
CDS on credit indexes. In recent years, margin
requirements for uncleared swaps have, in some
cases, made cleared swaps more cost-efficient.

50
2014

2015

Source: CFTC

2016

2017

2018

2019

2020

2021

50

Note: Gross notional of new transactions.
Excludes security-based swaps.

Over the last several years, clearing rates on
new CDS on credit indexes trended downwards.
The decline in clearing rates between 2016 and
2019 can primarily be attributed to an increase
in the volume of credit swaptions, total return
swaps on credit indexes, and other exotic
credit products for which clearing is not widely
available.

Fina nc ia l De v el opment s

119

Box E: LIBOR Transition

The Council continues to support an orderly transition
from USD LIBOR to alternative reference rates, in
order to mitigate risks and ensure smooth market
functioning. The Council recommends that market
participants only utilize alternative reference rates
with robust underlying transaction volumes and in
a way that is fit for the purpose of the rate’s design.
The ARRC has recommended the use of SOFR, as
it provides a robust rate which is suitable for use in
a wide array of products and is based on a large
volume of underlying transactions.
Since the Council’s 2020 annual report, there have
been several important developments in the transition
from USD LIBOR. With LIBOR’s end dates now
certain, market participants should act with urgency
to address their existing LIBOR exposure and
transition to robust and sustainable alternative rates.
Greater Certainty on LIBOR’s Cessation
LIBOR cessation dates were proposed in December
2020 by the ICE Benchmark Administration (IBA).
The cessation date of December 31, 2021 was
proposed for all tenors of LIBOR calculated in EUR,
CHF, JPY, GBP and for one-week and two-month
USD LIBOR. The cessation date of June 30, 2023
was proposed for the remaining tenors of USD LIBOR
(overnight, one-month, three-months, six-months,
and 12-months).
IBA confirmed these LIBOR cessation dates, after a
consultation period, on March 5, 2021, and the UK
Financial Conduct Authority (FCA) issued a formal
statement that announced, “the future cessation
or loss of representativeness of the 35 LIBOR
benchmark settings.” The FCA’s announcement
was considered an index cessation event by
International Swaps and Derivatives Association
(ISDA) and resulted in the determination of the fixed
spread adjustment between LIBOR and SOFR for all
currency tenors. This adjustment is to be used for
the transition of legacy derivatives adhering to ISDA’s
interbank offer rate (IBOR) Fallbacks Protocol, or

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new derivatives using ISDA’s revised definitions. The
ARRC adopted the use of ISDA’s spread adjustments
for fallbacks to legacy cash instruments. For legacy
contracts where SOFR is selected as the transition
rate, the setting of the fixed spread adjustment to
SOFR will allow the transition to a uniform spread
adjustment and provides greater clarity to market
participants on the performance of these legacy
LIBOR contracts at LIBOR’s cessation.
The Federal Reserve, FDIC, and OCC issued
guidance in November 2020, in anticipation of the
setting of cessation dates for LIBOR. This guidance
stated that entering into new contracts that use USD
LIBOR as a reference rate after December 31, 2021
would create safety and soundness risks. In October
2021, a Joint Statement on Managing the LIBOR
Transition was issued by the Federal Reserve, FDIC,
OCC, CFPB, and NCUA, in conjunction with state
bank and state credit union regulators. The statement
emphasized the expectation that supervised
institutions with LIBOR exposure continue to progress
toward an orderly transition away from LIBOR. The
statement also provided clarification on the meaning
of new LIBOR contracts, considerations when
assessing appropriateness of alternative reference
rates, and expectations for fallback language.
Utilization of Alternative Rates
The Council has continued to advise lenders,
borrowers, and other market participants to consider
SOFR-based rates and conduct a comprehensive
evaluation before adopting any alternative reference
rate. Such an evaluation would, at a minimum, review
any alternative rate’s fitness for the purpose of its use,
ensure that the rate is based on a sufficiently active
market with sufficient transaction volumes, assess the
adequacy of the representativeness of the underlying
interest, and evaluate the resilience of the rate
during times of stress. Individual institutions should
review how alternative rates fit into their internal risk
management guidelines, business strategies, and risk
appetite. In a public meeting of the Council in June

Box E: LIBOR Transition (continued)

2021, several Council members emphasized their
concerns about credit-sensitive rates being used as
reference rates in capital and derivatives markets.
Similarly, the International Organization of Securities
Commissions (IOSCO) Board in September 2021
called attention to the importance of assessing the
size of the market underlying a rate in relation to the
volumes traded on it and noted that IOSCO would
closely monitor the IOSCO compliance of creditsensitive rates.
Adoption of SOFR as a reference rate has increased
over the past year. The amount of activity in SOFR
futures has risen substantially, as measured by
volume and open interest (Charts E.1, E.2). However,
SOFR futures volumes still only equal a small
proportion of the volume of Eurodollar futures (which
are LIBOR-based derivatives). In other markets,
a small number of leveraged loan agreements
benchmarked against SOFR were announced for
the first time in September 2021. Earlier in the year,
trade groups representing corporate borrowers had
expressed demand for greater availability of loan
agreements based on SOFR, as noted in an exchange
of public letters between those groups and the
Treasury, Federal Reserve, FRBNY, CFTC, and SEC.
In interdealer trading, the “SOFR First” initiative was
announced in June by a subcommittee of the CFTC.
This initiative encouraged a prioritization of interdealer
trading in SOFR rather than LIBOR and set July 26,
2021 as a date when it would be appropriate for
interdealer brokers to adopt SOFR.
Following the adoption of this change in
interdealer trading conventions, the ARRC formally
recommended the CME’s SOFR term rates. In
endorsing the CME’s Term SOFR Rate, the ARRC
has set out a limited set of recommended use cases.
To protect against the outsized growth of term SOFR
derivatives, CME’s licensing agreement for the rate
restricts its use to cash products and derivatives
that hedge those cash products, and certain
securitizations with underlying assets tied to SOFR

term rates. ARRC continues to recommend that
market participants use overnight SOFR and SOFR
averages where possible and appropriate.
E.1 SOFR Futures Volume

E.1 SOFR Futures Volume
Millions of Contracts
As Of: Sep-2021
Percent
4
8
3-Month SOFR Futures
As a Percent of Eurodollar
(left axis)
Volume (right axis)

3

1-Month SOFR Futures
(left axis)

6

2

4

1

2

0
May:2018

Feb:2019

Nov:2019

Aug:2020

May:2021

0

Source: CME, Bloomberg, L.P.

E.2 SOFR Futures Open Interest

E.2 SOFR Futures Open Interest
Millions of Contracts

As Of: Sep-2021

Percent

1250
1000

10
3-Month SOFR Futures
(left axis)

As a Percent of Eurodollar
Open Interest (right axis)

1-Month SOFR Futures
(left axis)

8

750

6

500

4

250

2

0
May:2018

Feb:2019

Nov:2019

Aug:2020

May:2021

0

Source: CME, Bloomberg, L.P.

Legacy Contracts Without Robust Fallback Provisions
Legacy contracts that lack robust fallback provisions
may be silent on the transition of the interest rate
benchmark or contain fallback language that is
considered infeasible. Market participants have
received greater clarity about the treatment of
these contracts. On April 7, 2021, New York State
enacted ARRC-endorsed legislation to help transition
contracts governed by New York law to a SOFRbased rate after LIBOR’s cessation or in the event

Fina nc ia l De v el opment s

121

Box E: LIBOR Transition (continued)

LIBOR is declared unrepresentative by the regulatory
supervisor for the administrator of LIBOR, the
FCA. The state of Alabama also passed legislation
substantively identical to the New York bill the same
month. However, it is unclear how effective such laws
will be in fully addressing the transition for contracts
subject to their requirements, and legal issues may
remain for contracts governed by the laws of other
jurisdictions. Congress has deliberated federal
legislation to address these issues.
Accounting Considerations
FASB is monitoring the global reference rate reform
initiatives to identify areas of generally accepted
accounting practices (GAAP) that may need to be
amended in response to those initiatives. In March
2020, FASB issued ASU 2020-04, Reference Rate
Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting, and
in January 2021, issued ASU 2021-01 on SCOPE.

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The guidance provides temporary optional relief
from existing accounting requirements related to
contracts and other transactions where the reference
rate is expected to be discontinued. This guidance is
meant to simplify evaluations of high-volume contract
modifications, and transition hedge accounting
relationships that would otherwise be required to be
terminated. The guidance is generally effective from
March 12, 2020 to December 31, 2022. FASB is
evaluating whether to extend the sunset date of Topic
848 in response to the new expected cessation date
(June 30, 2023) for certain tenors of USD LIBOR. The
guidance also allows eligible held-to-maturity (HTM)
debt securities that reference an eligible reference
rate to be sold and or transferred to available-for-sale
or trading categories if they were classified as HTM
before January 1, 2020.

3.6.2 Financial Innovation
3.6.2.1 Digital Assets
Investor interest in digital assets in the United States
has continued to increase, although high volatility
in the prices of these assets may be limiting wider
adoption. There are indications that institutional
investor interest has risen over the past several years,
including increased open interest in digital-assetlinked futures and investor statements to the media,
though data remain incomplete. Access to digital
assets has continued to expand in 2021 as several
large online and mobile payment platforms enabled
users to maintain exposure to a limited number
of digital assets alongside dollar-based activity.
Two U.S. listed bitcoin futures exchange-traded
funds launched in October 2021, with one product
attracting the fastest billion-dollar fundraising
on record. However, the use of digital assets as
an investment instrument remains limited. The
prices of many digital assets are far more volatile
than the prices of traditional assets and may not
be appropriate for many investors. It appears that
speculation continues to drive the majority of digital
asset activity, though it is unclear what percentage
of transactions may directly tie to economic
activity given the pseudonymous nature of many
transactions. Finally, growing awareness of the
energy demands of proof-of-work protocols, which
continue to power the majority of digital assets as
measured by market capitalization, have shaped
conversations around sustainability and future
developments.
Digital assets continued to evolve over the course
of 2021, with significant development occurring
in projects that are broadly described as “DeFi,” a
term derived from so-called decentralized finance.
DeFi applications generally claim to replace central
financial intermediaries in traditional financial
infrastructure with automatic code execution,
though degrees of centralized project control may
vary. Users of these services face risk of loss due
to market value fluctuations, operational issues,
and cybersecurity threats, among other risks.
Participants who use DeFi to borrow additional
digital assets to leverage their exposure face
considerable market risk from volatile market
prices. Price volatility amplifies the potential risk
that borrowers may need to liquidate their positions

to meet minimum margin calls. There is currently
uncertainty about whether such liquidations of
assets could be broadly correlated across many
accounts and the extent to which liquidations in
one digital asset could lead to spillover effects
across other digital assets. Varying collateralization
standards and operational standards exacerbate
these market and liquidation risks, warranting
additional scrutiny from lenders.
Stablecoins are digital assets that are designed
to maintain a stable value relative to a national
currency or other reference assets (see Box G).
The market capitalization of stablecoins issued by
the largest stablecoin issuers exceeded $127 billion
as of October 2021. This amount reflects a nearly
500 percent increase over the preceding twelve
months. At the time of publication of this report,
stablecoins are predominantly used in the United
States to facilitate trading, lending, and borrowing
of other digital assets. For example, stablecoins allow
market participants to engage in speculative digital
asset trading; to move value easily between digital
asset platforms and applications; and to store and
transfer value associated with digital asset trading,
lending, and borrowing within the distributed
ledger environment. Stablecoins that are generally
created, or “minted,” in exchange for fiat currency
are often advertised as being supported or backed
by a variety of “reserve assets.” The reserves of these
stablecoins, however, may not be subject to rigorous
audits and the quality and quantity of collateral may
not, in some cases, correspond to the issuer’s claims.
Likewise, stablecoins that maintain their value
through algorithmic mechanisms are potentially
subject to failure due to market pressures,
operational failures, and other risks.
DeFi projects and stablecoin arrangements may
implicate the jurisdiction of the SEC, the CFTC,
and other authorities. Depending on their
structure, stablecoins, or certain parts of stablecoin
arrangements, may be one or a combination of
securities, commodities, and derivatives. Moreover,
much of the trading, lending, and borrowing activity
currently fueled by stablecoins on digital asset
trading platforms and within DeFi similarly may
constitute either or both of securities and derivatives
transactions that must be conducted in compliance

Fina nc ia l De vel opment s

123

with federal securities laws and the Commodity
Exchange Act (CEA), including applicable
regulations. To the extent that a given stablecoin
activity falls within the jurisdictions of the SEC and
CFTC, it must be conducted in compliance with
applicable provisions of the federal securities laws,
the CEA, and associated regulations, as applicable.

3.6.2.2 Peer-to-Peer Payments
Consumers continue to embrace peer-to-peer
payment services, and the COVID-19 pandemic
has further highlighted the potential benefits of
mobile contactless payment options. Peer-to-peer
payment services allow for the transfer of funds
between two parties using mobile apps. Some peerto-peer payment services have expanded capabilities
beyond simply facilitating transactions between
peers, which has allowed them to, for example,
help facilitate government assistance payments.
The apps are typically linked to debit or credit card
accounts and other types of bank accounts, thereby
allowing the funding transfers to proceed through
bank-maintained payment networks. Although
some service providers are relatively new companies,
banks and other financial service providers are also
entering the market and have reported significant
consumer participation and transaction volume.

3.6.2.3 Digital Lending
The pandemic further accelerated the adoption
of digital lending, which involves the provision of
loans through online, electronic platforms. Health
concerns and public health restrictions caused
many banks and credit unions to temporarily
close or restrict access to branches. Some smaller
institutions, in particular, expanded their online
services to meet customer needs and to compete
with large banks and fintech lenders. While online
applications and automated credit decisions have
been common in lending to retail customers, loans to
small and medium-sized businesses had lagged in this
regard. The need to rapidly process PPP applications
accelerated digital lending to small and mediumsized businesses. According to data released by the
Small Business Administration on May 31, 2021,
approximately 95 percent of PPP lenders were banks
with less than $10 billion in assets and credit unions,
demonstrating a role for smaller, traditional financial
institutions in digital lending.

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Recent years have witnessed significant growth in
point-of-sale financing services, also known as “buy
now, pay later” (BNPL) services. These unsecured
loans permit consumers to finance an online
purchase and repay the loan through an installment
plan. The loan is an integrated payment option on a
retailer’s website and is often offered at zero interest.
Merchants and service providers report that the
product increased conversion from cart to purchase,
increased order values, and lowered the number of
abandoned carts. For some consumers, the loan may
offer cheaper and more readily available financing
than a credit card but present the risk of taking on
too much debt in small increments or incurring late
fees. McKinsey & Company estimates that BNPL
financing generated 10 percent of unsecured loan
balances in 2020 and grew by 15 percent during
2020, despite a decline of 11 percent in other
unsecured consumer lending balances over the same
period. This market share is forecasted to continue
growing. Early entrants to the market emerging with
significant market share have largely been nonbank
financial technology companies, though some banks
and at least one major card network have announced
plans to launch their own competing products.

3.6.2.4 Use of Technology in Financial Services
Technological capabilities are a significant
differentiator in the highly competitive market for
financial services. Over recent years, several large
technology and e-commerce firms entered, or
explored entering, the financial services market,
often through business relationships with banks.
Some of these technology and e-commerce
companies have characteristics that could allow
them to grow quickly in the financial services
market, including large customer networks, broad
name recognition, and access to client data. In other
cases, new firms may seek to use technology as a
competitive advantage to achieve rapid growth in an
area traditionally dominated by banks. Banks and
traditional financial services companies may also
seek to develop or acquire similar advances to their
existing offerings through in-house development or
through relationships with third parties.
The integration of new technology improves
products and services by some measures but may
also present new risks. For example, new technology

and systems can help to evaluate and determine the
creditworthiness of potential borrowers, benefiting
financial institutions and customers by expanding
access to credit and shortening the approval process.
At the same time, automated processing of loan
applications may introduce algorithmic biases
when evaluating creditworthiness. In this case,
lenders may need to manage new risks, including
operational changes from the implementation of the
new technology and its impact on credit evaluation
models. This includes consideration of compliance
risks to ensure that new technologies reliant on
algorithmic methods adhere to fair lending laws.

3.6.2.5 Reliance of Financial Institutions on Third-Party
Service Providers
Financial institutions have increased their use of
third-party service providers to supplement or
increase capabilities. This dynamic has accelerated
during the COVID-19 pandemic, as institutions
are utilizing third parties to support widespread
remote work capabilities, increase technological
capacity, and maintain operations. These business
relationships may be with entities that specialize
in the use of technology in financial services (see
Section 3.6.2.4).

financial protection laws and regulations, the Bank
Secrecy Act and other anti-money laundering
laws, or with prudential standards. As discussed
in Section 4.4.2, the NCUA issued a final rule in
October 2021 expanding the lending activities
permitted by CUSOs.
Financial institutions are expected to appropriately
manage and evaluate the risks associated with
each third-party relationship, as engaging a third
party to perform functions does not relieve a
financial institution of its own legal and regulatory
obligations. Financial institutions should conduct
appropriate due diligence before entering into
a third-party relationship and exercise effective
oversight and management throughout the life of
the relationship.

While the use of third-party service providers can
have advantages, financial institutions that contract
with a third-party service provider may expose
themselves to additional risks if the third party is not
appropriately managed when performing services
on behalf of the financial institution. As large
service providers gain market share and some service
providers become more specialized, concentration
risk may increase. This is of particular concern
where many institutions rely on the same third-party
provider for key services and may introduce hidden
concentration risk into the supply chain. Additional
challenges to effective risk management can occur
as third-party service providers further subcontract
services, which may make oversight more complex for
both the financial institution and regulatory agencies.
Some regulators, including the FHFA and NCUA,
continue to have limited authority to regulate
or supervise third-party service providers. The
NCUA, for example, continues to have no authority
to supervise credit union service organizations
(CUSOs) for compliance with federal consumer
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125

3.7.1.1 Federal Reserve Swap Lines
3.7.1.1 Federal Reserve Swap Lines
As Of: 29-Sep-2021

Billions of US$
500

Billions of US$
500

400

400

300

300

200

200

100

100

0
Jan:20

Apr:20

Jul:20

Oct:20

Jan:21

Apr:21

Source: Federal Reserve

0

Jul:21

Note: Wednesday levels.

3.7.1.2 Nominal U.S. Dollar Trade-Weighted Index
3.7.1.2 Nominal U.S. Dollar Trade-Weighted Index
Index
105
104
103

As Of: 30-Sep-2021

Index
105

Emerging Markets
Broad
Advanced

104
103

102

102

101

101

100

100

99

99

98
Jan:2021

98

Mar:2021

May:2021

Jul:2021

Sep:2021

Source: Federal Reserve, Haver Analytics

3.7.1.3 YTD Change in USD Exchange Rates, EMEs
3.7.1.3 YTD Change in USD Exchange Rates, EMEs
Percent
10

Percent
10

5

5

0

0

-5

-5

-10

-10

-15

-15

-20

-20

Source: Federal
Reserve, Wall Street
Journal, Haver Analytics

126

As Of: 30-Sep-2021

Note: Percent change relative to end-2020. Chinese renminbi (RMB), Korean
won (KRW), Indian rupee (INR), Indonesian rupiah (IDR), Mexican peso (MXN),
South African rand (ZAR), Russian ruble (RUB), Argentine peso (ARS), Turkish
lira (TRY), Brazilian real (BRL). Positive indicates appreciation of listed currency.

2 0 2 1 F S O C / / Annual Report

3.7 Global Economic and Financial
Developments
3.7.1 Foreign Exchange Market
Following sudden financial market strains
in early 2020 and subsequent extraordinary
actions taken by central banks and
governments, pressure on the dollar subsided
for the remainder of the year. The nominal
broad trade-weighted dollar depreciated by 7.3
percent in the second half of 2020, weakening
against both advanced economy and emerging
market currencies. Dollar funding markets
experienced significant strains in March 2020 as
investors sought the safety of the dollar and the
premium to obtain dollar funding increased.
Expansion and enhancement of dollar liquidity
swap lines by the Federal Reserve and other
central banks led to a stabilization in these
markets and retracement of dollar funding
premiums. After reaching almost $450 billion
at the end of May, outstanding drawings on all
Federal Reserve swap lines declined to about
$18 billion at the end of 2020 and fell further to
$340 million as of September 29, 2021 (Chart
3.7.1.1). Meanwhile, the FX swap basis for major
currencies have narrowed to pre-pandemic
levels.
The dollar has strengthened 3.1 percent on a
nominal trade-weighted basis over the first nine
months of 2021. In the first quarter of 2021,
the dollar appreciated by 0.9 percent against
a basket of advanced economy currencies
and 1.8 percent against a basket of emerging
market currencies. The dollar briefly weakened
against advanced economy currencies in June,
but subsequent appreciation in July more than
offset the second quarter fall (Chart 3.7.1.2).
The dollar generally appreciated against
emerging market economies, although modestly
depreciating against a few year-to-date (Chart
3.7.1.3). Continued pressures on emerging
market currencies have reflected in part a
lack of vaccination progress, developments
regarding new COVID-19 variants, relative
utilization of policy support, and pre-existing
macroeconomic strains in a few specific
instances.

The real broad dollar index is 3.2 percent
stronger on net in 2021 through the end of
September and remains relatively strong from a
historical perspective. Notably, the real tradeweighted dollar stands 7.2 percent above its
20-year average in this same period, having
moderated since its peak in April of last year
(Chart 3.7.1.4).

3.7.2 Advanced Economies
Economic activity in advanced economies,
which fell sharply at the onset of the COVID-19
pandemic, rebounded in 2021, and the
International Monetary Fund (IMF) projects
that advanced economies will grow by 5.2
percent in 2021. The rebound in economic
growth can be attributed to COVID-19
mitigation efforts, including vaccination
programs and continued policy support. Real
GDP in the UK, U.S., euro area, and Japan is
projected to rise by 6.8 percent, 6.0 percent,
5.0 percent, and 2.4 percent, respectively
(Chart 3.7.2.1). Despite this rebound in
economic activity, the emergence of more
virulent COVID-19 variants, as well as persistent
supply chain effects and a potential earlier
than projected central bank liftoff, introduce
significant downside risks.

3.7.1.4 Real U.S. Dollar Trade-Weighted Index
3.7.1.4 Real U.S. Dollar Trade-Weighted Index
Index
120

As Of: Sep-2021

Index
120

110

110

100

100

90

90

80
2001

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

80

2019

Note: Index shown as a share of its 20-year average. Real USD
Trade-Weighted Index is a weighted average of the FX value of
the USD against the currencies of a broad group of major U.S.
trading partners. Gray bars signify NBER recessions.

3.7.2.1 Advanced Economies Real GDP Growth

3.7.2.1 Advanced Economies Real GDP Growth
Percent
8

As Of: Oct-2021

Percent
8

4

4

0

0

-4

-4

-8

Euro Area
Japan

-12
2005

2008

Source: IMF WEO,
Haver Analytics

-8

United States
United Kingdom
2011

2014

2017

2020

2023

-12

Note: Annual change in GDP, constant prices. Dotted lines
represent the October 2021 projections for 2021-2023.

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3.7.2.2 Discretionary Fiscal Response to the COVID-19 Pandemic
3.7.2.2 Discretionary Fiscal Response to the COVID-19 Pandemic
As Of: Oct-2021
Percent of GDP
40
Equity, Loans, and Guarantees
Additional Spending &
Foregone Revenue
30

Percent of GDP
40

30

20

20

10

10

0

USA

CAN

GBR

FRA

DEU

ITA

JPN

0

AEs

Note: IMF Database of Country Fiscal Measures
in Response to the COVID-19 Pandemic.

Source: IMF

3.7.2.3 Advanced Economy Interest Expense and Government Debt
3.7.2.3 Advanced Economy Interest Expense and Government Debt

As Of: Apr-2021
Percent of GDP
Percent of GDP
140
3.5
Government Debt
Interest Expense
(left axis)
(right axis)
120
3.0
100

2.5

80

2.0

60

1.5

40

2007

2009

2011

2013

2015

2017

2019

2021

1.0

Note: 2021 projected.

Source: IMF Fiscal Monitor

3.7.2.4 Advanced Economy Headline Inflation Rate
3.7.2.4 Advanced Economy Headline Inflation Rate
Percent
8
Euro Area
Japan
6

As Of: Sep-2021

United States
United Kingdom

6

4

4

2

2

0

0

-2

-2

-4
2011

2013

2015

Source: Bloomberg, L.P.

128

Percent
8

2 0 2 1 F S O C / / Annual Report

2017

2019

2021

-4

Note: Data represents year-over-year
percentage change in headline inflation.

Advanced economies have taken significant
measures to support long-term economic
recovery, relying on a combination of direct
fiscal stimulus programs, such as wage subsidies
and cash payments, and liquidity support in the
form of loans, asset purchases, and guarantees
(Chart 3.7.2.2). While direct fiscal spending
programs have increased headline government
debt levels meaningfully, interest expense has
remained stable given the low interest rate
environment (Chart 3.7.2.3). In addition,
the economic recovery was supported by
unprecedented easing by major central banks,
which helped keep global financial conditions
historically accommodative in the first nine
months of 2021.
Headline inflation rates were elevated in most
advanced economies through the first nine
months of 2021 (Chart 3.7.2.4). This increase
was driven by a variety of factors, including an
increase in commodity prices, supply chain
disruptions, and labor shortages. In September,
concerns over inflationary pressures pushed
nominal yields higher.

Euro Area
Euro area output fell slightly in the fourth
quarter of 2020 and the first quarter of 2021, as
the surge of COVID-19 cases and reimposition
of restrictions hindered the economic recovery.
However, euro area economic sentiment quickly
recovered over the winter and now stands well
above pre-pandemic levels (Chart 3.7.2.5).
The recovery resumed in the second quarter
of 2021, and euro area real GDP growth rose
by 2.2 percent quarter-over-quarter in the
third quarter. Nevertheless, economic activity
remains hindered, with third quarter output
trailing pre-pandemic levels in most Euro area
countries (Chart 3.7.2.6).
The ECB continues to deploy a range of
unconventional monetary tools to help support
the euro area economy. As part of the Pandemic
Emergency Purchase Programme, the ECB has
purchased €1.4 trillion of public and private
sector securities through September 2021 and
is expected to purchase an additional €550
billion until at least the end of March 2022.
On September 9, the ECB announced it would
move to a “moderately lower pace” from the
€80 billion per month level it had conducted
since March. The program, which supplements
the continued asset purchase programme, has
helped preserve favorable financing conditions
and support the smooth transmission of
monetary policy. At the same time, the ECB has
maintained a bank deposit rate of -0.5 percent
and conducted a monetary policy strategic
review, agreeing to a symmetric inflation target
of 2.0 percent over the medium term. As a
result, the ECB revised its forward guidance
in July 2021, noting that it expects key interest
rates to remain at current or lower levels, until
it sees inflation reaching 2.0 percent, well ahead
of the end of its projection horizon. However,
according to September ECB staff projections,
the projection horizon reading for inflation is
1.5 percent, well below the 2.0 percent target.

3.7.2.5 Euro Area Business and Consumer Surveys
3.7.2.5 Euro Area Business and Consumer Surveys
Percent
As Of: Sep-2021
30
Economic Sentiment (right axis)
20 Industrial Confidence (left axis)
Consumer Confidence (left axis)
10

Index
130

120
110

0

100

-10

90

-20

80

-30

70

-40
2013

2014

2015

2016

2017

2018

2019

2020

2021

60

Note: Confidence surveys calculated by subtracting
the percentage of negative responses from the
percentage of favorable responses. For economic
sentiment index, 100 = long-term average.

Source: European
Commission, Haver Analytics

3.7.2.6 Real GDP for Select Euro Area Economies
3.7.2.6 Real GDP for Select Euro Area Economies
Index
105

Index
105

As Of: 2021 Q3

100

100

95

95

90

90

85
80

Germany
France
Italy
Spain

75
2019:Q4

85
80

2020:Q2

Source: European Commission,
Haver Analytics

2020:Q4

2021:Q2

75

Note: Seasonally adjusted real GDP.
Indexed to 100 as of 2019:Q4.

In July 2021, the EU began disbursing
funds to member states under its historic
NextGenerationEU (NGEU) plan. The plan,
which was officially proposed in May 2020, was
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129

3.7.2.7 Euro Area 10-Year Sovereign Yields
3.7.2.7 Euro Area 10-Year Sovereign Yields
Percent
5

As Of: 30-Sep-2021

Spain
France
Germany

4

Percent
5
Greece
Italy
4
Portugal

3

3

2

2

1

1

0

0

-1
Jan:2018

Jan:2019

Source: Reuters, Haver Analytics

Jan:2020

Jan:2021

-1

established to help member states’ economic
recovery from COVID-19 while also supporting
the green and digital transition. In total, the
European Commission is permitted to borrow
up to €806.9 billion on behalf of member
states. The EU’s Recovery and Resilience
Facility accounts for the bulk of the NGEU
spending, with €338 billion allocated to be
dispersed as grants and €385.8 billion to be
dispersed as loans. The facility should provide
heavily indebted member states additional
fiscal space to support economic recovery from
the COVID-19 pandemic. As of October 2021,
the European Commission had approved 19
member state plans.
In the second quarter of 2021, the euro area
general government debt totaled €11.6 trillion,
a 6 percent increase year-over-year. While the
euro area debt-to-GDP decreased from 101
percent to 98.3 percent in the second quarter,
it exceeds the 94.4 percent recorded one year
prior. This increase in debt can be attributed
to the financing needs of the policy measures
adopted to mitigate financial fallout from
the pandemic. Core and periphery euro area
sovereign bond yields remain historically
low, and as of September 30, all 10-year euro
area sovereign bonds were trading with yields
below one percentage point (Chart 3.7.2.7).
The continued low yields and tight sovereign
credit spreads can be primarily attributed
to accommodative monetary policy and the
introduction of the EU-wide fiscal relief
package, in addition to low rates of inflation,
expected inflation, and economic growth.

United Kingdom
UK activity rebounded strongly in the spring
and summer of 2021, as the government made
progress on its vaccination program and lifted
COVID-19 restrictions. UK real GDP rose by
1.3 percent in the third quarter, following a 5.5
percent increase in the second quarter of 2021.
A pickup in consumer spending drove much of
that growth, with household consumption rising
by 7.3 percent and 2.0 percent in the second
and thirds quarter of 2021, respectively.

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The UK government launched a series of
programs, which largely ended this year, to
support households and businesses through
the COVID-19 pandemic. As of May 31, 2021,
aggregate lending under the UK’s three
business loan schemes totaled £79 billion and
as of September 14, total claims under the UK’s
Coronavirus Job Retention Scheme totaled £69
billion. These programs have helped support
employment, and as of September 2021, the UK
unemployment rate stood at 4.3 percent.
Similar to other advanced economies, UK
inflation has risen above 2 percent in recent
months. While the pickup in inflation was
primarily attributed to higher goods prices,
the UK has experienced an increase in service
sector inflation. In October 2021, the Bank of
England (BOE) warned that it would have to act
to curb inflationary pressure, causing markets
to anticipate a potential November rate hike.
The BOE also announced that it has lowered
the level of the Bank Rate at which it would
begin to reduce its stock of purchased assets,
thereby allowing its balance sheet to start
shrinking earlier than market participants had
expected.​

3.7.2.8 Japanese Consumer Price Inflation
3.7.2.8 Japanese Consumer Price Inflation
Percent
3

As Of: Sep-2021

Percent
3

2

2

1

1

0

0

-1

-1

-2

-2

-3
2005

2008

Source: Bank of Japan,
Haver Analytics

2011

2014

2017

2020

-3

Note: Data represents year-over-year percentage
change. CPI excludes fresh food and is adjusted for the
consumption tax increase that took effect in April 2014.

Japan
While Japanese economic activity has
rebounded, the recovery has been more
subdued relative to other advanced economies,
with real GDP by just 0.4 percent in the second
quarter of 2021 before declining by 0.8 percent
in the third quarter of 2021. The relative
underperformance of the Japanese recovery
may be partly attributed to the reintroduction
of emergency measures to stem the spread
of the virus and the delayed vaccination
program, in addition to the economy’s lower
potential growth due to its rapidly aging and
falling population. Japanese inflation has
picked up in recent quarters but remains well
below 2.0 percent (Chart 3.7.2.8).
Prior to the pandemic, the Bank of Japan (BOJ)
eased its monetary stance by switching from
date-based forward guidance to open-ended
policy, noting that it expected to keep policy

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3.7.2.9 Japan 10-Year Government Bond Yield
3.7.2.9 Japan 10-Year Government Bond Yield
Basis Points
160

As Of: 30-Sep-2021

Basis Points
160

120

120

80

80

40

40

0

0

-40
2010

2012

2014

2016

2018

2020

-40

Source: Bloomberg, L.P.

3.7.3.1 EME GDP Growth

3.7.3.1 EME GDP Growth
Percent
10
8

As Of: Oct-2021

Percent
10

2010–2019 Average
2021 Projected

8

6

6

4

4

2

2

0

Aggregate

Asia

Source: IMF WEO

Europe

Latin
America

Middle East

Africa

rates at current levels or to reduce them so long
as uncertainties remained regarding reaching
the 2 percent inflation target. The BOJ has
maintained its policy rate at -0.1 percent since
January 2016. In addition, the BOJ continued to
follow its policy of yield curve control whereby
the BOJ will purchase Japanese government
bonds (JGBs) so that the 10-year JGB yield
remains at around zero percent. Since the
introduction of the BOJ’s yield curve control
policy in 2016, the yield on 10-year JGBs has
remained little changed (Chart 3.7.2.9).

0

On March 26, 2020, the BOJ announced that
it would enhance monetary easing through
a number of policy measures, including
increasing purchases of JGBs, easing access
to U.S. dollar funds, purchasing CP and
corporate bonds, establishing a new operation
to provide loans against corporate debt, and
actively purchasing exchange-traded funds and
Japanese REITs.
At subsequent meetings, the BOJ announced
the expansion of its CP and corporate bond
purchase programs along with the introduction
of a new operation to support bank lending
to small and medium-sized enterprises. In
addition, the BOJ has announced it will launch
a climate change scheme by the end of 2021,
which is expected to last until 2030. Under this
scheme, the BOJ will offer funds to banks that
extend green and sustainability-linked loans, as
well as invest in green bonds and sustainabilitylinked bonds.

3.7.3 Emerging Market and Developing
Economies
Emerging market economies, which
experienced a sharp contraction in economic
output in the first half of 2020, are projected
to rebound sharply in 2021. According to the
IMF’s October 2021 WEO update, emerging
and developing economies are projected to
grow by 6.4 percent in 2021 (Chart 3.7.3.1).
In aggregate, emerging Asian economies are
projected to continue to outperform other
emerging market economies, with the region
projected to grow by 7.2 percent in 2021.
Despite significant COVID-19 outbreaks in
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Latin America, the region is expected to
rebound sharply in 2021, with projected GDP
growth reaching 6.3 percent compared to an
average of 2.0 percent between 2010 and 2019.
While headline emerging market GDP has
rebounded strongly, the economic recovery
has not been uniform. Commodity producers,
which were particularly hard hit in the early
stages of the pandemic, have rebounded with
the increased demand for raw materials. In
contrast, emerging market economies reliant
on tourism continue to struggle and have
seen a deterioration in external balances.
Additionally, limited vaccine access in certain
emerging market economies may weigh on
growth prospects, particularly if the spread of
more virulent COVID-19 variants stresses local
health infrastructure. Inflationary pressures
have prompted some central banks to raise
policy rates, which, combined with a potential
tightening of global financial conditions,
could introduce additional stress in emerging
economies.
Spreads on USD-denominated sovereign bonds
have compressed markedly since the March
2020 market stress, with Latin American,
Asian, and European spreads returning to
pre-pandemic levels (Chart 3.7.3.2). The
compression of sovereign bond spreads, which
can be attributed to improved risk sentiment
and accommodative financial conditions, has
helped support emerging market global bond
issuances. In 2020, non-local emerging market
bond issuances totaled $795 billion, up from
$709 billion the previous year. The strong pace
of issuances continued in 2021, with yearto-date issuances totaling $654 billion as of
September 30, 2021 (Chart 3.7.3.3).
Similarly, emerging market economies
experienced strong foreign investor portfolio
inflows in the second half of 2020 (Chart
3.7.3.4). By the fourth quarter, portfolio flows
hit a record $201 billion, with equity inflows
totaling $82 billion and debt inflows totaling
$120 billion. As of the second quarter of 2021,
portfolio flows and foreign direct investment
made up 24 percent and 37 percent of foreign

3.7.3.2 Emerging Market Sovereign Bond Spread
3.7.3.2 Emerging Market Sovereign Bond Spreads
As Of: 30-Sep-2021

Basis Points
1000
Latin America
Europe
800
Asia

Basis Points
1000
800

600

600

400

400

200

200

0
2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: JP Morgan, Haver Analytics

0

Note: JP Morgan EMBI+ Sovereign
Spreads indices for each region.

3.7.3.3 Emerging Market Non-Local Bond Issuance
3.7.3.3 Emerging Market Non-Local Bond Issuance
Billions of US$
900
Public
Private
750
Sovereign

As Of: 30-Sep-2021

Billions of US$
900
750

600

600

450

450

300

300

150

150

0

2005

2007

2009

Source: Dealogic

2011

2013

2015

2017

2019

2021
YTD

0

Note: Bonds have maturities greater than one-year and have been
internationally marketed or placed. “Public” includes issuance by municipal
and state-owned enterprises. 2021 figures are through September.

3.7.3.4 Foreign Investor Inflows to EMEs
3.7.3.4 Foreign Investor Inflows to EMEs
Billions of US$

As Of: 2021 Q2

Billions of US$

600

600

450

450

300

300

150

150

0

0

-150
-300

2011

2013

2015

-150

Other

Portfolio Flows
Foreign Direct Investment

Net Flows
2017

2019

2021

-300

Source: IMF, Haver Analytics
Fina nc ia l De v el opment s

133

3.7.3.5 Foreign Investor Portfolio Inflows to EMEs, by Region
3.7.3.5 Foreign Investor Portfolio Inflows to EMEs, by Region
Billions of US$
300

As Of: 2021 Q2

Billions of US$
300

Emerging Markets (ex-China)
China

225

225

150

150

75

75

0

0

-75

-150

-75

2011

2013

2015

2017

2019

2021

-150

Source: IMF, Haver Analytics

3.7.3.6 Chinese Real GDP Growth and its Components

3.7.3.6 Chinese Real GDP Growth and its Components
Percent
30
Agriculture
Services
20
Manufacturing
Total
10

As Of: 2021 Q3

Percent
30
20

10

0

0

-10
-20
2016

-10

2017

2018

Source: China National Bureau
of Statistics, Haver Analytics

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2019

2020

2021

-20

Note: Year-over-year percentage change.

investor flows into emerging market economies,
respectively. Portfolio flows into China have
driven the recent increase in foreign investor
inflows, accounting for approximately two
thirds of total foreign investor portfolio inflows
for the three quarters ended December 31, 2020
(Chart 3.7.3.5).

China
At the onset of the pandemic, Chinese
authorities imposed strict containment
measures, which led to a sharp decline in
economic activity. These containment efforts
helped mitigate the spread of COVID-19 and
ultimately allowed for a full reopening of the
Chinese economy. At the same time, an increase
in external demand for goods allowed for a
sharp rebound in Chinese manufacturing,
and Chinese economic growth outpaced
global economic growth in 2020 (Chart
3.7.3.6). However, household consumption
lagged the broader recovery, and in 2020,
Chinese household consumption fell by 4
percent despite the increase in overall GDP.
In September 2021, China’s official producer
price index climbed nearly 11 percent from a
year earlier, exceeding forecasts and reaching
the highest level since November 1995, as coal
prices and other commodity costs soared.

Prior to the COVID-19 pandemic, Chinese
authorities were taking steps to encourage
financial deleveraging, leading to a stabilization
in the level of credit provided to the
nonfinancial private sector as a percent of GDP
(Chart 3.7.3.7). Chinese regulators paused this
deleveraging campaign as authorities tried to
balance COVID-19-related credit support with
longer-term financial stability goals. With the
stabilization of the Chinese economy, regulators
have since normalized their monetary policy
and credit growth has returned to prepandemic levels (Chart 3.7.3.8).
Recent events have highlighted the tensions
Chinese regulators face in introducing market
discipline. In the spring, reports emerged of
a potential default by China Huarong Asset
Management Co., the largest of China’s four
“bad banks” established in 1999 to manage
nonperforming loans in the aftermath of
the Asian Financial Crisis. In light of this,
Huarong’s $21 billion of dollar bonds traded
at a significant discount despite the fact that
the firm carried an A and A- rating from Fitch
and S&P in the first quarter, which raised
investor uncertainty around government
support for state-linked firms. Ultimately,
Huarong announced in August that it would be
recapitalized by state investors, which reversed
the effect of contagion to other state-owned
enterprises.

3.7.3.7 Credit to the Chinese Nonfinancial Private Sector

3.7.3.7 Credit to the Chinese Nonfinancial Private Sector
Percent of GDP
250

As Of: 2021 Q1

Percent of GDP
250

Nonbank Lending
Bank Lending

200

200

150

150

100

100

50

50

0
0
2008
2010
2012
2014
2016
2018
2020
Source: China National Bureau of
Statistics, BIS, Haver Analytics
Note: Rolling 4-quarter sum of GDP.

3.7.3.8 Chinese Credit Growth
3.7.3.8 Chinese Credit Growth
Percent
25

As Of: Sep-2021

Percent
25

Total Social Financing (New Definition)

Total Social Financing (Old Definition)

20

20

15

15

10

10

5
2013

2014

2015

Source: PBOC, CCDC,
Haver Analytics, Staff
Calculations

2016

2017

2018

2019

2020

2021

5

Note: Calculated as the year-over-year percentage change in total
social financing (TSF) flows since 2002. TSF refers to the total volume
of financing provided by the financial system to the real economy. TSF
(old definition) excludes loan write-offs, ABS of depository institutions,
and local government special bonds.

Additionally, China Evergrande Group, the
world’s most indebted property developer,
has experienced significant distress in recent
months, with the firm warning that it “has
risks of defaults on borrowings.” Evergrande
had about $20 billion in dollar denominated
bonds outstanding and in early September,
its 2022 dollar bonds were trading at less than
30 cents on the dollar. On September 16,
Evergrande’s main unit applied to suspend
trading of its onshore corporate bonds
following a downgrade. Stress has spilled over
into the broader offshore dollar bond market,
with yields spiking past levels seen at the onset
of the COVID-19 pandemic. Additionally,
the event has highlighted fears over China’s

Fina nc ia l De v el opment s

135

heavily leveraged real estate sector, which, by
some estimates, amount to almost 30 percent of
its economy. A slowdown in China’s real estate
market could also trigger spillover effects in global
commodity markets, where China accounts for
almost half or more than half of steel, copper, and
iron ore consumption.
Chinese authorities have launched a crackdown
on various industries in recent months, with
particular focus on the “platform economy”, or
internet companies operating a range of services;
cryptocurrency; and for-profit education. In
November 2020, Chinese technology company Ant
Group’s initial public offering in Shanghai and
Hong Kong was suspended, with the Shanghai
Stock Exchange citing as the cause Ant’s inability
to meet listing conditions and information
disclosure requirements. Since then, authorities
have introduced anti-monopoly legislation against
multiple technology companies, including the
e-commerce company Alibaba and the ride-hailing
firm Didi. Financial regulators subsequently
barred banks and online payment firms from using
cryptocurrency for payment or settlement in May
2021 and banned cryptocurrency transactions and
mining in September. Moreover, in its July “double
reduction policy”, the government ordered private
businesses to suspend online and offline tutoring
classes for children from kindergarten through
ninth grade.

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4

Council Activities and Regulatory

Developments

4.1 Council Activities
4.1.1 Risk Monitoring and Regulatory Coordination
The Dodd-Frank Act charges the Council with
the responsibility to identify risks to U.S. financial
stability, promote market discipline, and respond
to emerging threats to the stability of the U.S.
financial system. The Council also has a duty to
facilitate information sharing and coordination
among member agencies and other federal and state
agencies regarding financial services policy and
other developments.
The Council regularly examines significant market
developments and structural issues within the
financial system. This risk monitoring process
is facilitated by the Council’s Systemic Risk
Committee (SRC), whose participants are primarily
member agency staff in supervisory, monitoring,
examination, and policy roles. The SRC serves as
a forum for member agency staff to identify and
analyze potential risks, which may extend beyond
the jurisdiction of any one agency. The Council’s

Regulation and Resolution Committee (RRC)
also supports the Council in its duties to identify
potential gaps in regulation that could pose risks to
U.S. financial stability.
As part of its responsibility to identify risks to U.S.
financial stability, the Council has considered
climate-related financial risks over the past year. The
Council first discussed these risks at its March 2021
meeting, at which members highlighted a broad set
of work beginning or underway at individual agencies
and organizations. In October 2021, the Council
published a Report on Climate-Related Financial
Risk, issued in response to the directive in Executive
Order 14030, Climate-Related Financial Risk, to the
Secretary of the Treasury to engage Council members
on this topic and report on the Council’s activities.
The report details the Council’s finding that climate
change is an emerging threat to the financial stability
of the United States (see Box F).

Box F: Climate-Related Financial Risk
There is broad scientific consensus that climate
change is driven by greenhouse gas (GHG)
emissions caused by human activity. According to
the Intergovernmental Panel on Climate Change,
climate change is impacting every region of the
Earth’s climate, these impacts are intensifying, and
some of these impacts, such as sea-level rise, are
likely to be irreversible. Increasing adverse effects
from climate change to households, communities,
and businesses will likely exacerbate climaterelated risks to the U.S. and global financial
systems if not addressed.
Climate-related financial risks can be grouped
into two broad categories: physical risks and
transition risks.

Physical risks refer to the harm to people and
property arising from acute, climate-related
disaster events such as hurricanes, wildfires,
floods, and heatwaves, as well as longer-term
chronic phenomena such as higher average
temperatures, changes in precipitation patterns,
sea level rise, and ocean acidification.
Transition risks refer to stresses to certain
institutions or sectors arising from the shifts
in policy, consumer and business sentiment,
or technologies associated with the changes
necessary to limit climate change. One key
category of policy changes associated with
transition risks are those directed at incentivizing
or requiring reductions in GHG emissions. A

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137

Box F: Climate-Related Financial Risk (continued)

variety of economic mechanisms could be used to
lower GHG emissions. These mechanisms could
include regulation, such as a Clean Electricity
Standard, carbon taxation, or subsidization of
green products. Depending on the stringency of
the standard and related incentives, subsidies, or
penalties, such regulatory mechanisms would raise
the implicit price of carbon by varying degrees.
This can incentivize the transition of GHG-intensive
production processes, products, or services to lowerGHG states. While these regulatory tools can facilitate
the achievement of climate-related goals, there may
be associated climate-related financial risks.
As the United States and other countries
undertake the transition to a less GHG-intensive
economy, changing public policies, adoption of
new technologies, and shifting consumer and
investor preferences have the potential to impact
the allocation of capital in their economies. If
these changes occur in a disorderly way owing to
substantial delays in action or abrupt unanticipated
changes in policy, their impact on households,
communities, businesses, and other entities is likely
to be more sudden and disruptive.
From Climate-Related Physical Risks to Financial Risks
Increased frequency and severity of acute physical
risk events and longer-term chronic phenomena
associated with climate change are expected to
lead to increased economic and financial costs.
For example, the Network of Central Banks and
Supervisors for Greening the Financial System
(NGFS), an international organization of which
the FRB and OCC are members, has developed
scenarios that the private and public sectors can use
in their analysis of climate-related financial risks. The
NGFS scenario for potential outcomes under current
policies shows a substantial increase in the segment
of the U.S. population annually subject to heatwaves,
with consequent potential effects on productivity
and other factors, and shows a sizable increase in
the annual damages associated with tropical storms

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(Charts F.1, F.2).
F.1 Annual Expected Damage from Tropical Cyclones

F.1 Annual Expected Damage from Tropical Cyclones
As Of: Jun-2021
Percent Change
50
97.5th Percentile
Median
40

Percent Change
50
40

30

30

20

20

10

10

0

2020

2030

Source: NGFS CA
Climate Impact Explorer

2040

2050

0

Note: Percent change in annual damages under
NGFS current policies scenario; relative to 2020.

F.2 Fraction of Population Exposed to Heatwaves
F.2 Fraction of Population Exposed to Heatwaves
As Of: Jun-2021
Percent Change
25
th
97.5 Percentile
Median
20

Percent Change
25
20

15

15

10

10

5

5

0

2020

Source: NGFS CA
Climate Impact Explorer

2030

2040

2050

0

Note: Change in fraction of U.S. population annually
exposed to heatwaves under NGFS current policies
scenario. Percent change relative to 1986-2006 average.

Physical risks have direct effects on households,
communities, businesses, and other entities where
those risks are realized, as well as to the financial
institutions and investors to which they are linked,
thereby creating a variety of climate-related financial
risks. For example, insurers of property, hazard, flood,
and other property-related risks are directly exposed
to these risks. To reduce their potential losses,
insurers may seek to increase premiums or withdraw
from at-risk markets, which may lead to reduced
affordability or availability of insurance coverage in

Box F: Climate-Related Financial Risk (continued)

vulnerable regions of the country. Such responses by
insurers may affect the economic and financial health
of households, businesses, and governments in these
communities.
In addition, increased actual damages to properties
associated with physical risks may lower the value
of collateral or the income generated by such
properties, posing credit and market risks to banks,
insurers, pension plans, and others. Increased legal,
operational, and liquidity risks may also occur. In
response, creditors may pull back from impacted
regions, amplifying the initial harmful impact of the
climate-related disaster events and creating further
financial and economic strains. Further, if investors’
expectations about physical risks shift suddenly,
this could contribute to an abrupt repricing event in
certain asset classes. If leveraged institutions are
exposed to that repricing event, that could transmit
risk more broadly through the financial system.
From Climate-Related Transition Risks to Financial Risks
As countries transition to a low-GHG economy,
the underlying drivers of transition risk—changes
in public policy, adoption of new technologies, and
shifting consumer and investor preferences—all
have the potential to impose added costs on some
households, communities, businesses, and other
entities even as they reduce overall climate risks.
As a result, impacted firms may have less ability to
meet their financial obligations. Economic sectors
that produce the majority of GHG emissions—the
transportation sector (including household and
business motor vehicles), electricity generation, and
heavy manufacturing, for example—may witness
sizable shifts in modes of production. This process
may lead some businesses to experience losses
and decline, while other businesses may succeed in
adapting to new modes of production and expand.
The shifts in economic and financial risks will likely
be broadly felt, as, for example, sectors most directly
affected by reductions in GHG emissions pass

on increased costs through supply chains and to
consumers.
As a result, the economic effects associated with
transitions may be transmitted through the financial
sector and the economy in ways that could challenge
the resilience of financial institutions or the financial
sector if firms do not manage the risk appropriately.
Financial risks associated with transitions to a lowGHG economy likely increase if such transitions
are delayed and occur in an unanticipated, abrupt
manner. In such a scenario, financial markets could
experience dramatic movements in response to
unexpected changes, potentially resulting in a large
decline in the values of assets.
Financial Risks Associated with a Disorderly Transition
A disorderly transition to a low-GHG economy
increases risks to financial stability. A disorderly
transition could occur because of delays in mitigating
the drivers of climate change, large and unpredictable
policy changes, or sharp differences in approaches
across countries, among other possibilities. To
highlight potential considerations, the NGFS has
developed disorderly transition scenarios. For
example, one scenario involves delays in policy
steps to mitigate climate change, which may boost
uncertainty regarding the ultimate impact of possible
policy changes on economic activity and asset
values. Moreover, delays and years of complacency
eventually require larger, more disruptive policy
adjustments in the scenario, which would likely have
more dramatic effects on economic activity and asset
values. Risks to financial stability would likely be
most contained if policies to facilitate the transition
begin early, are communicated clearly, and follow an
orderly, predictable path, thereby assisting a smooth
transition for economic and financial actors, as well
as households and businesses. It is considerably
more difficult to judge the magnitude of risks to
financial stability in a disorderly transition in which the
economy and markets are forced to react to large,
unanticipated changes in policy.

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139

Box F: Climate-Related Financial Risk (continued)
Analysis and preparation for such a scenario
are needed in light of the current lack of
international or even domestic agreement on
a coherent set of policies for achieving stated
climate objectives. Financial authorities around
the world have recognized the need to consider
a disorderly transition in analyzing climate-

The Council is also evaluating the vulnerabilities
posed by three types of NBFIs: open-end mutual
funds, hedge funds, and MMFs. Over the past
year, the Council has established an open-end
fund working group and re-established a hedge
fund working group in order to better share data
and identify risks associated with both kinds of
nonbanks. The structural vulnerabilities of MMFs
were the subject of a statement by the Council on
June 11, 2021, which emphasized the importance of
reforms to improve the resilience and functioning of
short-term funding markets. The Council expressed
support for the SEC’s engagement on this critical
issue and will continue to monitor this initiative.

4.1.2 Determinations Regarding Nonbank Financial
Companies and Activities-Based Approach
One of the Council’s statutory authorities is to
subject a nonbank financial company to supervision
by the Federal Reserve and enhanced prudential
standards if the company’s material financial
distress—or nature, scope, size, scale, concentration,
interconnectedness, or mix of its activities—could
pose a threat to U.S. financial stability. The DoddFrank Act sets forth the standard for the Council’s
determinations regarding nonbank financial
companies and requires the Council to consider
ten specific considerations and any other riskrelated factors that the Council deems appropriate
when evaluating those companies. The Council’s
final interpretive guidance, issued in 2019, makes
modifications to the processes the Council
intends to follow if it were to consider making
a determination to subject a nonbank financial
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related financial risks. For example, the French
Autorité de Contrôle Prudentiel et de Résolution
considered two disorderly scenarios in its 2021
assessment, and the Bank of England’s 2021
Biennial Exploratory Scenario on financial risks
from climate change included a late transition that
highlighted the attendant risks.

company to supervision by the Federal Reserve. The
guidance also describes the approach the Council
intends to take in prioritizing its work to identify
and address potential risks to U.S. financial stability
using an activities-based approach.
As of the date of this report, no nonbank financial
companies are subject to a final determination by
the Council under Section 113 of the Dodd-Frank
Act or are under review in Stage 1 or Stage 2 of the
Council’s designation process.

4.1.3 Operations of the Council
The Dodd-Frank Act requires the Council to
convene no less than quarterly. The Council
held seven meetings in 2021, including at least
one each quarter. The meetings bring Council
members together to discuss and analyze market
developments, potential threats to financial stability,
and financial regulatory issues. Although the
Council’s work frequently involves confidential
supervisory and sensitive information, the Council
is committed to conducting its business as openly
and transparently as practicable. Consistent with the
Council’s transparency policy, the Council opens
its meetings to the public whenever possible. The
Council held a public session at four of its meetings
in 2021. Approximately every two weeks, the
Council’s Deputies Committee, which is composed
of senior representatives of Council members,
convenes to discuss the Council’s agenda and to
coordinate and oversee the work of the Council’s
five other committees. The other committees are
the Data Committee; the Financial Market Utilities
and Payment, Clearing, and Settlement Activities

Committee; the Nonbank Financial Companies
Designations Committee; the RRC; and the SRC.
The Council is forming two additional committees
in connection with its work on climate-related
financial risk. The Council adopted its twelfth
budget in 2021.

4.2 Safety and Soundness
4.2.1 Enhanced Capital and Prudential Standards and
Supervision
On December 8, 2020, the Federal Reserve issued a
final rule to amend the Federal Reserve’s assessment
rule, Regulation TT, pursuant to Section 318 of the
Dodd-Frank Act to address amendments made by
section 401 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA).
The final rule raises the minimum threshold for
being considered an assessed company from $50
billion to $100 billion in total consolidated assets for
BHCs and savings and loan holding companies, and
adjusts the amount charged to assessed companies
with total consolidated assets between $100 billion
and $250 billion to reflect changes in supervisory
and regulatory responsibilities resulting from
EGRRCPA.
On January 6, 2021, the OCC, Federal Reserve, and
FDIC issued a final rule that applies to advanced
approaches banking organizations with the aim
of reducing both interconnectedness within the
financial system and systemic risks. As a general
matter, the final rule requires deduction from a
banking organization’s regulatory capital for certain
investments in unsecured debt instruments issued by
foreign or U.S. G-SIBs for the purposes of meeting
minimum total loss-absorbing capacity requirements
and, where applicable, long-term debt requirements,
or for investments in unsecured debt instruments
issued by G-SIBs that are pari passu or subordinated
to such debt instruments.
On February 3, 2021, the Federal Reserve issued
a final rule tailoring the requirements in the
Federal Reserve’s 2011 capital plan rule based
on risk. Specifically, as indicated in the Federal
Reserve’s October 2019 rulemaking that updated the
prudential framework for large BHCs and U.S. IHCs
of FBOs (tailoring rules), the final rule modifies
the capital planning, regulatory reporting, and

stress capital buffer requirements for firms subject
to “Category IV” standards under that framework.
To be consistent with recent changes to the Federal
Reserve’s stress testing rules, the final rule makes
other changes to the Federal Reserve’s stress testing
rules, Stress Testing Policy Statement issued in 2019,
and regulatory reporting requirements, such as the
assumptions relating to business plan changes and
capital actions and the publication of companyrun stress test results for savings and loan holding
companies. The final rule also applies the capital
planning and stress capital buffer requirements
to covered saving and loan holding companies
subject to Category II, Category III, and Category IV
standards under the tailoring rules.
On February 11, 2021, the OCC, the Federal
Reserve, and the FDIC issued a final rule that
implements a stable funding requirement, known
as the net stable funding ratio (NSFR), for
certain large banking organizations. The final
rule establishes a quantitative metric, the NSFR,
to measure the stability of the funding profile of
certain large banking organizations and requires
these banking organizations to maintain minimum
amounts of stable funding to support their assets,
commitments, and derivatives exposures over a
one-year time horizon. The NSFR is designed
to reduce the likelihood that disruptions to a
banking organization’s regular sources of funding
will compromise its liquidity position, promote
effective liquidity risk management, and support
the ability of banking organizations to provide
financial intermediation to businesses and
households across a range of market conditions.
The NSFR supports financial stability by requiring
banking organizations to fund their activities with
stable sources of funding on an ongoing basis,
reducing the possibility that funding shocks would
substantially increase distress at individual banking
organizations. The final rule applies to certain
large U.S. depository institution holding companies,
depository institutions, and U.S. IHCs of FBOs,
each with total consolidated assets of $100 billion or
more, together with certain depository institution
subsidiaries (together, covered companies). Under
the final rule, the NSFR requirement increases in
stringency based on risk-based measures of the toptier covered company. U.S. depository institution
Counc il Ac tivitie s a nd R e gula tory De vel opment s

141

holding companies and U.S. IHCs subject to the
final rule are required to publicly disclose their
NSFR and certain components of their NSFR every
second and fourth calendar quarter for each of the
two immediately preceding calendar quarters. In
addition, the final rule amended certain definitions
in the agencies’ liquidity coverage ratio rule that are
also applicable to the NSFR.
On May 10, 2021, the OCC, the Federal Reserve,
and the FDIC issued a proposed rule under section
39 of the Federal Deposit Insurance Act that would
establish requirements for tax allocation agreements
between institutions and their holding companies
in a consolidated tax filing group. The proposal
is intended to promote safety and soundness by
preserving depository institutions’ ownership rights
in tax refunds and ensuring equitable allocation of
tax liabilities among entities in a holding company
structure. Under the proposal, national banks, state
banks, and savings associations that file tax returns
as part of a consolidated tax filing group would be
required to enter into tax allocation agreements
with their holding companies and other members
of the consolidated group that join in the filing of
a consolidated group tax return. The proposal also
describes specific mandatory provisions in these
tax allocation agreements, including provisions
addressing the ownership of tax refunds received.

Actions Relating to CARES Act and Federal Reserve
Facilities
On December 31, 2020, the NCUA issued a final
rule amending its regulation governing assessment
of an annual operating fee to federal credit unions
(FCUs). First, for purposes of calculating the annual
operating fee, the final rule made amendments to
exclude from total assets any loan an FCU reports
under the Small Business Administration’s PPP or
similar future programs approved for exclusion
by the NCUA. Second, the final rule eliminates
regulatory references to the Credit Union System
Investment Program and the Credit Union
Homeowners Affordability Relief Program, both of
which no longer exist. Third, the final rule amends
the period used for the calculation of an FCU’s
total assets. Under the final rule, total assets will be
calculated as the average total assets reported on
the FCU’s previous four Call Reports available at
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the time the NCUA approves the agency’s budget
for the upcoming year, adjusted for any excludable
programs as determined by the NCUA.
On March 24, 2021, in response to the enactment of
the Consolidated Appropriations Act of 2021 (CAA),
the NCUA issued an interim final rule to conform
the NCUA’s regulations to the statutory changes
made by the CAA. Specifically, the CAA extended
several enhancements to the NCUA’s Central
Liquidity Facility (CLF), which were first enacted by
the CARES Act. This rule amended the NCUA’s CLF
regulation to reflect these extensions. It also extends
the withdrawal from CLF membership provisions
that the NCUA included in the April 2020 interim
final rule that made the aforementioned regulatory
changes related to the CARES Act.
On April 17, 2020, the Federal Reserve issued an
interim final rule to except certain loans made
through June 30, 2020, which are guaranteed
under the PPP, from the requirements of the
Federal Reserve Act and the associated provisions
of the Federal Reserve’s Regulation O. The Federal
Reserve issued two additional interim final rules
to extend the exception when Congress approved
extensions to the PPP. On May 21, 2021, to reflect
a further extension approved by Congress and to
automatically capture any further extensions, the
Federal Reserve issued an interim final rule to
extend this exception to such loans made through
March 31, 2022.

Additional Regulatory Actions in Response to
COVID-19
On December 2, 2020, the OCC, Federal Reserve,
and the FDIC issued an interim final rule to
mitigate temporary transition costs on banking
organizations related to COVID-19. The rule
permits national banks, savings associations, state
banks, BHCs, savings and loan holding companies,
and U.S. branches and agencies of foreign banking
organizations with under $10 in total assets as of
December 31, 2019, to use asset data as of December
31, 2019, in order to determine the applicability of
various regulatory asset thresholds during calendar
years 2020 and 2021. For the same reasons, the
Federal Reserve temporarily revised the instructions
to a number of its regulatory reports to provide that

community banking organizations may use asset
data as of December 31, 2019, in order to determine
reporting requirements for reports due in calendar
years 2020 or 2021.
On December 4, 2020, the NCUA issued a proposed
rule to amend its regulations by removing the
prohibition on the capitalization of interest in
connection with loan workouts and modifications.
The NCUA determined that the prohibition on
authorizing additional advances to finance unpaid
interest may be overly burdensome and, in some
cases, hamper a federally insured credit union’s
(FICU’s) good-faith efforts to engage in loan
workouts with borrowers facing difficulty because
of the economic disruption that the COVID-19
pandemic has caused. It further determined that
advancing interest may avert the need for alternative
actions that would be more harmful to borrowers.
The proposed rule would establish documentation
requirements to help ensure that the addition
of unpaid interest to the principal balance of a
mortgage loan does not hinder the borrower’s
ability to become current on the loan. The proposed
change would apply to workouts of all types of
member loans, including commercial and business
loans.
On December 16, 2020, the Federal Reserve
announced the extension of its temporary U.S.
dollar liquidity swap lines and the FIMA repo facility
through September 30, 2021. These facilities were
temporarily established in March 2020 to ease
strains in global dollar funding markets resulting
from the COVID-19 shock and mitigate the effect
of such strains on the supply of credit to households
and businesses, both domestically and abroad. The
Federal Reserve indicated that a further extension
would help sustain recent improvements in global
U.S. dollar funding markets by serving as an
important liquidity backstop. The Federal Reserve
also indicated that the FIMA repo facility would
help continue to support the smooth functioning of
the U.S. Treasury market by providing an alternative
temporary source of U.S. dollars other than sales
of securities in the open market. The FIMA repo
facility was made a standing facility on July 28, 2021.
On December 22, 2020, the NCUA extended the
effective date of its temporary final rule, issued

in April 2020, which modified certain regulatory
requirements to help ensure that federally insured
credit unions (FICUs) remain operational and can
properly conduct appropriate liquidity management
to address economic conditions caused by the
COVID-19 pandemic. Specifically, the rule issued
in April 2020 temporarily raised the maximum
aggregate amount of loan participations that a
FICU may purchase from a single originating
lender to the greater of $5,000,000 or 200 percent
of the FICU’s net worth. The rule also temporarily
suspended limitations on the eligible obligations
that a federal credit union (FCU) may purchase
and hold. In addition, given physical distancing
practices necessitated by COVID-19, the rule tolled
the required timeframes for the occupancy or
disposition of properties not being used for FCU
business or that have been abandoned. Unless
extended, each of these temporary modifications
would expire on December 31, 2020. Due to
the continued impact of COVID-19, the NCUA
determined it was necessary to extend the effective
period of these temporary modifications until
December 31, 2021.
On March 22, 2021, the OCC, Federal Reserve, and
FDIC issued an interim final rule to support and
facilitate the timely implementation and acceptance
of the Congressionally authorized Emergency
Capital Investment Program (ECIP) for Treasury
to make capital investments in low- and moderateincome community financial institutions. The
rule provides that preferred stock issued under
ECIP qualifies as additional tier 1 capital and that
subordinated debt issued under ECIP qualifies as
tier 2 capital under the agencies’ capital rule.

4.2.2 Dodd-Frank Act Stress Tests and
Stress Capital Buffer
Section 165(i)(2) of the Dodd-Frank Act, as revised
by EGRRCPA, requires certain large financial
companies to conduct periodic stress tests.
On February 12, 2021, the Federal Reserve and OCC
released economic and financial market scenarios
for use in stress tests for covered institutions. The
supervisory scenarios include baseline and severely
adverse scenarios, as described in the agencies’ final
rule that implements stress test requirements of the
Dodd-Frank Act. Rules state that the agencies will
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provide scenarios to covered institutions by February
15 of each year. Covered institutions are required
to use the scenarios to conduct periodic stress tests.
The results of the company-run stress tests will assist
the agencies in assessing the risk profile and capital
adequacy of covered institutions.
In March 2020, the Federal Reserve simplified its
capital framework with the stress capital buffer
requirement, which integrates the results from the
supervisory stress test with its non-stress capital
requirements into one forward-looking and risksensitive framework. This framework replaced the
quantitative portion of the Board’s Comprehensive
Capital Analysis and Review (CCAR) framework.
Stress Capital Buffers resulting from the 2021
stress test went into effect for the largest firms on
October 1, 2021.

4.2.3 Resolution Planning and Orderly Liquidation
Under the framework of the Dodd-Frank Act,
resolution under the U.S. bankruptcy code is the
statutory first option in the event of the failure of
a financial company. Section 165(d) of the DoddFrank Act requires nonbank financial companies
designated by the Council for supervision by the
Federal Reserve and certain BHCs—including
certain FBOs with U.S. operations—to periodically
submit plans to the Federal Reserve, the FDIC, and
the Council for their rapid and orderly resolution
under the U.S. bankruptcy code in the event
of material financial distress or failure. These
submissions are also referred to as living wills. The
Federal Reserve and FDIC review each plan and
may jointly determine that a plan is not credible
or would not facilitate an orderly resolution of the
company under the U.S. bankruptcy code. Since
the resolution planning requirements took effect
in 2012, U.S. G-SIBs and certain other firms have
improved their resolution strategies and governance,
refined their estimates of liquidity and capital needs
in resolution, and simplified their legal structures.
These changes have made these firms more resilient
and resolvable.
On December 9, 2020, the Federal Reserve and
FDIC announced several resolution plan actions.
First, the agencies confirmed that weaknesses
previously identified in the resolution plans for
several large foreign banks have been remediated.
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Second, the agencies finalized guidance for the
resolution plans of certain large foreign banks. This
final guidance modifies the proposed guidance,
which was issued in March 2020, in several ways.
The agencies tailored their expectations around
resolution capital and liquidity, derivatives and
trading activity, as well as payment, clearing, and
settlement activities. The scope of the guidance
was also modified to generally cover foreign
banks in category II of the agencies’ large bank
regulatory framework. And third, the agencies
provided information for large foreign and domestic
banks that will inform the content of their next
resolution plans, which are now due December
17, 2021. In particular, these targeted plans will
be required to include core elements of a firm’s
resolution strategy—such as capital, liquidity, and
recapitalization strategies—as well as how each
firm has integrated changes to, and lessons learned
from, its response to COVID-19 into its resolution
planning process. The information applies to
foreign and domestic banks in categories II and III
of the large bank regulatory framework.
As of July 1, 2021, the U.S. G-SIBs submitted public
and confidential sections of their resolution plans
to the Federal Reserve and FDIC. On July 19, 2021,
the Federal Reserve and FDIC released the public
sections of these firms’ resolution plans on the
agencies’ respective websites. The agencies will
review both the confidential and public portions of
the resolution plans.
Furthermore, in 2021, the Federal Reserve and
FDIC hosted Crisis Management Group (CMG)
meetings for U.S. G-SIBs to discuss home and host
resolvability assessments for the firms to facilitate
cross-border resolution planning.

4.2.4 Insurance
NAIC/State Developments
On December 9, 2020, NAIC members adopted
revisions to existing holding company model
legislation to implement the Group Capital
Calculation (GCC) and Liquidity Stress Test (LST).
The model legislation revisions have since been
adopted by at least six states. The GCC is a groupwide capital reporting and assessment framework
including insurers, financial, and nonfinancial

businesses within an insurance group. The LST for
large life insurance groups meeting the scoping
criteria provides lead state regulators with more
insights into the groups’ liquidity risk. Until adoption
of the legislative revisions, states will use existing
examination authority to conduct the stress test.
On August 14, 2021, NAIC members voted to expose
for comment a requirement that the GCC and
LST would become NAIC Accreditation standards,
effective January 1, 2026. All states that were the
group wide supervisor for a U.S. group operating in
either the UK or the EU were encouraged to adopt
the model legislation to enable the GCC for yearend 2022. During the summer of 2021, 25 insurance
groups participated in a trial implementation of the
GCC, reporting their results to lead state supervisors
to inform anticipated refinements to GCC reporting
in 2022. In 2021, 22 life insurance groups filed an
LST using 2020 data.

The NAIC also adopted revisions to statutory
accounting rules and interpretations, specifically
SSAP No. 25—Affiliates and Other Related Parties
(SSAP No. 25), relating to insurer transactions with
affiliates, which clarifies that an ownership interest
greater than 10 percent in a reporting entity results
in a related party designation, regardless of any
disclaimer of control or affiliation. Additionally,
SSAP No. 25 now requires identification of an
insurer’s material controlling party and reporting
on a new Schedule Y, Part 3, which captures all
entities with ownership greater than 10 percent and
denotes the ultimate controlling parties of those
entities and entities they in turn control.

Throughout 2021, states continued to adopt the
NAIC Credit for Reinsurance Model Legislation
and Regulation, which modifies state reinsurance
rules in light of the U.S.–EU and U.S.–UK Covered
Agreements. To facilitate implementation of these
models in the states, the NAIC adopted additional
changes to the Uniform Application Checklist for
Certified Reinsurers and a new Uniform Checklist
for Reciprocal Jurisdiction Reinsurers. Similarly,
revisions were also adopted to the Process for
Evaluating Qualified and Reciprocal Jurisdictions.

The NAIC adopted Interpretation 21-01 to address
statutory accounting for cryptocurrencies to clarify
that directly held cryptocurrencies do not meet
the definition of either cash or admitted assets.
The NAIC also updated Risk Based Capital (RBC)
factors to expand the number of different RBC bond
factors to allow for more granularity and updated
historical data on defaults and recoveries and
updated real estate factors and longevity risk-factors.
Additionally, the NAIC revised filing requirements
to the NAIC Securities Valuation Office to capture
private rating letter rationale reports; and the
NAIC updated its Financial Condition Examiners
Handbook and Financial Analysis Handbook,
utilized in all states, relating to long-term care
insurance, cyber security assessments, and
information technology assessments.

The NAIC also adopted several changes impacting
regulators’ authorities in an insurer receivership,
specifically updates to the Insurance Holding
Company System Regulatory Act (#440) and
the Insurance Holding Company System Model
Regulation with Reporting Forms and Instructions
(#450) to make explicit the regulatory authority
that an insurance commissioner has relative to the
continuation of essential services of an insurance
company from an affiliate during a receivership, and
adopted a Guideline for Administration of Large
Deductible Policies in Receivership and a Guideline
for Definition of Reciprocal State in Receivership
Laws, to clarify regulator authority within the
receivership process.

States continue to make progress in adopting new
or revised core regulatory standards. As of October
2021, 16 states have adopted the 2020 revisions
to the NAIC’s Suitability in Annuity Transactions
Model Regulation, and it is pending in six states.
The revisions clarify that all recommendations by
agents and insurers must be in the best interest
of the consumer and that agents and carriers may
not place their financial interest ahead of the
consumer’s interest in making the recommendation.
As of October 21, 18 states have adopted some form
of the NAIC’s Insurance Data Security Model Law,
which establishes standards for insurer data security
and for investigation of and notification to state
insurance regulators of a cybersecurity event.

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Covered Agreements
The Bilateral Agreement between the U.S. and the
EU on Prudential Measures Regarding Insurance
and Reinsurance, generally known in the United
States as the U.S.–EU Covered Agreement, was
signed by the parties in September 2017, and entered
into force on April 4, 2018. The U.S.–UK Covered
Agreement, substantively similar to the agreement
with the EU, was signed by the parties in December
2018, and entered into force on December 31, 2019.
Both agreements were negotiated by Treasury’s
FIO in coordination with the Office of the United
States Trade Representative, pursuant to the Federal
Insurance Office Act of 2010 (FIO Act).
The NAIC Credit for Reinsurance Model Law and
Regulation, as amended in 2019, provides a basis
for U.S. states to revise their credit for reinsurance
measures for purposes of achieving consistency with
the covered agreements and avoiding a potential
preemption determination under the FIO Act.
During the past year there has been meaningful
state-level progress in adopting such revisions, with
over 45 states having now amended their credit for
reinsurance frameworks based on the amended
Model Law (although fewer have so far completed
revisions based on the amended Model Regulation).
Under the covered agreements, if U.S. insurance
supervisors do not develop and implement a
group capital assessment applicable to U.S. groups
with insurance operations in the EU and UK,
regulators from those jurisdictions could impose
their domestic group capital requirements on
such groups. In addition, regulators may not be
precluded from imposing collateral requirements
on U.S. reinsurers assuming business from insurers
in those jurisdictions. In December 2020, the NAIC
adopted its GCC through revisions to the Insurance
Holding Company System Model Act and Insurance
Holding Company System Model Regulation in
part to implement the group capital assessment
contemplated by the covered agreements.

Climate-Related Financial Risk
Executive Order 14030 on Climate-Related Financial
Risk (May 20, 2021) instructed the Secretary of the
Treasury to direct FIO “to assess climate-related
issues or gaps in the supervision and regulation
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of insurers, including as part of the Council’s
analysis of financial stability, and to further assess,
in consultation with States, the potential for major
disruptions of private insurance coverage in regions
of the country particularly vulnerable to climate
change impacts.”
To this end, FIO issued a request for information
(FIO Climate RFI) in August 2021 to solicit public
comment on the insurance sector and climaterelated financial risks. The FIO Climate RFI
seeks public comment on FIO’s three proposed
priorities: (1) assessing climate-related issues or
gaps in the state insurance regulatory framework;
(2) assessing the potential for major disruptions of
private insurance coverage in U.S. markets that are
particularly vulnerable to climate change impacts,
as well as facilitating mitigation and resilience for
disasters; and (3) increasing FIO’s engagement on
climate-related issues and leveraging the insurance
sector’s ability to help achieve climate-related goals.
FIO expects that responses to the FIO Climate RFI
will help inform its assessment of the implications
of climate-related financial risks for the insurance
sector and help FIO to better understand: (1)
which data elements are necessary to accurately
assess climate risk; (2) which data elements remain
unavailable; and (3) how FIO could collect this data
under its statutory data collection authorities and
make it available to stakeholders as needed.

Terrorism Risk Insurance Program
FIO assists the Secretary of the Treasury in
administering the Terrorism Risk Insurance
Program created under the Terrorism Risk
Insurance Act of 2002, as amended.
In June 2021, Treasury published a Study on the
Competitiveness of Small Insurers in the Terrorism
Risk Insurance Marketplace. In the study,
Treasury detailed numerous market differences
between small and larger (non-small) insurers
and concluded that small insurers are significant
participants in the market for terrorism risk
insurance in the United States.

International Association of Insurance Supervisors
Update
To assess the effects of the COVID-19 pandemic
on global insurers and insurance sectors, the
International Association of Insurance Supervisors
(IAIS) repurposed its 2020 Global Monitoring
Exercise (GME), focusing on the resulting
economic impact. Data were collected from a pool
of 60 insurance groups and regulatory agencies
in 28 jurisdictions, for the purpose of assessing
the financial impact of the pandemic at both the
company and sector level, as well as informing
insurance supervisors’ responses. Three different
data collections provided the IAIS with four
quarterly data points for its monitoring and forwardlooking analysis. The results of this work were
published in a December 2020 special edition of the
IAIS Global Insurance Market Report, addressing
the effects of the COVID-19 pandemic on the global
insurance sector in the first six months of 2020.
The IAIS concluded that despite the volatility in the
financial markets during this period, “the global
insurance sector has remained both financially and
operationally resilient,” although acknowledging
that the pandemic’s ultimate impact on the
insurance sector and its policyholders remains
uncertain.
For 2021, the GME has returned to its primary
purpose. The IAIS has completed a two-year (yearend 2019 and 2020) regular sector-wide monitoring
and individual insurer monitoring data collection.
The Holistic Framework for the Assessment and
Mitigation of Systemic Risk in the Insurance Sector
collective discussion was held in September 2021,
following completion in June of the phase 1 (or
baseline) implementation self-assessment of the
Holistic Framework. In 2022, the IAIS is still on
course to complete the outstanding implementation
assessment items and finalize the assessment’s
findings.
The second year of the International Capital
Standard monitoring period is currently underway,
and the IAIS will be evaluating submissions that
included optional reporting targeted at improving
the market adjusted valuation methodology. In
May 2021, the IAIS published its definition of
comparable outcomes as well as the six high-level

principles applicable to comparability. FIO, the
Federal Reserve, and the U.S. states through the
NAIC are engaged with the IAIS on development
of appropriate criteria for the comparability
assessment. The IAIS plans to publish a public
consultation on the draft criteria by the second
quarter of 2022.

4.3 Financial Infrastructure, Markets, and
Oversight
4.3.1 Derivatives, Swap Data Repositories, Regulated
Trading Platforms, and Central Counterparties
On November 9, 2020, the CFTC issued a final rule
amending the margin requirements (the CFTC
margin rule) for bilaterally cleared swaps for SDs
and major swap participants (MSPs) for which
there is not a prudential regulator. The CFTC
margin rule mandated the collection and posting of
variation margin and initial margin under a phased
compliance schedule extending from September 1,
2016, to September 1, 2020. Pursuant to this final
rule, the CFTC amended the compliance schedule
to further delay the compliance date for entities with
smaller average daily aggregate notional amounts
of swaps and certain other financial products
from September 1, 2021, to September 1, 2022, to
avoid market disruption due to the large number
of entities being required to comply by September
1, 2021, as a result of the adoption of a July 2020
interim final rule extending the compliance date for
certain groups of entities.
On November 25, 2020, the CFTC issued a final
rule amending its regulations for real-time public
reporting and dissemination requirements for
SDRs, derivatives clearing organizations (DCOs),
SEFs, DCMs, SDs, MSPs, and swap counterparties
that are neither SDs nor MSPs. The final rule also
made revisions that, among other things, change
the “block trade” definition and the block swap
categories, update the block thresholds and cap
sizes, and address issues market participants have
had in publicly reporting certain types of swaps.
On November 25, 2020, the CFTC issued a final
rule amending its regulations that establish swap
data recordkeeping and reporting requirements
for SDRs, DCOs, SEFs, DCMs, SDs, MSPs, and swap
counterparties that are neither SDs nor MSPs. The

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final rule gives the CFTC, for the first time, access
to uncleared margin data, thereby significantly
improving the CFTC’s ability to monitor for systemic
risk. The final rule also finalized revisions that,
among other things, streamline the requirements
for reporting new swaps, define and adopt swap
data elements that harmonize with international
technical guidance, and reduce reporting burdens
for reporting counterparties that are not SDs or
MSPs.
On November 25, 2020, the CFTC issued a final rule
amending its regulations to improve the accuracy
of data reported to, and maintained by, SDRs, and
to provide enhanced and streamlined oversight of
SDRs and data reporting generally. The final rule
also finalized revisions that, among other things,
modify existing requirements for SDRs to establish
policies and procedures to confirm the accuracy
of swap data with both counterparties to a swap
and require reporting counterparties to verify
the accuracy of swap data pursuant to those SDR
procedures. The final rule also updates existing
requirements related to corrections for data errors
and certain provisions related to SDR governance.
On November 30, 2020, the CFTC issued a final
rule amending the regulations governing which
swaps are exempt from the clearing requirement
set forth in applicable provisions of the Commodity
Exchange Act (CEA). These amendments exempt
from the clearing requirement swaps entered
into by certain central banks, sovereign entities,
international financial institutions, BHCs, savings
and loan holding companies, and community
development financial institutions.
On December 18, 2020, the CFTC issued a final rule
amending certain parts of its regulations relating
to the execution of package transactions on SEFs
and the resolution of error trades on SEFs. These
matters were the subject of relief in certain noaction letters from CFTC staff.
On December 22, 2020, the SEC issued a final
substituted compliance order for Germany, which
provides that certain German firms that are
registered with the SEC as security-based swap
dealers and major security-based swap participants
conditionally may satisfy certain requirements under
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the Exchange Act by complying with comparable
German and EU requirements. The SEC issued final
substituted compliance orders for France on July 26,
2021, and for the UK on July 30, 2021.
On January 11, 2021, the CFTC issued a final
rule amending its part 38 regulations to address
the potential risk of a DCM’s trading platform
experiencing a market disruption or system anomaly
due to electronic trading. The final rules set forth
three principles applicable to DCMs concerning:
the implementation of exchange rules applicable to
market participants to prevent, detect, and mitigate
market disruptions and system anomalies associated
with electronic trading; the implementation of
exchange-based pre-trade risk controls for all
electronic orders; and the prompt notification
by DCMs to CFTC staff of any significant market
disruptions on their electronic trading platforms.
In addition, the final rules include acceptable
practices, which provide that a DCM can comply
with these principles by adopting and implementing
rules and risk controls reasonably designed to
prevent, detect, and mitigate market disruptions and
system anomalies associated with electronic trading.
On January 14, 2021, the CFTC issued a final rule
conforming regulations concerning speculative
position limits to the relevant Dodd-Frank Act
amendments to the CEA. Among other regulatory
amendments, the CFTC adopted: new Federal
spot month limits for 16 new physical commodity
derivatives and certain associated derivatives;
updated single month and all-months-combined
limits for the nine agricultural contracts that already
were subject to Federal position limits under the
previous framework as well as certain associated
derivatives; new and amended definitions for
use throughout the position limits regulations,
including a revised definition of “bona fide hedging
transaction or position” and a new definition of
“economically equivalent swaps”; amended rules
governing exchange-set limit levels and grants of
exemptions therefrom; a new streamlined process
for bona fide hedging recognitions for purposes
of Federal position limits; new enumerated bona
fide hedges; and amendments to certain regulatory
provisions that would eliminate Form 204 while
also enabling the CFTC to leverage and receive

cash-market reporting submitted directly to the
exchanges by market participants.
On January 25, 2021, the CFTC issued a final rule
amending the CFTC margin rule. The final rule
permits the application of a minimum transfer
amount of up to $50,000 for each separately
managed account of a legal entity that is a
counterparty to an SD or MSP in an uncleared
swap transaction and to permit the application
of separate minimum transfer amounts for initial
margin and variation margin.
On April 13, 2021, the CFTC issued a final
rule amending its regulations governing
bankruptcy proceedings of commodity brokers.
The amendments are intended to update those
regulations to reflect current market practices
and lessons learned from past commodity broker
bankruptcies.
On May 7, 2021, the SEC approved the registration
of DTCC Data Repository (U.S.), LLC as a
security-based swap data repository (SBSDR). The
registration of the first SBSDR is the final condition
precedent for the compliance schedule previously
established by the SEC for Regulation SBSR,
which governs regulatory reporting and public
dissemination of security-based swap transactions.
Accordingly, security-based swap transaction
reporting will commence on November 8, 2021 and
public dissemination will begin on February 14,
2022.
In 2021, the FDIC and CFTC continued to
host CMG meetings for two U.S. CCPs that are
considered systemically important in more than one
jurisdiction. In addition, the FDIC and SEC hosted
the inaugural CMG meeting for a third U.S. CCP
considered systemically important in more than one
jurisdiction. The CMGs generally discuss matters
relevant to CCP resolution planning. Processes for
cooperation and sharing information, both during
a crisis and for purposes of resolution planning
and resolvability, are set forth in the cooperation
arrangements that are specific to the CMG.
Cooperation arrangements for the inaugural CMG
are underway, and they are complete for the two
previously established CMGs.

The FDIC, Federal Reserve, CFTC, and SEC
participate in an ongoing program of joint work
with the Bank of England to share analyses and
discuss policy formulation in relation to the
resolution of CCPs. To date, the group’s work has
been facilitating work towards the development
of prototype resolution strategies for these CCPs.
Going forward, the group seeks to facilitate
progression from the development of resolution
strategies to detailed operational planning.
On May 26, 2021, the NCUA issued a final rule
amending its rules regarding the use of derivatives
by federal credit unions (FCUs). The final rule
is intended to modernize the NCUA’s derivatives
rules and make them more principles-based, while
retaining key safety and soundness components.
The amendments are intended to provide more
flexibility for FCUs to manage interest rate risk
through the use of derivatives.

4.3.2 Securities and Asset Management
On December 21, 2020, pursuant to a final rule,
the SEC issued a new exemptive rule under the
Investment Company Act designed to address
the investor protection purposes and concerns
underlying section 18 of the Act and to provide
an updated and more comprehensive approach
to the regulation of funds’ use of derivatives
and the other transactions addressed by the new
rule. In addition, the SEC adopted new reporting
requirements designed to enhance the SEC’s ability
to effectively oversee funds’ use of and compliance
with the new rule, and to provide the SEC and
the public additional information regarding
funds’ use of derivatives. Finally, the SEC adopted
amendments under the Investment Company Act to
allow leveraged/inverse ETFs that satisfy the rule’s
conditions to operate without the expense and
delay of obtaining an exemptive order. The SEC,
accordingly, rescinded certain exemptive relief that
had been granted to these funds and their sponsors.
On January 6, 2021, pursuant to a final rule,
the SEC issued a new rule under the Investment
Company Act to address valuation practices and
the role of the board of directors with respect to
the fair value of the investments of a registered
investment company or business development
company. The rule provides requirements for
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determining fair value in good faith for purposes of
the Act. This determination involves assessing and
managing material risks associated with fair value
determinations; selecting, applying, and testing fair
value methodologies; and overseeing and evaluating
any pricing services used. The rule permits a
fund’s board of directors to designate certain
parties to perform the fair value determinations,
who will then carry out these functions for some
or all of the fund’s investments. This designation
is subject to board oversight and certain reporting
and other requirements designed to facilitate the
board’s ability to effectively oversee this party’s fair
value determinations. The rule includes a specific
provision related to the determination of the fair
value of investments held by unit investment trusts,
which do not have boards of directors. The rule also
defines when market quotations are readily available
under the Act. The SEC also adopted a separate rule
providing the recordkeeping requirements that will
be associated with fair value determinations and
rescinded previously issued guidance on the role of
the board of directors in determining fair value and
the accounting and auditing of fund investments.
On February 10, 2021, the SEC published a request
for comment on potential reform measures to
improve the resilience of MMFs, as PWG issued in
December 2020.
On March 5, 2021, the SEC issued a final rule
adopting amendments under the Advisers Act to
update the rules that govern investment adviser
marketing. The amendments create a merged
rule to replace both the advertising and cash
solicitation rules. These amendments reflect market
developments and regulatory changes since the
advertising rule’s adoption in 1961 and the cash
solicitation rule’s adoption in 1979. The SEC also
adopted amendments to Form ADV to provide the
SEC with additional information about advisers’
marketing practices.
On March 15, 2021, in light of demand for climate
change information and questions about whether
current disclosures adequately inform investors,
the SEC launched a request for public input from
investors, registrants, and other market participants
on climate change disclosure.

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On April 5, 2021, the SEC issued interim final
rules implementing the disclosure and submission
requirements of the Holding Foreign Companies
Accountable Act (HFCAA). The HFCAA requires
that the SEC identify companies in violation of
the HFCAA based on fiscal years beginning after
December 18, 2020. The SEC anticipates beginning
to make such identifications in early 2022 shortly
after completion of such companies’ fiscal years,
which is the soonest the identification can be made
under the HFCAA. Securities of companies that
are so identified for three consecutive years will be
prohibited from trading on an exchange or in the
over-the-counter market, beginning as early as 2024.
On April 9, 2021, the SEC issued a final rule
amending Regulation National Market System
(Regulation NMS) under the Exchange Act to
modernize the national market system for the
collection, consolidation, and dissemination of
information with respect to quotations for and
transactions in national market system stocks (NMS
information). Specifically, the SEC expanded the
content of NMS information that is required to be
collected, consolidated, and disseminated as part
of the national market system under Regulation
NMS and amended the method by which such
NMS information is collected, calculated, and
disseminated, by seeking to create a competitive
environment for the dissemination of NMS
information via a decentralized consolidation model
with competing consolidators.
On May 26, 2021, the OCC adopted as final a
previously released interim final rule on withdrawal
periods for collective investment funds (CIFs).
Under the final rule, a national bank or federal
savings association that administers a CIF invested
primarily in real estate or other assets that are
not readily marketable may require a prior notice
period, not to exceed one year, to withdraw an
account from a CIF. A bank that requires a prior
notice period for withdrawals must withdraw an
account from the CIF within the prior notice period
or, if permissible under the CIF’s written plan,
within one year after the date on which notice was
required. As an exception to the above, a bank may
request the OCC’s approval for extensions to the
standard withdrawal period if certain criteria are

met. The final rule revised one of the criteria for
OCC approval of an extension under the interim
final rule, so that the bank must “represent” that
it will act upon the withdrawal request as soon as
practicable.

4.3.3 Accounting Standards
Section 4013 (Temporary Relief from Troubled
Debt Restructurings) of the CARES Act, enacted
on March 27, 2020, was subsequently extended
by The Consolidated Appropriations Act of 2021
(CAA), which was signed into law on December 27,
2020. Financial institutions, including insurance
companies, that have loan restructurings meeting
eligibility requirements under the CARES Act, have
an option to suspend the application of accounting
and disclosure requirements for troubled debt
restructurings (TDRs) set forth in ASC Subtopic
310-40, Receivables – Troubled Debt Restructurings
by Creditors. A loan restructuring is eligible for an
election under Section 4013 if the restructuring is in
response to the COVID-19 pandemic, the loan was
not more than 30 days past due on December 31,
2019, and the restructuring was executed between
the applicable period: March 1, 2020 and the earlier
of 60 days after the termination of the COVID-19
national emergency or January 1, 2022.
Initially, on March 22, 2020, various federal financial
institution regulatory agencies issued an Interagency
Statement on Loan Modifications and Reporting
for Financial Institutions Working with Customers
Affected by the Coronavirus. On April 7, 2020, the
interagency regulators revised their statement on
the interaction between Section 4013 of the CARES
Act and whether loans restructured by creditors
in response to the pandemic are TDRs under ASC
310-40. The election for a non-Section 4013 loan
restructuring is available when the modification is
short term (not to exceed six months) and made on
a good-faith basis as a response to the pandemic,
and the loan was not a prior TDR and is less than
30 days past due on contractual payments when the
modification was granted or program relief offering
was implemented. In addition, a governmentmandated modification or a deferral program
related to the pandemic does not represent a TDR
because the lender did not choose to provide a
concession. For example, a state program requiring

institutions to suspend mortgage payments within
that state for a specified period does not represent a
TDR. If a lender defers payment, this may result in
no contractual payments being past due, and such
loans would not be considered past due during the
period of deferral.
Section 4014 of the CARES Act, Optional
Temporary Relief from Current Expected Credit
Losses, includes provisions that provide optional
temporary relief from certain accounting
requirements related to application of the CECL
methodology by insured depository institutions
(as defined in Section 3 of the Federal Deposit
Insurance Act), credit unions regulated by the
NCUA, and BHCs. Section 4014 states that no
financial institution will be required to comply with
ASU 2016-13, the CECL methodology for estimating
allowances for credit losses, during the period
beginning March 27, 2020 to the earlier of: (1) the
first day of an eligible financial institution’s fiscal
year that begins after the date when the COVID-19
national emergency is terminated; or (2) January 1,
2022 (as amended by the CAA).
On February 25, 2021, the FDIC issued a final
rule amending the risk-based deposit insurance
assessment system applicable to all large insured
depository institutions (IDIs), including highly
complex IDIs, to address the temporary deposit
insurance assessment effects resulting from
certain optional regulatory capital transition
provisions relating to the implementation of the
CECL methodology. The final rule removes the
double counting of a specified portion of the
CECL transitional amount or the modified CECL
transitional amount, as applicable (collectively, the
CECL transitional amounts), in certain financial
measures that are calculated using the sum of Tier 1
capital and reserves and that are used to determine
assessment rates for large or highly complex IDIs.
The final rule also adjusts the calculation of the loss
severity measure to remove the double counting of a
specified portion of the CECL transitional amounts
for a large or highly complex IDI. The final rule
does not affect regulatory capital or the regulatory
capital relief provided in the form of transition
provisions that allow banking organizations to

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phase in the effects of CECL on their regulatory
capital ratios.
On July 1, 2021, the NCUA issued a final rule
to facilitate the transition of federally insured
credit unions (FICUs) to the CECL methodology
required under GAAP. The final rule provides
that, for purposes of determining a FICU’s net
worth classification under the Prompt Corrective
Action regulations, the NCUA will phase-in the
day-one adverse effects on regulatory capital that
may result from adoption of CECL. Consistent with
regulations issued by the other federal banking
agencies, the final rule will temporarily mitigate the
adverse PCA consequences of the day-one capital
adjustments of CECL, while requiring that FICUs
account for CECL for other purposes, such as Call
Reports. The final rule also provides that FICUs
with less than $10 million in assets are no longer
required to determine their charges for loan losses
in accordance with GAAP. These FICUs may instead
use any reasonable reserve methodology (incurred
loss), provided that it adequately covers known and
probable loan losses.

4.3.4 Bank Secrecy Act/Anti-Money Laundering
Regulatory Reform
Effective January 1, 2021, the Anti-Money
Laundering Act of 2020 (AML Act) amended
the Bank Secrecy Act (BSA), initiating the most
significant revision of the United States’ framework
for anti-money laundering and countering the
financing of terrorism (AML/CFT) since 2001. The
Anti-Money Laundering Act requires establishing
AML/CFT priorities; improving coordination and
sharing of information; encouraging technological
innovation; and reinforcing the risk-based approach
to AML/CFT. The AML Act also requires the
establishment of uniform beneficial ownership
reporting requirements and a secure, nonpublic
database at the Financial Crimes Enforcement
Network (FinCEN) to maintain this information
to improve transparency for national security,
intelligence, and law enforcement agencies and
discourages the use of shell corporations as a tool to
disguise and move illicit funds.
The AML Act contains numerous provisions
according to which FinCEN, in consultation
with other federal agencies (including the
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federal banking agencies), must conduct studies,
review regulations and guidance, and propose
rulemakings. Relevant to the rulemakings, FinCEN
must promulgate regulations to carry out national
AML/CFT priorities. The federal banking agencies
plan to amend their BSA compliance program to
conform to changes implemented by FinCEN. In
addition, FinCEN, in consultation with the federal
banking agencies, must promulgate regulations
for beneficial ownership information reporting
requirements. Other provisions of the AML Act
require FinCEN, in consultation with federal
banking agencies, to conduct studies and review
regulations and guidance to identify those that
may be outdated, redundant or otherwise do not
promote a risk-based AML/CFT regime for financial
institutions, and propose rulemakings addressing
automated system testing procedures, sharing
reports with foreign affiliates, no-action letters,
whistleblower protections, AML/CFT requirements
for art and antiquities dealers and more.
The Financial Action Task Force (FATF) is the intergovernmental body that sets standards and promotes
effective implementation of legal, regulatory,
and operational measures for combating money
laundering, terrorist financing and the financing
of proliferation, and other related threats to the
integrity of the international financial system. In
collaboration with other international stakeholders,
the FATF also works to identify national-level
vulnerabilities to protect the international financial
system from misuse.
Amendments to certain FATF recommendations
and interpretive notes were adopted on October
23, 2020, related to identifying, assessing, and
mitigating the risks of potential breaches, nonimplementation, or evasion of targeted financial
sanctions. On September 14, 2020, the FATF
published the Virtual Assets Red Flag Indicators of
Money Laundering and Terrorist Financing, and
on June 29, 2021, the Guidance on Proliferation
Financing Risk Assessment and Mitigation.

4.4 Mortgages and Consumer Protection
4.4.1 Mortgages and Housing Finance
On December 17, 2020, the FHFA issued a final
rule that establishes risk-based and leverage capital

requirements for the Enterprises. The final rule
also makes conforming amendments to definitions
in FHFA’s regulations governing assessments and
minimum capital and removes the Office of Federal
Housing Enterprise Oversight’s regulation on capital
for the Enterprises.
On December 21, 2020, the FHFA issued a final rule
on the 2021 housing goals for the Enterprises. The
Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 requires FHFA to establish
annual housing goals for mortgages purchased
by the Enterprises. The housing goals include
separate categories for single-family and multifamily
mortgages on housing that is affordable to lowincome and very low-income families, among other
categories. The final rule established benchmark
levels for each of the housing goals for 2021.
On December 29, 2020, the CFPB issued final rules
related to qualified mortgage (QM) loans. Creditors
are required under the law to make a determination
that consumers have the ability to repay a mortgage
loan before extending the loan. Loans that meet
legal standards for QM loans are presumed to be
loans for which consumers have such an ability
to repay. With certain exceptions, Regulation Z
(which implements the Truth in Lending Act)
requires creditors to make a reasonable, good faith
determination of a consumer’s ability to repay
any residential mortgage loan, and loans that
meet Regulation Z’s requirements for “qualified
mortgages” obtain certain protections from liability.
Regulation Z contains several categories of QMs,
including the General QM category and a temporary
category (Temporary GSE QMs) of loans that are
eligible for purchase or guarantee by the Enterprises
while they are operating under the conservatorship
or receivership of the FHFA. One rule amends
the General QM loan definition in Regulation Z
by removing the General QM loan definition’s 43
percent DTI limit and replacing it with a pricebased threshold. The second rule creates a new
category of QMs (Seasoned QMs) for first-lien,
fixed-rate covered transactions that have met certain
performance requirements, are held in portfolio
by the originating creditor or first purchaser for a
36-month period, comply with general restrictions
on product features and points and fees, and meet

certain underwriting requirements. The CFPB’s
primary objective in the rulemaking was to ensure
access to responsible, affordable mortgage credit
by adding a Seasoned QM definition to the existing
QM definitions. Earlier, on October 26, 2020, the
CFPB issued a final rule extending the sunset date
of the Temporary QM until the earlier of the exit
from conservatorship or the mandatory compliance
date with the amended General QM loan definition.
On February 17, 2021, the CFPB issued a final rule
to amend Regulation Z, as mandated by section
108 of EGRRCPA. The amendments exempt certain
insured depository institutions and insured credit
unions from the requirement to establish escrow
accounts for certain higher-priced mortgage loans.
On May 4, 2021, the FHFA issued a final rule
that requires the Enterprises to develop plans to
facilitate their rapid and orderly resolution in the
event FHFA is appointed receiver. A resolution
planning rule represents part of FHFA’s ongoing
effort to develop a robust prudential regulatory
framework for the Enterprises, including capital,
liquidity, and stress testing requirements, as well
as enhanced supervision, which will be critical to
FHFA’s supervision of the Enterprises, particularly
in the event of an exit from conservatorship.
Requiring the Enterprises to develop resolution
plans is intended to support FHFA’s efforts as
receiver for the Enterprises to, among other things,
minimize disruption in the national housing
finance markets by providing for the continued
operation of an Enterprise’s core business lines
by a limited-life regulated entity; and ensure that
private-sector investors in Enterprise securities,
including Enterprise debt, stand to bear losses in
accordance with the statutory priority of payments
while minimizing unnecessary losses and costs to
these investors. In addition, resolution planning is
intended to help foster market discipline in part
through FHFA publication of “public” sections of
Enterprise resolution plans.
On June 30, 2021, the CFPB issued a final rule to
amend Regulation X (the Real Estate Settlement
Procedures Act) to assist mortgage borrowers
affected by the COVID-19 emergency. The final
rule establishes temporary procedural safeguards
to help ensure that borrowers have a meaningful
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opportunity to be reviewed for loss mitigation
before the servicer can make the first notice
or filing required for foreclosure on certain
mortgages. In addition, the final rule temporarily
permits mortgage servicers to offer certain
loan modifications made available to borrowers
experiencing a COVID-19-related hardship based
on the evaluation of an incomplete application. The
CFPB also finalized certain temporary amendments
to the early intervention and reasonable diligence
obligations that Regulation X imposes on mortgage
servicers.
On August 25, 2021, FHFA issued a notice of
proposed rulemaking that would establish GSE
housing goals for 2022-2024. FHFA proposed two
new single-family home purchase subgoals to replace
the existing low-income areas subgoal. A new
minority census tract subgoal is designed to improve
access to fair and sustainable mortgage financing in
communities of color.
On September 27, 2021, FHFA issued a notice
of proposed rulemaking that would amend the
Enterprise Regulatory Capital Framework by
refining the leverage buffer and the risk-based
capital treatment of CRT transactions. The
proposed amendments are intended to reduce
taxpayer risk by incentivizing the Enterprises to
distribute acquired credit risk to private investors
through CRT rather than to buy and hold that risk.

4.4.2 Consumer Protection
On January 19, 2021, the CFPB issued a final rule to
revise Regulation F, which implements the Fair Debt
Collection Practices Act (FDCPA). The final rule
addresses certain activities by debt collectors, as that
term is defined in the FDCPA. Among other things,
the final rule clarifies the information that a debt
collector must provide to a consumer at the outset
of debt collection communications, prohibits debt
collectors from bringing or threatening to bring a
legal action against a consumer to collect a timebarred debt, and requires debt collectors to take
certain actions before furnishing information about
a consumer’s debt to a consumer reporting agency.
On April 22, 2021, the CFPB issued an interim final
rule to amend Regulation F that addresses certain
debt collector conduct associated with an eviction
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moratorium issued by the CDC in response to the
global COVID-19 pandemic. The interim final
rule requires that debt collectors provide written
notice to certain consumers of their protections
under the CDC eviction moratorium and prohibit
misrepresentations about consumers’ ineligibility for
protection under such moratorium.
On October 27, 2021, the NCUA issued a final rule
that amends the NCUA’s CUSO regulation. The rule
expands the list of permissible activities and services
for CUSOs to include originating any type of loan
that a federal credit union may originate. The
NCUA’s authority to regulate or supervise CUSOs
has remained unchanged.

4.5 Data Scope, Quality, and Accessibility
4.5.1 Data Scope
Evolution of the LEI and Other Data Standards
Global adoption of the Legal Entity Identifier (LEI)
continues to grow. As of October 2021, more than
1.9 million LEIs have been issued by 40 approved
operational issuers. Some 32 percent of these were
issued in the United States, with 13 percent issued to
U.S.-based entities. The total number of LEIs issued
represents a year-to-date increase of 10 percent,
following a 15 percent increase in 2020.
The increasing adoption of the LEI continues
to be driven by its use in financial regulation. In
the United States, the LEI is used in regulatory
reporting mandated by the OFR, the CFTC, the
CFPB, and the SEC, among others. Beginning in
January 2018, EU regulators mandated the use of
the LEI by entities involved in securities and OTC
derivatives transactions, as part of the revised
Markets in Financial Instruments Directive (MiFID
II) — resulting in the most significant growth in LEI
adoption to date.
Future expansion could also be supported by the
growing interest of some large financial institutions
in utilizing the LEI for purposes other than
regulatory compliance and reporting. In the future,
such expansion could lead in turn to the LEI being
used (or evaluated for use) more extensively outside
of the financial industry. Further use of the LEI
in financial regulation can be expected to lead to

modest future global increases in the number of
LEIs issued.
The Unique Transaction Identifier (UTI),
the Unique Product Identifier (UPI), and the
harmonized Critical Data Elements (CDE) for OTC
derivatives transaction reporting were developed by
the FSB and jointly by the Committee on Payments
and Market Infrastructures and the International
Organization of Securities Commissions (CPMIIOSCO). These new data standards, when combined
with the LEI, improve the ability of market
regulators and authorities with financial stability
interests to monitor the accumulation of risk in
historically opaque OTC derivatives markets.

Reporting of Standardized Derivatives Data
In 2020 and 2021, the Council’s members developed
and published the technical requirements for
the UPI and CDE. Another major milestone was
the approval in October 2020 of the UPI as a new
International Organization for Standardization
(ISO) standard (ISO 4914), with support and input
from Council members. It is expected that the
UPI will become available for global application
sometime in the latter half of 2022.
The UPI allows derivatives regulators and their
counterparts to better monitor emerging risks
by categorizing different types of derivatives
transactions. The Derivatives Service Bureau, a
subsidiary of the Association of National Numbering
Agencies, is the UPI service provider (i.e., it receives
and stores product-specific attributes and assigns
UPI codes to each OTC derivatives product).
In May 2021, the integration of the CDE for OTC
derivatives reporting into the ISO 20022 repository
represented another major achievement. Council
members began working on this effort in 2014 with
CPMI-IOSCO and continued this work within the
FSB. Like the UTI and UPI, the CDE will be used
by regulators in multiple jurisdictions in their
respective OTC derivative transaction reporting
regimes. Council members completed this work
in partnership with the Society for Worldwide
Interbank Financial Telecommunication (SWIFT),
which is the Registration Authority for ISO 20022.

New Industry Standard
Separately, the Financial Instrument Global
Identifier was approved by the American National
Standards Institute (ANSI) as a U.S. standard,
following analysis and approval by the Accredited
Standards Committee X9, Inc. (ASC X9), an ANSIaccredited standards development organization. The
OFR and CFTC, as Council members and members
of ASC X9, were active contributors to the analysis
of this new free and open standard, which is now
available for industry use.

Role of the ROC
In October 2020, the FSB transferred the role of
international governance body for three new sets
of financial regulatory reporting data standards to
the Regulatory Oversight Committee (ROC) (at
which time the committee previously known as the
“LEI ROC” became known simply as the “ROC”).
The ROC is a group of more than 70 regulatory
authorities from around the world that oversee the
Global LEI Foundation (GLEIF), with additional
authorities acting as observers. The GLEIF is a notfor-profit organization that serves as the Global LEI
System’s “central operating unit,” helping ensure the
system’s operational integrity by setting standards
under which the “local operating units” (i.e., the
entities that issue LEIs) work.

4.5.2 Data Quality
Improving LEI Data Quality
Improving the quality of LEI data is important
to building market confidence in the value of the
LEI. Therefore, considerable attention is directed
to this challenge by the Council members that are
represented on the ROC, including the OFR, SEC,
CFTC, CFPB, FDIC, OCC, and Federal Reserve.
Council members continued their efforts to
review and improve the quality of reference data
in the LEI system, particularly with regard to U.S.
entities. For example, Council members led ROC
efforts to strengthen the front-end edit checks to
ensure that reference data on new and renewed
LEI registrations meet minimum data quality
standards. In particular, the Federal Reserve, OCC
and FDIC are working with the GLEIF and state
authorities to ensure that the quality of registration
authority, legal jurisdiction, and entity legal form
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are proper for U.S. commercial and savings banks
and certain other banking-related entities. Federal
Reserve analysis of U.S. business registry data has
identified opportunities to enhance the quality
and transparency of LEI reference data for entities
whose data corroboration relies on information
from those business registries. Such opportunities
would also improve the degree to which data
corroboration can be done on a ‘straight-through
processing’ basis.
One area of particular interest to these Council
members is the ongoing work on “Level 2” LEI
data. This is data submitted by legal entities
acquiring a LEI regarding their “direct accounting
consolidating parent” and their “ultimate
accounting consolidating parent.” Level 2 LEI data
reveals the direct counterparties to a transaction,
and affiliated entities, thereby improving the ability
of such entities to perform a risk assessment of the
transaction counterparties.
This past year, the ROC has continued to focus on
improving the quality of Level 2 LEI data, among
other elements of LEI reference data. The Council
is committed to its members’ participation on the
ROC and working with the GLEIF to ensure the
quality of LEI data is high enough to make it useful
for industry participants and regulators.

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5

Potential Emerging Threats, Vulnerabilities,

and Council Recommendations

5.1 Climate-Related Financial Risk
Climate change is an emerging threat to the
financial stability of the United States. Climaterelated financial risks can be grouped into two
broad categories: physical risks and transition risks.
Physical risks refer to the harm to people and
property arising from acute climate-related
disaster events such as hurricanes, wildfires, floods,
and heatwaves, as well as longer-term chronic
phenomena such as higher average temperatures,
changes in precipitation patterns, sea level rise,
and ocean acidification. Physical risks have direct
effects on households, communities, businesses, and
other entities where those risks are realized, as well
as to the financial institutions and investors they
are linked to, thereby creating a variety of climaterelated financial risks. For example, property and
casualty insurers are directly exposed to these risks.
In addition, increased actual damages to properties
associated with physical risks may lower the value
of collateral or the income generated by such
properties, posing credit and market risks to banks,
insurers, pension plans, and others. Increased legal,
operational, and liquidity risks may also occur. In
response, creditors may pull back from impacted
regions, amplifying the initial harmful impact of the
climate-related disaster event and creating further
financial and economic strains.
Transition risks refer to stresses to certain
institutions or sectors arising from the shifts
in policy, consumer and business sentiment, or
technologies associated with the changes necessary
to limit climate change. As countries transition to
a low-greenhouse gas economy, changes in public
policy, adoption of new technologies, and shifting
consumer and investor preferences all have the
potential to impose added costs on some firms and
communities even as they reduce overall climate
risks. As a result, impacted firms may have less
ability to meet their financial obligations. Therefore,
the economic effects associated with a transition

may be transmitted through the financial sector
and the economy in ways that could challenge the
resilience of financial institutions or the financial
sector. If these changes occur in a disorderly way
owing to substantial delays in action or abrupt
changes in policy, their impact is likely to be more
sudden and disruptive.

Recommendations
The Council recognizes the critical importance of
taking prompt action to improve the availability of
data and measurement tools, improve assessments
of climate-related financial risks and vulnerabilities,
and incorporate climate-related risks into risk
management practices and supervisory expectations
for regulated entities, where appropriate. In
addition, financial regulators should also promote
consistent, comparable, and decision-useful
disclosures that allow investors and financial
institutions to take climate-related financial risks
into account in their investment and lending
decisions. Through these actions, Council members
can promote financial-sector resilience and support
an orderly transition to a net-zero emissions
economy. The Council provided more detailed
recommendations to Council members in its Report
on Climate-Related Financial Risk.

5.2 Nonfinancial Business: Corporate Credit
The average leverage of nonfinancial corporations
is elevated relative to historical standards. Since
the onset of the pandemic, many firms increased
their leverage but have subsequently retraced those
increases. However, in some industries leverage
remains elevated compared to pre-pandemic
averages, including the airline, hospitality and
leisure, and restaurant sectors. The potential risks
to financial stability from nonfinancial business
borrowing depend in part on the ability of
businesses to service their obligations. Currently,
the vulnerabilities of high leverage are moderated
by elevated liquidity buffers at many firms and low
debt servicing costs given low interest rates. Still,

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businesses with floating rate debt are vulnerable to
an increase in servicing costs should interest rates
rise.
The risks to financial stability from corporate
leverage also depends on the ability of the
financial sector to absorb losses from defaults
and downgrades, and the continued willingness
of market participants to provide intermediation
during times of stress. Corporate borrowers may be
exposed to changing market conditions when they
need to refinance debt as it matures. Another key
factor is whether or not the increases in business
debt have been raised by corporations that were
able to use the additional debt to strengthen their
earnings potential, which would reduce debt
servicing problems.
Elevated leverage has been accompanied by rising
valuations in U.S. equities and corporate bonds.
These valuation pressures make these markets
vulnerable to a major repricing of risk, increased
volatility, and weakening balance sheets of financial
and nonfinancial businesses. Sharp reductions in
the valuations of different assets could heighten debt
rollover risk.
Debt overhang problems could affect the ongoing
economic recovery. In extreme situations when
debt servicing problems are widespread, credit
markets remain vulnerable to a repricing of risk
and disruptions to financial stability. A large wave
of bankruptcies could stress resources at courts and
make it harder for firms to obtain critical debtor-inpossession financing. Such outcomes could preclude
timely debt restructuring for many firms, potentially
forcing them into liquidation. In comparison to
debt restructurings, liquidations typically lead to
greater economic losses from the ensuing declines
in employment and capital spending. Moreover,
creditors may suffer bigger losses from liquidation,
potentially contributing to a further tightening in
overall credit conditions.

Recommendations
The Council recommends that member agencies
continue to monitor levels of nonfinancial business
leverage, trends in asset valuations, and potential
implications for the entities they regulate in order to
assess and reinforce the ability of the financial sector
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to manage severe, simultaneous losses. Regulators
and market participants should continue to monitor
and analyze the exposures, loss-absorbing capacity,
and incentives of different types of stakeholders.
This includes the direct and indirect exposures of
holders of U.S. nonfinancial corporate credit, the
potential amplification of liquidation pressures in
fixed income markets by open-end mutual funds if
a significant episode of stress were to develop, the
effects of evolving loan covenant and documentation
requirements, and the potential effects of markto-market losses and credit rating downgrades.
Regulators and market participants should
also continue to assess ways in which leveraged
nonfinancial corporate borrowers and elevated asset
prices may amplify stresses in the broader market in
the event of a rapid repricing of risk or a slowdown
in economic activity.

5.3

Financial Markets

5.3.1 Short-Term Wholesale Funding Markets
In normal times, wholesale funding markets
provide essential short-term funding to businesses,
local governments, and financial intermediaries.
Developments in the short-term wholesale funding
markets can have implications for financial stability,
and for the implementation of monetary policy.

Money Market Funds
MMFs supply funding to short-term wholesale
funding markets by investing in debt issued by both
banks and nonbanks. Certain types of MMFs can
amplify stress in those markets by liquidating assets
in order to meet redemptions. Other short-term
funds, including short-term collective investment
funds, can amplify stress in similar ways. Many of the
short-term instruments held by MMFs, particularly
prime MMFs, may have limited liquidity especially
during times of stress, constraining their ability to
sell assets quickly without losses. At the same time,
MMFs offer shareholders daily redemptions. This
liquidity gap contributes to a so-called first mover
advantage, in which investors have an incentive
to be the first to redeem in order to avoid losses,
which would be borne by the remaining investors.
The heavy redemptions that occurred in 2008 and
2020 led in both instances to extraordinary policy
responses, including the establishment of liquidity
facilities by the Federal Reserve in both episodes,

and a temporary guarantee of MMFs by the U.S.
Treasury in 2008. While post-2008 reforms allow
for a fund to impose fees or gates on redemptions
if their weekly liquid assets fall below 30 percent of
their balance sheet, the experience in March 2020
shows that approaching this threshold may itself
spark widespread redemptions.

leveraged participants raises concerns regarding
their role in amplifying funding stresses.

Repo Market
Repo funding is an important form of short-term
wholesale funding, and repo markets are critical
not only to financial stability but also to the
implementation of monetary policy.
Repo markets have undergone significant structural
changes since the 2008 financial crisis. These
changes helped streamline some repo operations
and reduced exposures to counterparty risk.
Nevertheless, recent episodes of stress in repo
markets have included large spikes in repo rates in
September 2019 and in March 2020, each stemming
from a different set of factors. The 2019 episode has
been attributed to technical and seasonal factors,
including an increase in demand for funds to
finance new Treasury settlements and quarterly tax
payments by corporations that decreased available
funds. The 2020 episode came at the onset of the
pandemic. The repo market was affected by intense
selling in the cash Treasury market by the official
sector and foreign investors, by open-end funds to
meet redemptions, and by hedge funds and other
leveraged investors adjusting to changes in risks or
covering losses and margin calls. These episodes
have highlighted the connections that repo markets
have to the rest of the financial system and to a
broad range of financial actors.
The reliance on repo funding by leveraged
participants like hedge funds and mREITs makes
them vulnerable to funding risks. When these
leveraged participants face margin calls, either
because of an external shock to the repo market or
investor concerns about their profitability, the need
to deleverage can increase pressure on asset prices
and lead to more margin calls. Because many of the
assets sold at declining prices are the same types
of assets used as collateral in repo funding, asset
sales also create an adverse feedback loop to further
deleverage. The complexity of interactions involving

In July 2021, the Federal Reserve announced
the establishment of a standing domestic repo
facility. The facility serves as a backstop in money
markets to support the effective implementation of
monetary policy and smooth market functioning.
As a backstop, the facility addresses pressures
in overnight funding markets that could spill
over to the federal funds markets and impair the
implementation and transmission of monetary
policy. Counterparties for this facility include
primary dealers and will be expanded over time to
include eligible depository institutions.
In addition, the Federal Reserve also established
in July 2021 the FIMA repo facility. By creating a
backstop source of temporary dollar liquidity for
FIMA account holders, the facility can help address
pressures in global dollar funding markets that
could otherwise affect financial market conditions
in the United States, including in repo markets. Its
role as a liquidity backstop also helps to support
the smooth functioning of financial markets more
generally.

Recommendations
In response to the redemptions faced by prime
MMFs in 2020 and the impacts they had on shortterm wholesale funding markets, the PWG released
the PWG Report on MMFs in December 2020. The
PWG Report on MMFs emphasized that future
reforms should address structural vulnerabilities
in MMFs, improve the resilience and functioning
of short-term funding markets, and reduce the
likelihood that official-sector interventions and
taxpayer support will be needed to halt future
MMF runs or address stresses in short-term funding
markets more generally. On February 4, 2021, the
SEC published a request for public comment on the
potential policy measures identified in the PWG
Report on MMFs and briefed the Council on the
comments it received regarding the potential reform
options.
The Council commends these steps and will
continue to monitor initiatives relating to MMF
reform. Keeping in mind the interconnectedness
of financial institutions and markets, potential

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reforms will be considered in the broader context of
efforts by financial regulators to strengthen shortterm funding markets and support orderly market
functioning, including during periods of heightened
market stress.
The Council recommends that regulators consider
these structural vulnerabilities, including the
vulnerability to large-scale redemptions in prime
and tax-exempt MMFs (as well as other shortterm funds with similar characteristics, such as
short-term collective investment funds), and any
role that leveraged nonbank entities may have
played in the repo market, and, if warranted, take
appropriate regulatory measures to mitigate these
vulnerabilities. For example, to the extent that
leveraged nonbank entities obtain leverage through
uncleared bilateral repos, relevant Council members
should consider whether additional data collection is
necessary.

5.3.2 Residential Real Estate Market
Nonbank mortgage companies play a significant
role in the housing finance system. In recent
years, nonbank mortgage companies originated
most new mortgages and serviced a large portion
of all mortgage debt outstanding. They have a
particularly large footprint in the provision of credit
to low- and moderate-income borrowers, and they
provide competition and liquidity in the market for
mortgage servicing rights.
Nonbank mortgage companies heavily rely on
short-term funding, making them vulnerable to an
abrupt disruption in their ability to operate should
lenders re-evaluate their willingness to provide that
funding. In addition, many mortgage companies
have limited loss absorbing capacity in the face of
adverse economic shocks. Disruption to nonbank
mortgage companies could interrupt mortgage
servicing operations, especially for nonperforming
loans, and might have knock-on effects on these
servicers’ mortgage originations in the residential
real estate market.
Concerns about potential strains on nonbank
mortgage companies were raised at the beginning
of the pandemic, when financial conditions
deteriorated, and these companies were obligated
to advance payments for borrowers under
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forbearance. In response, federal agencies issued
guidance and provided clarification on servicer
advance obligations that, in some cases, limited
the duration of required advances. Ginnie Mae
established a liquidity facility for its servicers that
provides a last resort financing option, though
that facility saw limited uptake. Ultimately, these
companies did not experience significant financial
stress, but they remain vulnerable to adverse market
conditions because a future shock may not be
accompanied by the same surge in refinancing that
has provided these companies with extra revenue or
by extraordinary fiscal support for households that
likely relieved some potential stress on servicers.
Looking forward, in light of the valuation increases
in residential real estate markets since mid-2020,
mortgage companies could come under pressure
if housing prices were to decline and contribute to
a rise in delinquencies. Mortgage companies may
also need to deal with a rise in foreclosures from
historically low levels, as forbearance policies roll off
in coming months.

Recommendations
The Council recommends that relevant federal and
state regulators continue to coordinate closely to
collect data, identify risks, and strengthen oversight
of nonbank companies involved in the origination
and servicing of residential mortgages. Regulators
and market participants have taken steps to address
the potential risks stemming from nonbanks. In
July 2021, Ginnie Mae issued a request for input
on eligibility requirements for its mortgagebacked securities issuers, bolstering net worth and
liquidity standards, and a minimum risk-based
capital ratio for nonbank servicers. In July 2021,
the Conference of State Bank Supervisors released
model state regulatory prudential standards for
nonbank mortgage servicers. The Council supports
these recent actions and encourages regulators
to take additional steps available to them within
their jurisdiction to address the potential risks of
nonbank mortgage companies. Relevant regulators
should ensure that the largest and most complex
nonbank mortgage companies are prepared should
foreclosure rates rise as forbearance agreements
expire. In addition, the Council recommends
that relevant federal and state regulators develop

and establish an information-sharing framework
to enable collaboration and communication in
responding to distress at a mortgage servicer.
Regulators should also develop and implement
coordinated resolution planning requirements for
large and complex nonbank mortgage companies.

decline in the valuation of underlying CRE
properties could lead to sluggish economic growth.

Recommendations

5.3.3 Commercial Real Estate Market
Considerable uncertainty remains about which
CRE sectors may recover completely following
the pandemic and which sectors face permanent
shifts in demand. The pandemic continues to
substantially weigh on office occupancy in central
business districts. A permanent shift toward
teleworking may reduce demand for office space,
including in city centers. Such a change would drive
economic activity away from city centers and affect
other types of properties located in those areas,
including apartments, restaurants, and retail spaces.
Hotel mortgage delinquencies also continue to
be elevated, as business travel remains depressed.
Outside of central business districts, the retail sector
more generally has experienced years of decline
as consumers have gradually shifted toward online
shopping. The pandemic may have accelerated
this trend, and retail mortgages continue to have
elevated delinquency rates.
Permanent downward changes in cash flows will
lead to permanent declines in valuations in certain
sectors, and eventually, holders of CRE will realize
losses. If these losses accumulate gradually, they are
unlikely to trigger large disruptions to the financial
system. If losses are more rapid, though, stress in
CRE markets could spill over to other parts of the
financial system through two mechanisms. First,
asset sales from financially distressed individual
properties can lower valuations, spilling over into
adjoining property values, leading to more distress
and a general downward spiral on CRE valuations.
Second, a significant proportion of CRE loans is
currently held on balance sheets of banks, with
small and mid-size banks’ loan holdings more
likely to be concentrated in CRE. Distress in CRE
properties makes these banks vulnerable to losses,
with the potential to tighten credit and dampen the
economic recovery. If these valuation pressures and
asset sales do not remain localized, a widespread

The Council recommends that regulators continue
to monitor CRE asset valuations, the level of CRE
concentration at banks, and the performance
of CRE loans. Regulators should also monitor
exposures, loss-absorbing capacity, and the
incentives of banks and other nonbank entities that
hold CRE loans, including mREITs, debt funds, and
insurance companies. The Council recommends
that regulators continue to encourage banks and
other entities to bolster, as needed, their loss
absorption capacity by strengthening their capital
and liquidity buffers commensurate with the levels
of CRE concentration on their balance sheets.

5.4 Financial Institutions
5.4.1 Large Bank Holding Companies
Large BHCs are critical to the U.S. financial system,
performing essential banking functions such as
the provision of credit to commercial and retail
borrowers. Given the central role that BHCs play
in retail and wholesale payment systems, strong
financial conditions at BHCs help ensure that firms
can continue their operations even in times of
market stress. Large BHCs also help financial and
nonfinancial firms hedge their risk exposures in
the derivatives markets. Lastly, several specialized
financial services, such as tri-party repo and mutual
fund accounting services, are concentrated in the
largest BHCs.
Large and complex U.S. financial institutions
entered the pandemic more resilient than they were
prior to the 2008 financial crisis. This resilience
has been achieved, in part, by maintaining higher
levels of capital; holding higher levels of liquid assets
to meet peak demands for funding withdrawals;
implementing better risk management practices;
and developing plans for recovery and orderly
resolution.
The results of the 2021 Dodd-Frank Act Stress Test
show that large firms have sufficient capital levels
to absorb losses during stressful conditions. Over
the past year, the capital positions of large BHCs
have improved. Capital positions have benefited

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from a strong recovery in revenue, and a decline
in risk-weighted assets as business borrowers have
continued to repay credit lines they drew down
in the spring of 2020. Capital positions have also
benefited from the release of significant portions of
the loan loss reserves that banks built after the onset
of the pandemic, reflecting an improved outlook
for asset quality, and supported to a large degree by
fiscal and monetary policy and progress in public
health. Nevertheless, some uncertainty for the credit
outlook remains, given the unknown path that the
pandemic will take, and the ongoing economic
recovery.
Banks also face long-run challenges to their
ability to build capital through retained earnings.
Historically low interest rates are, for the third time
in a generation, pushing down net interest margins.
On the other hand, if interest rates were to rise
sharply, banks and other financial institutions could
incur losses on fixed rate assets. Trading operations
support profitability at the largest banks but tend
to be volatile and trading risks must be managed
appropriately. The importance of maintaining
adequate counterparty credit risk management and
margining practices was highlighted this past year
by the failure of Archegos, which led to very large
losses at some banks.

Recommendations
The Council recommends that financial regulators
continue to require that the largest financial
institutions maintain sufficient capital and liquidity
to enhance their resilience against economic and
financial shocks. The Council recommends that
regulators continue to monitor capital adequacy for
these banks.
The Council also recommends that regulators
continue to monitor and assess the impact of rules
on financial institutions and financial markets—
including, for example, on market liquidity and
capital—and ensure that BHCs are appropriately
monitored based on their size, risk, concentration
of activities, and offerings of new products and
services.
The Council further recommends that the
appropriate regulatory agencies continue to review
resolution plans submitted by large financial
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institutions; provide feedback and guidance to
such institutions; and ensure there is an effective
mechanism for resolving large, complex institutions.
In reviewing the failure of Archegos, the Council
recommends that regulators continue to review
counterparty credit risk management, capital
practices, and margining policies at financial
institutions.

5.4.2 Investment Funds
Investment funds play a critical intermediary
role in the U.S. economy, promoting economic
growth through efficient capital formation.
While recognizing these benefits, the Council
has identified certain vulnerabilities related to
investment funds.
One vulnerability involves redemption risk at
certain open-end funds, which may lead to asset
liquidations that contribute to disruptions in
important financial markets. The level of this risk
is a function of, among other things, the liquidity
of the underlying assets, the widespread practice
of settling investor redemptions within two days,
the effectiveness of the fund’s management of its
liquidity, and the potential for an investor to enjoy
a first-mover advantage. For example, although
both equity and fixed income open-end funds offer
daily redemptions to investors, some fixed-income
markets are less liquid than equity markets and thus
funds holding mostly fixed-income instruments
may face greater vulnerability to run risks than
funds holding mostly equities. During periods of
significant financial stress, as investor perception
and sentiment about overall economic and market
conditions change, these funds—like other investors
such as insurance companies, pension funds, and
individual investors—may be inclined to directly sell
these fixed-income instruments for cash.
The Council has focused in particular on the
question of whether the structure of open-end funds
results in greater selling pressure than if investors
held the fixed-income instruments directly.
This past year, the Council formed the Open-End
Fund Working Group to assess potential financial
stability risks associated with open-end funds, with
a focus on liquidity risks. In particular, the working

group is reviewing the role of open-end funds in the
financial stability disruptions of 2020, and the extent
to which intense redemptions and asset liquidations
by some funds contributed to disruptions in the
U.S. Treasury, corporate debt, and municipal debt
markets. This working group seeks to evaluate these
risks and their impact on the broader financial
system, and to consider additional policy options
that could further mitigate such risks following the
SEC’s adoption of liquidity rules in 2016.
A second vulnerability relates to the use of
leverage by investment funds. The use of leverage
is most widespread among hedge funds but varies
significantly among hedge funds of different
sizes and investment strategies. Leverage can
allow investment funds to hedge risk or increase
exposures, depending on the activities and
strategies of the fund. However, in a period of stress,
leverage can magnify losses or lead to margin calls,
which can cause funds to liquidate assets at a size
and speed that disrupt the underlying markets.
The Council has re-established a Hedge Fund
Working Group this past year in order to better
share data and update the Council’s assessment of
potential financial stability risks from hedge funds.
The working group will also seek to establish a risk
monitoring framework to identify potential risks
to financial stability and communicate these risks
to the relevant regulatory agencies. This working
group is also reviewing the experience of hedge
funds at the onset of the pandemic and the ways in
which these funds contributed to Treasury market
volatility, including their liquidation of Treasury
securities and Treasury derivatives.

Recommendations
The Council plans to review the findings of the
hedge fund and open-end fund working groups as
they are developed. The Council supports initiatives
by the SEC and other agencies to address risks in
investment funds. The Council also supports data
collection and analytical work by member agencies
aimed at the identification of potential emerging
risks. The SEC implemented several data collection
efforts and has established additional reporting
requirements for investment funds. As a result,
there is now significantly more data available to

regulators to monitor and analyze developments
concerning fund liquidity, leverage, and risk-taking.
The Council recommends that the SEC and other
relevant regulators consider whether additional steps
should be taken to address these vulnerabilities.

5.5 Financial Market Structure, Operational
Challenges, and Financial Innovation
5.5.1 Central Counterparties
The benefits of CCPs include improved
transparency, the application of centralized
risk management and standardized margin
methodologies, multilateral netting, and clear,
predetermined procedures for the allocation
of counterparty credit losses. Central clearing
mandates have increased the volume of cleared
OTC derivatives trades, both in absolute terms and
relative to the size of the markets. As discussed
in the November 2021 Staff Progress Report, the
IAWG on Treasury Market Surveillance continues
to evaluate whether expanded central clearing
in Treasury cash or repo markets will enhance
Treasury market resilience (see Box A).
The safety and efficiency of CCPs across a broad
set of jurisdictions have been improved by the
implementation of the CPMI-IOSCO PFMI—which
set forth international principles for CCPs and other
types of financial market infrastructures.
There have also been advances in the development
of plans for CCP recovery. In connection with
those CCPs designated as systemically important
FMUs by the Council, the CFTC requires the CCPs
that it supervises to maintain recovery and orderly
wind-down plans pursuant to CFTC regulations.
The CFTC has reviewed and provided guidance on
these recovery plans. The SEC has also approved
recovery and orderly wind-down plans for the CCPs
it supervises.
Although CCPs provide significant benefits to
market functioning and financial stability, they
can also introduce strains to the financial system.
The inability of a CCP to meet its obligations
arising from the default of one or more clearing
member, or from non-default losses, could strain the
surviving members of the CCP and, more broadly,
the financial system. The overall market impact
of these demands depends on the size of the CCP

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and its interconnectedness with other systemically
important financial institutions.
CCPs’ risk management frameworks are designed
to ensure that they have sufficient pre-funded
resources to cover a member default and, in the case
of systemically important CCPs, multiple member
defaults. To mitigate their risk, CCPs impose
liquidity and resource requirements on clearing
members that can increase with market volatility or
other stressors. The first line of defense of the CCP
is often through initial margin requirements which,
to achieve adequate risk coverage, are inherently
procyclical. Initial margin models, however, also
have features that mitigate procyclicality, including
the use of historical and theoretical stress scenarios
even during low volatility periods, to dampen the
sensitivity of initial margin to changes in market
volatility.
Intraday margin calls may affect the liquidity
positions of CCP members, and in extreme cases
could affect their capital positions as well. Some
recent episodes, including during the March 2020
financial strains, have highlighted liquidity risk
management contingencies that CCP members
should monitor. For example, in January 2021, the
margin requirement of one member of the NSCC
increased by $3.0 billion as a result of a surge of
activity related to interest by retail investors in
certain securities discussed on social media. NSCC’s
decision to waive certain margin requirements likely
saved this member from default (see Section 3.6.1).
The Central Counterparty Risk and Governance
Subcommittee of the CFTC’s Market Risk
Advisory Committee published various reports
in 2021 on CCP risk management. Members of
this subcommittee, which is composed of central
counterparties, clearing members and other
market participants, generally agreed on the need
for credit and liquidity stress testing and on stress
testing and margining practices. Subcommittee
members indicated that further work is required
to understand what steps could be taken to reduce
the impact on the financial system if a CCP
were to come under financial strain, including
capital management practices at CCPs, default
management, and CCP transparency. A number of
regulatory efforts have focused on monitoring and
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quantifying potential systemic risks. Both the CFTC
and SEC maintain active risk surveillance programs
of CCPs’ and intermediaries’ risk management and
receive daily or weekly reports of positions, risk
measures, margins, collateral, and default resources.
In addition to risk surveillance programs,
supervisory stress tests involving multiple CCPs can
be an important tool in this assessment. Supervisory
stress tests can, for example, help shed light on
the risks and vulnerabilities related to potential
failures of the largest clearing members. Because
these clearing members are often active across many
markets, such failures could create exposures across
multiple CCPs.

Recommendations
The Council recommends that the CFTC, Federal
Reserve, and SEC continue to coordinate in the
supervision of all CCPs designated by the Council
as systemically important FMUs. Relevant agencies
should continue to evaluate whether existing
standards for CCPs are sufficiently robust to mitigate
threats to financial stability from both default
and non-default losses. These agencies should pay
particular attention to, and seek to balance, the
tradeoff between counterparty risk and liquidity
risk. Agencies that regulate clearing members
should continue to assess those firms’ liquidity risk
management practices and capabilities.
Member agencies should continue working with
global counterparts and international standardsetting bodies to identify and address areas of
common concern. The Council encourages
continued engagement with foreign regulators to
address the potential for inconsistent regulatory
requirements or supervision that pose risks to
U.S. financial stability. The Council encourages
cooperation in the oversight and regulation of FMUs
across jurisdictions.
The Council also encourages agencies to continue
to monitor and assess interconnections among
CCPs, their clearing members, and other financial
institutions. While margin requirements have
increased significantly in the aftermath of the
financial fallout from the COVID-19 pandemic,
agencies should continue to analyze and monitor the
impact of regulatory risk management frameworks

in cleared, uncleared, and related securities
markets and their impact on systemically important
intermediaries and clients.
Finally, the Council encourages regulators to
continue to advance recovery and resolution
planning for systemically important FMUs and to
coordinate in designing and executing supervisory
stress tests of multiple systemically important CCPs.

5.5.2 Alternative Reference Rates
After years of planning and preparation, the
transition away from LIBOR is entering a critical
stage. With end dates for LIBOR now set, and with
U.S. regulators having issued guidance, market
participants should act with urgency to address
their existing LIBOR exposures and transition
to robust and sustainable alternative rates. The
Council has identified certain risks for this critical
transition period.
One risk relates to the selection of new references
rates. The ARRC—a group of financial market
participants convened by the Federal Reserve and
FRBNY—recommends SOFR as the alternative
reference rate. SOFR is based on a deep market
whereas some other alternative rates are based on
a smaller number of transactions. A rate based on
a small volume of transactions, especially if much
lower than the volume of instruments that reference
a given rate, could introduce risks if the rate is
susceptible to volatility and disruption during times
of market stress. In addition, it is important to
consider whether the use of such a rate is fit for the
purpose of the rate’s design. In a public meeting of
the Council in June 2021, several Council members
emphasized their concerns about credit-sensitive
rates being used as reference rates in capital and
derivatives markets.
A second risk relates to the continued issuance of
instruments that create or extend LIBOR exposure.
With LIBOR cessation dates set, it is important that
financial institutions cease issuance of instruments
tied to LIBOR as soon as practicable. In November
2020, the FRB, OCC, and FDIC issued guidance
that their regulated entities should cease entering
into new contracts that use USD LIBOR as a
reference rate as soon as practicable and, in any
event, no later than December 31, 2021. In October

2021, the Federal Reserve, FDIC, OCC, CFPB, and
NCUA, in conjunction with state bank and state
credit union regulators, issued a Joint Statement on
Managing the LIBOR Transition that emphasized
the expectation that supervised institutions with
LIBOR exposure continue to progress toward an
orderly transition away from LIBOR. The ARRC
also recommended in October 2021 that market
participants “act now to slow their use of” USD
LIBOR before the end of the year. Continued
issuance of instruments that create or extend LIBOR
exposure—even those that mature prior to cessation
of LIBOR including in particular instruments
that routinely are rolled over or extended—is
inconsistent with guidance from regulators and
recommendations from the ARRC, delays the
inevitable work required to transition to alternative
rates, and unnecessarily increases exposures to a
rate that will cease to be published in the future.
A third risk relates to legacy contracts without robust
fallback provisions in the event of LIBOR’s cessation.
Market participants with significant exposure to
USD LIBOR maturing after cessation dates will
be vulnerable if they do not take action, where
feasible, to transition these contracts. The state of
New York has enacted legislation to help transition
such legacy contracts governed by New York law to
SOFR. The state of Alabama also passed legislation
substantively identical to the New York bill. However,
it is unclear how effective these laws will be in fully
addressing the transition for contracts subject to
their provisions, and legal issues may remain for
contracts governed by the laws of other jurisdictions.
Contractual fallback provisions may not contemplate
the need for an alternative rate or may include
provisions that probably cannot be operationalized
in the event of LIBOR’s cessation, like the polling of
LIBOR panel banks by the issuer. In addition, while
new floating rate note issuances have increasingly
included more robust contract fallback language,
some new issuances in 2021 still did not include
these provisions, putting issuers and investors at
risk. Securitized products are further complicated,
as legacy contracts may require the consent of all
parties to amend the transaction and new issuance
continues to use legacy language that may not be
feasible to implement. Revising the documents for
these products would require significant effort and

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expense, and in most cases, it may not be possible
to contact and obtain the required consent from all
parties involved; the slow adoption of more robust
fallback language in these instruments, therefore,
presents a particular risk.
Consumer exposures to LIBOR, most commonly
through adjustable-rate mortgages, present a special
set of considerations in addition to those discussed.
Noteholders will need to take care in working to
ensure that consumers are treated fairly and that the
transition is explained clearly. The ARRC is working
with consumer groups, lenders, investors, and
regulators to achieve a smooth LIBOR transition.
On June 4, 2020, the CFPB issued a Notice of
Proposed Rulemaking and FAQs relating to the
LIBOR transition. The CFPB is continuing work on
the final rule, which would amend Regulation Z to
address the anticipated expiration of LIBOR and
expects to issue it in January 2022. The FAQs pertain
to compliance with existing CFPB regulations for
consumer financial products and services impacted
by the anticipated LIBOR discontinuation and
resulting need to transition to other indices.

Recommendations
With the cessation dates for LIBOR set and with
U.S. regulators having issued guidance, market
participants should execute plans to transition to
alternative reference rates. Market participants
should understand the exposure of their firms
to LIBOR in every business and function, assess
the impact of LIBOR’s cessation or degradation
on existing contracts, and take available steps to
remediate risks from existing contracts that do not
have robust fallback provisions to transition the
contract to an appropriate alternative rate. It is
also important that participants consider potential
LIBOR exposure in services provided by third
parties, such as contract servicing, systems, and
models. Market participants should evaluate whether
any new agreements contain sufficiently robust
fallback provisions, such as those endorsed by the
ARRC, to mitigate risk that the contract’s interest
rate benchmark becomes unavailable. Market
participants should monitor legal developments that
address the transition of contracts tied to LIBOR
that lack fallback provisions or for which parties
failed to negotiate an alternative rate. Market
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participants that do not execute plans for this
transition could face significant legal, operational,
and economic risks.
Financial institutions should cease issuing
instruments linked to LIBOR as soon as practicable
and no later than December 31, 2021. In selecting
a reference rate to replace LIBOR, the Council
recommends that market participants only utilize
alternative reference rates with deep underlying
volumes and use alternative reference rates in ways
that are fit for the purpose of the rates’ designs.
The ARRC has recommended SOFR because it
provides a robust rate, suitable for use in most
products and with underlying transaction volumes
that are unmatched by other LIBOR alternatives.
The Federal Reserve, OCC, and FDIC previously
communicated that a supervised institution may use
any reference rate for its loans that the institution’s
management determines is appropriate based on its
funding model and customer needs, while several
Council members have emphasized that derivatives
and capital markets should move to SOFR given its
robustness. The Council advises lenders, borrowers,
and other market participants to consider the use
of SOFR-based rates. If market participants use
a rate other than SOFR, they should ensure that
they understand how their chosen reference rate is
constructed, be aware of any fragilities associated
with that rate, and use strong fallback provisions in
their contracts. Market participants should conduct
a comprehensive evaluation before adopting any
alternative reference rate. Such an evaluation
would, at a minimum, review the alternative rate’s
fitness for purpose, ensure that the rate is based
on a sufficiently active market with sufficient
transaction volumes, assess the adequacy of the
representativeness of the underlying interest, and
evaluate the resilience of the rate during times
of stress. Individual institutions should review
how alternative rates fit into their internal risk
management guidelines, business strategies, and risk
appetite.
The Council commends the efforts of the ARRC and
recommends that it continue to facilitate an orderly
transition to alternative reference rates. Council
member agencies should determine whether
regulatory relief is required to encourage market

participants to address legacy LIBOR portfolios.
Council member agencies should also continue to
use their supervisory authority to understand the
status of regulated entities’ transition from LIBOR,
including their legacy LIBOR exposure and plans to
address that exposure.

5.5.3 Financial Market Structure
Advances in information and communications
technologies, as well as regulatory developments,
have altered the structure of financial markets
over the last decade. The Council and member
agencies are closely monitoring how changes in
market structure have affected the robustness and
efficiency of capital markets and the stability of the
financial system. The extreme volatility in financial
markets after the onset of the pandemic last year has
further emphasized the importance of ensuring that
appropriate market structures are in place so that
financial markets can function effectively during
stress events.

Interlinkages Among Dollar Funding Markets
Some market participants are active in both secured
and unsecured short-term funding markets.
Commercial banks and the FHLBs operate in
the secured repo market as well as the unsecured
federal funds market. Other institutions operate
only in certain markets: MMFs lend in the repo
and the Eurodollar markets but cannot participate
in the federal funds market, while borrowing
options in dollar funding markets may be limited
to the repo market for some entities such as hedge
funds. In addition, since the 2008 financial crisis,
new regulations on bank capital and liquidity,
structural reforms in MMFs, and a new operating
environment for bank-affiliated broker-dealers have
fundamentally altered how market participants
interact and the various interlinkages among the
federal funds market, the repo market, and the
Eurodollar market. Given the myriad of participants
and strong interlinkages between them, disruptions
in one market can transmit to another.
There are benefits from interdependencies among
markets, including enhanced price discovery and
more options for hedging risks. At the same time,
interdependencies create transmission risks from

volatile or inaccurate pricing that have the potential
to amplify shocks across different markets.

Pressures on Dealer Intermediation
Traditionally, market-making and arbitrage
mechanisms involving securities dealers have helped
in the orderly functioning of the secondary market
for Treasury and MBS. Bank-affiliated brokerdealers are also the principal participants in the
tri-party and general collateral finance repo markets
that use these securities as collateral.
However, two developments in recent years have
raised the volume of transactions relative to dealer
intermediation capacity. First, issuance volumes
of these marketable securities, especially Treasury
securities, have increased significantly, and the
pace of issuance has risen further since the onset
of the pandemic. Second, large banks have taken
action to limit balance sheet growth in light of
capital requirements designed to constrain leverage,
resulting in major bank-affiliated broker-dealers
having reduced the portion of their balance sheet
that is allocated to trading and repo transactions.
Together, these developments may have contributed
to episodes of illiquidity in Treasury, MBS, and
corporate bond markets in March 2020. Market
disruptions not only have implications for financial
stability but also affect the implementation of
monetary policy.

Role of Non-Traditional Market Participants
Non-traditional market participants, including
principal trading firms, play an increasingly
important role in securities and other markets.
These firms may improve liquidity and investor
outcomes under normal circumstances, but
they may also introduce new potential risks. For
instance, the trading strategies that non-traditional
market participants employ and the incentives and
constraints that they operate under may not be as
well understood, leading to uncertainty about how
these firms might behave during periods of market
stress.

Disruptive Events in Securities Markets
An episode of stress in the Treasury market in
February 2021 is a recent example of occasional
abrupt disruptions to asset prices and liquidity
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conditions in securities markets. Other examples
include but are not limited to episodes in the
Treasury market in March 2020 and October 2014,
in the equity market in May 2010, and some other
less serious episodes more recently in gold and OTC
markets. Trading strategies may have contributed to
these episodes, though assessing these contributions
is difficult because the details of trading strategies
and operations are generally proprietary. The
continued occurrence of these episodes may signal
a vulnerability regarding the resilience of key
financial markets.

Consideration of Central Clearing in the U.S.
Treasury Market
Significant parts of the Treasury market are not
centrally cleared, including transactions between
dealers and their customers, and transactions on
market platforms involving principal trading firms.
Expansion of central clearing could have a range
of benefits, including reducing chains of settlement
failures and counterparty risk concerns in times of
stress. In addition, to the extent that dealers hold
more capital against bilaterally cleared trades than
centrally cleared trades, central clearing could
improve their ability to provide liquidity particularly
for repos. Whether more widespread central
clearing would benefit Treasury market resilience
is a question that must be studied carefully, like any
significant change in market structure. Study of
these questions should include understanding the
factors that have limited central clearing to date,
including concerns regarding increased costs and
operational burdens.

Recommendations
The Council recommends that member agencies
continue to review market structure issues that
may contribute to market volatility in key markets,
including short-term funding, Treasuries, MBS, and
corporate bond markets, and study the interlinkages
between them. Market participants should also
regularly assess how market developments affect
the risk profile of their institutions. The Council
recommends that financial regulators continue to
monitor and evaluate ongoing changes that might
have adverse effects on markets, including on
market integrity and liquidity, or that might underly
flash events. In the Treasury market, the Council
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recommends that agencies consider whether an
increase in central clearing would enhance the
resilience of the market and assess the potential
impact on liquidity of such an increase.

5.5.4 Cybersecurity
The financial sector, like other critical sectors,
is vulnerable to ransomware and other malware
attacks, denial of service attacks, data breaches,
and other events. Such incidents have the potential
to impact tens or even hundreds of millions of
Americans and result in financial losses of billions
of dollars due to disruption of operations, theft, and
recovery costs.
Ransomware attacks continue to rise worldwide, with
cyber criminals targeting critical infrastructure,
small businesses, hospitals, and schools. Over
the past year, firms victimized by ransomware
attacks include Colonial Pipeline and the meat
processing firm JBS. The ongoing drumbeat of these
cyberattacks is evidence of the danger they present
to the U.S. economy and financial system. While the
attacks on Colonial and JBS only briefly affected
commodity markets, a destabilizing cybersecurity
incident could potentially threaten the stability
of the U.S. financial system through at least three
channels:
First, the incident could disrupt a key financial
service or utility for which there is little or
no substitute. This could include attacks on
central banks; exchanges; sovereign and subsovereign creditors, including U.S. state and local
governments; custodian banks, payment clearing
and settlement systems; or other firms or services
that lack substitutes or are sole service providers.
Second, the incident could compromise the integrity
of critical data. Accurate and usable information
is critical to the stable functioning of financial
firms and the system; if such data is corrupted
on a sufficiently large scale, it could disrupt the
functioning of the system. The loss of such data also
has privacy implications for consumers and could
lead to identity theft and fraud, which in turn could
result in a loss of confidence.
Third, a cybersecurity incident that causes a loss
of confidence among a broad set of customers

or market participants could cause customers or
participants to question the safety or liquidity of
their assets or transactions, and lead to significant
withdrawal of assets or activity.
Looking ahead, a greater prevalence of teleworking
compared with the pre-pandemic period could
result in vulnerabilities from that source remaining
elevated. The implementation of teleworking
strategies using virtual private networks, virtual
conferencing services, and other technologies
can increase cybersecurity vulnerabilities, insider
risks, and other operational exposures. Firms have
increased their reliance on third-party service
providers to implement these strategies, and for a
variety of other services as well (see Section 3.6.2.5).
The interdependency of networks and technologies
supporting critical operations magnifies cyber
risks, threatening the operational capabilities of
individual institutions and the financial sector as
a whole. Rapid adoption of new technologies and
interconnected platforms used to support hybrid
work models have enhanced the efficient provision
of financial services but have simultaneously
increased complexity of information technology and
operations.

Recommendations
Improving the cybersecurity and operational
resilience of the financial sector requires continuous
assessment of cyber vulnerabilities and critical
connections across firms. Sustained senior-level
commitment to mitigate cybersecurity risks and
their potential systemic implications is necessary at
both member agencies and private firms.
The Council recommends that federal and state
agencies continue to monitor cybersecurity risks
and conduct cybersecurity examinations of financial
institutions and financial infrastructures. These
actions aim to ensure, among other things, robust
and comprehensive cybersecurity monitoring,
incident response and recovery processes,
considering new risks posed by the pandemic,
ransomware incidents, and supply chain attacks.
The Council encourages continued cooperation
across government agencies and private firms to
improve cybersecurity and operational resilience.
Controls that may help organizations improve

include adoption of immutable backups and
stronger authentication and authorization controls.
Controls such as these help organizations mitigate
the risk of cybersecurity incidents at any one
organization, and enhance the financial sector’s
cybersecurity posture overall.
The Council supports the ongoing work of
partnerships between government agencies and
private firms, including the Financial and Banking
Information Infrastructure Committee (FBIIC),
the Financial Services Sector Coordinating Council,
and the Financial Services Information Sharing
and Analysis Center (FS-ISAC). These partnerships
focus on improving the financial sector’s ability
to rapidly respond to and recover from significant
cybersecurity incidents, thereby reducing the
potential for such incidents to threaten the stability
of the financial system and the broader economy.
The Council recommends that the FBIIC continue
to promote processes to strengthen response and
recovery efforts, including efforts to address the
systemic implications of significant cybersecurity
incidents. The FBIIC should continue to work
closely with the Department of Homeland Security,
law enforcement, and industry partners to carry
out regular cybersecurity exercises recognizing
interdependencies with other sectors, such as
telecommunications and energy.
The Council further recommends that agencies
work to improve information sharing among private
firms and government partners. Sharing timely and
actionable cybersecurity information can reduce
the risk that cybersecurity incidents occur and
can mitigate the impacts of those that do occur.
Treasury and relevant agencies should carefully
consider how to appropriately share information
and, where possible, continue efforts to declassify
(or downgrade classification of) information
on incidents, consistent with national security
imperatives. The Council encourages efforts to
enhance information sharing with the FS-ISAC
and its growing community of financial sector
institutions.
Financial institutions are rapidly adopting new
technologies, including cloud computing and
artificial intelligence. The Council supports the

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efforts of the FBIIC Technology Working Group,
which examines the extent to which financial
services firms using emerging technologies
introduce new cyber vulnerabilities into the
financial services critical infrastructure. The
Council recommends agencies consider how such
emerging technologies change the sector’s risk
profile and consider the need for any corresponding
change to supervision and regulation. The growing
use of artificial intelligence by financial institutions
was the subject of a joint request for information
by the Federal Reserve, CFPB, FDIC, NCUA, and
OCC in March 2021 to gain input from stakeholders
including financial institutions, trade associations,
consumer groups, and others.

5.5.5 Data Gaps and Challenges
Episodes of acute financial stress in 2008 and 2020
have exposed several major gaps and deficiencies in
the range and quality of data available to financial
regulators to identify emerging risks in the financial
system. These gaps and shortcomings include
firm-level structure and ownership information;
transaction data in certain important financial
markets, including short-term funding, securities
lending arrangements, repo contracts, Treasury
securities, and OTC derivatives; and limitations in
financial statement reporting for certain types of
institutions. Areas of financial innovation are often
not well captured by existing data, particularly if
they involve firms that are subject to limited or
no oversight by financial regulators. In addition,
this past year, the failure of the family investment
fund Archegos has raised questions about whether
there is adequate transparency to assess the market
impacts of private investment vehicles, including
family funds. Financial institutions may benefit from
collecting more granular and higher-frequency
disclosures, as available measures may not be
capturing important risks. Often, the usefulness
of existing data is limited by institutional or
jurisdictional differences in reporting requirements.
These types of inconsistencies can create challenges
for data sharing and increase the reporting burden
on market participants.
Data gaps can present vulnerabilities to the financial
system. For example, incomplete data on Treasury
market developments can cause market participants

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to pull back out of uncertainty in volatile market
conditions, reducing liquidity provision and
amplifying volatility. Progress has been made on
this front. Treasury market data are now reported to
TRACE by broker-dealer FINRA members, though
publicly available information is still limited and
other participants such as banks do not yet report
data.
Council member agencies have worked with each
other, regulators in other jurisdictions, and financial
companies on developing standards and protocols
and carrying out data collection initiatives. Staff of
the OFR, CFTC, SEC, Federal Reserve, FDIC, OCC,
and CFPB, as members of the Regulatory Oversight
Committee, meet regularly with their international
regulatory counterparts on the ROC to oversee
implementation of the LEI, UTI, UPI, and CDE
standards. Member agencies have also been working
to facilitate the adoption of LEIs and Universal
Loan Identifiers for mortgage loans.

Recommendations
High-quality financial data is an essential input
into the financial regulatory process. The Council
and member agencies rely on data collected from
market participants to monitor developments in the
financial system, identify potential risks to financial
stability, and prioritize and execute supervisory
and examination work. The Council encourages
member agencies to collaborate and expand their
data resources and analytical capabilities to assess
interconnectedness and concentration risks in their
respective areas of responsibility.
The establishment of uniform market standards
for digital reporting, assurance, and collection
enhances the usefulness of market data and reduces
the reporting, access, and analysis burdens on
market participants. The failure to adopt broadly
shared granular data standards for financial
products, transactions, and entities can lead to
unnecessary costs and inefficiencies, such as
duplicate reporting, and may impede the ability to
aggregate data for risk-management and reporting
purposes. The Council recommends that regulators
and market participants continue to partner to
improve the scope, quality, and accessibility of
financial data, as well as data sharing among

relevant agencies. These partnership efforts include
implementing new standardized identifiers such as
the UTI, UPI, and CDE; developing and linking data
inventories; and implementing industry standards,
protocols, and security for secure data sharing.
Broader adoption of the LEI by financial market
participants continues to be a Council priority. The
LEI enables unique and transparent identification of
legal entities participating in financial transactions.
ULIs will make it possible to track loan records
through a loan’s life cycle. The Council recommends
that member agencies update their regulatory
mortgage data collections to include LEI and
ULI fields. The Council also recommends that
member agencies promote adoption and use of
standards in mortgage data, including consistent
terms, definitions, and data quality controls, which
will make transfers of loans or servicing rights
less disruptive to borrowers and investors. Finally,
the LEI remains under consideration for a role in
authenticating digital identities.
Important initiatives are underway at member
agencies that will improve the functioning of
financial markets. Among these is the collection of
repo transaction data, which is used to create SOFR
benchmark rates for use by market participants. The
Council recommends that member agencies continue
to work to harmonize domestic and global derivatives
data for aggregation and reporting and ensure
that appropriate authorities have access to trade
repository data needed to fulfill their mandates.
The Council encourages pension regulators and
FASB to improve the quality, timeliness, and depth
of disclosures of pension financial statements and
portfolio holdings.
The Council recommends that member agencies
review steps that could be taken to improve
transparency about the activities of leveraged
investment vehicles including family offices and
determine any financial stability implications of
those activities. The Council commends the steps
taken by the SEC to implement new rules related to
security-based swaps.
Finally, as noted in Section 5.1, the Council
recognizes the critical importance of taking prompt

action to improve the availability of data and
measurement tools pertaining to climate-related
financial risks.

5.5.6 Financial Innovation
Financial innovation can offer considerable benefits
to consumers and providers of financial services
by reducing the cost of certain financial services,
increasing the convenience of payments, and
potentially increasing the availability of credit. But
innovation can also create new risks that need to be
understood.

5.5.6.1 Digital Assets
The development of digital assets and the use
of associated distributed ledger technology may
present the opportunity to promote innovation and
further modernization of financial infrastructure.
Regulatory attention and coordination are
critically important in light of the quickly evolving
market for digital assets. As with all technological
advances, the advances associated with digital assets
are accompanied by both benefits and risks, and
regulation should seek to balance innovation with the
risks it presents, including those to financial stability.
Digital asset arrangements vary widely. The risk
posed by each depends, among other things, on
the structure of the asset’s consensus mechanism,
and the risk management practices of participants.
Digital assets have garnered interest as a potential
tool for developing new products, services, and
infrastructures; however, it appears that speculation
drives the majority of digital asset activity at this
time. Like all highly speculative investments, the
prices of some digital assets may be highly volatile.
In general, digital assets may also be subject to the
risk of fraud and market manipulation. Digital
asset networks can be international in scope and
include a diverse set of participants, including nontraditional financial service providers, heightening
illicit financing and national security risks related to
anti-money laundering, tax compliance, sanctions,
and use of digital assets in ransomware attacks.
The significant number of counterparties could
introduce complexities in governance structures
and incentives, as well as transfer risk to other
components of the system. Digital asset networks
may also be subject to operational risks, including
disruptions to the technologies that underlie the

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platform and cybersecurity. These events could
prove disruptive to users and, in an extreme case,
undermine confidence in the system as a whole.
The use of leverage to obtain exposure to highly
volatile digital assets increases the risk of a fire sale
in the underlying asset: a decrease in asset values
could trigger a cycle of sales to meet margin calls
and further price declines, possibly spilling into
other digital assets. Participants may use various
arrangements to obtain leveraged investments in
digital assets, including through some decentralized
finance (DeFi) arrangements. Links between
traditional financial institutions, markets, and
infrastructure to various digital assets and DeFi
projects may create a channel for a risk event in digital
assets to spread to the broader financial system.
Stablecoins have been an important part of digital
asset development over the past few years. Some
stablecoin arrangements are already sizeable, and
many stablecoins are growing. A run on stablecoins
during strained market conditions may have
the potential to amplify a shock to the economy
and the financial system. Today, stablecoins are
predominantly used in the United States to facilitate
trading, lending, and borrowing of other digital
assets. There could also be various risks from the
use of a stablecoin as a payment system, including
operational, settlement, and liquidity risks (see
Box G). Risks to payment systems, if not properly
managed, can present financial stability risks, given
the importance of a well-functioning payments
system in facilitating commercial activities.

Recommendations
The Council recommends that federal and state
regulators continue to examine risks to the financial
system posed by new and emerging uses of digital
assets, including risks from connections with
banking services, financial markets, and financial
intermediaries, arising directly or indirectly; risks
to consumers, investors, and businesses associated
with potential losses or instability in market
prices; illicit financing risks; risks to national
security; cybersecurity and privacy risks; and risks
to international monetary and payment system
integrity. The Council encourages coordination

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among U.S. financial regulators to address risks
arising from digital assets.
The Council has reviewed the Report on Stablecoins
published by the PWG, the FDIC, and the OCC on
November 1, 2021, and recommends that its member
agencies consider the recommendations in that
report. The Council will further assess and monitor
the potential risks of stablecoins and recommends
that its members consider appropriate actions within
each member’s jurisdiction to address those risks
while continuing to coordinate and collaborate on
issues of common interest. The Council will also be
prepared to consider steps available to it to address
risks outlined in the PWG Report on Stablecoins in
the event comprehensive legislation is not enacted.
The Council recommends that state and federal
regulators review available regulations and tools that
could be applied to digital assets and their experience
to date in using those tools.

Box G: Stablecoins

The PWG, along with the FDIC and the OCC, recently
issued an interagency Report on Stablecoins
to examine the current regulation of stablecoins,
identify risks posed by stablecoins, and develop
recommendations for addressing those risks.
Stablecoins are digital assets that are designed to
maintain a stable value relative to a national currency
or other reference assets. As discussed in Section
3.6.2.1, the market capitalization of stablecoins
issued by the largest stablecoin issuers exceeded
$127 billion as of October 2021, reflecting a nearly
500 percent increase over the preceding twelve
months. Today, stablecoins are predominantly used
in the United States to facilitate trading, lending, and
borrowing of other digital assets.
Proponents of stablecoins believe that stablecoins
could become widely used by households and
businesses as a means of payment. If well-designed
and appropriately regulated, stablecoins could
support faster, more efficient, and more inclusive
payments options. The transition to broader use of
stablecoins as a means of payment could occur
rapidly due to network effects or relationships
between stablecoins and existing user bases or
platforms. The potential for the increased use of
stablecoins as a means of payment raises a range
of prudential concerns, in addition to concerns
regarding market integrity, investor protection, and
illicit finance.
A stablecoin requires users’ confidence in order
to serve as a reliable store of value or means of
payment. This confidence could be undermined by
factors including the use of reserve assets that fall
in price or become illiquid; a failure to appropriately
safeguard reserve assets; a lack of clarity regarding
the redemption rights of stablecoin holders; and
operational risks related to cybersecurity and the
collecting, storing, or safeguarding of data.
The failure of a stablecoin to perform according to
expectations would harm users of that stablecoin and
could pose systemic risk. The mere prospect of a

stablecoin not performing as expected could result
in a “run” on the stablecoin, i.e., a self-reinforcing
cycle of redemptions and fire sales of reserve assets.
Moreover, failures or disruptions may not be isolated.
For example, where stablecoin arrangements rely on
digital asset trading platforms for various functions—
such as to distribute stablecoins, enable conversion
into national currency, and facilitate arbitrage
mechanisms—failures or disruptions to the digital
asset trading platform could disrupt the stablecoin,
and vice versa. Fire sales of reserve assets could
disrupt critical funding markets, depending on the
type and volume of reserve assets involved. Risks to
the broader financial system could rapidly increase
as well, particularly in the absence of prudential
standards.
The transfer mechanisms used in stablecoin
arrangements (and potentially other aspects of the
arrangements’ activities) can provide opportunities
for efficient payment processing but also can pose
risks to their participants and the broader financial
system. Payment stablecoins face many of the same
basic risks as traditional payment systems, including
credit risk, liquidity risk, operational risk, risks arising
from improper or ineffective system governance, and
settlement risk. These risks may remain inadequately
addressed for stablecoin arrangements due to the
lack of consistent risk-management standards,
the number of key parties that may be involved,
and operational complexity. When not managed
comprehensively, these risks can make payment
systems less available and less reliable for users,
and they can create financial shocks or operate as a
channel through which financial shocks spread.
The potential for an individual stablecoin to scale
rapidly raises additional sets of policy concerns
regarding concentration of economic power. First, a
stablecoin issuer or a key participant in a stablecoin
arrangement (e.g., a custodial wallet provider) could
pose systemic risk if widely adopted at rapid scale.
This means that the failure or distress of such an

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Box G: Stablecoins (continued)

entity could adversely impact financial stability and
the real economy. Second, the combination of a
stablecoin issuer or wallet provider and a commercial
firm could lead to an excessive concentration
of power to the detriment of broader market
competition. Third, a stablecoin that becomes widely
adopted as a means of payment could present
concerns about anti-competitive effects. For example,
users of a widely adopted stablecoin might face
undue frictions or costs in the event that they choose
to switch to other payment services or products.
Concerns about anti-competitive effects are thus
likely to be greater absent interoperability standards
for stablecoins and stablecoin arrangements.
Today, stablecoins are not subject to a consistent
set of prudential regulatory standards that address
their risks. The number of different key parties
that may be involved in an arrangement and the

5.5.6.2 Use of Technology in Financial Services
Technology companies providing financial services
are another source of innovation in financial
markets (see Section 3.6.2.4). Innovative technology
companies may offer benefits to the financial system
such as fostering inclusion and improving small
business access to credit. These companies may
seek to compete directly with incumbent financial
service providers, and their market presence could
grow significantly. Currently, these firms may not
be subject to the same types of financial services
regulations that govern incumbent financial service
providers.
One area in which technology companies have been
active is in the provision of third-party services for
financial firms. In general, financial institutions
that contract with a third-party service provider are
exposed to risk that a third-party service provider
is unable to perform as intended. Concentration
in the use of technological innovations may
increase operational risks associated with financial
institutions’ use of third-party service providers.
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operational complexity of these arrangements pose
challenges for supervisory oversight. Critical creation,
governance, and payment functions could be widely
distributed among the jurisdictions of different
domestic and international regulators. In such
fragmented systems and under conditions of rapid
growth and change, regulation and supervision are
more complex, less efficient, and more susceptible to
arbitrage.
Altogether, the benefits and potential risks associated
with stablecoins and other digital assets underscore
the importance of U.S. regulators adopting an
approach to digital assets that will provide for
responsible innovation in a manner that is safe
and fair and complies with all applicable laws. A
comprehensive regulatory framework promotes
responsible innovation and functional payment
systems, regardless of the underlying technology.

When technology innovations rely on relatively few
companies to provide supporting infrastructure,
the risk grows that financial or operational failures
or faults at companies providing supporting
infrastructure could disrupt the activities of
multiple financial institutions or financial markets.
In addition, business relationships with technology
firms, depending on the products and services
offered, may introduce other risks relating to
compliance, BSA/AML, and reputation that require
a commensurate risk management framework.
Finally, technology has increasingly enabled retail
investors to participate at higher rates in U.S.
equity markets, particularly in day trading and
self-directed trading. This trend has accelerated
during the COVID-19 pandemic. Innovations that
democratize access to trading markets and increase
the diversity of participants can have positive
benefits. However, some emerging vulnerabilities
may have been highlighted by the January 2021
episode of market volatility, which involved heavy
trading in certain equities, including GameStop

Corp., that were discussed widely on social media. In
this episode, asset price movements do not appear
to have had any systemic impacts. However, sudden
asset price movements unrelated to fundamental
news could represent a vulnerability if they lead to
cascading impacts by causing asset liquidations or
putting stress on financial institutions. This episode
raises the question of how social media coordination
compares to other more traditional forms of
coordination that existing policy tools are designed
to address.

identify additional ways to support information
sharing among state and federal regulators.
The Council encourages continued coordination
among federal and state regulators to
support responsible financial innovation and
competitiveness, promote consistent regulatory
approaches, and identify and address potential risks
that arise from such innovation.

5.6

Recommendations
The Council encourages financial regulators to
continue to be proactive in evaluating new products
and services and in monitoring how responsible
innovation can benefit investors and consumers,
regulated entities, and financial markets. The
Council also encourages relevant authorities to
evaluate the potential effects of new financial
products and services on financial stability,
including risks relating to operations, compliance,
BSA/AML, and reputation. Agencies should ensure
that their supervision, including monitoring and
data collection systems, identifies risks associated
with financial innovations. To ensure comprehensive
visibility into innovation across the financial system
and avoid regulatory fragmentation, regulators
should share relevant information on financial
innovation as appropriate with the Council and
other agencies.
The authority to supervise third-party service
providers varies across financial regulators. To
further enhance third-party service provider
information security and address other critical
regulatory challenges, the Council recommends
that Congress pass legislation that ensures that
the FHFA, NCUA, and other relevant agencies
have adequate examination and enforcement
powers to oversee third-party service providers.
The importance of ensuring adequate powers
of this kind was underscored this past year by
the expansion of lending activities permitted by
credit union service organizations. The Council
also recommends that federal banking regulators
continue to coordinate third-party service provider
examinations, work collaboratively with states, and

Managing Vulnerabilities amid Uneven
and Volatile Global Growth

Global economic activity in the COVID-19 era
has been unusually volatile, with periods of
economic shutdowns followed by rapid growth amid
reopening. Looking forward, the outlook for global
growth is characterized by elevated uncertainty, with
the potential for continued volatility and unevenness
of growth across countries and sectors. Financial
institutions may need to manage the exposure of
their businesses to vulnerabilities that could arise in
this uncertain macroeconomic environment.
Amid the rapid pace of the global economic
recovery over the past year, supply constraints
and labor shortages have become widespread and
particularly severe in some sectors such as auto
production and have led to higher inflation in many
countries. This experience raises the risk that the
recent surge in inflation will continue to be higher
than expected, particularly if supply constraints
are more severe and persist longer than currently
anticipated. The advent of higher inflation also
raises the question of whether longer-term inflation
expectations of households and businesses will
rise or become unanchored. If higher inflation
or inflation expectations were to lead to higher
policy rates and longer-term yields, borrowing costs
for households and businesses could rise, while
financial institutions might experience losses on
their existing asset holdings. As a result, the global
economic recovery could lose momentum. A rapid
or unexpected rise in interest rates could induce
particularly sharp contractionary forces.
Overall, financial vulnerabilities in China are
high. China’s increased use of macroprudential
regulations have tightened liquidity conditions—

Pote ntia l Eme rging Thre a ts, Vulne ra b ilitie s, a nd Counc il R e c omm endat i ons

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especially for property developers, many of
whom are overleveraged. Over the past year, the
required recapitalization of China Huarong Asset
Management Co. and the rapidly deteriorating
financial condition of China Evergrande Group,
one of China’s largest and most indebted property
developers, have highlighted the tensions that
Chinese regulators face in balancing the need to
reduce medium- and long-term financial stability
risks while limiting spillovers to the real economy
and the financial system. Given the ample resources
available to the Chinese authorities, there is a
good chance that the Chinese authorities will be
successful in limiting spillovers. However, were a
hard landing to occur in China, it could be expected
to include a decline in Chinese asset valuations
and stress in the Chinese banking sector. Such
developments would likely have substantial negative
impacts on the global economy and financial system,
given the size of the Chinese economy, its demand
for commodities, and its centrality to global supply
chains.
The pandemic also continues to directly shape the
global growth outlook. The potential development
of more virulent strains of the COVID-19 carries
the risk of further volatility in economic activity,
including economic shutdowns and reopenings,
possibly in a piecemeal fashion, or further supply
chain disruptions. Many advanced foreign
economies have used fiscal powers to help smooth
out the effects of this volatility so far in the
pandemic but may face difficulty balancing the
appropriate level and duration of further support
against longer-run debt sustainability. The global
vaccination campaign will limit the likelihood of
further shutdowns, but vaccination has been uneven
across countries. The generally weaker vaccination
rates in emerging market economies (EMEs) pose
greater risks to the outlook for their recoveries.
EMEs may also experience stresses as they deal
with potentially volatile capital flows against the
backdrop of uneven global growth and possible
policy spillovers from large, advanced economies.
Volatile or uneven global growth could affect
the U.S. financial system in a few ways. Losses at
financial institutions in advanced foreign economies
caused by slow or interrupted growth, or from long-

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run debt sustainability issues, could spill over to
the U.S. financial system through direct exposures
and counterparty risks. Direct U.S. exposures to
the Chinese financial sector are more limited, and
therefore the direct consequences of a Chinese
hard landing for U.S. financial stability appear
manageable. However, U.S. economic performance
could be affected indirectly if developments in
China or other countries weigh on the global
economy or global market confidence. Finally, with
nonbank financial institutions playing an increasing
role in financing foreign activity, the toolkits for
addressing risks related to these institutions and
their effect on the U.S. may not be as well developed
as those for dealing with the risks stemming from
banks.

Recommendations
The Council recommends that member agencies
ensure that the financial institutions they oversee
are attentive to the risks posed by uneven or volatile
global growth, including higher levels of inflation
and interest rates, stress at foreign financial
institutions including banks and nonbanks, and
changes in global economic activity and market
confidence. Supervisors should review in particular
the risks faced by large banks with global footprints
and trading operations. Market regulators should
review available steps that could be taken in
anticipation of potential volatility in global funding
flows that might increase stress in funding markets
or engender deleveraging or large-scale asset sales.

6

Abbreviations
ABCP
ABS
Advisers Act
AML
AML Act
ANSI
ARP Act
ARRC
ASC X9
AUM
BHC
BIS
BNPL
BOE
BOJ
BSA
C&I
CAA
CARES Act
CBD
CCAR
CCP
CD
CDC
CDE
CDS
CEA
CECL
CET1
CFPB
CFT
CFTC
CIF
CLF
CLO
CMBS
CME
CMG
Council
CP
CPFF
CPMI

Asset-Backed Commercial Paper
Asset-Backed Security
Investment Advisers Act of 1940
Anti-Money Laundering
Anti-Money Laundering Act of 2020
American National Standards Institute
American Rescue Plan Act of 2021
Alternative Reference Rates Committee
Accredited Standards Committee X9, Inc.
Assets Under Management
Bank Holding Company
Bank for International Settlements
Buy Now, Pay Later
Bank of England
Bank of Japan
Bank Secrecy Act
Commercial and Industrial
Consolidated Appropriations Act of 2021
Coronavirus Aid, Relief, and Economic Security Act of 2020
Central Business District
Comprehensive Capital Analysis and Review
Central Counterparty
Certificate of Deposit
Center for Disease Control
Critical Data Elements
Credit Default Swap
Commodity Exchange Act
Current Expected Credit Losses
Common Equity Tier 1
Consumer Financial Protection Bureau
Countering the Financing of Terrorism
Commodity Futures Trading Commission
Collective Investment Funds
Central Liquidity Facility
Collateralized Loan Obligation
Commercial Mortgage-Backed Security
Chicago Mercantile Exchange Inc.
Crisis Management Group
Financial Stability Oversight Council
Commercial Paper
Commercial Paper Funding Facility
Committee on Payments and Market Infrastructures

Ab brev i at i ons

177

CRE
CUSO
DCM
DFAST
Dodd-Frank Act
DTCC
DTI
EBITDA
ECB
ECIP
EGRRCPA
EME
Enterprises
ESG
ETF
ETN
ETP
EU
Exchange Act
Fannie Mae
FASB
FATF
FBIIC
FBO
FCA
FCM
FCU
FDCPA
FDIC
Federal Reserve
FHA
FHFA
FHLB
FICC
FICO
FICU
FIMA Repo Facility
FinCEN
FIO
FIO Act
FMU
FOMB
FOMC
FRBNY
Freddie Mac

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Commercial Real Estate
Credit Union Service Organizations
Designated Contract Market
Dodd-Frank Act Stress Tests
Dodd-Frank Wall Street Reform and Consumer Protection Act
Depository Trust & Clearing Corporation
Total Monthly Debt to Total Monthly Income
Earnings Before Interest, Taxes, Depreciation, and Amortization
European Central Bank
Emergency Capital Investment Program
Economic Growth, Regulatory Relief, and Consumer Protection Act
Emerging Market Economy
Fannie Mae and Freddie Mac
Environmental, Social, and Governance
Exchange-Traded Fund
Exchange-Traded Note
Exchange-Traded Product
European Union
Securities Exchange Act of 1934
Federal National Mortgage Association
Financial Accounting Standards Board
Financial Action Task Force
Financial and Banking Information Infrastructure Committee
Foreign Banking Organization
Financial Conduct Authority
Futures Commission Merchant
Federal Credit Union
Fair Debt Collection Practices Act
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Federal Housing Administration
Federal Housing Finance Agency
Federal Home Loan Bank
Fixed Income Clearing Corporation
Fair Isaac Corporation
Federally Insured Credit Union
Repo Facility for Foreign and International Monetary Authority
Financial Crimes Enforcement Network
Federal Insurance Office
Federal Insurance Office Act of 2010
Financial Market Utility
Financial Oversight and Management Board for Puerto Rico
Federal Open Market Committee
Federal Reserve Bank of New York
Federal Home Loan Mortgage Corporation

FSB
FS-ISAC
FSOC
FX
G-SIB
GAAP
GAV
GCC
GDP
GHG
Ginnie Mae
GLEIF
GME
GNE
GSE
GSD
HFCAA
HFWG
HTM
IAIS
IAWG
IBA
IBOR
IDIs
IHC
IMF
Investment Company Act
IPO
IOSCO
ISDA
ISO
JGB
LCR
LEI
LEI ROC
LIHTC
LST
M&A
MBS
MBSD
MiFID II
MLF
MMLF
MMF
mREIT

Financial Stability Board
Financial Services Information Sharing and Analysis Center
Financial Stability Oversight Council
Foreign Exchange
Global Systemically Important Bank
Generally Accepted Accounting Principles
Gross Asset Value
Group Capital Calculation
Gross Domestic Product
Greenhouse Gas
Government National Mortgage Association
Global LEI Foundation
Global Monitoring Exercise
Gross Notional Exposure
Government-Sponsored Enterprise
Government Securities Division
Holding Foreign Companies Accountable Act
Hedge Fund Working Group
Held-to-maturity
International Association of Insurance Supervisors
Inter-Agency Working Group for Treasury Market Surveillance
ICE Benchmark Administration
Interbank Offer Rate
Insured Depository Institutions
Intermediate Holding Company
International Monetary Fund
Investment Company Act of 1940
Initial Public Offering
International Organization of Securities Commissions
International Swaps and Derivatives Association
International Organization for Standardization
Japanese Government Bond
Liquidity Coverage Ratio
Legal Entity Identifier
Legal Entity Identifier Regulatory Oversight Committee
Low-Income Housing Tax Credit
Liquidity Stress Test
Merger and Acquisition
Mortgage-Backed Security
Mortgage-Backed Securities Division
Markets in Financial Instruments Directive
Municipal Liquidity Facility
Money Market Mutual Fund Liquidity Facility
Money Market Mutual Fund
Mortgage REITs

Ab brev i at i ons

179

MSP
NAIC
NAV
NBFI
NCUA
NGEU
NGFS
NMDB®
NMS
NSCC
NSFR
OCC
OFR
OIS
ON-RRP
OPEC
OPEC+
OTC
P&C
PBGC
PFMI
PPP
PROMESA
PWG
PWG Report on Stablecoins
QM
RBC
REIT
Repo
RMBS
ROAA
RRC
RWA
S&P
SA-CCR
SBSDR
SCB
SD
SDR
SEC
SEF
SIFMA
SLOOS
SLR
SOFR

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Major Swap Participant
National Association of Insurance Commissioners
Net Asset Value
Nonbank Financial Institution
National Credit Union Administration
NextGenerationEU
Network of Central Banks and Supervisors for Greening the Financial System
National Mortgage Database
National Market System
National Securities Clearing Corporation
Net Stable Funding Ratio
Office of the Comptroller of the Currency
Office of Financial Research
Overnight Index Swaps
Overnight Reverse Repurchase Agreement Facility
Organization of Petroleum Exporting Countries
OPEC and non-OPEC Participating Countries
Over-the-Counter
Property and Casualty
Pension Benefit Guaranty Corporation
Principles for Financial Market Infrastructures
Paycheck Protection Program
Puerto Rico Oversight, Management, and Economic Stability Act
President’s Working Group on Financial Markets
PWG, FDIC, and OCC Report on Stablecoins
Qualified Mortgage
Risk Based Capital
Real Estate Investment Trust
Repurchase Agreement
Residential Mortgage-Backed Security
Return on Average Assets
Regulation and Resolution Committee
Risk-Weighted Asset
Standard & Poor’s
Standardized Approach for Counterparty Credit Risk
Security-Based Swap Data Repository
Stress Capital Buffer
Swap Dealer
Swap Data Repository
Securities and Exchange Commission
Swap Execution Facility
Securities Industry and Financial Markets Association
Senior Loan Officer Opinion Survey
Supplementary Leverage Ratio
Secured Overnight Financing Rate

SRC
SRF
SPAC
SWIFT
TALF
TBA
TDR
TGCR
TIPS
Treasury
UK
ULI
UPB
UPI
USD
USDA
UTI
VA
WAL
WAM
WEO
WTI
YTD

Systemic Risk Committee
Standing Repo Facility
Special Purpose Acquisition Company
Society for Worldwide Interbank Financial Telecommunications
Term Asset-Backed Securities Loan Facility
To Be Announced
Troubled Debt Restructurings
Tri-party General Collateral Rate
Treasury Inflation-Protected Securities
U.S. Department of the Treasury
United Kingdom
Universal Loan Identifier
Unpaid Principal Balance
Unique Product Identifier
U.S. Dollar
U.S. Department of Agriculture
Unique Transaction Identifier
U.S. Department of Veterans Affairs
Weighted Average Life
Weighted Average Maturity
World Economic Outlook
West Texas Intermediate
Year-to-Date

Ab brev i at i ons

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7

Glossary

Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income
typically includes unrealized gains and losses in
available for sale securities; actuarial gains and
losses in defined benefit plans; gains and losses
on derivatives held as cash flow hedges; and gains
and losses resulting from translating the financial
statements of foreign subsidiaries.

Additional Tier 1 Capital
A regulatory capital measure that may include items
such as noncumulative perpetual preferred stock
and mandatory convertible preferred securities
that satisfy the eligibility criteria in the Revised
Capital Rule, as well as related surplus and minority
interests.

(2) both companies are consolidated with a third
company on financial statements prepared in
accordance with such principles or standards; (3)
for a company that is not subject to such principles
or standards, consolidation as described above
would have occurred if such principles or standards
had applied; or (4) a primary regulator determines
that either company provides significant support to,
or is materially subject to the risks or losses of, the
other company.

Asset-Backed Commercial Paper (ABCP)
Short-term debt which has a fixed maturity of up
to 270 days and is backed by some financial asset,
such as trade receivables, consumer debt receivables,
securities, or auto and equipment loans or leases.

Advanced Approaches Capital Framework

Asset-Backed Security (ABS)

The Advanced Approaches capital framework
requires certain banking organizations to use
an internal ratings-based approach and other
methodologies to calculate risk-based capital
requirements for credit risk and advanced
measurement approaches to calculate risk-based
capital requirements for operational risk. The
framework applies to large, internationally active
banking organizations—generally those that
are G-SIBs or with at least $700 billion in total
consolidated assets or at least $75 billion in crossjurisdictional activity with at least $250 billion
in total consolidated assets or at least $10 billion
in total on-balance sheet foreign exposure—and
includes the depository institution subsidiaries of
those firms.

A fixed-income or other type of security which is
collateralized by self-liquidating financial assets that
allows the holder of the security to receive payments
that depend primarily on cash flows from the assets.

Affiliate

Bilateral Repo

In general, a company is an affiliate of another
company if: (1) either company consolidates
the other on financial statements prepared
in accordance with U.S. Generally Accepted
Accounting Principles, the International Financial
Reporting Standards, or other similar standards;

Backwardation
Backwardation is when the current spot price is
trading higher than the futures price. It is most
easily identified by a downward sloping forward
curve. Backwardation, sometimes called inversion
for other commodities, is the opposite of contango.
Contango is when the back end of the futures curve
is priced higher than the nearby months and when
spot prices rise to converge to futures prices. Crude
oil is normally in backwardation while natural gas is
normally in contango.

A repo between two institutions in which
negotiations are conducted directly between the
participants or through a broker, and in which the
participants must agree on the specific securities
to be used as collateral. The bilateral repo market
includes both non-cleared trades and trades cleared


183

through Fixed Income Clearing Corporation’s
delivery versus payment repo service.

Central Counterparty (CCP)
An entity that interposes itself between
counterparties to contracts traded in one or more
financial markets, becoming the buyer to every seller
and the seller to every buyer, thereby ensuring the
performance of open contracts.

Common Equity Tier 1 Capital (CET1)
A regulatory capital measure which includes capital
with the highest loss-absorbing capacity, such as
common stock and retained earnings.

Common Equity Tier 1 Capital Ratio
A ratio which divides common equity tier 1 capital
by total risk-weighted assets. The ratio applies to all
banking organizations subject to the Revised Capital
Rule.

Clearing Bank
A BHC subsidiary that facilitates payment and
settlement of financial transactions, such as check
clearing, or facilitates trades between the sellers and
buyers of securities or other financial instruments or
contracts.

Collateral

An annual exercise by the Federal Reserve to ensure
that institutions have robust, forward-looking capital
planning processes that account for their unique
risks and sufficient capital to continue operations
throughout times of economic and financial stress.

Any asset pledged by a borrower to guarantee
payment of a debt.

Credit Default Swap (CDS)

Collateralized Loan Obligation (CLO)
A securitization vehicle backed predominantly by
commercial loans.

Commercial Mortgage-Backed Security
(CMBS)

A financial contract in which one party agrees to
make a payment to the other party in the event of a
specified credit event, in exchange for one or more
fixed payments.

Defined Benefit Plan

A security which is collateralized by a pool of
commercial mortgage loans and makes payments
derived from the interest and principal payments on
the underlying mortgage loans.

A retirement plan in which the cost to the employer
is based on a predetermined formula to calculate
the amount of a participant’s future benefit. In
defined benefit plans, the investment risk is borne
by the plan sponsor.

Commercial Paper (CP)

Defined Contribution Plan

Short-term (maturity of up to 270 days), unsecured
corporate debt.

Commercial Paper Funding Facility (CPFF)
A funding backstop established by the Federal
Reserve under section 13(3) of the Federal Reserve
Act to facilitate the issuance of term commercial
paper by eligible issuers. The CPFF is structured as a
credit facility to a special purpose vehicle.

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A retirement plan in which the cost to the employer
is limited to the specified annual contribution. In
defined contribution plans, the investment risk is
borne by the plan participant.

Digital Asset
A digital asset is an electronic representation of
value that may be issued or transferred using
distributed ledger technology, including blockchain
technology. Ownership may be established through
cryptographic means. Digital assets include
instruments that may qualify under applicable U.S.
laws as securities, commodities, and security- or
commodity-based instruments such as futures or

swaps. Other industry terms used for these assets
include cryptocurrencies, crypto assets, virtual
currencies, digital currencies, stablecoins, and
crypto tokens.

Dodd-Frank Act Stress Tests (DFAST)
Annual stress tests required by the Dodd-Frank Act
for national banks and federal savings
associations with total consolidated assets of more
than $10 billion.

Dry Powder
The amount of capital that has been committed to a
private capital fund minus the amount that has been
called by the general partner for investment.

Duration
The sensitivity of the prices of bonds and other
fixed-income securities to changes in the level of
interest rates.

Emerging Market Economy (EME)
Although there is no single definition, emerging
market economies are generally classified according
to their state of economic development, liquidity,
and market accessibility. This report has grouped
economies based on the classifications used by
significant data sources such as the MSCI and
Standard & Poor’s, which include, for example,
Brazil, China, India, and Russia.

Exchange-Traded Product (ETP)
An investment fund or note that is traded on an
exchange. ETPs offer continuous pricing—unlike
mutual funds, which offer only end-of-day pricing.
ETPs are often designed to track an index or a
portfolio of assets. ETPs include: (1) exchangetraded funds (ETFs), which are registered as
investment companies under the Investment
Company Act of 1940 (’40 Act); (2) non-’40 Act
pooled investment vehicles, which are generally
trust or partnership vehicles that do not invest in
securities; and (3) exchange-traded notes (ETNs),
which are senior debt instruments issued by
financial institutions that pay a return based on the
performance of a “reference asset.”

Federal Funds Rate
The interest rate at which depository institutions
lend reserve balances to other depository
institutions overnight. The FOMC sets a target range
for the level of the overnight federal funds rate. The
Federal Reserve Bank of New York then uses open
market operations to influence the rate so that it
trades within the target range.

FICO Score
A measure of a borrower’s creditworthiness based
on the borrower’s credit data; developed by the Fair
Isaac Corporation.

Financial and Banking Information
Infrastructure Committee (FBIIC)
The FBIIC consists of 18 member organizations
from across the financial regulatory community,
both federal and state. It was chartered under
the President’s Working Group on Financial
Markets following September 11, 2001 to improve
coordination and communication among financial
regulators, enhance the resilience of the financial
sector, and promote public-private partnership.

Financial Market Infrastructure (FMI)
A multilateral system among participating financial
institutions, including the operator of the system,
used for the purposes of recording, clearing, or
settling payments, securities, derivatives, or other
financial transactions. Under the Dodd-Frank Act,
certain FMIs are recognized as FMUs.

Financial Market Utility (FMU)
An entity, as defined in the Dodd-Frank Act, that,
subject to certain exclusions, “manages or operates a
multilateral system for the purpose of transferring,
clearing, or settling payments, securities, or other
financial transactions among financial institutions
or between financial institutions and the person.”

Fiscal Year
Any 12-month accounting period. The fiscal year for
the federal government begins on October 1 and
ends on September 30 of the following year; it is
named after the calendar year in which it ends.

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185

Futures Contract

High-Quality Liquid Asset

An agreement to purchase or sell a commodity
for delivery in the future: (1) at a price that is
determined at initiation of the contract; (2) that
obligates each party to the contract to fulfill the
contract at the specified price; (3) that is used
to assume or shift price risk; and (4) that may be
satisfied by delivery or offset.

An asset—such as a government bond—which is
considered eligible as a liquidity buffer in the U.S.
banking agencies’ liquidity coverage ratio. Highquality liquid assets should be liquid in markets
during times of stress and, ideally, be central bank
eligible.

Initial Margin
General Collateral Finance (GCF)
An interdealer repo market in which the Fixed
Income Clearing Corporation plays the role of CCP.
Trades are netted at the end of each day and settled
at the tri-party clearing bank. See Tri-party Repo.

Collateral that is collected to cover potential
changes in the value of each participant’s position
(that is, potential future exposure) over the
appropriate closeout period in the event the
participant defaults.

Government-Sponsored Enterprise (GSE)

Initial Public Offering (IPO)

A corporate entity with a federal charter authorized
by law, but which is a privately owned financial
institution. Examples include the Federal National
Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).

The first time a company offers its shares of capital
stock to the general public.

Institutional Leveraged Loan
The term portion of a leveraged loan that is sold to
institutional investors.

Gross Domestic Product (GDP)
The broadest measure of aggregate economic
activity, measuring the total value of all final goods
and services produced within a country’s borders
during a specific period.

Gross Notional Exposure (GNE)
The sum of the absolute values of long and short
notional amounts. The “notional” amount of a
derivative contract is the amount used to calculate
payments due on that contract, just as the face
amount of a bond is used to calculate coupon
payments.

Haircut
The discount, represented as a percentage of par or
market value, at which an asset can be pledged as
collateral. For example, a $1,000,000 bond with a 5
percent haircut would collateralize a $950,000 loan.
The purpose of a haircut is to provide a collateral
margin for a secured lender.

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Interest Rate Swap
A derivative contract in which two parties swap
interest rate cash flows on a periodic basis,
referencing a specified notional amount for a fixed
term. Typically, one party will pay a predetermined
fixed rate while the other party will pay a short-term
variable reference rate which resets at specified
intervals.

Intermediate Holding Company (IHC)
A company established or designated by an FBO
under the Federal Reserve Board’s Regulation Y Y.
Regulation Y Y requires that an FBO with U.S. nonbranch assets of $50 billion or more must hold its
entire ownership interest in its U.S. subsidiaries,
with certain exclusions, through a U.S. IHC.

Legal Entity Identifier (LEI)
A 20-character alpha-numeric code that connects to
key reference information which enables clear and
unique identification of legal entities participating
in global financial markets. The LEI system is
designed to facilitate many financial stability
objectives, including improved risk management

in firms; better assessment of microprudential
and macroprudential risks; expedition of orderly
resolution; containment of market abuse and
financial fraud; and provision of higher-quality and
more accurate financial data.

Margin

Leveraged Buyout (LBO)

Money Market Mutual Fund Liquidity Facility
(MMLF)

An acquisition of a company financed by a private
equity contribution combined with borrowed funds,
with debt constituting a significant portion of the
purchase price.

Leveraged Loan
While numerous definitions of leveraged lending
exist throughout the financial services industry,
generally a leveraged loan is understood to be a type
of loan that is extended to companies that already
have considerable amounts of debt and/or have a
non-investment grade credit rating or are unrated
and/or whose post-financing leverage significantly
exceeds industry norms or historical levels.

In the context of clearing activity, collateral that
is collected to protect against current or potential
future exposures resulting from market price
changes or in the event of a counterparty default.

A facility established by the Federal Reserve under
section 13(3) of the Federal Reserve Act that
provides funding to U.S. depository institutions and
bank holding companies to finance their purchases
of certain types of assets from MMFs under certain
conditions. The MMLF is intended to assist MMFs in
meeting demands for redemptions by investors and
to foster liquidity in the markets for the assets held
by MMFs.

Money Market Mutual Fund (MMF)
A type of mutual fund which invests in short-term,
high-quality, liquid securities such as government
bills, CDs, CP, or repos.

LIBOR
A rate based on submissions from a panel of banks.
LIBOR is intended to reflect the rate at which large,
globally-active banks can borrow on an unsecured
basis in wholesale markets.

Mortgage-Backed Security (MBS)
An ABS backed by a pool of mortgages. Investors
in the security receive payments derived from the
interest and principal payments on the underlying
mortgages.

Liquidity Coverage Ratio (LCR)
A standard to ensure that covered companies
maintain adequate unencumbered, high-quality
liquid assets to meet anticipated liquidity needs for a
30-day horizon under a standardized liquidity stress
scenario.

Mortgage Servicing Company
A company which acts as an agent for mortgage
holders by collecting and distributing mortgage
cash flows. Mortgage servicers also manage defaults,
modifications, settlements, foreclosure proceedings,
and various notifications to borrowers and investors.

Loan-to-Value Ratio
The ratio of the amount of a loan to the value of
the asset that the loan funds, typically expressed as
a percentage. This is a key metric when considering
the level of collateralization of a mortgage.

Mortgage Servicing Right (MSR)
The right to service a mortgage loan or a portfolio
of mortgage loans.

Municipal Bond
Major Swap Participant
A person that is not a swap dealer and maintains
a substantial position in swaps, creates substantial
counterparty exposure, or is a financial entity that is
highly leveraged and not subject to federal banking
capital rules.

A bond issued by states, cities, counties, local
governmental agencies, or certain nongovernment
issuers to finance certain general or project-related
activities.

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187

Net Asset Value (NAV)
An investment company’s total assets minus its total
liabilities.

Net Interest Margin (NIM)
Net interest income as a percent of interest-earning
assets.

Net Stable Funding Ratio (NSFR)
A liquidity standard to promote the funding
stability of internationally active banks, through the
maintenance of stable funding resources relative to
assets and off-balance sheet exposures.

Open Market Operations
The purchase and sale of securities in the open
market by a central bank to implement monetary
policy.

Operational Resilience
The ability of an entity’s personnel, systems,
telecommunications networks, activities or processes
to resist, absorb, and recover from or adapt to an
incident that may cause harm, destruction, or loss of
ability to perform mission-related functions.

Option
A financial contract granting the holder the
right but not the obligation to engage in a future
transaction on an underlying security or real asset.
The most basic examples are an equity call option,
which provides the right but not the obligation to
buy a block of shares at a fixed price for a fixed
period, and an equity put option, which similarly
grants the right to sell a block of shares.

Overnight Reverse Repurchase Agreement
Facility (ON RRPF)
A supplementary policy tool that the Federal Reserve
uses to set the floor on rates to keep the federal
funds rate in the target range set by the FOMC.

Over-the-Counter (OTC)
A method of trading which does not involve a
registered exchange. An OTC trade could occur on
purely a bilateral basis or could involve some degree
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of intermediation by a platform that is not required
to register as an exchange. An OTC trade could,
depending on the market and other circumstances,
be centrally cleared or bilaterally cleared. The
degree of standardization or customization of
documentation of an OTC trade will depend on
the whether it is cleared and whether it is traded
on a non-exchange platform (and, if so, the type of
platform).

Primary Dealer
A financial institution that is a trading counterparty
of the Federal Reserve Bank of New York. Primary
dealers are expected to make markets for the
Federal Reserve Bank of New York on behalf of its
official accountholders as needed, and to bid on a
pro-rata basis in all Treasury auctions at reasonably
competitive prices.

Prudential Regulation
Regulation aimed at ensuring the safe and sound
operation of financial institutions, set by both state
and federal authorities.

Private Debt
Private debt markets refers to direct lending, mostly
to middle-market borrowers, by non-depositories
such as hedge funds, private equity funds, insurance
companies, business development companies, and
other alternative asset managers. Key private debt
categories include direct lending, distressed debt,
mezzanine, special situations, and venture debt.

Public Debt
All debt issued by Treasury and the Federal
Financing Bank, including both debt held by
the public and debt held in intergovernmental
accounts, such as the Social Security Trust Funds.
Not included is debt issued by government agencies
other than Treasury.

Qualifying Hedge Fund
A hedge fund advised by a Large Hedge Fund
Adviser that has a net asset value (individually or in
combination with any feeder funds, parallel funds,
and/or dependent parallel managed accounts) of
at least $500 million as of the last day of any month

in the fiscal quarter immediately preceding the
adviser’s most recently completed fiscal quarter.
Large Hedge Fund Advisers are advisers that have at
least $1.5 billion in hedge fund AUM.

Run Risk
The risk that investors lose confidence in an
institution—stemming from concerns about
counterparties, collateral, solvency, or related
issues—and respond by pulling back their funding.

Real Estate Investment Trust (REIT)
An operating company which manages incomeproducing real estate or real estate-related assets.
Certain REITs also operate real estate properties in
which they invest. To qualify as a REIT, a company
must have three-fourths of its assets and gross
income connected to real estate investment and
must distribute at least 90 percent of its taxable
income to shareholders annually in the form of
dividends.

Repurchase Agreement (Repo)
The sale of a security combined with an agreement
to repurchase the security, or a similar security, on a
specified future date at a prearranged price. A repo
is a secured lending arrangement.

Residential Mortgage-Backed Security (RMBS)
A security which is collateralized by a pool of
residential mortgage loans and makes payments
derived from the interest and principal payments on
the underlying mortgage loans.

Risk-Weighted Assets (RWAs)
A risk-based concept used as the denominator of
risk-based capital ratios (common equity tier 1, tier
1, and total). The total RWAs for an institution are a
weighted total asset value calculated from assigned
risk categories or modeled analysis. Broadly, total
RWAs are determined by calculating RWAs for
market risk and operational risk, as applicable, and
adding the sum of RWAs for on-balance sheet, offbalance sheet, counterparty, and other credit risks.

Rollover Risk
The risk that as an institution’s debt nears maturity,
the institution may not be able to refinance the
existing debt or may have to refinance at less
favorable terms.

Secured Overnight Financing Rate (SOFR)
A broad measure of the cost of borrowing cash
overnight collateralized by Treasury securities. The
rate is calculated as a volume-weighted median
of transaction-level tri-party repo data as well as
GCF Repo transaction data and data on bilateral
Treasury repo transactions.

Securities Lending/Borrowing
The temporary transfer of securities from one party
to another for a specified fee and term, in exchange
for collateral in the form of cash or securities.

Securitization
A financial transaction in which assets such as
mortgage loans are pooled, securities representing
interests in the pool are issued, and proceeds from
the underlying pooled assets are used to service and
repay the securities.

Security-Based Swap Dealer
A person that holds itself out as a dealer in securitybased swaps, makes a market in security-based
swaps, regularly enters into security-based swaps
with counterparties, or engages in any activity
causing it to be known as a dealer or market maker
in security-based swaps; does not include a person
entering into security-based swaps for such person’s
own account.

Short-Term Wholesale Funding
Short-term funding instruments not covered by
deposit insurance which are typically issued to
institutional investors. Examples include large
checkable and time deposits, brokered CDs, CP,
Federal Home Loan Bank borrowings, and repos.

Special Purpose Acquisition Company (SPAC)
Companies formed through an IPO to raise funds
to purchase businesses or assets to be acquired after
the IPO.
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189

Stablecoins
Stablecoins are digital assets that are designed
to maintain a stable value relative to a national
currency or other reference assets.

Supplementary Leverage Ratio (SLR)
Tier 1 capital of an advanced approaches banking
organization divided by total leverage exposure. All
advanced approaches banking organizations must
maintain an SLR of at least 3 percent. The SLR is
effective January 1, 2018, and organizations must
calculate and publicly disclose their SLRs beginning
March 31, 2015.

Swap
An exchange of cash flows with defined terms and
over a fixed period, agreed upon by two parties. A
swap contract may reference underlying financial
products across various asset classes including
interest rates, credit, equities, commodities, and FX.

Swap Data Repository (SDR)
A person that collects and maintains information
or records with respect to transactions or positions
in, or the terms and conditions of, swaps entered
into by third parties for the purpose of providing
a centralized recordkeeping facility for swaps. In
certain jurisdictions, SDRs are referred to as trade
repositories. The Committee on Payments and
Settlement Systems and IOSCO describe a trade
repository as “an entity that maintains a centralized
electronic record (database) of transaction data.”

Swap Dealer
Section 1a(49) of the Commodity Exchange Act
defines the term “swap dealer” (SD) to include any
person who: (1) holds itself out as a dealer in swaps;
(2) makes a market in swaps; (3) regularly enters
into swaps with counterparties as an ordinary course
of business for its own account; or (4) engages in any
activity causing the person to be commonly known
in the trade as a dealer or market maker in swaps.

participants have the ability to execute or trade
swaps by accepting bids and offers made by multiple
participants in the facility or system, through
any means of interstate commerce, including any
trading facility, that: (a) facilitates the execution of
swaps between persons; and (b) is not a designated
contract market.

Swaption
An option granting the right to enter into a swap.
See Option and Swap.

Syndicated Loan
A loan to a commercial borrower in which financing
provided by a group of lenders. The loan package
may have a revolving portion, a term portion, or
both

Tier 1 Capital
A regulatory capital measure comprised of common
equity tier 1 capital and additional tier 1 capital. See
Common Equity Tier 1 Capital and Additional Tier 1
Capital.

Tier 2 Capital
A regulatory capital measure which includes
subordinated debt with a minimum maturity of
five years and satisfies the eligibility criteria in the
Revised Capital Rule.

Time Deposits
Deposits that the depositor generally does not have
the right to withdraw before a designated maturity
date without paying an early withdrawal penalty. A
certificate of deposit (CD) is a time deposit.

Total Capital
A regulatory capital measure comprised of tier 1
capital and tier 2 capital. See Tier 1 Capital and Tier
2 Capital.

Tri-Party Repo
Swap Execution Facility (SEF)
Section 1a(50) of the Commodity Exchange Act
defines the term “swap execution facility” as a
trading system or platform in which multiple
190

2 0 2 1 F S O C / / Annual Report

A repo in which a clearing bank acts as third-party
agent to provide collateral management services and
to facilitate the exchange of cash against collateral
between the two counterparties.

Total Return Swap
A derivative contract in which one counterparty
receives the total return (interest payments and any
capital gains or losses) from a specified reference
asset and the other counterparty receives a specified
fixed or floating cash flow that is not related to the
creditworthiness of the reference asset.

Underwriting Standards
Terms, conditions, and criteria used to determine
the extension of credit in the form of a loan or
bond.

Variation Margin
Funds that are collected and paid out to reflect
current exposures resulting from actual changes in
market prices.

VIX (Chicago Board Options Exchange Market
Volatility Index)
A standard measure of market expectations of shortterm volatility based on S&P 500 option prices.

Weighted Average Life (WAL)
A weighted average of the maturities of all securities
held in a MMF’s portfolio.

Weighted Average Maturity (WAM)
A weighted average of the time to maturity on all
loans in an asset-backed security.

Yield Curve
A graphical representation of the relationship
between bond yields and their respective maturities.

Gl os s ary

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8

List of Charts
3.1.1 Household Debt as a Percent of Disposable Personal Income..............................19
3.1.2 Household Personal Savings Rate.......................................................................19
3.1.3 Household Debt Service Ratio............................................................................ 20
3.1.4 Owners’ Equity as Share of Household Real Estate............................................ 20
3.1.5 Components of Consumer Credit....................................................................... 20
3.1.6 Percentage of Mortgages in Forbearance...........................................................21
3.1.7 Transition to Delinquency (30+Days) by Loan Type............................................ 22
3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP.............................................23
3.2.1.2 Corporate Leverage: Debt / EBITDA.................................................................23
3.2.1.3 Interest Coverage Ratios .................................................................................24
3.2.1.4 Nonfinancial Corporations Liquid Assets .........................................................24
3.2.1.5 U.S. Corporate Defaults ..................................................................................24
3.2.1.6 Bank Business Lending Standards...................................................................25
3.2.1.7 Investment Grade Corporate Bond Spreads......................................................25
3.2.1.8 High-Yield Corporate Bond Spreads.................................................................25
3.2.1.9 Gross Issuance of Corporate Bonds................................................................ 26
3.2.1.10 Leveraged Loan Spreads ...............................................................................27
3.2.1.11 Leveraged Loan Issuance...............................................................................27
3.2.3.1 Performance of U.S. Stock Indices...................................................................28
3.2.3.2 S&P 500 Forward Price-to-Earnings.............................................................. 29
3.2.3.3 S&P 500 Volatility.......................................................................................... 29
3.2.3.4 SPAC Issuances............................................................................................. 30
3.2.3.5 Returns in Selected Equities Indices............................................................... 30
3.3.1.1 Federal Budget Surplus/Deficit.........................................................................31
3.3.1.2 Federal Debt Held by the Public.......................................................................31
3.3.1.3 Net Issuance of Treasury Securities.................................................................32
3.3.1.4 Treasury General Account Balance..................................................................32
3.3.1.5 U.S. Treasury Yields........................................................................................ 33
3.3.1.6 10-Year TIPS Yield and Breakeven.................................................................. 33
3.3.1.7 Intraday Volatility for 10-Year Treasury Yields.................................................. 34
3.3.2.1 Municipal Bond Issuance ............................................................................... 36
3.3.2.2 Municipal Bond Mutual Fund Flows................................................................ 36
3.3.2.3 Municipal Bonds to U.S. Treasuries.................................................................37
3.3.2.4 Changes in State and Local Government Tax Revenues...................................37
3.4.1.1 CP Outstanding by Issuer Type.........................................................................39
3.4.1.2 CP Investors................................................................................................... 40
3.4.1.3 3-Month CP Interest Rate Spreads................................................................ 40
3.4.1.4 Commercial Bank Deposit Growth...................................................................41
3.4.2.1 Repo Volumes..................................................................................................42
3.4.2.2 Sponsored Repo Activity.................................................................................42
3.4.2.3 Primary Dealer Repo Agreements................................................................... 43
3.4.2.4 Primary Dealer Repo Collateral....................................................................... 43
3.4.2.5 Primary Dealer Reverse Repo Agreements..................................................... 44
3.4.2.6 Repo Borrowing of Qualifying Hedge Funds.................................................... 44
List of C hart s

193

3.4.2.7 Repo Rates..................................................................................................... 45
3.4.2.8 ON-RRP Participation..................................................................................... 45
3.4.2.9 Value of Securities on Loan............................................................................ 46
3.4.2.10 Value of U.S. Securities on Loan....................................................................47
3.4.2.11 Securities Lending Cash Collateral.................................................................47
3.4.2.12 U.S. Securities Lending Cash Reinvestment...................................................47
3.4.2.13 U.S. Securities Lending Cash Reinvestment Collateral .................................. 48
3.4.3.1 U.S. Futures Markets Volume ......................................................................... 48
3.4.3.2 U.S. Futures Markets Open Interest................................................................ 49
3.4.3.3 Futures 60-Day Historical Volatility................................................................. 49
3.4.3.4 Micro Futures Contracts Open Interest........................................................... 50
3.4.3.5 Futures Transaction Volume – Leaderboard.................................................... 50
3.4.3.6 U.S. Treasury Futures Open Interest: Asset Manager.......................................51
3.4.3.7 U.S. Treasury Futures Open Interest: Leveraged Funds....................................51
3.4.3.8 CME Bitcoin Futures Open Interest..................................................................52
3.4.3.9 Bitcoin Futures and Reference Index Volume...................................................52
3.4.3.10 Growth of USD ESG and Emissions Derivatives Markets............................... 53
3.4.3.11 Growth of the ESG Indices Futures Markets.................................................. 53
3.4.3.12 Exchange-Traded Equity Option Volume........................................................ 53
3.4.3.13 Options on Futures: Open Interest................................................................. 54
3.4.3.14 Options on Futures: Volume.......................................................................... 54
3.4.3.15 3-Month Implied Volatility for Select Commodities Options........................... 54
3.4.3.16 Global OTC Positions..................................................................................... 55
3.4.3.17 Global OTC Equity Derivatives Outstanding................................................... 55
3.4.3.18 Derivatives Notional Volume.......................................................................... 56
3.4.3.19 Derivatives Notional Amount Outstanding..................................................... 56
3.4.3.20 Commodity Swaps: Open Interest................................................................ 56
3.4.3.21 Commodity Index Swaps Gross Notional Value..............................................57
3.4.3.22 Customer Margin Funds Held at FCMs..........................................................57
3.4.3.23 FCM Concentration: Customer Futures Balances.......................................... 58
3.4.3.24 FCM Concentration: Customer Swap Balances............................................. 58
3.4.3.25 Concentration of Swap Positions for Registered SDs.................................... 58
3.4.3.26 SEF Trading Volumes: Interest Rate Swaps....................................................59
3.4.3.27 SEF Trading Volumes: CDS Index...................................................................59
3.4.4.1 Relative Performance of Commodity Indices....................................................59
3.4.4.2 Relative Performance of Precious Metals........................................................ 60
3.4.4.3 Relative Performance of Industrial Metals...................................................... 60
3.4.4.4 Relative Performance of Agriculture Products..................................................61
3.4.4.5 U.S. Drought Conditions..................................................................................61
3.4.4.6 CME Lumber Futures.......................................................................................62
3.4.4.7 U.S. Crude Oil Production & Inventories...........................................................62
3.4.4.8 WTI Crude Oil Futures Curve.......................................................................... 63
3.4.4.9 Natural Gas Futures Curve............................................................................. 63
3.4.4.10 Natural Gas Spot and Futures Price.............................................................. 63
3.4.4.11 European & U.S. Natural Gas Prices.............................................................. 64
3.4.5.1 House Prices by Census Division.................................................................... 64
3.4.5.2 Home Sales.................................................................................................... 65
3.4.5.3 New Housing Starts and Price Changes......................................................... 65
3.4.5.4 Homeownership and Vacancy Rates............................................................... 65
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3.4.5.5 30-Year Fixed Rate Mortgage Rate and Spread.............................................. 66
3.4.5.6 Mortgage Originations and Rates................................................................... 66
3.4.5.7 Purchase Origination Volume by Credit Score................................................. 66
3.4.5.8 Shares of Mortgages by Equity Percentage.....................................................67
3.4.5.9 Mortgage Delinquency....................................................................................67
3.4.5.10 Forbearance Rates by Investor Type............................................................. 68
B.1 House Price Growth...............................................................................................69
B.2 Inventory of Homes Listed for Sale .......................................................................69
B.3 Price-to-Rent Ratios.............................................................................................70
3.4.5.11 Mortgage Originations by Product..................................................................71
3.4.5.12 RMBS Issuance.............................................................................................71
3.4.5.13 Cumulative MBS Purchases by the Federal Reserve.......................................72
3.4.6.1 Commercial Property Price Growth..................................................................75
3.4.6.2 Conduit CMBS Delinquency and Foreclosure Rate...........................................75
3.4.6.3 Average Capitalization Rates and Spreads.......................................................75
3.4.6.4 CMBS Issuance...............................................................................................76
3.5.1.1 Categorization of Large U.S. BHCs.................................................................. 77
3.5.1.2 Total Assets by BHC Type/IHC......................................................................... 77
3.5.1.3 Common Equity Tier 1 Ratios...........................................................................78
3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs....................................................78
3.5.1.5 Payout Rates at U.S. G-SIBs............................................................................78
3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs...............................................79
3.5.1.7 Return on Assets.............................................................................................79
3.5.1.8 Net Interest Margins....................................................................................... 80
3.5.1.9 Sources of Funding at G-SIBs and Large-Complex.......................................... 80
3.5.1.10 Deposit Growth, All Commercial Banks......................................................... 80
3.5.1.11 Effective Deposit Rates by BHC Category.......................................................81
3.5.1.12 Delinquency Rates on Real Estate Loans........................................................81
3.5.1.13 Delinquency Rates on Selected Loans............................................................81
3.5.1.14 Provisions to Loans Ratios at BHCs................................................................82
3.5.1.15 C&I Loan Growth, All Commercial Banks........................................................82
3.5.1.16 Loans to Nondepository Financial Institutions.................................................82
3.5.1.17 High-Quality Liquid Assets by BHC Type........................................................ 83
3.5.1.18 Selected Liquid Assets at All BHCs................................................................ 83
3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs....................................................... 83
3.5.1.20 Held-to-Maturity Securities.......................................................................... 84
3.5.1.21 Duration Gap................................................................................................ 84
3.5.1.22 Bank Stock Performance.............................................................................. 84
3.5.1.23 Price-to-Book for Select U.S. G-SIBs............................................................ 85
3.5.1.24 5-Year CDS Premiums Select U.S. G-SIBs..................................................... 85
3.5.1.25 5-Year CDS Premiums Select Foreign Banks................................................. 85
3.5.1.26 Initial and Stressed Capital Ratios................................................................ 86
3.5.1.27 FDIC-Insured Failed Institutions.................................................................... 86
3.5.1.28 Commercial Bank and Thrift Net Income........................................................87
3.5.1.29 Total Assets of Largest Insured Depository Institutions................................. 88
3.5.1.30 U.S. Branches and Agencies of Foreign Banks: Assets.................................. 88
3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Liabilities.............................. 89
3.5.1.32 Credit Union Income..................................................................................... 90
3.5.1.33 Loans as a Percent of Total Deposits............................................................ 92
List of C hart s

195

3.5.2.1 Number of Broker-Dealers.............................................................................. 93
3.5.2.2 Broker-Dealer Revenues and Net Income....................................................... 93
3.5.2.3 Broker-Dealer Assets and Leverage............................................................... 93
3.5.2.4 Broker-Dealer Assets and Leverage by Affiliation........................................... 94
3.5.2.5 mREIT Financial Assets.................................................................................. 94
3.5.2.6 REIT Stock Performance................................................................................ 95
3.5.2.7 MMF Assets by Fund Type............................................................................. 95
3.5.2.8 Liquid Asset Shares of Prime MMFs................................................................97
3.5.2.9 Weighted Average Maturities by Fund Type.....................................................97
3.5.2.10 Net Assets of the Investment Company Industry........................................... 98
3.5.2.11 Monthly Bond Mutual Fund Flows................................................................. 98
3.5.2.12 Monthly Equity Mutual Fund Flows............................................................... 98
3.5.2.13 Monthly Bank Loan and High-Yield Mutual Fund Flows................................. 99
3.5.2.14 Cumulative Equity Fund Flows...................................................................... 99
3.5.2.15 Cumulative Fixed Income Fund Flows........................................................... 99
3.5.2.16 ETP Assets by Category of Investment.........................................................100
3.5.2.17 Monthly ETP Flows: Fixed Income Funds.....................................................100
3.5.2.18 Monthly ETP Flows: Equity Funds................................................................100
3.5.2.19 Monthly Inverse and Leveraged ETP Flows..................................................101
3.5.2.20 Hedge Fund Gross and Net Assets..............................................................105
3.5.2.21 Private Equity AUM.....................................................................................106
3.5.2.22 M&A Loan Volume for Private Equity-Backed Issuers..................................107
D.1 Static Margin Model Example..............................................................................109
3.5.2.23 Public Plan Allocation to Alternative Assets................................................. 112
3.5.2.24 Insurance Industry Net Income.................................................................... 112
3.5.2.25 Consumer Loans and Leases Outstanding................................................... 114
3.5.2.26 Business Loans and Leases Outstanding.................................................... 114
3.5.2.27 AAA Securitization Spreads......................................................................... 114
3.5.2.28 ABS Issuance.............................................................................................. 115
3.6.1.1 DTCC Clearing Fund Requirements................................................................. 116
3.6.1.2 Maximum Uncovered Exposure for DTCC....................................................... 117
3.6.1.3 Initial Margin: U.S. Exchange Traded Derivatives............................................ 118
3.6.1.4 Initial Margin: Centrally Cleared OTC Derivatives............................................ 118
3.6.1.5 Initial Margin by Segregation Type................................................................. 118
3.6.1.6 Average Clearing Rates for OTC Trading......................................................... 119
E.1 SOFR Futures Volume..........................................................................................121
E.2 SOFR Futures Open Interest ...............................................................................121
3.7.1.1 Federal Reserve Swap Lines ..........................................................................126
3.7.1.2 Nominal U.S. Dollar Trade-Weighted Index.....................................................126
3.7.1.3 YTD Change in USD Exchange Rates, EMEs...................................................126
3.7.1.4 Real U.S. Dollar Trade-Weighted Index...........................................................127
3.7.2.1 Advanced Economies Real GDP Growth.........................................................127
3.7.2.2 Discretionary Fiscal Response to the COVID-19 Pandemic.............................128
3.7.2.3 Advanced Economy Interest Expense and Government Debt..........................128
3.7.2.4 Advanced Economy Headline Inflation Rate....................................................128
3.7.2.5 Euro Area Business and Consumer Surveys...................................................129
3.7.2.6 Real GDP for Select Euro Area Economies.....................................................129
3.7.2.7 Euro Area 10-Year Sovereign Yields...............................................................130
3.7.2.8 Japanese Consumer Price Inflation................................................................131
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3.7.2.9 Japan 10-Year Government Bond Yield..........................................................132
3.7.3.1 EME GDP Growth...........................................................................................132
3.7.3.2 Emerging Market Sovereign Bond Spread......................................................133
3.7.3.3 Emerging Market Non-Local Bond Issuance..................................................133
3.7.3.4 Foreign Investor Inflows to EMEs...................................................................133
3.7.3.5 Foreign Investor Portfolio Inflows to EMEs, by Region....................................134
3.7.3.6 Chinese Real GDP Growth and its Components..............................................134
3.7.3.7 Credit to the Chinese Nonfinancial Private Sector ..........................................135
3.7.3.8 Chinese Credit Growth ..................................................................................135
F.1 Annual Expected Damage from Tropical Cyclones................................................138
F.2 Fraction of Population Exposed to Heatwaves......................................................138

List of C hart s

197

Endnotes

198

1

SOFR is a blended rate that measures overnight Treasury repo rates in the tri-party and FICCcleared segments. TGCR, which is also published by FRBNY, measures overnight Treasury
repo rates only in the non-cleared tri-party segment.

2

In mid-September 2019, overnight money market rates spiked and exhibited significant
volatility, amid a large drop in reserves due to the corporate tax date and increases in net
fcouter issuance. See Sriya Anbil, Alyssa Anderson, and Zeynep Senyuz, What Happened in
Money Markets in September 2019?, FEDS Notes, (Feb. 27, 2020), available at: https://www.
federalreserve.gov/econres/notes/feds-notes/what-happened-in-money-markets-in-september-2019-20200227.html

3

See Eliot Anenberg and Daniel Ringo, Housing Market Tightness During COVID-19: Increased
Demand or Reduced Supply?, FEDS Notes, (Jul. 8, 2021), available at: https://www.federalreserve.gov/econres/notes/feds-notes/housing-market-tightness-during-covid-19-increaseddemand-or-reduced-supply-20210708.htm.

4

The Dodd-Frank Act amended the Advisers Act to exclude family offices from regulation under
the Advisers Act. The exclusion is limited to a family office that: 1) provides investment advice
only to “family clients”; 2) is wholly owned by family clients and is exclusively controlled by
family members and/or family entities; and 3) does not hold itself out to the public as an investment adviser.

5

See Paul, Weiss, Rifkind, Wharton & Garrison LLP, Credit Suisse Group Special Committee of
the Board of Directors Report on Archegos Capital Management, (Jul. 29, 2021), p. 123, available at: https://www.credit-suisse.com/about-us/en/reports-research/archegos-info-kit.html

6

Ibid, p. 40-43.

7

Ibid, p. 22.

8

Ibid, p. 20.

9

For example, Robinhood saw its clearing fund requirement rise from $0.7 billion at end of day
January 27 to $3.7 billion at start of day January 28. Robinhood attributed $2.2 billion of this
$3.0 billion margin call to the capital premium charge. See Vladimir Tenev, CEO of Robinhood
Markets, Inc., Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide: Testimony before the House Committee on Financial Services, (Feb.
18, 2021), p. 9, available at: https://financialservices.house.gov/uploadedfiles/hhrg-117-ba00wstate-tenevv-20210218.pdf .

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