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2022

ANNUAL REPORT
FINANCIAL STABILITY OVERSIGHT COUNCIL

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 (U.S.) 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:
•

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:
•

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
two-year terms.
Financial Stability Oversight Council

1

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:
1) the activities of the Council;
2) 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;
3) potential emerging threats to the financial stability of the United States;
4) all determinations made under Section 113 or Title VIII and the basis for such determinations;
5) all recommendations made under Section 119 and the result of such recommendations; and
6) recommendations—
a) to enhance the integrity, efficiency, competitiveness, and stability of United States financial
markets;
b) to promote market discipline; and
c) to maintain investor confidence.
Approval of the Annual Report
This annual report was approved by the voting members of the Council on December 16, 2022.
Abbreviations for Council Member Agencies and Member Agency Offices

2

•

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)

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

Table of Contents
1 Member Statement .................................................................................. 5
2 Executive Summary.................................................................................... 7
Box A: Stress in Global Markets....................................................................................................................... 13

3 Vulnerabilities, Significant Market Developments,
and Council Recommendations.................................................................17
3.1 Financial Risks............................................................................................................. 17
3.1.1 Commercial Real Estate.......................................................................................................................... 17
3.1.2 Residential Real Estate........................................................................................................................... 19
Box B: The Rapid Rise of Mortgage Rates....................................................................................................... 22
3.1.3 Nonfinancial Corporate Credit................................................................................................................ 23
3.1.4 Short-term Wholesale Funding Markets................................................................................................ 26
3.1.5 Digital Assets......................................................................................................................................... 32

3.2 Financial Institutions.................................................................................................. 35
3.2.1 Large Bank Holding Companies............................................................................................................ 35
Box C: The Impact of Interest Rate Risk on Banks, Insurance Companies, and Pension Funds..................... 38
3.2.2 Investment Funds.................................................................................................................................. 42
Box D: The Protection Gap and Insurance...................................................................................................... 49
3.2.3 Central Counterparties.......................................................................................................................... 50
Box E: Recent Developments in Commodities Markets.................................................................................. 54

3.3 Financial Market Structure......................................................................................... 56
3.3.1 Treasury Markets................................................................................................................................... 56
3.3.2 Alternative Reference Rates.................................................................................................................. 59
3.3.3 Provision of Financial Services by Nonbank Financial Institutions......................................................... 61

3.4 Operational and Technological Risk........................................................................... 66
3.4.1 Cybersecurity........................................................................................................................................ 66
Box F: Cyber Risk Data Collection................................................................................................................... 68
3.4.2 Third-Party Service Providers................................................................................................................ 70
Box G: The Use of Artificial Intelligence (AI) in Financial Services...................................................................72

3.5 Climate-related Financial Risk.................................................................................... 73

4 Council Activities and Regulatory Developments...................................... 78
4.1 Council Activities........................................................................................................ 78
Table of Contents

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4.1.1 Risk Monitoring and Regulatory Coordination........................................................................................78
4.1.2 Determinations Regarding Nonbank Financial Companies....................................................................79
4.1.3 Operations of the Council.......................................................................................................................79

4.2 Safety and Soundness................................................................................................ 79
4.2.1 Enhanced Capital and Prudential Standards and Supervision................................................................79
4.2.2 Dodd-Frank Act Stress Tests ................................................................................................................. 80
4.2.3 Resolution Planning and Orderly Liquidation......................................................................................... 81
4.2.4 Insurance................................................................................................................................................ 81

4.3 Financial Infrastructure, Markets, and Oversight....................................................... 82
4.3.1 Climate-Related Financial Risks............................................................................................................ 82
4.3.2 Digital Assets, Payment Systems, and Technological Innovation.......................................................... 83
4.3.3 Derivatives, Swap Data Repositories, Regulated Trading Platforms, Central Counterparties,
		
and Financial Market Utilities................................................................................................................ 85
4.3.4 Securities and Asset Management........................................................................................................ 85
4.3.5 Accounting Standards............................................................................................................................87
4.3.6 Bank Secrecy Act/Anti-Money Laundering Regulatory Reform...............................................................87

4.4 Mortgages and Consumer Protection ....................................................................... 88
4.4.1 Mortgages and Housing Finance........................................................................................................... 88
4.4.2 Consumer Protection............................................................................................................................. 88

4.5 Data Scope, Quality, and Accessibility....................................................................... 89
4.5.1 Data Scope............................................................................................................................................ 89
4.5.2 Data Quality........................................................................................................................................... 89

5 Select Council Member Agency Publications on Financial
and Regulatory Developments................................................................. 91
6 Abbreviations.......................................................................................... 93
7 Glossary................................................................................................... 97
8 List of Charts ......................................................................................... 103
9 Endnotes................................................................................................107

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

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

Martin J. Gruenberg
Acting Chairman
Federal Deposit Insurance Corporation

Rostin Behnam
Chairman
Commodity Futures Trading Commission

Sandra L. Thompson
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
Member Statement

5

2

Executive Summary

The Council’s 2022 annual report reviews
significant financial market developments,
describes potential emerging threats to U.S.
financial stability, identifies vulnerabilities in the
financial system, and makes recommendations
to mitigate them. Significant unaddressed
vulnerabilities could potentially disrupt the
provision of critical financial services, such as
the clearing of payments, provision of liquidity,
and the availability of credit needed to support
economic activity. The annual report also
summarizes notable regulatory developments
and reports on the activities of the Council.
Since last year’s report, U.S. economic growth
has slowed, reflecting a confluence of factors,
including the unprovoked Russian war against
Ukraine in February and the Federal Reserve’s
tightening of monetary policy to reduce inflation.
Russia’s war has caused the deaths of tens of
thousands of people and displaced millions
more, and energy and food prices have climbed.
Meanwhile, supply chain disruptions lingered
even as the acute phase of the COVID-19
pandemic passed. Global growth also slowed
amid heightened economic uncertainty and
contributed to financial and economic stress.
Inflation rose globally, and the Federal Reserve
and other major central banks tightened
monetary policy. The target range for the federal
funds rate was at its effective lower bound at the
beginning of 2022, and by November, the Federal
Reserve had raised the target range to 3.75% to
4%. The Federal Reserve also began to reduce
the size of its balance sheet, which had expanded
notably due to its response to the market turmoil
at the onset of the COVID-19 pandemic in March
2020.
Financial conditions tightened sharply as
Treasury yields rose, corporate and mortgage
risk spreads widened, and equity prices fell. The
10-year nominal U.S. Treasury security yield
rose to its highest level since 2007. Economic
uncertainty led to implied interest rate volatility

in the Treasury market as measured by the
Merrill Lynch Option Volatility Estimate (MOVE)
index to reach levels last seen in early 2020. The
dollar’s exchange value against a basket of major
currencies appreciated notably and remains
at two-decade highs. Corporate bond spreads
widened to levels near longer-run historical
averages. Broad equity market indexes dropped
considerably, and the CBOE Volatility Index
(VIX), which provides a market estimate of the
expected volatility of the Standard and Poor’s
(S&P 500) Index, periodically rose above 30, a
level commonly considered as elevated by market
participants.
Reflecting greater market volatility, liquidity in
fixed-income markets has declined, although
investors continue to be able to execute trades,
albeit at somewhat higher costs. Bid-ask spreads
in Treasury markets widened, and market depth
measures worsened, though levels are much
lower than seen in March 2020. Liquidity in other
markets deteriorated, particularly those most
directly affected by commodity and agricultural
price shocks. Corporate bond bid-ask spreads
also widened, although they remained below
the levels seen at the onset of the COVID-19
pandemic.
Nonfinancial firms, commercial real estate
borrowers, and municipalities faced higher
borrowing costs in capital markets. Even so,
bank lending remains robust, and in particular,
lending to nonbank financial institutions (NBFIs)
continued to increase notably. In the residential
real estate market, mortgage rates rose sharply,
the rate of house price increases slowed, and
prices dropped in some markets. As a result,
while aggregate mortgage credit grew, the pace
of new mortgage originations decelerated amid
higher rates.
Some commodity markets experienced significant
strains, especially at the onset of Russia’s war
against Ukraine. The price of oil rose notably, and
natural gas prices jumped sharply, particularly
Executive Summary

7

in the European market. Global agricultural
commodity prices surged, with the price of wheat,
a major export good for Ukraine and Russia,
increasing relatively more than other products.
Pressures in the London nickel market led to
price spikes and a multi-day trading halt at one
exchange.
The decline in traditional asset prices was
magnified in crypto-asset markets. Widely-traded
crypto-assets experienced sharp price drops,
with Bitcoin losing more than half of its value,
and there were runs at multiple algorithmic
stablecoins. Meanwhile, in November, cryptoexchange FTX and some affiliated firms declared
bankruptcy. Alongside these developments,
consumer and investor complaints about
crypto activities continue to mount. While the
scale of crypto-asset activities has increased
significantly in recent years, interconnections
with the traditional financial system are currently
relatively limited, so these events left little imprint
on broader financial markets.
In the United Kingdom (UK), a steep rise in
UK government bond (gilt) yields following
the announcement of a new fiscal package in
September 2022 led to broad-based forced selling
by leveraged UK liability-driven investment funds.
In line with its financial stability objective, the
Bank of England purchased gilts to help restore
market functioning and reduce any risks from
contagion to credit conditions for households and
businesses. This targeted action helped to limit
spillovers, including to U.S. markets.
Amid heightened geopolitical and economic
shocks and persistent inflation, risks to the U.S.
economy and financial stability have increased
even as the financial system has exhibited
resilience to date. The U.S. banking system has
significantly higher capital and liquidity levels
than before the 2008 financial crisis, which has
increased its ability to absorb potential losses and
disruptions in funding markets. Asset valuation
pressures have moderated, leaving markets less
susceptible to an abrupt repricing of risk. The
U.S. markets and financial firms largely shrugged
off the volatility prompted by the leveragedinduced forced selling in the UK. More generally,
despite the wave of shocks this year, destabilizing

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

spirals at U.S. levered intermediaries appeared
to be absent. U.S. central counterparties for
commodities ably managed the heightened
volatility witnessed earlier this year, and initial
and variation margins built up to guard against
risk. Households still have significant savings,
and aggregate household balance sheets are
solid. Businesses have considerable cash buffers
and can service debt burdens. That said, a shock
leading to unexpected interest rate increases or
other market turmoil could lead to increases in
defaults or difficulties servicing debt burdens,
including for residential or commercial real estate
exposures.
The Council has identified 14 specific financial
vulnerabilities. This report reviews these
vulnerabilities, which fall into a range of broader
categories: financial risks, financial institutions,
financial market structure, operational and
technological risks, and climate-related financial
risk. This report also describes the Council’s
recommendations for mitigating the identified
vulnerabilities.

Financial Risks
The Council has identified five vulnerabilities
associated with market and credit risk:
Commercial Real Estate, Residential Real Estate,
Nonfinancial Corporate Credit, Short-term
Wholesale Funding Markets, and Digital Assets.
Because of their scale and leverage, the
commercial real estate (CRE) and residential real
estate sectors have the potential to increase risks
to U.S. financial stability significantly. Uncertain
economic conditions and rising borrowing
costs have increased risk in both sectors. The
Council recommends supervisors and financial
institutions monitor exposures and ensure the
adequacy of credit loss allowances.
Rising interest rates and slower economic
growth have led to an increase in the credit risk
of some nonfinancial corporate borrowers. If
credit quality worsened significantly, a potential
wave of defaults could lead to large redemptions
at investment funds with significant liquidity
mismatches, and in turn, disrupt market
functioning. The Council recommends that

member agencies continue to monitor leverage
and encourage entities exposed to corporate
credit risk to review their risk-rating methods
and, if applicable, assess the adequacy of their
allowances for credit losses.
Short-term wholesale funding markets are critical
for financing U.S. businesses and the government.
Reflecting ongoing market volatility and shifts
in monetary policy, the Council recommends
close monitoring of short-term funding market
conditions and actions to mitigate vulnerabilities,
and supports efforts by financial regulators to
strengthen market functioning, including during
periods of stress. Where a lack of data prevents
close monitoring, proposals should be developed
to collect the necessary data, such as the efforts
by the OFR to improve the collection and
transparency of non-centrally cleared bilateral
repo markets data.
The Council’s Report on Digital Asset Financial
Stability Risks and Regulation, published in
October, concluded that crypto-asset activities
could pose risks to the stability of the U.S.
financial system if their interconnections with
the traditional financial system and their scale
grow without appropriate regulation. The
existing regulatory structure covers large parts
of the crypto-asset ecosystem. The Council
emphasizes the importance of continued
enforcement of existing rules and regulations in
applying these existing authorities. The report
also identifies gaps in the regulation of cryptoasset activities in the United States. To address
the gaps in the regulatory framework, the Council
recommends the passage of legislation providing
for rulemaking authority for federal financial
regulators over the spot market for crypto-assets
that are not securities, steps to address regulatory
arbitrage, and an assessment of whether vertically
integrated market structures can or should
be accommodated under existing laws and
regulations. Finally, the Council recommends
bolstering its members’ capacities related to data
and to the analysis, monitoring, supervision, and
regulation of crypto-asset activities.

Financial Institutions
The Council has identified vulnerabilities related
to three types of financial institutions: Large Bank
Holding Companies (BHCs), Investment Funds,
and Central Counterparties (CCPs).
Large BHCs perform essential banking functions
such as providing credit to commercial and retail
borrowers, helping firms raise capital, hedging
risk, providing asset management and custody
services, and facilitating clearing and settlement.
The stability of these organizations is critical to
the global financial system. Large BHCs face a
challenging environment that includes rising
interest rates, increased concerns about the
economic outlook and its potential impact on
credit quality, and continued cyber security
threats. The Council recommends that banks and
banking supervisors assess the adequacy of their
capital, including unrealized losses on securities
portfolios. The Council encourages agencies and
financial institutions to ensure their stress-testing
methodologies reflect plausible tail risks given
changing economic conditions. The Council also
recommends that banking agencies continue
monitoring bank exposures to NBFIs, including
assessing how banks manage their exposure to
leverage in the nonbank financial sector.
The Council has identified vulnerabilities
in hedge funds, open-end funds, certain
collective investment funds, and money market
funds (MMFs) due to their scale, leverage,
interconnectedness, and ability to engage in
liquidity and maturity transformation. Some
of these vulnerabilities have the potential to
amplify shocks, including recent unexpectedly
persistent inflation and the associated rise in
interest rates. The Council supports the initiatives
by the SEC and other agencies to address risks in
hedge funds, including proposed data collection
improvements for Form PF. The Council will
continue to review the findings of its Hedge Fund
Working Group (HFWG) as they are developed.
The Council recommends that the SEC and
other relevant regulators consider whether
additional steps should be taken to address these
vulnerabilities. In light of the growth of collective
investment funds (CIFs), regulators should
consider whether the regulatory differences
between the regimes governing CIFs and mutual
Executive Summary

9

funds increase the risks of regulatory arbitrage.
Meanwhile, the Council supports the SEC’s
efforts to improve the resilience and transparency
of MMFs and strengthen short-term funding
markets. The Council will continue to monitor
initiatives relating to MMF reforms.
Since the 2008 financial crisis, firms have become
increasingly incentivized through regulatory
reforms to use CCPs instead of bilateral contracts,
making CCPs key actors in the global financial
system. Central clearing protects against defaults
among counterparties whose failure could
threaten financial stability but simultaneously
makes the central counterparty vulnerable to
a shock. For example, earlier in the year, as
commodity price volatility surged following
Russia’s war against Ukraine, several commodityfocused CCPs were forced to raise initial margins
suddenly and substantially. Despite the stress
on some CCPs, there was limited impact on
the broader financial system. The Council
recommends that the CFTC, Federal Reserve,
and SEC continue to coordinate the supervision
of all CCPs designated by the Council as financial
market utilities (FMUs) that are systemically
important. CCP supervisory agencies should
continue to work with the FDIC to support
CCP resolution planning. In addition, member
agencies should continue working with global
counterparts and international standard-setting
bodies to identify and address areas of concern.
Finally, the Council encourages cooperation
in the oversight and regulation of systemically
important CCPs, and continued progress in
advancing recovery and resolution planning for
systemically important CCPs.

Financial Market Structure
The Council has identified three vulnerabilities
associated with financial market structures:
Treasury Markets, Alternative Reference Rates,
and the Provision of Financial Services by
Nonbank Financial Institutions.
The Treasury market plays a critical role in
financing the federal government, supporting
the broader financial system, and implementing
monetary policy. While the Treasury market
has shown resilience in the face of increased
uncertainty and volatility in 2022, the official

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

sector should seek continual improvements that
strengthen the Treasury market to keep pace
with changing technology and trading patterns
to ensure that the Treasury market continues to
fulfill these vital purposes. The Council supports
efforts by Treasury to improve transparency in
post-trade transactions in the cash market for
Treasury securities.
Since 2013, the Council has identified LIBOR as
a key risk to financial stability, bank safety and
soundness, and market integrity. Most LIBOR
rates are no longer published, and the remaining
U.S. dollar (USD) LIBOR rates are similarly due
to end as of June 30, 2023, marking the end of
LIBOR. Given the large volume of legacy USD
LIBOR contracts outstanding, the Council advises
firms to take advantage of any existing contractual
terms or opportunities for renegotiation
to transition their remaining legacy LIBOR
contracts before June 30, 2023. The Council
advises responsible parties to communicate
any outstanding decisions regarding the rates to
which outstanding legacy LIBOR contracts will
transition and any necessary conforming changes
well in advance of June 2023.
NBFIs increasingly provide financial services
traditionally provided by banks. The
emergence of nonbank financial institutions
in certain markets has increased competition,
fostered innovation, and enhanced access to
capital markets. However, it has introduced
vulnerabilities related to leverage and liquidity
mismatches to the broader financial system,
and rising interest rates or a broader economic
downturn could further amplify these
vulnerabilities. The Council recommends that
member agencies leverage existing authority
to ensure that the same activity with the same
risk, when conducted by different entities, has
the same regulatory outcome. The Council also
encourages relevant federal and state regulators
to continue coordinating closely to collect
data, identify risks, and strengthen oversight of
nonbank companies involved in the origination
and servicing of residential mortgages. This year,
the Council’s nonbank mortgage servicing task
force was re-established to analyze nonbank
servicer risks and concerns. Finally, the Council
recommends agencies ensure that the largest and

most complex nonbank mortgage companies are
prepared should delinquencies and subsequent
foreclosures increase as interest rates rise.

Operational Risk and Technological
Risk
The Council has identified cybersecurity and
third-party service providers as vulnerablities.
A grave cybersecurity incident could potentially
threaten the stability of the U.S. financial system
through at least three channels: (1) disrupting
key institutions with few or no substitutes, such
as central banks, exchanges, payment clearing
and settlement systems, or other critical service
providers; (2) compromising the integrity of
data that is critical to the stable functioning of
financial firms and the system; and (3) causing
a loss of confidence among a broad set of
market participants. Thus far, there have been
few successful cyberattacks against the U.S.
financial system related to Russia’s war against
Ukraine, and they have proven to be negligible
in both disruption and impact. Maintaining
and improving the cybersecurity resilience
of the financial sector requires continuous
assessment of cyber vulnerabilities and close
cooperation across firms and governments
within the U.S. and internationally. The Council
supports ongoing partnerships between federal
and state government agencies, private firms,
and international partners. It encourages the
Financial and Banking Information Infrastructure
Committee (FBIIC) to continue working
closely with member and state agencies, the
Department of Homeland Security (DHS), law
enforcement, and industry partners to conduct
regular cybersecurity exercises. The Council
recommends that agencies carefully consider
how to share information, including confidential
supervisory and classified information, and
supports additional work to understand and
mitigate the financial stability risks associated
with cybersecurity.
The Council has identified the financial
sector’s concentrated dependency on a limited
number of third-party service providers as a
potential risk to financial stability. The Council
supports federal banking regulators continuing

to coordinate third-party service provider
examinations, working collaboratively with
states, and identifying additional ways to support
information sharing among state and federal
regulators. The Council recommends Congress
pass legislation that ensures that the FHFA,
NCUA, and other relevant agencies have adequate
examination and enforcement powers to examine
certain services of third-party service providers to
banking organizations.

Climate-related Financial Risk
Climate change is an emerging threat to U.S.
financial stability. The physical and transition
risks associated with climate change could
contribute to financial instability through
numerous channels, including financial
intermediaries experiencing significant losses,
the impairment of financial market functioning,
or the sudden and disruptive repricing of
assets. Climate-related financial risks can affect
households, communities, businesses, and
governments by damaging property, impeding
business activity, impacting income, and altering
the value of assets and liabilities. These risks may
lead financial institutions or insurance providers
to pull back from credit or insurance provisions,
potentially amplifying the initial climate-related
shock and harming financial stability. Over the
last year, Council members have made significant
progress in improving their capacity to assess
and address climate-related financial risks. The
Council supports member agencies’ continued
efforts to: address climate-related data gaps;
promote consistent, comparable, and decisionuseful disclosures; improve assessments of
climate-related financial risks and vulnerabilities;
and incorporate climate-related financial
risks into their risk management practices and
supervisory expectations for regulated entities
where appropriate.

Council Activities
The Council, as charged by the Dodd-Frank Act,
works to identify risks to U.S. financial stability,
promote market discipline, and respond to
emerging threats to the financial stability of the
U.S. financial system. It serves as a vital forum for
collaboration, discussion, risk analysis, and policy
formulation among the U.S. financial stability
Executive Summary

11

and regulatory community. In 2022, the Council
has focused on four key priorities to address risks
and vulnerabilities in the financial system: (1)
nonbank financial intermediation, (2) Treasury
market resilience, (3) climate-related financial
risk, and (4) digital assets.
The Council continues to assess the
vulnerabilities posed by three types of NBFIs:
open-end mutual funds, hedge funds, and money
market funds. In February, the Council issued a
public statement describing the risks associated
with NBFIs and expressing support for continued
efforts to mitigate those risks. Of particular
note, over the last year, the Council’s HFWG has
developed an interagency risk monitoring system
to assess hedge fund-related risks to U.S. financial
stability. In addition, in June 2022, the Council
restarted the Nonbank Mortgage Servicing Task
Force meetings.
Enhancing the resiliency of the Treasury market
remains a priority for the Council. The Council
continues to support efforts across the U.S.
Treasury and through the Interagency Working
Group on Treasury Market Surveillance (IAWG)
to strengthen the Treasury market. The Council’s
work through the HFWG and Open-end Fund
Working Group, for example, is helping inform
the IAWG’s assessment of how funds’ leverage
and liquidity risk management practices affect the
Treasury market.
Climate-related financial risk is another key
priority for the Council. Since 2021 the Council
has been leading and coordinating an interagency
response to climate-related risks to the financial
system. In October 2021, the Council published
its Report on Climate-Related Financial Risk,
which recommended the formation of two
committees – a staff-level Climate-related
Financial Risk Committee (CFRC), which has
met regularly since February 2022, and an
external advisory committee, the Climaterelated Financial Risk Advisory Committee
(CFRAC), which was established in October
2022. The CFRC has served as a key forum for
interagency information sharing, coordination,
and capacity building to help fill data gaps,
improve the assessment of climate-related risks,
and advance agencies’ efforts to implement the

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

recommendations identified in the Council’s
climate report.
The Council identified digital assets as a priority
area in February 2022. In response to the
directive in Executive Order 14067, Ensuring
Responsible Development of Digital Assets, the
Council published its Report on Digital Asset
Financial Stability Risks and Regulation on
October 3, 2022. The report details the Council’s
findings and recommendations, as discussed
in Section 3.1.5. The Council’s Digital Assets
Working Group met regularly throughout 2022
and coordinated the drafting process.
The Council has advanced efforts to assess and
address financial stability risks in all four priority
areas and also continues to focus on other
vulnerabilities identified in this year’s report. For
more information on the Council’s priorities and
activities in 2022, please refer to Section 4.1.

Box A: Stress in Global Markets
The global economy is facing headwinds to
growth and grappling with higher inflation, posing
heightened financial stability risk. Russia’s war
against Ukraine has complicated the global
macroeconomic outlook, adding stresses to an
already challenging economic environment
coming out of the COVID-19 pandemic. Different
paces of monetary tightening have contributed to
currency movements, and the dollar has
appreciated broadly against both advanced and
emerging market currencies (Figure A.1).
Russia’s war against Ukraine has led to a severe
energy crisis in Europe and other parts of the
world that is detrimentally impacting economic
activity. In China, the lockdowns associated with
the zero COVID policy have contributed to
slowing growth, and the country’s property
sector, a significant component of economic
activity and historically a key driver of Chinese
economic growth, is weakening. The
International Monetary Fund (IMF) projects weak
global growth in 2022 to persist into 2023.
A.1 Nominal Trade-Weighted U.S. Dollar Index
Index
125
120
115

As Of: 31-Oct-2022
Advanced
Broad
Emerging Markets

Index
125
120
115

110

110

105

105

100

100

95
Jan 2020 Jul 2020 Jan 2021 Jul 2021 Jan 2022 Jul 2022
Source: Federal
Reserve, Haver
Analytics

95

Note: Indexed to 100 as of Dec. 31, 2020.

reserve buffers and EME preemptive monetary
policy tightening. However, high inflation and
continued monetary tightening in advanced
economies may cause risk-adjusted yield
differentials between EMEs and advanced
economies to narrow. Further capital outflows
and currency depreciations could curtail funding
sources for EME governments and corporations
and, in vulnerable EMEs with elevated debt
levels, could result in debt-service difficulties in
the face of higher interest rates.
A.2 Portfolio Flows to EMEs
Basis Points
800

Percent of Assets
0.75

As Of: Oct-2022

600

0.25

400

-0.25

200

-0.75

0
2015

Equity Flows (right axis)
Bond Flows (right axis)
2016

Source: EPFR,
Bloomberg, L.P.

2017

2018

EMBIG spread (left axis)
2019

2020

2021

-1.25
2022

Note: Bars show monthly averages of weekly
flow data, line shows monthly average of
daily Spread data.

Rising commodity prices have helped mitigate
the fragilities of EMEs that are commodity
exporters. But this mitigation will reverse should
commodity prices stabilize. In addition,
commodity-importing countries constitute a far
larger share of total EME GDP than commodity
exporters (Figure A.3). Many of these countries
are facing energy and food insecurity that can
potentially lead to social unrest and political
instability.

The various stresses in the global economy have
led to capital outflows from EMEs in 2022 (Figure
A.2). The impact of these external factors on
EMEs has been tempered in part by their
generally large stock of foreign exchange

Executive Summary

13

Box A: Stress in Global Markets (continued)

A.3 Shares of Commodity Importers and Exporters
Percent
100

As Of: 2021
Commodity Exporters
Commodity Importers

Percent
100

75

75

50

50

25

25

0

2021

0

Source: UN Comtrade, Haver Analytics, FSOC calculations

High levels of debt in China in public, corporate,
and household balance sheets could cause
financial distress and be a catalyst for wider EME
stress. China’s economy is slowing significantly
amid sporadic COVID-19 lockdowns and troubles
in the real estate sector—a pillar of the Chinese
economy, with real estate-based lending
equivalent to 45% of China’s GDP and mortgagebased household debt amounting to 35% of
China’s GDP.1 Property developers are facing
cash flow problems that hinder their ability to finish
construction projects, contributing to a sharp
deterioration in confidence in the real estate
sector. The renminbi has depreciated against
the dollar, reflecting both slowing growth in China
and interest rate differentials. Capital outflows
have persisted but remain orderly. The Chinese
authorities have taken some steps to support
the property sector, especially encouraging
local governments to facilitate the completion of
ongoing construction projects, which has been
a source of social unrest. However, these steps
have so far been more cautious than in the past,
in part reflecting the difficult tradeoff of supporting
growth and mitigating moral hazards. Difficulties
in the real estate sector could cause strains across
China’s financial system, including at banks,
nonbanks, corporate bond markets, and local
government finances.

14

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

EME stresses are unlikely to threaten U.S.
financial stability unless a broad EME financial
crisis were to occur. Financial stresses in EMEs
could impact the U.S. financial system through
losses on investors’ exposures to EME assets
and other channels.
Decelerating growth and high inflation have also
affected many advanced economies in 2022.
These economies have experienced significant
currency depreciation versus the dollar. Most
advanced economies have flexible, fully floating
exchange rates and accordingly have not
undertaken currency intervention as EMEs have.
In one notable exception, Japan intervened in
currency markets in September to support the
yen over concerns about depreciation. Yield
differentials have widened between Japan and
other advanced economies as Japan has notably
continued an accommodative monetary policy
and yield curve control (YCC) at a time when
other major advanced economies have raised
interest rates (Figure A.4). Ongoing depreciation
pressure could create challenges to the YCC
policies moving forward.
A.4 Advanced Economies 10-Year Sovereign Yields
Percent
5
4
3

As Of: 31-Oct-2022

Percent
5

United States
United Kingdom
Germany
Japan

4
3

2

2

1

1

0

0

-1
Jan 2017

Feb 2018 Mar 2019

Apr 2020 May 2021 Jun 2022

Source: U.S. Treasury, Deutsche Bundesbank, Ministry of Finance
Japan, Bank of England, Haver Analytics

-1

Advanced economy sovereigns are facing
lesser strains than EMEs in terms of servicing
debt, and while currency depreciation may
contribute to inflation, the impact is likely modest.
For advanced economies that export more to
the United States than they import, currency
depreciation against the dollar may provide
some positive impetus to growth through the
trade channel. Real factors, including the energy
crisis in Europe, have been the predominant
weight on growth and the associated decline
in European assets and rise in corporate bond
spreads over the past several months. Direct
U.S. exposures to advanced economies are
significant, suggesting potentially sizable
spillovers to U.S. financial stability. However,
financial sectors in these economies generally
retain substantial buffers that support their
resilience to shocks.
The challenges facing the global economy
require careful calibration of macroeconomic
policies. In September, the Bank of England
(BOE) was forced to intervene in the UK
sovereign bond market due to the sharp
increase in interest rates after the UK announced
a significantly expansionary government
budget. This intervention was made necessary
in part because levered UK pension funds
were reportedly forced to sell sovereign bond
holdings in order to meet margin requirements
on their derivatives holdings. While this is not
seen as a risk for U.S. pension funds due to
differences in regulation and structure, it is one
example of how higher interest rates and slower
growth trajectories have contributed to financial
stability challenges abroad, even in advanced
economies.

Executive Summary

15

3

Vulnerabilities, Significant Market
Developments, and Council Recommendations

3.1

Financial Risks

3.1.1

Commercial Real Estate

Commercial real estate (CRE) loans totaled
almost $5.4 trillion as of Q2 2022,2 and CRE
represents a significant portion of the assets of
many financial institutions. While CRE lending
is a key function of the financial sector, the
Council has identified certain risks related to CRE
lending. In a period of stress, high concentrations
of CRE loans can expose financial institutions
to significant credit risk. For example, many
depository failures during the 2008 financial crisis
were related to CRE loans.3
Although the CRE market performed relatively
well in 2022, it faces a more uncertain outlook
given elevated inflation, rising interest rates, a
slowing economy, and the potential for structural
changes in behaviors due to the COVID-19
pandemic. High inflation and interest rates could
lead to decreasing cash flows and property values
in the CRE market, and these properties may be
worth less than the lender assumed when the
property was financed. If the value decline is
sufficiently steep, especially compared with the
property valuation at the time of financing, lender
credit losses will likely occur. Slowing economic
growth negatively affects demand for almost
all types of CRE properties, and the COVID-19
pandemic’s negative after-effects continue to
linger, particularly for office properties in large
cities.

sheet invested in CRE loans. Widespread CRE
distress could pressure such banks and tighten
credit availability and economic growth. In
extreme cases, CRE credit losses can lead to
outright bank failures, particularly for banks with
high exposure to CRE loans.
CRE Loan Performance
Banks hold a significant market share of CRE
loans at 50%, with the rest held by various
financial institutions such as insurance
companies, commercial mortgage-backed
securities, and debt funds, and CRE is the largest
loan category at almost one-half of U.S. banks.4
The delinquency rate on CRE loans held by U.S.
banks was modest at 0.74% in Q2 2022, near 2019
pre-pandemic lows.5

As losses from a CRE loan portfolio accumulate,
eroding the lender’s capital, they can spill over
to the broader financial system through two
mechanisms. First, asset sales of financially
distressed individual properties can lower overall
market valuations, affecting adjoining property
values and leading to more distress and a broader
downward CRE valuation spiral. Second, many
CRE loans are owned by banks. Among them,
small- and medium-sized banks have a higher
proportion of their loan book or their balance
Vulnerabilities, Significant Market Developments, and Council Recommendations

17

3.1.1.1 Conduit CMBS Delinquency and Foreclosure Rate
As Of: Sep -2022

Percent
10
8

Percent
10

60+ Days
Delinquency

8

6

6

4

4
Foreclosure /
Real Estate Owned

2

0
Jan 2005 Dec 2007 Nov 2010 Oct 2013
Source: JPMorgan,
Trepp

2

0
Oct 2016 Sep 2019 Aug 2022

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

3.1.1.2 Delinquency Rate by Property Type
Percent
24
20
16

As Of: Sep -2022

Percent
24

Multifamily
Lodging
Industrial
Office
Retail

12

20

CRE Sectors

16

While the CRE market has largely recovered
from stressed levels during the COVID-19
pandemic, significant uncertainties remain
in certain CRE sectors. Industrial and
multifamily property sectors performed
well in 2022, but parts of the shopping mall
sector are weak amid changing consumer
preferences, including the continued
expansion of online shopping.

12

8

8

4

4

0
0
Jan 2005 Dec 2007 Nov 2010 Oct 2013 Oct 2016 Sep 2019 Aug 2022
Source: JPMorgan, Trepp

3.1.1.3 Vacancy Rate by Property Type
Percent
14

As Of: 2022 Q3

12

10

10

8

8

2
0
2006

6

Office

4

Industrial

4

Multifamily

2

Retail
2009

Source: CoStar, Haver
Analytics

18

Percent
14

12

6

2011

2014

2017

2019

Note: Gray bars signify NBER recessions.

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

Delinquency rates on conduit commercial
mortgage-backed securities (CMBS)
increased substantially during the initial
phase of the COVID-19 pandemic but
improved in 2021 and 2022 (Figure 3.1.1.1).
In September 2022, the overall commercial
mortgage-backed securities conduit CMBS
delinquency rate fell to 3.8% after reaching
a high of 7.8% in July 2020. The delinquency
rate in the hotel and lodging sector remained
elevated at 6.8% but is well below the
COVID-19 pandemic peak of 20.5% (Figure
3.1.1.2). In addition, the delinquency rate
in office properties remained below the
pre-pandemic level, improving to 2.3% in
September 2022. However, structural changes
in the demand for office space can lead to
weaker credit quality for loans secured by
office properties over the long term.

0
2022

The industrial property sector, mostly
warehouse and distribution centers,
experienced low vacancy rates amid strong
demand for space in 2022 (Figure 3.1.1.3).
However, demand related to warehouse and
e-commerce distribution centers is showing
signs of slowing.6 Similarly, the vacancy rate
in the multifamily sector was near a 20-year
low in Q2 2022, but the pace of construction
has been brisk, especially in rapidly growing
regions.
The office property market may face the most
uncertainty, with the prospect of weak future
demand as return-to-office plans evolve and
users decide how much space they need. At
the onset of the COVID-19 pandemic, net
absorption turned negative for the first time
in a decade, as commercial office space that
was vacated or supplied by new construction

exceeded what was leased or absorbed by tenants.
Net absorption of office space improved in 2022
but remained tepid. The drop in demand for
office space has contributed to an increase in
vacant space. Through Q2 2022, the U.S. office
vacancy rate, at 12.3%, remained well above
pre-pandemic levels. Further, office property
sales prices and rent growth have lagged behind
other property types. Low absorption, softening
rents, and elevated vacancy rates suggest weak
demand, but the effects of structural change
in the office sector are still evolving. Office
property demand may take time to stabilize as
tenants navigate remote work decisions, adjust
how much space they need, and make leasing
decisions. In addition, a slow return to densely
populated urban office centers could reduce
the desirability of office properties and even
nearby retail space. This may be especially true
for older, less desirable office spaces with fewer
modern amenities. Finally, softening economic
conditions could lead to additional stress amid a
structural shift in the office property sector.
Recommendations
Rising interest rates, uncertain economic
conditions, continuing weakness in urban
commercial real estate, and the possibility that
some post-pandemic changes in demand for
CRE will become permanent have heightened
concerns about CRE. The Council recommends
supervisors and financial institutions continue
to monitor CRE exposures and concentrations,
ensure the adequacy of credit loss allowances,
assess CRE underwriting standards, and review
contingency planning for a possible increase in
delinquencies.

3.1.2

A sharp decrease in home prices could negatively
affect homeowners’ net wealth, weaken consumer
confidence, and increase the likelihood or depth
of a broader slowdown in the U.S. economy. At
the same time, a weaker labor market could
increase delinquency or foreclosure rates, putting
additional negative pressure on home prices.
Nonbank mortgage companies could also face
acute liquidity strains in the event of widespread
delinquencies (see Section 3.3.3). Nevertheless,
a variety of factors should mitigate spillovers
from a potential decline in home prices. First,
mortgage underwriting standards remain high,
with the median credit score of newly originated
mortgages standing at 773 in Q2 2022, an increase
from below 750 in the years before the 2008
financial crisis.8 Second, there is little evidence
to date that a surge in speculative activity drove
recent house price increases. The rapid rise in
house prices experienced since the onset of the
pandemic was likely in part attributable to a shift
in the demand for housing.9 Finally, delinquency
rates remain subdued, and the equity of current
mortgage holders is strong. As of Q2 2022, 92.7%
of all outstanding mortgages had 20% or more
equity – an all-time high since 2000.10

Residential Real Estate

Residential real estate is a significant part of the
U.S. economy, comprising almost 15% of real
GDP through residential fixed investments and
consumption spending on housing services.7
Recognizing the importance of residential real
estate, the Council has identified downside
risks to housing from rising mortgage rates,
including pressure on home prices and increased
delinquencies.

Vulnerabilities, Significant Market Developments, and Council Recommendations

19

3.1.2.1 Monthly House Price Growth
Percent
As of: Aug-2022
3
FHFA Home Price Index
Case-Shiller Home Price Index

Percent
3

2

2

1

1

0

0

-1

2012

2014

2016

2018

2020

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

-1

2022

Note: SA. Month-overmonth percentage
change.

3.1.2.2 Residential Purchase and Refinance Levels
Percent
6

As Of: 2022 Q1
Purchase (right axis)
Refinance (right axis)

30 Year Mortgage
Rate (left axis)

Billions of US$
1500
1200

5

900
4
600
3

2
2015

300

2016

2017

2018

2019

2020

2021

0
2022

Source:
Primary Mortgage Survey
Source: NMDB®, Freddie Mac Primary

3.1.2.3
Real House Prices Relative to Long-Term Trend
3.1.2.3 Real House Prices Relative to Long
- Term Trend
Index

Index

180

180

160

160

140

140

120

120

100

100

80

80

60
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

60

Source: FHFA, BLS,
FRED

20

As Of: 2022 Q2

Note: Not seasonally adjusted, real terms. Trend is
estimated using data from 1975 Q3 through 2012 Q2
(trough-to-trough).

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

There is evidence of significant cooling of
the U.S. housing market. By July 2022, both
the Case-Shiller and FHFA indices reported
a decline in home prices (Figure 3.1.2.1).
At the same time, mortgage originations
have moderated, and refinance activity has
declined significantly (Figure 3.1.2.2). Based
on the National Mortgage Database (NMDB®),
mortgage refinancing has fallen to $351
billion in Q1 2022, a 57% drop from Q1 2021,
and existing home sales fell to a seasonally
adjusted annual rate of 4.7 million units in
September 2022, down from the 6.5 million
units in January.11 This is the lowest pace of
home sales since June 2020.
Much of this recent contraction can be
attributed to the rapid increase in mortgage
rates. Mortgage rates have more than
doubled over the past year, with the 30-year
fixed-rate mortgage (FRM) rate exceeding
7% in October, the highest level in 20 years.
Despite this recent increase in mortgage rates,
home prices remain elevated relative to their
long-term trend (Figure 3.1.2.3). The rapid
increase in mortgage rates and elevated home
prices have worsened housing affordability
problems (see Box B).

Mortgage-backed securities (MBS) markets
have experienced similar cooling. Agency
residential mortgage-backed securities
(RMBS) issuances fell to $401 billion in
Q3 2022, a 52% decline relative to Q3
2021.12 Additionally, spreads have widened
materially, with the spread between the
30-year current coupon MBS and 10-year
U.S. Treasury note hitting its highest level
since 2008 (Figure 3.1.2.4). At the same
time, liquidity in the agency MBS market
deteriorated over the summer of 2022.13

3.1.2.4 30-Year MBS Spread

Increased volatility in MBS markets could
lead to further significant investment losses
by certain market participants, put further
pressure on mortgage rates, and lead to a
sharper decline in home prices. Further
losses for fixed-income investors carrying
MBS securities at market value could lead
to outflows and sales by asset managers
facing liquidity strains. Additionally, a
further widening in MBS spreads could
lead to deleveraging by mortgage real estate
investment trusts (mREITS), adding strains on
MBS spreads and overall market liquidity.

Percent
2.5

As Of: 31 -Oct-2022

Percent
2.5
2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
2005

2008

Source: Bloomberg,
L.P.

2011

2014

2017

2020

0.0

Note: Spread to 10-Year Treasury.

Recommendations
With rising interest rates and a slowdown
in economic growth creating the potential
for a softening of the housing market, the
Council recommends supervisors and
financial institutions continue to monitor
residential real estate exposures and ensure
the adequacy of credit loss allowances.
Federal and state agencies should enhance
or establish information-sharing protocols
to enable collaboration and communication
in response to the increased risk in
residential real estate and mortgages. The
Council acknowledges the changing market
environment and encourages member
agencies to review existing loss mitigation
options of their regulated entities, including
assessing the affordability and sustainability
of available home retention solutions, such
as modifications, in a higher interest rate
environment. The results of such a review
should inform supervisory responses by
member agencies.

Vulnerabilities, Significant Market Developments, and Council Recommendations

21

Box B: The Rapid Rise of Mortgage Rates
The mortgage interest rate is a key factor affecting
housing market affordability. For a standard
30-year fixed-rate mortgage, the interest rate rose
to over 7% in October 2022, up almost 400 basis
points from the prior year (Figure B.1). This is the
largest year-on-year increase observed in the last
40 years and the highest level since 2002.
B.1 Mortgage Rate (30-Year Fixed-Rate Average)
Percent
20

As Of: 27- Oct-2022

Percent
20

15

15

10

10

5

5

0
1972

0

1982

1992

2002

2012

2022

Source: Freddie Mac Primary Mortgage Market Survey, FRED

There are two possible ways that the “ability
to pay” channel could create risks to financial
stability. First, facing higher interest rates,
payment-constrained potential borrowers may
place lower bids on the market or exit the market,
which could reduce housing asset values through
the demand channel. Second, the resulting
valuation changes may affect perceptions of the

22

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

riskiness of the collateral on mortgages through
changes in equity valuations and mark-to-market
loan-to-value ratios for existing mortgages.
As interest rates rise, the maximum loan amount
a borrower can afford under a fixed monthly
payment falls when facing a binding debt service
payment constraint. For example, a borrower
who can afford a maximum $1,000 monthly
mortgage payment faces a change in borrowing
power from $237,000 to $167,000 as rates for a
30-year fixed-rate mortgage increase from 3% to
6%, a drop of $70,000 or 30%. Alternatively, if a
borrower maintains a loan amount of $237,000,
the monthly payment would increase by 42%,
from $1,000 to $1,421. Accordingly, increasing
interest rates may reduce house prices through
demand channels.
While future mortgage interest rates are
uncertain, current forward rates indicate the
possibility that mortgage rates could remain
elevated in the medium-term. Although the
current expected monetary policy path is priced
into current mortgage rates, deviations from
expectations will likely cause changes to mortgage
interest rates. In particular, changes to long-run
inflation expectations and the Federal Reserve’s
MBS holdings may significantly impact mortgage
rate volatility and direction, and a further
significant increase in mortgage rates could
increase the risk to financial stability.

3.1.3 Nonfinancial Corporate Credit
Well-functioning corporate credit markets
facilitate efficient capital formation and allow
investors to direct capital to fund economic
growth.14 However, financial stability risks
arise when companies cannot service their
obligations, and the financial sector cannot
absorb losses from defaults and downgrades.
For example, investment funds that hold
corporate credit and have significant
liquidity mismatches may experience large
redemptions, which could disrupt market
functioning. Additionally, financial stability
risks may occur if market participants are
unwilling or unable to provide intermediation
during times of stress. Thus far, corporations
and investors have managed to weather
the recent increase in interest rates despite
increased funding costs and significant
investment losses. Nevertheless, if the sharp
increase in interest rates leads to widespread
debt servicing problems, credit markets could
experience a further repricing of risk and
disruptions to financial stability.

3.1.3.1 Nonfinancial Corporate Debt as Percent of GDP
Percent
60

As Of: 2022 Q2

Percent
60

50

50

40

40

30

30

20
1980

1985

Source: Federal
Reserve, Haver
Analytics

1990

1995

2000

2005

2010

2015

2020

20

Note: Gray bars signify NBER recessions.

Nonfinancial corporate debt as a percent of
GDP has decreased from its peak in early 2020
but remains elevated relative to pre-pandemic
levels (Figure 3.1.3.1).15 While many firms
increased their leverage during the early
COVID-19 pandemic period by drawing
on their lines of credit in an abundance of
caution, many companies reduced their
leverage in the second half of 2020 to more
normalized levels. Still, leverage remains
elevated, especially within industries most
impacted by the COVID-19 pandemic,
including the airline, hospitality and
leisure, and restaurant sectors. Some public
companies have large cash buffers that can
mitigate some of the risk created by elevated
leverage levels, but higher leverage levels
generally equate to a higher risk of default.

Vulnerabilities, Significant Market Developments, and Council Recommendations

23

Corporate Debt Markets

3.1.3.2 Gross Issuance of Corporate Bonds
As Of: Oct -2022
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 2010

2012

Source: Refinitiv,
SIFMA

2014

2016

2018

2020

YTD
2022

Note: Includes all non-convertible corporate debt,
MTNs, and Yankee bonds, but excludes all issues with
maturities of one year or less and CDs. 2022 figures
are through October.

3.1.3.3 Corporate
Bond Yields
Corporate Bond Yields

3.1.3.3
Percent
12

9

Percent
12

As Of: 31 - Oct- 2022

9

High-Yield

6

3

0
2012

0.0

6

3

Investment-Grade

2014

Source: ICE Data
Indices, FRED

2016

2018

2020

2022

0

Note: Dotted lines represent 20-year average.

3.1.3.4 Corporate Bond Spreads
Percent
12

As Of: 31-Oct-2022

Percent
12

9

6

3

0
2012

9
High-Yield

3

Investment-Grade

2014

Source: ICE Data
Indices, FRED

24

6

2016

2018

2020

2022

Note: Dotted lines represent 20-year average.

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

0

In 2020 and 2021, corporations took
advantage of historically low-interest rates
by issuing record amounts of corporate debt
(Figure 3.1.3.2). Corporate bond yields have
since risen markedly, and by mid-October,
both investment grade and high-yield bond
yields were well above their 20-year average
(Figure 3.1.3.3). In light of the less favorable
financing conditions, corporate bond
issuances have fallen markedly; in Q3 2022,
investment grade issuances fell by 17%, while
high-yield issuances fell by 81% compared
to Q3 2021. Nevertheless, the increase in
interest rates has not led to material spillovers
to corporate credit market functioning, and
corporate credit spreads remain in line with
their longer-term average (Figure 3.1.3.4).
Additionally, many corporations have
extended the maturity of their debt, which
should mitigate near-term refinancing risks
(Figure 3.1.3.5).

Corporate debt investors also face risks in a
rising rate environment. Over the last several
years, investors have been willing to purchase
longer-term debt in exchange for higher
yields. However, the interest rate sensitivity of
fixed-rate debt increases as the instrument’s
maturity lengthens, exposing investors to
greater market value declines as rates rise.
The recent increase in interest rates has led
to significant investment losses, as indicated
by the ICE BofA US Corporate Total Return
Index, which was down 19.2% year-to-date as
of October 31, 2022. Moreover, fixed-income
investors, including open-end funds, could
accumulate further losses if rates continue to
increase (see Section 3.2.2).

3.1.3.5 Maturity Profile of U.S. Nonfinancial Corporate Debt
As Of: 01 -Jul-2022

Billions of US$
1200
1000

Billions of US$
1200

High-Yield
Investment Grade

1000

800

800

600

600

400

400

200

200

0

2022.2H

2023

Source: S&P Global
Ratings Research

2024

2025

2026

2027

0

Note: Includes bonds, loans, and revolving credit
facilities that are rated by S&P Global Ratings. Excludes
debt maturing after 2027.

3.1.3.6 Institutional Leveraged Loans Outstanding

Leveraged Loan Markets

Trillions of US$
1.6

High-yield issuers that obtained financing
through leveraged loans pay variable interest
on their outstanding obligations. In the
event of rising rates, these companies may
struggle to make payments as their debt
service burden increases, especially if they
do not hedge their interest rate exposure.
In addition, deteriorating macroeconomic
conditions can further impact these
companies’ ability to service debt.

Trillions of US$
1.6

1.4

1.4

1.2

1.2

1.0

1

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0

The leveraged lending market has
experienced rapid growth since 2011, with
U.S. institutional loans exceeding $1.4 trillion
as of September 2022 (Figure 3.1.3.6).
Covenant-lite loans, which have fewer
investor protections, continue to represent
most new loan issuances. The widespread
use of covenant-lite loans could reduce the
amount of technical defaults through less
frequent covenant violations. However, when
combined with weaker credit quality, weaker
financial maintenance covenants in leveraged
loans may lead to lower recovery rates in the
event of a default (see Section 3.3). Thus far,
leveraged loan default rates have remained
below pre-pandemic levels.16

As Of: 2022 Q3

2006 2008 2010

Source: S&P LCD

2012

2014

2016

2018

2020 2022

0

Note: Includes all loans including those not included
in the LSTA/TRLPC mark-to-market service. Primarily
institutional tranches.

Recommendations
Rising interest rates, the continued
effects of the COVID-19 pandemic, and
the slowdown in economic growth have
increased nonfinancial corporate credit
Vulnerabilities, Significant Market Developments, and Council Recommendations

25

risk. If credit quality worsened significantly, a
potential wave of defaults could lead to large
redemptions at investment funds with significant
liquidity mismatches, and in turn disrupt market
functioning. The Council recommends that
member agencies, in order to assess and reinforce
the ability of the financial sector to manage severe
simultaneous losses, continue to monitor levels
of nonfinancial business leverage, trends in asset
valuations, and potential implications for the
entities they regulate. The Council encourages
entities exposed to corporate credit risk to review
their risk-rating methods in light of the uncertain
economic environment and, if applicable, assess
the adequacy of their allowance for credit losses.

3.1.4

Short-term Wholesale Funding Markets

Short-term wholesale funding markets provide
essential financing for businesses, financial
intermediaries, state and local governments,
and the federal government. These markets are
critical for implementing monetary policy and
supporting financial market liquidity. They are
also highly interconnected with systemically
important financial institutions that borrow
and lend in these markets. In addition, some
key intermediaries in these markets perform
significant liquidity and maturity transformation
and are vulnerable to runs. These features
contribute to fragilities in the short-term funding
markets that can affect financial stability.
The Role of Money Market Funds as Short-term
Lenders
U.S. domiciled money market funds (MMFs) are
major lenders in the short-term funding markets.
As described in (Section 3.2.2), MMFs contribute
to funding market vulnerabilities by performing
liquidity and maturity transformation. In both
2008 and 2020, prime and tax-exempt MMFs
experienced heavy redemptions, contributing to
dislocations in the short-term funding markets.
These events led to extraordinary policy responses
in 2008, when the Federal Reserve established
liquidity facilities and the U.S. Treasury provided
a temporary guarantee of MMFs, and in 2020
when the Federal Reserve again established
facilities to stabilize short-term funding markets.
In February 2022, the SEC published proposed
amendments to MMF rules to address the

26

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

vulnerabilities demonstrated at the onset of the
COVID-19 pandemic.17
Other investment funds operating as lenders in
the short-term funding markets include dollardenominated non-U.S. domiciled (so-called
“offshore”) MMFs, bank-sponsored short-term
investment funds (STIFs), local government
investment pools, private liquidity funds, and
ultrashort bond funds. Like MMFs, these
intermediaries perform liquidity and maturity
transformation, can contribute to fragilities
in the short-term funding markets, and have
experienced large outflows amid financial stress.
Many of these intermediaries, including
government MMFs, prime and tax-exempt MMFs
offered to retail investors, offshore MMFs, STIFs,
and private liquidity funds, maintain stable net
asset values (NAVs). These products may obtain
a stable share price by using amortized cost
accounting for calculating the NAV, arriving at a
fixed share price of, for example, $1.00. Stable
NAV funds are typically limited in the risk they
can take, but when short-term interest rates rise
sharply or portfolio assets lose value for other
reasons, the market value of a fund’s shares
may fall below the typical stable NAV. The rising
possibility of losses in a stable NAV fund may
prompt investor concerns and redemptions
that can cause a fund to sell assets to meet
redemptions, potentially straining markets for
short-term instruments.

Unsecured Lending
Commercial paper (CP) is an important
source of unsecured short-term funding used
by both nonfinancial and financial firms.
Negotiable certificates of deposit (NCDs)
are a means for banks to obtain short-term
unsecured funding in capital markets. CP
and NCD markets have grown over the past
year and reached $1.1 trillion and $700
billion in September 2022 (Figure 3.1.4.1).18
There has also been a significant shift in the
composition of the CP outstanding in recent
years, as the amount issued by domestic
nonfinancial firms has declined while the
amount issued by foreign financial firms has
increased (Figure 3.1.4.2). The CP investor
base has also shifted over time, with MMFs’
share declining but remaining significant
and nonfinancial firms increasing their
direct investment (Figure 3.1.4.3). While CP
spreads have been somewhat volatile in 2022,
they are not indicating crisis-level concerns
regarding liquidity or credit (Figure 3.1.4.4).

3.1.4.1 CP and NCDs Outstanding
Trillions of US$
As Of: Sep-2022
1.5
CP Outstanding
Outstanding NCDs with <1 Yr Maturity

Trillions of US$
1.5

1.2

1.2

0.9

0.9

0.6

0.6

0.3
2017

2018

Source: Federal
Reserve, Haver
Analytics, DTCC
Solutions LLC

2019

2020

2021

0.3

2022

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

3.1.4.2 CP Outstanding by Issuer Type
Trillions of US$
2.5

As Of: Oct-2022

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
Jan 2004

Oct 2007

Source: Federal
Reserve, Haver
Analytics

Jul 2011

Apr 2015

Jan 2019

0.0
Oct 2022

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

3.1.4.3 CP Investors
Percent
100

As Of: 2022 Q2

Percent
100

80

80

60

60

40

40

20

20

0
1990 1994 1998
Funding Corporations
Money Market Funds

2002 2006 2010 2014
State & Local Governments
Nonfinancial Corporates

2018

0
2022

Other

Source: Federal Reserve, Haver Analytics

Vulnerabilities, Significant Market Developments, and Council Recommendations

27

3.1.4.4 3-Month CP Interest Rate Spreads
Percent
4

As Of: 31 - Oct - 2022
A2/P2-Rated Nonfinancial
AA-Rated ABCP
AA-Rated Financial
AA-Rated Nonfinancial

3

Percent
4
3

2

2

1

1

0

0

-1
Jan 2020

Sep 2020

Source: Federal
Reserve, Refinitiv,
Haver Analytics

May 2021

Jan 2022

Sep 2022

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

-1

As investors tend to buy and hold these shortterm instruments to maturity, demand for
secondary market liquidity is usually low, and
dealers face little incentive to intermediate
and support secondary markets. Hence,
when demand for liquidity rises sharply, such
as during the “dash for cash” in March 2020,
these markets cannot accommodate large
volumes of sales requests from investors, such
as prime MMFs. At the same time, financial
institutions that depend on these markets as
a source of funding may be unable to obtain
new funding as these short-term instruments
mature. This creates a channel for financial
instability between the institutions seeking
funding and the institutional investors
providing the funds, contributing to the
fragility of the short-term funding markets. In
March 2020, the Federal Reserve established a
Commercial Paper Funding Facility to ensure
that firms were able to roll over their CP based
on the severe market disruption, illustrating
the vulnerability that this market can create
and the importance of ensuring that it is
properly functioning during market stress.
Secured Lending
The repurchase agreement (repo) market is
an important source of short-term wholesale
funding, and repo markets play a critical role
in Treasury market liquidity and monetary
policy implementation. Repos are a form
of secured lending in which an investor
receives securities as collateral in exchange
for cash, with an agreement to repurchase the
securities at a later date at a specified price.19
Large bank-affiliated dealers serve as the
primary intermediaries in the repo market by
borrowing from cash lenders, such as MMFs,
and lending to entities that employ leverage,
such as hedge funds.20 Dealers also borrow
in the repo market to finance their own
securities holdings. In addition, large banks
may rely on repo markets in times of stress
to obtain quick access to cash rather than
liquidate assets.
Over the past year, repo market rates
increased along with the increase in Federal
Reserve policy rates. However, the Secured
Overnight Financing Rate (SOFR) and Tri-

28

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

Party General Collateral Rate (TGCR) have
generally been slightly below the Overnight
Reverse Repo Facility (ON RRP) rate,
indicating ample cash available for lending
(Figure 3.1.4.5). Repo borrowing totaled
$6.1 trillion, of which non-Federal Reserve
borrowing represented $3.8 trillion as of Q2
2022 (Figure 3.1.4.6).21 The market consists
of two main segments: tri-party repo, in
which settlement occurs within the custodial
accounts of a clearing bank, and bilateral
repo, which typically refers to all activity not
settled within the tri-party system. Bilateral
repo consists of transactions cleared through
the Fixed Income Clearing Corporation
(FICC) and those that are not centrally
cleared. Repo trading volumes in the tri-party
and centrally cleared bilateral repo markets
have been relatively stable over the past two
years, as represented by the roughly $300
billion in daily volumes for the TGCR and
$600 billion making up the remainder used
for the Secured Overnight Financing Rate
SOFR (Figure 3.1.4.7). Included in the SOFR
volumes are FICC’s sponsored repo service,
which has been an important way for nonFICC members to access centrally cleared
bilateral repo markets (Figure 3.1.4.8).
Less is known about the aggregate size of the
non-centrally cleared bilateral repo market,
which is the subject of a data collection pilot
initiated by the OFR in 2022. For the pilot,
nine participants voluntarily shared data
on their non-centrally cleared bilateral repo
agreement transactions with the OFR for
three days in June 2022. The insights from
this pilot collection will also help support
ongoing research about overall market
stability and vulnerabilities that may emerge.
The OFR pilot collection is designed to
prepare industry participants and the OFR for
permanent data collection under a future final
rule, which will capture data on an ongoing
basis across market participants.
Repo markets may impact financial stability,
given their size and the prominent role
played by systemically important financial
institutions and utilities. Many repo market
participants are vulnerable to funding or

3.1.4.5 Repo Rates
Percent
6
SOFR
5

As Of: 31-Oct-22

Percent
6

TGCR

5

4

4

3

3

2

2

1

1

0
Jan 2019

Oct 2019

Source: FRBNY

Jul 2020

Apr 2021

Jan 2022

0
Oct 2022

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

3.1.4.6 Repo Borrowing Outstanding
Trillions of US$
7

As Of: 2022 Q2

Trillions of US$
7

Federal Reserve
Other

6

6

5

5

4

4

3

3

2

2

1

1

0
2012

2014

Source: Federal
Reserve, Haver
Analytics

2016

2018

2020

2022

0

Note: Federal Reserve repo borrowing primarily
consists of ON-RRP facility.

3.1.4.7 Repo Volumes
Billions of US$
1500

As Of: 31 - Oct- 2022

Billions of US$
1500

SOFR
1200

1200
900
600

900
600

TGCR

300
0
Jan 2019
Source: FRBNY

300

Dec 2019

Nov 2020

Oct 2021

0
Sep 2022

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

Vulnerabilities, Significant Market Developments, and Council Recommendations

29

3.1.4.8 Sponsored Repo Activity
As Of: Oct - 2022
Billions of US$
700
Repo Borrowing
Repo Lending
600
Aggregate

Billions of US$
700
600

500

500

400

400

300

300

200

200

100

100

0
Jul 2019
Source: DTCC

Aug 2020

Sep 2021

0
Oct 2022

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

liquidity shocks and may transmit stress to
other repo market participants and broader
short-term funding markets. For example,
MMFs and open-end funds, which are net
lenders in the repo market, may pull back
from the market during periods of market
stress to raise cash to meet redemptions. At
the same time, leveraged investors, such
as hedge funds and mortgage real estate
investment trusts (mREITS), may face a
sudden tightening in financing terms or be
unable to roll over financing. As a result,
leveraged investors may be forced to sell
assets quickly, which can depress asset prices,
lead to a further tightening in financing terms,
and force further deleveraging. In addition,
CCPs, which tend to reduce strains in repo
markets and improve market functioning by
reducing counterparty risk, could become
a source of strain if multiple large clearing
members defaulted on their obligations to the
clearing house simultaneously. This could
force the CCP to liquidate a large amount of
collateral in a way that may be challenging for
the underlying market.22
Repo markets, and in particular tri-party
repo, have undergone significant structural
changes since the 2008 financial crisis,
making them safer.23 These changes helped
streamline some repo operations, and higher
collateral quality has helped reduce exposure
to counterparty risk. Nevertheless, recent
episodes of stress in repo markets, particularly
in September 2019, and to a lesser extent, in
March 2020, highlighted how problems in
the repo market could quickly transmit or
exacerbate stress in the financial system.
In July 2021, the Federal Reserve established
two repo facilities, one standing repo
facility (SRF) for primary dealers and
depository institutions and one for foreign
and international monetary authorities
(FIMA Repo Facility).24 Initially, the SRF
only included primary dealers, but the
Federal Reserve has, over time, added
certain depository institutions that can
apply for access. Both of these facilities
allow counterparties to obtain funds from
the Federal Reserve by pledging securities,

30

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

including U.S. Treasuries, agency debt,
and agency mortgage-backed securities
for the SRF but only U.S. Treasuries for the
FIMA Repo Facility, thus supporting market
functioning by serving as a backstop source
of secured funding. These facilities support
effective monetary policy implementation as
their primary objective, limiting the potential
for pressures in overnight interest rates.

3.1.4.9 Overnight Reverse Repo Facility
Trillions of US$
3.0

The Federal Reserve also operates the ON
RRP. The ON RRP places a floor under
overnight interest rates by providing an
alternative investment opportunity for eligible
counterparties when overnight repo rates fall
below the rate offered at the ON RRP.25 Over
the past year, the ON RRP has seen usage
expand to over $2 trillion amid low repo
rates relative to other short-term rates and
limited alternative investments for ON RRP
participants (Figure 3.1.4.9). Nonetheless,
private market rates and volumes in the
overnight Treasury repo market have been
relatively stable over the past year.

As Of: 31 - Oct - 2022

Trillions of US$
3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0
Jan 2020 Jul 2020

Jan 2021

Jul 2021

Jan 2022 Jul 2022

0.0

Source: FRED, FRBNY

As we look ahead, the increase in the supply
of U.S. Treasury securities to private sector
investors may require higher levels of repo
financing. Accordingly, ensuring a robust
and smooth functioning repo market will be
critical to maintaining liquidity in the market
for Treasury securities and other financial
markets more broadly.
Recommendations
In light of the ongoing market volatility
and shifts in monetary policy, the Council
recommends member agencies closely
monitor short-term funding market
conditions and take actions to mitigate
vulnerabilities. The Council supports efforts
by financial regulators to strengthen shortterm funding markets and support orderly
market functioning, including during periods
of heightened market stress. Where lack
of data prevents close monitoring, Council
members should develop proposals to collect
the necessary data, such as the efforts by the
OFR to improve collection and transparency
of non-centrally cleared bilateral repo
markets data.
Vulnerabilities, Significant Market Developments, and Council Recommendations

31

3.1.5

3.1.5.1 Bitcoin Price
Thousands of US$
70

As Of: 30 - Nov - 2022

Thousands of US$
70

60

60

50

50

40

40

30

30

20

20

10

10

0
Jan 2018

Dec 2018

Dec 2019

Source: Bloomberg, L.P.

Dec 2020

Nov 2021

0
Nov 2022

Digital Assets

In February 2022, the Council identified
digital assets as a priority area. In October,
the Council released its Report on Digital
Asset Financial Stability Risks and Regulation
in response to Executive Order 14067,
Ensuring Responsible Development of
Digital Assets.26 The report found that
financial stability vulnerabilities fall into two
categories with respect to digital assets. The
first category arises from interconnections
between the digital asset ecosystem and
the traditional financial system. Such
interconnections would broaden the effects
of shocks that originate inside the digital
asset ecosystem. The second category covers
a set of vulnerabilities primarily confined
to the digital asset ecosystem, including the
potential for drops in asset prices, financial
exposures via interconnections inside that
ecosystem, operational vulnerabilities,
funding mismatches, risk of runs, and the
use of leverage. Each vulnerability within
the digital asset ecosystem has the potential
to operate independently, but they are likely
to interact as they do in traditional financial
markets.
The digital asset ecosystem has grown
substantially in scale and scope in recent
years. However, crypto-asset prices fell
broadly over the past year, including major
assets such as Bitcoin (Figure 3.1.5.1)
and Ethereum, and prominent crypto
platforms such as Blockfi, Voyager Digital,
and Celsius Network experienced severe
financial problems and subsequently filed for
bankruptcy. In November, crypto-exchange
FTX and some affiliated firms declared
bankruptcy. The exchange could not meet
withdrawal requests from customers, which
followed reports that the exchange had
loaned billions of dollars of customer funds to
Alameda Research, an affiliated crypto trading
firm, and that a significant amount of those
funds were missing or lost.27 In its bankruptcy
filing, the new CEO of FTX identified many
problems including a lack of trustworthy
financial information, compromised systems
integrity, faulty regulatory oversight abroad,
and concentrated control of the business.28

32

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

The problems at FTX precipitated price decreases
in Bitcoin and other crypto-assets, but thus far
have had a limited impact on the broader U.S.
financial system.
The crypto downturn has negatively impacted
many investors. Documentation from bankruptcy
proceedings of recently failed crypto-asset
platforms provides qualitative insight into
individuals whose crypto-asset holdings faced
substantial losses and, in some cases, lost
their entire life savings.29 For example, survey
data suggest that 46% of crypto-asset owners
reported their investments did worse than
they expected, versus only 15% who said they
did better than expected.30 According to one
survey, the percentage of Americans comfortable
investing in crypto-assets reportedly dropped
to about 21% in 2022 from 35% in 2021.31 The
steepest drop came among millennials: almost
30% of American investors between the ages of
26 and 51 are comfortable investing in cryptoassets, down 20 percentage points from the
50% who reported being comfortable in 2021.
The decline in investor enthusiasm may be
attributed to a number of market characteristics,
including price volatility, fraud, and lack of
compliance with disclosure and market integrity
requirements among crypto-asset market
participants.
Past surveys about crypto-asset ownership have
focused on the percentage of surveyed people
who hold any amount of crypto-assets, not on
where most crypto-assets are concentrated.
Industry metrics show a high concentration of
crypto-asset ownership among the top 1% of
asset holders. This is true for many governance
tokens and stablecoins, and outstanding tokens
held by the top 1% exceed 95% in several cases.
While survey data from the Federal Reserve shows
that 29% of crypto-asset investors make less
than $50,000 per year, there are indications that
the majority of crypto-assets are held by a few
wealthy entities, colloquially known as “whales.”32
Fraud can cause or exacerbate financial
instability, and state securities regulators
consistently identify crypto-assets as one of the
most common subjects of enforcement actions.33
The CFPB’s Consumer Complaint Database

reveals that fraud and scams are a significant
problem in crypto-asset markets: 40% of the
8,300 crypto-asset complaints received between
October 2018 – September 2022 were marked
by consumers as a complaint about a “fraud or
scam.”34 The crypto-asset fraud reports from the
Federal Trade Commission’s (FTC) Consumer
Sentinel show similar trends: between January
1, 2021 – March 31, 2022, the FTC reported that
over 46,000 people lost more than $1 billion worth
of crypto-assets due to scams and fraud, with
an overall median loss of approximately $2,600.
Crypto-asset losses reported to the FTC in 2021
were nearly sixty times more than in 2018.35 The
SEC has received over 23,000 tips, complaints,
and referrals since fiscal year 2019 involving
crypto-asset activities. Common subjects of these
reports to the SEC include initial “coin” or “token”
offerings, crypto-asset wallet access issues,
crypto-asset platform operational issues, pricing
and manipulation, and high-yield investment
schemes that purport to involve crypto-asset
trading and mining.36
However, the turmoil in the crypto-assets
ecosystem did not have notable effects on
the traditional financial system. The current
regulatory framework, and the limited overall
scale of crypto-asset activities, have helped
largely insulate traditional financial institutions
from the acute instability seen in the crypto-asset
ecosystem. While crypto-asset interconnections
with the traditional financial system are
relatively limited, they could increase rapidly.
Participants in the crypto-asset ecosystem and
the traditional financial system have explored or
created a variety of interconnections. Notable
sources of potential interconnections include
stablecoin issuers’ reserve assets held by
traditional financial institutions. Crypto-asset
trading platforms may also have the potential
for greater interconnections by providing a wide
variety of services, including leveraged trading
and asset custody, to a range of retail investors
and traditional financial institutions. Other
connections between traditional finance and
the crypto-asset ecosystem could arise through
increased consumer access to crypto-assets,
including through certain traditional money
services businesses.

Vulnerabilities, Significant Market Developments, and Council Recommendations

33

Recommendations
Council members have continued to enforce
existing rules and regulations applicable
to crypto-asset activities over the past year,
including actions related to unregistered offers
and sales of crypto-asset securities, episodes
of fraud and market manipulation, and false
and misleading statements made directly or by
implication, concerning the availability of federal
deposit insurance for a given product. These are
violations of the law, and have given customers
the impression that they are protected by the
government safety net when that protection
does not exist. The Council’s Report on Digital
Asset Financial Stability Risks and Regulation
recommends that members continue to enforce
existing laws and, in doing so, consider a set
of general principles described in the report,
including the principle of same activity, same risk,
and same regulatory outcome.
In addition, though the existing regulatory system
covers large parts of the crypto-asset ecosystem,
the report notes three gaps in the regulation of
crypto-asset activities in the United States.
First, the spot markets for crypto-assets that are
not securities are subject to limited direct federal
regulation. As a result, those markets may not
be subject to a regulatory framework designed to
ensure orderly and transparent trading, prevent
conflicts of interest and market manipulation,
and protect investors and the financial system
more broadly. To address this regulatory gap,
the Council recommends that Congress pass
legislation that provides for explicit rulemaking
authority for federal financial regulators over
the spot market for crypto-assets that are not
securities. The Council recommends that this
rulemaking authority should not interfere
with or weaken market regulators’ current
jurisdictional remits. Legislation should provide
for enforcement and examination authority to
ensure compliance with these rules.
Second, crypto-asset market businesses do not
have a consistent or comprehensive regulatory
framework and can engage in regulatory
arbitrage. Some crypto-asset businesses may
have affiliates or subsidiaries operating under
different regulatory frameworks, with no single

34

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

regulator having visibility into the risks across
the entire business. To address the risk of
regulatory arbitrage, the Council recommends
continued coordination, legislation addressing
the risks posed by stablecoins, legislation relating
to regulators’ authorities to have visibility into
and supervise the activities of all of the affiliates
and subsidiaries of crypto-asset entities, and
appropriate service provider regulation.
Third, a number of crypto-asset trading platforms
have proposed offering retail customers direct
access to markets by vertically integrating the
services provided by intermediaries such as
broker-dealers or futures commission merchants.
Financial stability and investor protection risks
may arise from retail investors’ exposure to some
practices often proposed by vertically integrated
trading platforms, such as automatically and
rapidly closing out customer positions. Therefore,
the Council recommends that member agencies
assess the impact of potential vertical integration
by crypto-asset firms.
Finally, the Council recommends that Council
members continue to build capacities related to
data and the analysis, monitoring, supervision,
and regulation of crypto-asset activities. The
Council’s report on digital assets describes these
recommendations in greater detail.

3.2
3.2.1

Financial Institutions

3.2.1.1 Total Assets by BHC Type/IHC
Trillions of US$

Large Bank Holding Companies

Large bank holding companies (BHCs)
comprise the majority of banking assets in
the U.S., with global systematically important
banks (G-SIBs) comprising the majority of
U.S. banking assets (Figure 3.2.1.1). Large
BHCs are critical to the U.S. financial system,
performing essential banking functions such
as providing credit to commercial and retail
borrowers, helping firms raise capital and
hedge risk, and providing asset management
and custody services. These companies also
fill a central role in facilitating retail and
wholesale payments on a global scale and
clearing large volumes of transactions in repo
markets. The stability of these operations is
critical to the global financial system. Due to
their interconnectedness to global financial
markets, large BHCs are also subject to
material risks from counterparty exposures
and emerging global climate-related risks that
could have greater relevance to the broader
financial ecosystem.
37

Bank Capital and Liquidity
In the early stages of the COVID-19 pandemic,
fiscal stimulus from the Coronavirus Aid,
Relief, and Economic Security (CARES) Act
and monetary stimulus measures from the
Federal Reserve injected trillions of dollars
into the U.S. economy. This resulted in
significant deposit inflows, which helped
to increase banks’ capital and liquidity
levels. These actions helped to avert severe
economic stress and a wave of defaults that
would have weakened these institutions
considerably during the COVID-19 pandemic.
The economic and policy initiatives
undertaken during and after the 2008
financial crisis,38 which set stronger capital
and liquidity requirements for banks and
gave existing supervisors greater authority
to restrict leverage, also contributed to
this outcome. Bank common equity tier 1
(CET1) capital ratios and return on average
assets dropped in the months after the initial
COVID-19 outbreak as banks added to credit
loss reserves in anticipation of loan losses
(Figures 3.2.1.2 and 3.2.1.3). As the stimulus

As Of: 2022 Q2

Trillions of US$

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

G-SIBs

Source: FR Y -9C
Source: FR Y-9C

Large
Complex

Large
Noncomplex

Other

0

IHCs

3.2.1.2 Common Equity Tier 1 Ratios
Percent of RWA
16
14
12

As Of: 2022 Q2

Percent of RWA
16

G-SIBs
Large Complex
Large Noncomplex
Other

14
12

10

10

8

8

6

6

4
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

4

Source: FR Y-9C,
Haver Analytics

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 riskweighted assets (RWA). Shaded areas indicate NBER
recessions.

3.2.1.3 Return on Assets

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

As Of: 2022 Q2

Percent
3

2

1

1

0

0

-1

2010

2012

Source: FR Y-9C

2014

2016

2018

2020

2022

-1

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

Vulnerabilities, Significant Market Developments, and Council Recommendations

35

3.2.1.4 Payout Rates at U.S. G-SIBs
Percent of NIAC
As Of: 2022 Q2
200
Common Stock Cash Dividends
(left axis)
Stock Repurchases
150
(left axis)

Billions of US$
200
NIAC (right axis)

took effect and loans performed better than
expected, banks released reserves, which
helped improve their capital and profitability
levels.

150

Large BHCs have sound capital and liquidity
positions as several large BHCs had increased
100
100
earnings retention rates and credit loss
reserves to meet higher risk-based capital
requirements and boost resilience. Following
50
50
the 2022 Comprehensive Capital Analysis
and Review (CCAR), several large U.S. banks,
0
0
including G-SIBs, were required to hold
2014 2015 2016 2017 2018 2019 2020 2021 2022
Note: Payout rates are the ratios of stock repurchases plus cash dividends to
higher stress capital buffers beginning in
Note: Payout rates are the ratios of stock repurchases
Source: FR Y-9C
plus cash dividends to net income available to common
Q4 2022. In addition, some G-SIBs will also
shareholders (NIAC). NIAC is net income minus
preferred dividends. 2022 data represents YTD data
have to meet a higher G-SIB capital surcharge
through Q2.
beginning in Q1 2023.

3.2.1.5 AOCI as a Percent of Equity
As Of: 2022 Q2

Percent
5

Percent
5

0

0

-5

-5

-10
-15
-20
2014

-10
G-SIBs
Large Complex
Large Noncomplex
Other
2015

2016

-15

2017

Source: FR Y-9C

2018

2019

2020

2021

2022

-20

Note: Accumulated other comprehensive income
(AOCI).

3.2.1.6 Held-to-Maturity Securities
Percent of Investment
Securities
70
G-SIBs
60
Large Complex
Large Noncomplex
50
Other
40

Percent of Investment
Securities
70

As Of: 2022 Q2

60
50
40

30

30

20

20

10

10

0
2010

2012

Source: Call Report

2014

2016

2018

2020

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

0
2022

Bank profitability declined somewhat in
2022 as banks increased loan loss provisions
amid higher uncertainty about the economic
outlook. But banks report that rising interest
rates will support their profitability going
forward, as higher rates will lead to higher
interest revenues on new loans and existing
floating rate assets.
Since 2019, large BHCs retained more
earnings to build capital levels as risks to
capital grew and some BHCs were also
subject to temporary restrictions on their
capital distributions in 2020 and 2021 (Figure
3.2.1.4).
Tightening Financial Conditions
Financial conditions tightened in 2022 in
response to rising inflation. Investment
portfolios are at risk as rates rise, particularly
portfolios where duration was extended over
the last two years to offset net interest margin
(NIM) compression (see Box C). The high
proportion of securities classified as heldto-maturity (HTM) at G-SIBs has helped
to offset unrealized losses in accumulated
other comprehensive income (AOCI) related
to their market-sensitive available-for-sale
(AFS) securities portfolio (Figures 3.2.1.5 and
3.2.1.6).
Aggregate banks’ survey responses from the
July 2022 Senior Loan Officer Opinion Survey

36

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

indicate an overall net tightening in lending
standards and a net weakening in loan demand.
In their outlook for the second half of 2022, banks
reported expecting to tighten lending standards
across all loan categories, which stands in stark
contrast to the January 2022 survey when banks
expected to further ease lending standards over
2022. The most cited reasons for expecting to
tighten standards were an expected deterioration
in borrowers’ debt-servicing capacity due to
inflation, an expected reduction in risk tolerance,
and an expected decline in collateral values.
Nevertheless, bank lending remains robust,
and in particular, lending to nonbank financial
institutions (NBFIs) continued to increase
notably. Credit quality measures show limited
credit risk on these loans, but because NBFIs
rely primarily on their bank credit lines to meet
unexpected liquidity needs, loan commitments
can experience sudden, correlated drawdowns.
These drawdowns could generate liquidity
pressures at large banks during times of financial
stress.
The vulnerabilities of U.S. banks to the Russian
war against Ukraine appear to be limited.
Before the war, banks maintained relatively
small footprints in Russia and Ukraine, and
their outstanding loans to borrowers in those
countries were small. Exposures of large banks
to counterparties that are active in commodity
markets increased markedly, but banks appear
to have managed risks amid the extremely
high volatility seen in these markets since the
beginning of the war. However, several indirect
channels could pose risks for U.S. banks,
including heightened volatility in asset markets;
disruptions in payment, clearing, and settlement
systems due to sanctions; and interconnections
with large European banks, which could be
adversely affected through the impact of the
conflict on the European economy.

constitute over 50% of non-interest expenses.
Smaller banks face similar challenges. Coupled
with the disruption caused by the COVID-19
pandemic and resulting changes in work and
return-to-office dynamics, staffing management
has grown more complex. Banks continue
leveraging new technology and innovative
products and services to meet evolving
operational needs, customer demands, and
expectations. Digitalizing the financial services
industry presents myriad risks and points of
disruption for traditional banks, which could
impact long-term profitability if risks are not
adequately managed.
Operational and technology risks are already
elevated at many large BHCs. Introducing new
products and processes can exacerbate challenges
in addressing legacy issues. Banks operate in
an increasingly complex environment due to
the adoption of these new products, services,
and delivery channels, as well as expanded
relationships with fintech companies and other
third parties. These activities may result in
increased operational risks related to innovation
or the failure to implement appropriate controls
and risk management frameworks.
While banks are critically dependent on
information technology to conduct business
operations, threats to their information
technology are increasing. The finance and
insurance industries were subject to the
most cyberattacks of any industry from 2015
to 2020.39 The current geopolitical situation
further heightens the importance of cyber threat
monitoring and effective defensive capabilities.
Banks’ increasing reliance on third-party
relationships, development, and adoption of
innovative products, services, and technologies,
and ongoing changes to banks’ staffing and
operating environment, may increase operational
risk.

Operational and Technological Risks

Recommendations

While rising interest rates may benefit net interest
margins, inflation and a tight labor market
are increasing operating costs. In addition,
heightened competition for highly-skilled and
high-paid workers is driving efficiency measures
at the largest banks, where salaries and benefits

Large BHCs face a challenging environment that
includes rising interest rates, increased concerns
about the economic outlook and its potential
impact on credit quality, and continued cyber
security threats. The Council recommends
banking supervisors continue to ensure that

Vulnerabilities, Significant Market Developments, and Council Recommendations

37

banks maintain adequate capital and liquidity,
sound interest rate risk management practices,
and well-developed operational resiliency plans.
The Council encourages banks and supervisors
to focus their monitoring efforts on the impact of
interest rate risk on bank capital, including the
impact of unrealized losses on their securities
portfolios. The Council supports the continued
use of stress testing to assess risks to banks,
noting that banking agencies and financial
institutions should ensure that their stresstesting methodologies adequately account for
plausible tail risks, given the current economic
environment. Models calibrated to recent data
may not fully capture forward-looking risk. The
Council recommends that banking agencies
continue monitoring bank exposures to NBFIs,
including assessing how banks manage their
exposure to leverage or liquidity mismatch in the
nonbank financial sector.

Box C: The Impact of Interest
Rate Risk on Banks, Insurance
Companies, and Pension Funds
Higher interest rates may affect the resilience of
banks, insurance companies, and pension funds
as the Federal Reserve tightens monetary policy
to bring down above-target inflation.
Banks
Higher interest rates have various effects on
bank profits and capital. On the one hand, banks
may benefit from higher interest rates due to an
increase in their NIM as higher rates are passed
through more quickly to bank assets like floatingrate securities and loans than to bank liabilities
like deposits and debt (Figure C.1).40 However, a
rapid increase in rates may decrease profitability
for banks with larger shares of long duration
holdings like longer-term fixed-income securities
or mortgage loans. Further, higher rates cause
mark-to-market losses on available-for-sale (AFS)
fixed-income securities, reducing banks’ tangible
equity capital. For some of the largest banks,
these losses also reduce their regulatory capital.
C.1 Bank NIM and Fed Funds Rates: 2013 - 2022
Percent
4.0
3.5
3.0

As Of: 2022 Q2
NIM
Eff Fed. Funds

Percent
4.0
1.0
3.5
0.9
3.0
0.8

2.5

2.5
0.6

2.0

2.0
0.5

1.5

0.4
1.5

1.0

0.3
1.0

0.5

0.1
0.5

0.0
0.0
2013Q1 2014Q3 2016Q1 2017Q3 2019Q1 2020Q3 2022Q1
Source: Call Report, Federal Reserve

Under current accounting rules, declines in the
market value of held-to-maturity (HTM) securities
do not impact banks’ tangible equity capital or
regulatory capital, and many banks have shifted
their securities portfolios from AFS to HTM with
unrealized losses or gains being amortized
over the life of the securities, resulting in an

38

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

adjustment to yield. However, banks can face
economic losses due to revaluation effects on
HTM securities and other long-term fixed-rate
assets, such as first and junior-lien residential
real estate loans. Additionally, declines in the
value of securities and fixed-rate assets can have
material impacts on the equity market value of
the firm.41
The largest U.S. banks have shifted their asset
mix in recent years, creating more exposure to
changes in long-term rates and securities losses.
For example, long-term securities have increased
as a percentage of banks’ balance sheets from
8% in Q2 2014 to 14% in Q2 2022 (Figure C.2). In
nominal terms, the value of long-term securities
increased from about $1.2 trillion to about $3.0
trillion during this same period. However, banks
have also reduced their dependence on shortterm wholesale funding over the past several
years, and they have experienced significant
growth in stable deposits, which may have
boosted NIMs and helped offset the impact of
securities losses by delaying the pass-through of
rates to depositors.42

8

7

2022 Q2

14
9

76

8
7

72

Long-term securities

Other securities

RRE

Other

Source: FR Y-9C

Life insurers’ liabilities generally have longer
effective duration than life insurers’ assets. As a
result, gradually rising interest rates may have a
positive effect on the profitability of life insurers.
One way to estimate life insurer interest rate risk
is to measure the sensitivity of insurers’ stock
returns to changes in long-term interest rates
(Figure C.3). However, the most recent
estimates show the sensitivity is not statistically
significant.
C.3 Realized Interest Rate Risk Hedging by Life Insurers:
2008 - 2022

2008 - 2022
Gamma
0.75

As Of: Sept 2022

Note: Long-term securities are defined as
securities that mature or reprice in more than
five years. RRE loans include first and junior
lien mortgage loans.

Gamma
0.75

0.00

0.00

-0.75

-0.75
Realized Gamma

-1.50
2008

Sample Average

Zero Gamma
2010

2012

Source: Thomson Reuters
Tick History

C.2 Bank Asset Composition: 2014 and 2022
2014 Q2

Insurance Companies

2014

2016

2018

2020

-1.50
2022

Note: Realized gamma is the daily coefficient
from a regression of five-minute returns on
a market capitalization-weighted index of
life insurers on five-minute return on a 10Y
Treasury Index controlling for five-minute
returns on the S&P500 index. See Brunetti,
Foley-Fisher and Verani (2022) “What Do
High-Frequency Insurer Stock Prices Tell Us
About Their Interest Rate Risk Management?”, mimeo for more details. Confidence
intervals are constructed by subsampling
returns within each day. A gamma below
zero indicates that insurance companies did
not hedge the change in interest rates and
would benefit from rising long-term interest
rates.

One salient source of life insurer interest rate
risk is that some liabilities can be redeemed
earlier than expected. Insurance products, such
as whole life and deferred fixed annuities, often
can be “surrendered,” meaning the savings can
be withdrawn early, though sometimes subject
to a penalty. Since these products often also
have a guaranteed minimum return, the incentive

Vulnerabilities, Significant Market Developments, and Council Recommendations

39

Box C: The Impact of Interest Rate Risk on Banks, Insurance Companies,
and Pension Funds (continued)
for surrendering can depend on the level of
interest rates and market volatility. A large,
quick increase in interest rates can lead to an
unexpected large wave of surrenders, which is
referred to as disintermediation risk. Higherthan-expected surrender rates could force
insurers to sell assets while rising interest rates
are pushing down market prices, forcing insurers
to realize losses to meet higher redemptions.
Significant realized losses could prompt
institutional investors to re-evaluate their funding
to life insurers’ nontraditional liabilities, potentially
contributing to increased liquidity stresses.
Pension Funds
Defined benefit (DB) pension plans, which are
offered through private, state and local, and
federal employers, continue to play a major role
in the U.S. retirement system, accounting for over
$17 trillion in pension entitlements as of June
2022 (Figure C.4).
C.4 U.S. Total Retirement Entitlements
Billions of US $
14000
12000

11,669*

10000

As Of: 2022 Q2
Retirement Assets

Unfunded Liabilities

9,253

4000
2000

3,236

IRAs

Source: ICI

6000
3,805

3,817
581
5,118

12000
8000

4,479

6000

14000
10000

9,597

8000

0

Billions of US $

1,646

4000
2,185

2,204

DC Private-Sector State Federal DB Annuity
Plans
DB Plans and Local
Plans
Reserves
Government
DB Plans

2000
0

Note: For definitions of categories, see Table
1 and 2 in the US Retirement Market, Second
Quarter 2022 ICI statistical report. Components may not add to the total because of
rounding.
* Data are estimated.

Defined benefit plans promise a regular
retirement income that typically depends on age,
tenure, and final salary. To meet these promises,
plan sponsors set aside financial assets that are

40

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

invested in various asset classes, such as fixedincome, equity, or alternative investments, which
include hedge funds, private equity, real assets,
and private credit. If plan assets are sufficient to
cover the present value of future liabilities, the
plan is said to be fully funded.
Interest rate changes affect the present value
of pension assets and liabilities. A fully funded
plan can fully match the duration of its liabilities
to immunize itself against interest rate shocks.
DB plans use strategies to manage interest
rate risk, such as derivative instruments and
liability-driven investments (LDI),43 but can also
be exposed to interest rate risk from derivatives.
The overall interest rate risk for private, state, and
local DB plans differs due to different rules and
regulations.
Public pension funds discount obligations at the
expected return of plan assets, following
Government Accounting Standards Board
accounting rules. The relatively high discount
rates allowed lower contributions, which led to
substantial underfunding. The underfunding,
exacerbated by higher liabilities under the recent
low-interest rate environment, in turn,
incentivized sponsors to invest further in risky
alternatives in a reach for yield (Figure C.5).
Some pension fund boards allowed the use of
leverage, repurchase agreements, and
derivatives instruments to boost returns.44 In the
event that fast-changing interest rates sufficiently
affect the value of collateral, these funds could
need to sell assets such as Treasuries to cover
these positions since the funds’ cash holdings
are usually limited.45

C.5 State and Local DB Total Assets by Z.1 Category

C.6 Private DB Total Assets by Z.1 Category

Billions of US$
7000

Billions of US$

As Of: 2022 Q2

Billions of US$
7000

As Of: 2022 Q2

Billions of US$

7000

7000

6000

6000

6000

6000

5000

5000

5000

5000

4000

4000

4000

4000

3000

3000

3000

3000

2000

2000

2000

2000

1000

1000

1000

1000

0

2015

2016 2017 2018 2019 2020 2021 2022
Short Term Assets
Corporate Equities
Treasury Securities
Mutual Fund Shares
Agency- and
Mortgages
Municipal Securities
GSE-Backed Securities
Corporate and
Foreign Bonds
Alternative Investments

Source: Financial
Accounts of the United
States

0

Note: Alternative investments include hedge
funds, private funds, and other unclassified assets as reported in the Census
QSPP. Short term assets include checkable
deposits and currency, time and savings deposits, money market fund shares, security
repurchase agreements, and open market
paper. Private equity is included in corporate
equities.

0

2015 2016 2017 2018
Short Term Assets
Treasury Securities
Agency- and
GSE-Backed Securities
Corporate and Foreign Bonds
Unallocated Insurance
Contracts
Debt Securities
Source: Financial
Accounts of the United
States

0
2019 2020 2021 2022
Corporate Equities
Mutual Fund Shares
Mortgages
Alternative Investments
Pension Funds Contributions
Receivable
Claims of Pension Fund on
Sponsor

Note: Alternative investments include hedge
funds, private funds, and other unclassified assets as reported in the Census
QSPP. Short term assets include checkable
deposits and currency, time and savings deposits, money market fund shares, security
repurchase agreements, and open market
paper. Private equity is included in corporate
equities.

Private DB plans discount pension benefit
obligations using investment-grade corporate
bond yields and adhere to stricter funding rules.
As a result, they are more likely to use interest
rate immunization strategies, though most funds
still rely on long bond portfolios over LDI
strategies.46 Since the average duration of their
liabilities is a little over 10 years, U.S. private
pensions can achieve their target duration in the
large and more liquid 10-year U.S. Treasury bond
market and the corporate bond market (Figure
C.6). Beyond their effect on funding levels,
interest rate increases may accelerate the shift
away from DB plan schemes. As pension buyouts become more attractive, sponsors’
incentives to engage in pension risk transfers
(PRT)47 to life insurance companies increase.
Following a PRT, pension liabilities are
irrevocably transferred to insurers, along with the
associated interest rate risk.

Vulnerabilities, Significant Market Developments, and Council Recommendations

41

3.2.2

3.2.2.1 Investment Company Asset Growth
Trillions of US$
35

Trillions of US$
35

As Of: 2022 Q2

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

30
25
20

30
25
20

15

15

10

10

5
0

5
1990

Source: ICI

1995

2000

2005

2010

2015

Note: Excludes non ’40 Act ETPs.

2020

0

Investment Funds

Investment funds play a critical intermediary
role in the U.S. financial system, promoting
economic growth through efficient capital
formation and providing vital funding to
the U.S. economy. While recognizing these
benefits, the Council has identified certain
vulnerabilities related to investment funds,
whose assets have increased significantly
over the past decade (Figure 3.2.2.1). Hedge
funds, open-end mutual funds, collective
investment funds, and money market funds
all play unique and critical roles in the
financial system but also carry their own set of
risks to financial stability.
Hedge Funds
Hedge funds have come to play a more
prominent role in certain markets in recent
years. The hedge fund industry has grown
considerably over the last five years, with
gross assets rising from approximately $6.4
trillion in Q4 2016 to approximately $9.8
trillion in Q4 2021.48 Over the same period,
qualifying hedge funds’ presence in the
critically important short-term funding
markets and the U.S. Treasury market has
increased markedly. Between Q4 2016 and
Q4 2021, qualifying hedge fund exposures to
U.S. Treasuries increased by 55%, while their
repo and reverse repo exposures increased by
92%.49
From the perspective of systemic risk, there
are three main channels through which hedge
funds can create risks to financial stability:
(1) by causing or contributing to market
disruptions through large asset liquidations;
(2) by transmitting risks to counterparties
that are large, highly interconnected financial
institutions; or (3) by reducing financial
intermediation, which could, under certain
conditions, potentially impair market
functioning.
A common thread for each channel is hedge
funds’ use of leverage. During periods of
market stress, leveraged funds can face
internal or external pressure to liquidate their
positions. An initial shock can create losses
for a fund that lead to margin or collateral

42

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

calls, which may lead the fund to liquidate its
positions. This liquidation can, in turn, lead
to adverse price changes in the assets the
fund holds, leading to further margin calls,
additional losses on existing positions, and
tighter risk management.

3.2.2.2 GNE/NAV

3.2.2.2 GNE/NAV
Leverage
40

Similarly, the counterparty or prime broker
could reduce or cut off its funding exposure
to the fund instead of demanding additional
margin or collateral. If a counterparty
becomes concerned about the riskiness of a
fund, it may refuse to roll over the funding and
force the fund to liquidate its positions.
Finally, the counterparty’s exposure to a
distressed fund can also act as a transmission
channel through which the fund’s losses
inflict losses on the counterparty and
broadly disrupts the financial system.
This vulnerability is particularly salient if
the counterparty fails to implement the
appropriate practices to manage the risk of its
exposure to the fund.
Hedge funds’ use of leverage varies widely
by the type of investment strategy the fund
uses. At the aggregate level, the median
gross notional exposure (GNE) to net asset
value (NAV) ratio for qualifying hedge funds
stood at 1.9x, while the median gross asset
value (GAV) to NAV ratio stood at 1.4x as of
Q4 2021. However, this aggregate statistic
masks the significant heterogeneity in funds’
use of leverage across different strategies.
For example, relative value, global macro,
and multi-strategy funds use much more
leverage than other funds. As a result, those
three fund strategies reported asset-weighted
average GNE/NAV ratios of 27.1x, 32.9x,
and 16.0x and GAV/NAV ratios of 7.0x, 4.2x,
and 3.4x in Q4 2021 (Figures 3.2.2.2 and
3.2.2.3). Additionally, leverage appears to be
concentrated among a small number of large
hedge funds, with 25 funds accounting for
55% of hedge fund derivatives value and 49%
of hedge fund borrowing (Figure 3.2.2.4).

Leverage
40

As Of: 2021 Q4

30

30

20

20

10

10

0

Macro Relative Managed Multi- Inv. In
Value Futures/ Strategy other
CTA
Funds

Other

Credit

Equity

Event
Driven

0

Source: SEC Form PF Statistics Report

3.2.2.3 GAV/NAV
Leverage
8

As Of: 2021 Q4

Leverage
8

6

6

4

4

2

2

0

Macro Relative Managed Multi- Inv. In
Value Futures/ Strategy other
CTA
Funds

Other

Credit

Equity

0

Event
Driven

Source: SEC Form PF Statistics Report

3.2.2.4 Hedge Fund Industry Concentration
Percent
100

As Of: 2021 Q4

Percent
100

80

80

60

60

40

40

20

20

0

Net Asset Gross Asset
Value
Value

Gross
Notional

Top 10
Top 11-25
Source: SEC Form PF Statistics Report
Source: SEC Form PF Statistics Report

Borrowing
Top 26-50

Derivative
Value

0
Other

Vulnerabilities, Significant Market Developments, and Council Recommendations

43

The events of March 2020 and the more
prominent role of leveraged funds in Treasury
markets underscore the importance of assessing
hedge funds’ impact on market functioning
during stress periods. At the same time, no single
regulator has all the information necessary to
evaluate the complete risk profiles of hedge
funds. While the SEC’s Form PF data and hedge
fund exams provide some information, other
information on hedge fund activities comes
indirectly from insight gained through regulatory
oversight of their counterparties.
To enhance regulators’ abilities to assess hedge
fund-related risks in systemically important
markets, the Council re-established the Hedge
Fund Working Group (HFWG) in 2021. In
February 2022, the HFWG presented its analysis
of hedge fund financial stability risks to the
Council using activity in the Treasury markets
during March 2020 and the failure of Archegos
Capital Management, a family office employing
levered strategies also used by hedge funds, as
case studies. The HFWG found that hedge funds
were among the three largest categories of sellers
of Treasury securities in March 2020, along
with foreign institutions and open-end mutual
funds. Hedge funds materially contributed to the
Treasury market disruption during this period
but were not the sole cause. The HFWG also
found that the failure of Archegos transmitted
material stress to large, interconnected financial
institutions.50 Since then, the HFWG has
developed an interagency risk monitoring
framework based on quantitative and qualitative
information to identify potential risks to
financial stability posed by hedge fund activity
and communicate those risks to the relevant
regulators.
The HFWG also identified gaps in the availability
of data related to hedge funds, and Council
member agencies are taking steps to address
these gaps. For example, the SEC and the
CFTC proposed amendments to Form PF, the
primary regulatory data source on the private
fund industry. The SEC also proposed a new
requirement that certain advisers to hedge
funds report timely information about events
that indicate significant distress at a fund.
Moreover, the HFWG coordinates its work with

44

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

the Interagency Working Group on Treasury
Market Surveillance (IAWG) and is currently
considering policy options to mitigate the risks it
has identified.
Open-end Funds
Open-end funds can create risks to financial
stability by engaging in liquidity and maturity
transformation. They allow daily redemptions
while potentially investing in less-liquid assets.
These two features can amplify and transmit stress
in the U.S. financial system. Investors may be
incentivized to redeem ahead of others because
the remaining investors in the fund bear the cost
of meeting large-scale redemptions, creating a
first-mover advantage. Funds’ asset sales can
lead to asset price declines, transmit stress to
previously unaffected market participants, and
ultimately create broader market disruptions.
In February 2022, the Council’s Open-end Fund
Working Group presented updated findings
on potential financial stability risks associated
with these funds, concluding that open-end
funds were one of the significant contributors
to the financial system disruptions experienced
in March 2020. Unprecedented investor
redemptions drove the large volume of asset
liquidations for fixed-income open-end funds.
As a result, U.S. open-end funds were among the
largest recorded net sellers of U.S. Treasuries, U.S.
municipal bonds, and possibly U.S. corporate
debt during this period. The impact of these asset
sales on U.S. fixed-income markets, together
with sales by other investors, was magnified
by challenging liquidity and stressed trading
conditions. While open-end funds were not the
sole or primary cause of market stress, the size of
their asset liquidations indicates that they were
one of the significant contributors to this stress.

Open-end funds continue to pose risks to U.S.
financial stability. While U.S. mutual funds
have seen notable investor outflows this year,
these funds remain important investors in
the U.S. debt markets that were disrupted in
March 2020. U.S. mutual funds have seen
investor outflows of $718 billion year-to-date
through September 2022, with equity fund
outflows totaling $260 billion and bond-fund
outflows totaling $395 billion (Figures 3.2.2.5
and 3.2.2.6).51 Rising interest rates create
challenges for fixed-income funds, where the
inverse relationship between bond prices and
interest rates can lead to losses. In contrast
to outflows from mutual funds, equity and
bond exchange-traded funds (ETFs) took in
a combined total of $414 billion during the
same period.52 Even after the outflows, U.S.
mutual funds remain one of the top investors
in U.S. Treasuries, municipal bonds, and
corporate bonds.
In November 2022, the SEC voted to propose
amendments to better prepare open-end
funds for stressed conditions and mitigate
the dilution of shareholders’ interests.53 The
rule and form amendments would enhance
how funds manage their liquidity risks,
require mutual funds to implement liquidity
management tools, and provide more timely
and detailed reporting of fund information.
Among other things, the proposal would
require open-end funds to use a liquidity
management tool called “swing pricing,”
which is a method to allocate costs stemming
from inflows or outflows to the investors
engaged in that activity rather than diluting
other shareholders.

3.2.2.5 Monthly Equity Mutual Fund Flows
Billions of US$
As Of: Sep-2022
100
Global Equity
Domestic Equity
50

Billions of US$
100
50

0

0

-50

-50

-100
-150

-100

2017

2018

Source: ICI, Haver
Analytics

2019

2020

2021

2022

-150

Note: Net fund flows.

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

Billions of US$
200

As Of: Sep-2022

100

0

0

-100

-100

-200

-200

-300
2017

2018

Source: ICI, Haver
Analytics

2019

2020

2021

2022

-300

Note: Net fund flows.

Collective Investment Funds
Collective investment funds (CIFs) include
common trust funds for personal trusts
and collective investment trusts (CITs)
offered to tax-qualified retirement plans.
Certain funds have grown relative to other
investment options in retirement plans,
especially for 401(k) and other participantdirected plans. CIFs can be daily valued and
traded like shares of mutual funds, but at the
same time, are perceived as lower cost and
more flexible than investments in mutual
Vulnerabilities, Significant Market Developments, and Council Recommendations

45

3.2.2.7 MMFs Total Net Assets by Fund Type
Trillions of US$
6
5
4

As Of: Sep-2022

Trillions of US$
6

Government & Treasury
Tax-Exempt
Prime

5
4

3

3

2

2

1

1

0
Jan 2013

Jun 2015

Source: SEC Form N-MFP

Nov 2017

Apr 2020

0
Sep 2022

funds. Although CIFs and mutual funds are
both pooled investment vehicles managed
collectively in accordance with a common
investment strategy, they are subject to
different regulatory regimes. For example,
by statute, qualifying CIFs are subject to
prudential oversight by banking regulators,
are not required to be registered under federal
securities laws, and must be administered
by a bank acting as a fiduciary. Additionally,
the vast majority of funds invested in CITs
are retirement funds subject to the Employee
Retirement Income Security Act (ERISA) and
related regulations promulgated thereunder.
Despite these requirements, additional
regulation of open-end funds, such as the
liquidity risk management proposal discussed
above, may make mutual funds more costly
compared to other CIFs, including CITs, and
has the potential to encourage growth of CIFs.
Money Market Funds
MMFs serve as intermediaries between
investors seeking daily liquidity with limited
principal volatility and entities with shortterm funding needs. As of September 30,
2022, total U.S. MMF net assets were $5.1
trillion, up 1.3% from a year earlier (Figure
3.2.2.7). There are three main types of MMFs.
First, government and Treasury MMFs,
which had net assets of $4.0 trillion at the
end of September 2022, invest in obligations
of the U.S. government and federal agencies
and repurchase agreements backed by
government securities and account for 79%
of U.S. MMF assets under management.
Second, prime MMFs, which had net assets of
around $980 billion at the end of September
2022, hold a variety of short-term taxable
obligations issued by corporations, banks,
and governments along with repurchase
agreements and asset-backed commercial
paper and account for 19% of U.S. MMF assets
under management. Finally, tax-exempt
MMFs, which primarily hold obligations of
state and local governments, had net assets
of about $110 billion at the end of September
2022 and account for approximately 2% of U.S.
MMF assets under management.

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

All MMFs engage in liquidity and maturity
transformation. Prime and tax-exempt funds
hold a variety of short-term obligations issued
by financial and non-financial corporations,
governments, municipalities, and assetbacked structures, as well as provide funding
through repos (Figure 3.2.2.8). As discussed
in Section 3.1.4, some of these instruments
can become illiquid amid financial stress.
MMFs provide liquidity to investors by
offering redemptions on demand. In certain
funds, this liquidity mismatch contributes
during times of stress to an incentive for
investors to be the first to redeem, which may
lead to runs on MMFs and dislocations in
short-term funding markets.

3.2.2.8 Prime MMF Exposures
Percent of Assets
100

As Of: Sep-2022

Percent of Assets
100

80

80

60

60

40

40

20

20

0
2018

2019

Financial CP
CD & Time Deposits
Govt & Treasury

2020

2021

2022

0

Nonfinancial CP & Other
Asset-Backed

Source: SEC Form N-MFP

Large-scale outflows from prime MMFs
during the early stages of the COVID-19
pandemic contributed to stress in shortterm funding markets. These events
underscored that prime MMFs continued
to have structural vulnerabilities that can
create or transmit stress to short-term funding
markets. In contrast, government MMFs
typically experience asset inflows during
market stress as investors seek the most
conservative and liquid investment option.
To address the vulnerabilities in prime and
tax-exempt MMFs, in February 2022, the
SEC proposed amendments to certain rules
to improve the resilience and transparency
of MMFs.54 A main goal of the proposal is to
eliminate investors’ incentive for preemptive
redemptions from certain types of MMFs
and to strengthen MMFs’ liquidity buffers,
to help ensure they are available to be used
in times of stress. In addition, under the
proposal, certain MMFs would be required
to implement swing pricing policies and
procedures to ensure that redeeming
investors bear the liquidity costs of their
redeeming decisions.
Prime MMFs have experienced significant
growth over the past year. Much of this
recent growth has been driven by retail
prime funds, which have grown by $96
billion, or 45%, for the twelve-month period
that ended September 30, 2022. Prime
funds have become more attractive to retail
Vulnerabilities, Significant Market Developments, and Council Recommendations

47

3.2.2.9 MMF Weighted Average Maturity
Days
60

Days
60

As Of: Sep-2022

50

50

40

40

30

30

20
10

20

Treasury
Government
Prime Retail
Prime Institutional

0
Jan 2018

10

Mar 2019

May 2020

Jul 2021

0
Sep 2022

Source: SEC Form N-MFP

3.2.2.10 Prime MMF Gross Yields
Percent
4
Prime Retail
Prime Institutional

Percent
4

As Of: Sep-2022

3

3

2

2

1

1

0
Jan 2018

Dec 2018

Nov 2019

Source: SEC Form N-MFP

Oct 2020

Sep 2021

0
Aug 2022

investors, given the recent increase in rates
and poor performance of other asset classes.
Institutional prime funds have experienced
more modest growth, increasing by $10.1
billion, or 1.5%, over this same period.
MMFs have assumed a more defensive
position in the current environment of
expected interest rate increases. More
specifically, MMFs have materially reduced
the weighted average maturity of their
portfolios by investing in shorter-duration
securities (Figure 3.2.2.9). By investing in
shorter-duration securities, funds have been
able to reinvest cash in higher-yielding assets
and offer higher returns to their investors. As
a result, gross yields for prime retail funds
have risen from 0.16% at year-end 2021 to
3.19% as of September 2022 (Figure 3.2.2.10).
The asset composition of MMFs has
continued shifting towards repo holdings
over the past year. MMFs’ repo investments
stood at $2.7 trillion in September 2022,
or 54% of total assets, compared to 45% of
MMFs’ total assets in September 2021 and
22% in September 2020. MMFs’ use of the
Federal Reserve’s overnight reverse repo
facility (ON RRP) has continued trending
upwards. As of September 30, 2022, MMFs’
ON RRP investments totaled $2.2 trillion, or
44% of total assets, up from $1.4 trillion, or
29% of total assets, twelve months earlier.55
In contrast, MMFs have continued reducing
their investments in sponsored repos, which
FICC centrally clears. MMFs’ sponsored repo
investments totaled $64 billion at the end of
September 2022, down from the peak of $276
billion as of year-end 2019.
Recommendations
The Council supports the initiatives by the
SEC and other agencies to address risks
in hedge funds, including proposed data
collection improvements for Form PF. The
Council will continue to review the findings
of the Hedge Fund Working Group as they are
developed. The Council recommends that the
SEC and other relevant regulators consider
whether additional steps should be taken to
address these vulnerabilities.

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

The Council is encouraged by the SEC’s continued
engagement regarding potential reforms of
open-end funds, including its recently proposed
amendments regarding open-end fund liquidity
risk management, swing pricing, and fund
reporting, and looks forward to reforms that
robustly address the financial stability risks from
SEC-registered open-end funds. The Council
should also consider whether congruent reforms
are needed for open-end funds not subject
to SEC regulation. For example, in light of
inconsistent reporting across different regimes,
regulators should consider whether additional
data reporting is necessary to obtain appropriate
information concerning these funds so that
the Council can gain a better understanding
of whether the regulatory differences between
the regimes governing CIFs and mutual funds
increase the risks of regulatory arbitrage.
In February 2022, the SEC proposed reforms for
MMFs that would increase the minimum liquidity
requirements for these funds, require some MMFs
to adopt swing pricing, and remove provisions
that tie an MMF’s ability to impose liquidity fees
and redemption gates under rule 2a-7 to a decline
in the fund’s liquidity below identified thresholds.
The Council supports the SEC’s efforts to improve
the resilience and transparency of MMFs and
strengthen short-term funding markets. The
Council will continue to monitor initiatives
relating to MMF reforms. These reforms will be
considered in the broader context of regulatory
efforts to strengthen short-term funding markets
and support orderly market functioning.
The Council encourages pension regulators and
the Financial Accounting Standards Board (FASB)
to improve the quality, timeliness, and depth
of pension financial statements and portfolio
holdings disclosures.

Box D: The Protection Gap
and Insurance
Insurance plays an important role in the
U.S. financial system and economy, allowing
individuals and firms to engage in economic
activity while managing the financial risks
associated with their activities.56 Insurance also
typically creates financial incentives through
underwriting, pricing, and contract features that
encourage insureds to manage and mitigate risk.
However, not all risks are fully covered, creating
a protection gap, which is the difference between
insured losses and total economic losses from
a particular event risk.57 This gap is growing
for some risks, such as those related to climate
change or cyber incidents, and may expose more
of the financial system and economy without full
coverage for those risks.
Sectors of the economy that have historically
relied on readily available insurance coverage,
such as housing and lending activities, may be
forced to internalize the liability and physical risk
associated with these activities if the protection
gap widens and no other alternatives for
managing risk are available. One estimate of the
protection gap for climate-related catastrophes
concludes that 62% of potential economic losses
are not insured in North America, compared with
78% in Europe, 86% in Latin America, and 91% in
Asia.58
As a result of the increased likelihood and
severity of losses and less insurance coverage,
commercial insureds may have to spend more
resources absorbing and mitigating business risks
like cyber incidents, business interruption, or
property damage, passing those costs on to their
customers. For example, while cyber insurance
coverage is available, recent ransomware attacks
have caused a tightening of underwriting
standards among insurers and lower coverage
amounts. This underwriting tightening may
provide incentives for insureds to strengthen
their cybersecurity defenses and be more resilient
to cyberattacks and may reduce the insurance
sector’s exposure, but it also leaves more of the

Vulnerabilities, Significant Market Developments, and Council Recommendations

49

Box D: The Protection Gap
and Insurance (continued)
risk uninsured. For example, Lloyds of London
estimates that the global cost for cyber incidents
is roughly $400 billion, and the potential
protection gap for a significant incident is as
much as 90%.59
As climate-related disasters grow more frequent
and severe, insurers may require that insureds
retain more of this exposure through product
features like named storm deductibles, caps on
coverage, exclusions, and limitations for certain
perils. In addition, insurers may exit certain
regions or lines of business. For an individual
insured, this may alter the price and location of
a home purchase or create other unintended
economic barriers.
Additional analysis is needed to measure gaps in
insurance coverage, explain how the gaps could
threaten financial stability, and assess whether
there are alternatives to insurance that could
effectively mitigate those financial stability risks.

3.2.3

Central Counterparties

Since the 2008 financial crisis, regulatory reforms
have increased the use of central counterparties
(CCPs) instead of bilateral contracts, making
them key actors in the global financial system.
Under central clearing, parties to a financial
contract enter into two matched contracts with
the CCP that offset one another, with the CCP
ensuring the performance of open contracts.
Central clearing protects against defaults among
counterparties that could threaten financial
stability but also concentrates the risk of default
at the central counterparty. As a result, although
CCPs provide significant benefits to market
functioning and financial stability, they can also
create potential risks to the financial system.
The inability of a CCP to meet its obligations
arising from the default of one or more clearing
members or non-default losses could strain the
surviving members of the CCP and, more broadly,
the financial system. The stress on the financial
system depends on several factors, including the
size of the CCP and its interconnectedness with
other financial institutions.
CCPs’ risk management frameworks are
structured to ensure they have sufficient
resources to cover member defaults by
mutualizing counterparty credit risk. A CCP
reduces settlement risks by netting offsetting
transactions between multiple counterparties and
reduces financial risk by:
•

requiring margin deposits;

•

providing independent valuation of trades
and collateral;

•

monitoring the creditworthiness of the member firms; and

•

providing a guarantee fund that can be used
to cover losses that exceed a defaulting member’s collateral on deposit.

A key part of a CCP’s risk management framework
is the collection of initial margin and default fund
contributions to protect the clearinghouse in
the event of a clearing member’s default. CCPs
typically adjust initial margin requirements in
response to changes in market conditions. For
instance, a CCP may increase initial margin
requirements in response to high price volatility.
Variation margin is another key component of

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

a CCP’s risk management framework that
offsets changes in current exposures resulting
from changes in market prices. To determine
the variation margin, which is typically
collected and paid out in cash, positions are
marked to market, and the profit or loss for
each position is calculated. If the position
has a loss, the member must pay a variation
margin; if the position has a profit, the
member receives a variation margin. To cover
defaults greater than a defaulting member’s
resources, a CCP may set aside some of its
capital and establish a mutualized guarantee/
default fund. If a clearing member defaults,
CCPs will use their default procedures, likely
liquidating the defaulting member’s cleared
positions and collateral. In the event that
a CCP realizes losses associated with the
default of a clearing member that exceeds the
defaulting firm’s resources, the CCP may draw
on its mutualized guarantee fund to cover
those losses or impose special assessments on
its clearing members.

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

Billions of US$
60

As Of: 2022 Q2

50

40

40

30

30

20

20

10

10

0

2016

2017

2018

2019

2020

2021

2022

0

Source: PFMI Quantitative Disclosures, Clarus FT

U.S. CCPs
In the U.S., the Depository Trust & Clearing
Corporation (DTCC) is the primary provider
of clearing services for cash securities
through its subsidiaries, the FICC and the
National Securities Clearing Corporation
(NSCC).60 Required contributions to MBSD’s
and NSCC’s clearing funds, which spiked
at the onset of the COVID-19 pandemic,
remained elevated through Q2 2022 relative
to pre-pandemic levels. As of June 30, 2022,
clearing fund requirements across the DTCC’s
three clearing services totaled $40.3 billion,
down $3.8 billion from June 30, 2021 (Figure
3.2.3.1).
Most U.S. exchange-traded derivatives are
cleared through the Chicago Mercantile
Exchange (CME), the Intercontinental
Exchange (ICE) Clear U.S., and the Options
Clearing Corp (OC Corp). CME and ICE Clear
U.S. provide clearing services for futures and
options on futures, while OC Corp mainly
provides clearing services for exchangetraded equity options. The initial margin
posted against futures and options remains
elevated relative to pre-pandemic levels, with
Vulnerabilities, Significant Market Developments, and Council Recommendations

51

3.2.3.2 Initial Margin: U.S. Exchange Traded Derivatives
Billions of US$
As Of: 2022 Q2
400
Options Clearing Corp.
ICE Clear US
CME
300

Billions of US$
400

300

200

200

100

100

0

2016

2017

Source: PFMI
Quantitative
Disclosures, Clarus FT

2018

2019

2020

2021

2022

0

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

3.2.3.3 Initial Margin: Centrally Cleared OTC Derivatives
Billions of US$
As Of: 2022 Q2
400
Credit Default Swaps
Interest Rate Swaps

Billions of US$
400

300

300

200

200

100

100

0

2016

2017

Source: PFMI
Quantitative
Disclosures, Clarus FT

2018

2019

2020

2021

2022

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.

the margin at OC Corp, CME, and ICE Clear
U.S. totaling $294.3 billion (Figure 3.2.3.2).
Within the over-the-counter (OTC) derivative
markets, most U.S. dollar interest rate swaps
are cleared through LCH Ltd. or CME, while
most credit default swaps (CDS) are cleared
through ICE Clear Credit, ICE Clear Europe,
or LCH SA. The required initial margin for
interest rate swaps and credit default swaps
totaled $300.2 billion as of June 30, 2022,
up $11.1 billion from the prior year (Figure
3.2.3.3).
Commodity Market Volatility
As noted in Box E, commodity price volatility
surged following Russia’s war against Ukraine,
forcing several commodity-focused CCPs to
raise initial margins substantially. Despite
the sudden increase in margins in February
and March 2022, there was limited impact
on the broader financial system. However,
several lessons can be learned from this
stress. High commodity prices and volatility
can hamper commercial activity and key
participants’ willingness or ability to hedge
price risk in derivatives markets or engage in
market-making activity, which could impact
commodities supplies to the market and the
economy.
CCP Stress Test Results
Although increased margin demands may
have put a temporary strain on the liquidity of
some members, these events helped alleviate
concerns about potential CCP defaults
going forward. As a result, the banks’ CCP
probability of default estimates, as reflected in
the Federal Reserve’s CCAR, have decreased
substantially from their levels in Q1 2020.
Additional evidence is derived from the March
10, 2022, release of stress tests performed
on 7 of 13 CCPs considered systemically
important in more than one jurisdiction (SI>1
CCPs). The seven SI>1 CCPs operate a total
of 15 service lines, all of which were tested
in coordination with their regulator. The
analysis was based on default and non-default
loss scenarios potentially extreme enough
to require recovery and resolution tools.
Although there are limitations to the analysis

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

that mean the results of these stress tests should
be interpreted cautiously, all the CCP service lines
could absorb all of the losses.61 About half of the
15 CCP service lines had to use recovery tools,
but none needed resolution. For non-default
losses, a cyber theft scenario was considered,
and resolution authorities would have needed
to trigger resolution for the majority of CCPs to
generate sufficient resources to cover the loss.
In another non-default scenario, the liquidity
arrangements of one CCP were insufficient.
CCP Resolution
Although CCP failures are rare, they require
sufficient resolution planning and preparedness
to continue critical functions to maintain U.S.
financial stability. Accordingly, the Council has
designated five CCPs as financial market utilities
(FMUs) that are systemically important because
the failure of or a disruption to the functioning
of the FMU could threaten financial stability. In
addition, 13 CCPs from 10 jurisdictions were
identified as SI>1 CCPs, including three U.S.
CCPs. Regulators have taken steps for these SI>1
CCPs to enhance their preparedness, including
setting up crisis management groups with
cooperation agreements to support resolution
planning and resolvability assessments. These
CCPs have also prepared and submitted plans to
their primary regulators outlining potential paths
for recovery and orderly wind down. However,
it is important to note these CCP orderly winddown plans consider cessation of critical services.
Furthermore, recovery and orderly wind-down
plans may fail, which could create serious
financial stability concerns for the United States
in the absence of readily available substitutes.
Recommendations
The Council recommends that the CFTC,
Federal Reserve, and SEC continue to coordinate
the supervision of all CCPs designated by the
Council as FMUs that are systemically important.
Relevant agencies should continue to evaluate
whether existing standards for CCPs are
sufficiently robust to mitigate threats to financial
stability from default and non-default losses.
The agencies should pay particular attention to
the tradeoff between counterparty and liquidity
risks. Agencies that regulate clearing members
should continue to assess those firms’ liquidity

risk management practices and capabilities.
CCP supervisory agencies should continue to
work with the FDIC to support CCP resolution
planning.
Council member agencies should continue
working with global counterparts and
international standard-setting bodies to identify
and address areas of 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 SI>1 CCPs and consideration of
appropriate resources for SI>1 CCP resolution.
The Council also encourages agencies to continue
monitoring and assessing interconnections
among CCPs, their clearing members, and other
financial institutions. CCPs should ensure
they can manage risks associated with sudden
volatility and that participants are prepared to
meet their liquidity needs to fund higher margin
calls during periods of stress.
In addition, while margin requirements have
increased significantly in the aftermath of
Russia’s war against Ukraine, agencies should
continue analyzing and monitoring the impacts
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 advancing recovery and resolution
planning for FMUs and SI>1 CCPs and to
continue coordinating the design and execution
of supervisory stress tests of these entities.

Vulnerabilities, Significant Market Developments, and Council Recommendations

53

Box E: Recent Developments in Commodities Markets
Commodities and commodities derivatives
markets have experienced several bouts of
volatility over the last few years. As a result,
commodity-focused CCPs have raised margin
requirements significantly. Despite significant
volatility, trading remained orderly on U.S.
exchanges. However, disorderly trading in the
London Metal Exchange’s (LME) nickel contract
led to the suspension of the nickel market in
March. Although LME is not regulated by any
U.S. entity, its decision to suspend trading raises
broader questions about the role and design of
trade suspensions.
Commodities prices, which generally fell at the
onset of the COVID-19 pandemic, have since
rebounded sharply. Aggressive monetary and
fiscal stimulus accelerated a sharp rebound in
aggregate demand. At the same time, supply for
many commodities continued to be constrained
by logistical bottlenecks, bad weather, and rising
input costs. As a result, by the end of August
2021, almost all energy, metals, and agricultural
markets exceeded pre-pandemic price levels,
and many were trading at multi-year highs. For
the most part, markets steadied through the
fall of 2021, as the emergence of the Omicron
variant, continued lockdowns in China, and more
restrictive monetary policies tempered bullish
expectations for commodities.
Just before and after the Russian war against
Ukraine began on February 24, 2022, prices for
markets with the potential for supply disruptions
from the region, such as crude oil, natural gas,
and wheat, rose sharply from already elevated
levels (Figure E.1). European natural gas markets
were especially affected since Europe imports a
significant amount of natural gas from Russia.
While European economies have since reduced
their reliance on Russian gas, natural gas prices
remain significantly elevated as Russia continues
to interrupt supplies. At about the same time,
monetary tightening by the Federal Reserve led to
multi-year highs in the U.S. dollar. Many

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

commodities, notably oil, are priced in U.S.
dollars, and historically a stronger dollar puts
downward pressure on commodities prices.
Additionally, price pressure was tempered by
continued lockdowns in China and increasingly
tight worldwide financial conditions.
E.1 Relative Price of Selected Futures Contracts
Index
420
350
280
210

As Of: 31-Oct-2022

Index
420

Wheat
Copper
Dutch NG
Henry Hub NG
WTI

350
280
210
140

140

70

70

0
0
Aug 2021 Nov 2021 Jan 2022 Mar 2022 Jun 2022 Aug 2022 Oct 2022
Source: CFTC

Derivatives Clearing
Elevated commodities market volatility has led to
material increases in initial margin levels at CCPs
(Figure E.2). Total collateral for futures and
options contracts rose roughly $50 billion in
February and March 2022, with further margin
increases in interest rate derivatives as many
central banks worldwide began successive rate
increases.
E.2 Aggregate Initial Margin by Asset Class

E .2 Aggregate Initial Margin by Asset Class
Billions of US$
As Of: 31-Oct-2022
400
IRS
350
F&O
CDS
300

Billions of US$
400
350
300

250

250

200

200

150

150

100

100

50
0
Feb 2020
Source: CFTC

50
Oct 2020

Jun 2021

Feb 2022

0
Oct 2022

The geographical distribution of margin increases
highlighted the regional impact of the war in
Ukraine, with increases highly concentrated in
Europe-based clearinghouses (Figure E.3). By
the fall of 2022, total collateral held by registered
CCPs exceeded $700 billion, significantly higher
than during the peak of the COVID-19 pandemic.
During this period, variation margin payments,
which represent the day-to-day changes in
portfolio value, rose to approximately $50 billion
per day, similar to those seen early in the
COVID-19 pandemic.62
E.3 Aggregate Initial Margin by Region
Billions of US$
400
350
300

As Of: 31-Oct-2022

350
300

250

250

200

200

150

150

100

100
50

50
0
Feb 2020 Aug 2020 Mar 2021

Sep 2021

Index

As Of: 31-Oct-2022

Index

5
4
3

5
Wheat
Ruble
US NG
Dutch NG
WTI

4
3

2

2

1

1

0
Oct 2021

Jan 2022

Apr 2022

Jul 2022

Oct 2022

0

Source: CFTC

Billions of US$
400

US
UK
Europe

E.4 Normalized Margin of Futures Contracts

0
Apr 2022 Oct 2022

Source: CFTC

The increase in initial margin levels was most
pronounced for derivative products directly
affected by recent events. Normalized margin
levels are shown for futures products most
impacted by Russia’s war against Ukraine (Figure
E.4). While some initial margin requirements for
products were increased in advance of Russia’s
invasion, the pace of margin increases accelerated
post invasion, with margin levels on certain
contracts tripling over a few months. Margin
requirements for most products have since fallen.
However, margin levels for European gas futures
remain elevated, which can be attributed to
ongoing supply disruptions and continued
volatility going into the winter heating season.

LME Nickel Market
On March 8, 2022, the LME suspended trading
in the nickel market following unprecedented
price increases in the 3-month nickel contract.63
The LME also retroactively canceled all contracts
executed on the morning of March 8, ceased
publication of nickel prices, and deferred delivery
of physically settled nickel contracts. LME’s
decision to suspend trading was partly due to
concerns that the extreme volatility had created
a systemic risk to the market.64 More specifically,
there were serious concerns about market
participants’ ability to meet margin calls, raising
the significant risk of multiple defaults.
The suspension raises a broader question
about the role and design of trade suspensions.
Although such measures can help mitigate risks
to financial stability by reducing liquidity stress,
interruptions to trading and price discovery may
carry significant costs, including loss of price
transparency, which is important for valuation,
settlement, and risk management. It also
constrains participants’ ability to enter into or
close out positions and mitigate their exposures.

Vulnerabilities, Significant Market Developments, and Council Recommendations

55

3.3.1.1 Net Issuance of Treasury Securities
Billions of US$
3000

2000

As Of: 2022 Q3

Billions of US$
3000

Bills
Notes and Bonds
Net

2000

1000

1000

0

-1000

0

2015

2016

2017

2018

2019

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

2020

2021

2022

-1000

Note: Includes
marketable securities
only.

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

As Of: 2022

Percent of GDP
150
CBO July 2022
Baseline Projection

Historical

100

125
100

75

75

50

50

25

25

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

56

Note: Data for fiscal years. Years after 2021 are
projected.

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

3.3

Financial Market Structure

3.3.1

Treasury Markets

The Treasury market plays a critical role
in financing the federal government,
supporting the broader financial system, and
implementing monetary policy. The market
remains the deepest and most liquid market
in the world and a central component of the
financial system. However, recent episodes
of challenging liquidity conditions in the
secondary Treasury market, including in
September 2019 and March 2020, highlight
market vulnerabilities and illustrate the need
to consider policies that enhance Treasury
market resilience. The sheer size of the total
Treasury market, at $24 trillion marketable
outstanding and $670 billion of average
daily trading volume over the past year as of
September 2022, requires close monitoring
and vigilance, as a breakdown in market
functioning would have significant financial
stability implications.
In FY 2022, the federal deficit declined to
around $1.4 trillion, half of the $2.8 trillion
deficit in FY 2021, based on a decline in
fiscal spending related to the COVID-19
pandemic.65 Treasury net marketable
borrowing, however, increased from around
$1.4 trillion in FY 2021 to $1.7 trillion in FY
2022, due primarily to the need to rebuild
the cash balance after the prior debt limit
episode (Figure 3.3.1.1). In July 2022, the
Congressional Budget Office projected that
public debt would remain relatively stable as
a percent of GDP over the next few years at
just below 100% before increasing again to
110% by 2032 (Figure 3.3.1.2). In the near
term, net marketable borrowing was forecast
to increase by around $1 trillion over the next
two years, which will need to be absorbed by
private sector investors. Adding to the supply
of Treasury debt to the private sector are the
maturities of the Federal Reserve holdings
of Treasury securities, which contributed to
the need to raise an additional $150 billion in
privately-held net marketable borrowing in
FY 2022.

During 2022, nominal Treasury yields rose
substantially as 2-year yields increased
over 350 basis points to above 4.5% (Figure
3.3.1.3). The increase was primarily the result
of the Federal Reserve increasing the target
range for the federal funds rate. However, the
Treasury curve also flattened significantly
and inverted with 2-year yields rising above
10-year yields for the first time since 2019, a
spread commonly viewed as one indicator of
recession risk.
Economic and monetary policy uncertainty,
combined with the disruptive impact of
Russia’s war against Ukraine, resulted
in substantial Treasury yield volatility,
leading to lower levels of trading liquidity
across the global financial system (Figure
3.3.1.4). The lower Treasury market liquidity
was particularly acute in the short- and
intermediate-term tenors, which are more
sensitive to the policy rate path (Figure
3.3.1.5). As a result, trading costs in the
Treasury market have been somewhat higher
as depth has declined, bid-ask spreads
widened, and measures of price dispersion
have increased. Nonetheless, while the cost of
trading has increased, given the higher yield
volatility, trading volumes have remained
robust (Figure 3.3.1.6). Market participants
continue to note that the Treasury market
continues to function smoothly and that they
can still execute trades effectively.

3.3.1.3 U.S. Treasury Yields
Percent
5

As Of: 31-Oct-2022

Percent
5
4

4
10-Year

3

3

2

2
2-Year

1
0
2012

2014

1

2016

2018

2020

0

2022

Source: U.S. Department of the Treasury

3.3.1.4 Intraday Volatility for 10-Year Treasury Yields
Basis Points
35

As Of: 31-Oct-2022

Basis Points
35

30
25
20
15

30
99th Percentile

25
20

95th Percentile

15

Intraday Volatility

10

10

5
0
Jan 2017

5
Feb 2018

Source: Bloomberg,
L.P.

Mar 2019

Apr 2020 May 2021

0

Note: 5-day moving average. Intraday volatility
calculated as daily high yield minus daily low yield on
10-year Treasury notes. Percentiles based on January
2005–October 2022. Dec. 5, 2018 is included in the
data despite the market being closed.

Treasury Market Resilience

3.3.1.5 MOVE Index and 2-Year Treasury Yield

The Treasury market has shown resilience
in the face of increased uncertainty and
volatility in 2022. To ensure that the Treasury
market continues to fulfill its vital purpose, it
is important to seek continual improvements
that strengthen the Treasury market to keep
pace with the changing size of the market,
technology, and trading patterns. Multiple
agencies and organizations have regulatory
and oversight responsibilities for the Treasury
market. To ensure effective surveillance and
coordinated policymaking, these groups
collaborate through the Inter-Agency Working
Group for Treasury Market Surveillance
(IAWG), which consists of the Treasury,
Federal Reserve, SEC, CFTC, and the Federal

Index
180

As Of: 31-Oct-2022

150

Percent
5
4

120
MOVE Index (left axis)

90

3
2

60
30
0
Jan 2019

Jun 2022

2-Year (right axis)
Apr 2020

Jul 2021

1
0
Oct 2022

Source: FRED, Bloomberg, L.P.

Vulnerabilities, Significant Market Developments, and Council Recommendations

57

3.3.1.6 Total TRACE Treasury Weekly Trading Volumes
Trillions of US$
6

As Of: 31-Oct-2022

Trillions of US$
6

5

5

4

4

3

3

2

2

1

1

0
Dec 2018

Sep 2019

Jun 2020

Source: FINRA

Mar 2021

Dec 2021

0
Sep 2022

Reserve Bank of New York (FRBNY). On
November 8, 2021, the IAWG published a Staff
Progress Report, which identified specific
principles and workstreams the joint staffs
are pursuing to improve Treasury market
resilience, including bolstering the resilience
of market intermediation, improving data
quality and availability, evaluating expanded
central clearing, and enhancing trading venue
transparency and oversight.66
Since the 2021 Staff Progress Report,
significant additional progress has been
achieved.67 On November 10, 2022, the
IAWG released another Staff Progress Report
detailing the steps taken over the past year.68
For example, in 2022, the SEC proposed three
rules to (1) enhance oversight of and public
disclosures by Treasury trading platforms,
(2) require certain market participants
that act as liquidity providers to register as
dealers and comply with other laws and
regulatory obligations, and (3) enhance
risk management practices for central
counterparties while expanding central
clearing requirements for Treasury securities
transactions.
The FRBNY released a working paper
examining the considerations for expanded
all-to-all trading in the Treasury market. The
working paper, All-to-All Trading in the U.S.
Treasury Market, discusses the benefits and
challenges of a potential Treasury market
structure where all participants can trade
directly.69 The Federal Reserve has also
added depository institution counterparties
to the standing repo facility, an important
development for ensuring repo market
functioning in stressed environments. The
Federal Reserve has also required certain
depository institutions to begin reporting
Treasury transactions data in the Trade
Reporting and Compliance Engine (TRACE).
In addition to the new bank reporting to
TRACE, significant progress has also been
made by Treasury and the OFR regarding
additional data collection and transparency.
For example, OFR conducted a pilot program
designed to prepare industry participants

58

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

and the OFR for a permanent data collection
of non-centrally-cleared bilateral repo market
transactions. Likewise, the Financial Industry
Regulatory Authority (FINRA) made several
announcements regarding enhancements to
Treasury transaction data in TRACE, such as
reducing the reporting timeframe, improving
execution timestamps, and increasing the
frequency of and the information included
in aggregate public data releases. Treasury
conducted a request for information (RFI) on
additional transparency for secondary market
transactions in the Treasury market. Based, in
part, on feedback received in the RFI, Treasury
proposed releasing transaction data for onthe-run nominal coupons, with end-of-day
dissemination and with appropriate cap sizes.70

3.3.2

Alternative Reference Rates

LIBOR is a key risk to financial stability, bank
safety and soundness, and market integrity due to
the decline in the underlying markets that LIBOR
was meant to represent, the ability to manipulate
LIBOR rates, and the vast scale of derivatives
tied to LIBOR. The remaining U.S. dollar (USD)
LIBOR rates are due to end as of June 30, 2023,
marking the end of LIBOR.71 The financial
exposures to USD LIBOR rates are sizeable: the
Alternative Reference Rates Committee (ARRC)
has estimated that USD LIBOR was used in $223
trillion of financial contracts as of Q1 2021, and it
is also used extensively in nonfinancial contracts.

Although significant steps have been taken
toward enhancing Treasury market resilience,
additional work is ongoing. The rapid increase
in interest rates this year will cause government
financing costs to increase and will create losses
for some investors. Technological changes in
trading also continue to present new risks that
need to be monitored and understood. The
Council acknowledges the need to be flexible in
order for public policy to evolve alongside the
evolution of the Treasury market and expects
significant further progress to be made to bolster
market resilience.
Recommendations
The Council recommends that member agencies
continue to review Treasury market structure
issues that may contribute to liquidity challenges
in Treasury markets in the context of the ongoing
growth of Treasury debt outstanding and the
evolution of technology and counterparties
providing market liquidity. Policies should
be considered for improving data quality
and availability, bolstering the resilience of
market intermediation, evaluating expanded
central clearing, and enhancing trading venue
transparency and oversight.
The Council also supports and encourages efforts
by Treasury to continue to enhance collection
and transparency in post-trade transactions in the
cash market for Treasury securities.

Vulnerabilities, Significant Market Developments, and Council Recommendations

59

3.3.2.1 Progress in Transition to SOFR
Percent
100
80

As Of: Sep-2022

Percent
100

Total Agency
ARM MBS
Issuance
Total Private
Floating Rate
Note Issuance

60
40

80

Total Swaps
Risk Traded

60
40

Futures Trading

20

20

0
Jan 2021 Apr 2021 Jul 2021 Oct 2021 Jan 2022 Apr 2022 Jul 2022

0

Source: Black Knight-eMBS, Bloomberg Finance L.P., and Clarus Financial
Technology

3.3.2.2 Syndicated Lending
As Of: Oct-2022

Billions of US$
200

Percent
100

150

75

100

50

50

25

0

0

Sep
2021

Nov
Jan
2021
2022
SOFR (left axis)
LIBOR (left axis)

Source: LCD, an
offering of PitchBook
Data, and Refinitiv LLC

Mar
2022

May
2022

July
2022

Sep
2022

SOFR as a percent of Total (right axis)

Note: Excludes loans without an identical base rate,
foreign currency, and prime loans.

Council member agencies have worked
with the ARRC to address the risks USD
LIBOR poses. Following guidance issued
by the Federal Reserve, FDIC, and OCC to
stop most use of LIBOR, activity in Agency
ARM MBS, private floating rate notes, swaps,
and futures has shifted toward using the
Secured Overnight Financing Rate (SOFR),
the rate recommended by the ARRC as
the replacement for USD LIBOR (Figure
3.3.2.1). SOFR is published by the FRBNY in
conjunction with the OFR and reflects the cost
of borrowing in the repo market collateralized
by Treasury securities.72 In derivatives
markets, activity in SOFR-linked products has
accelerated. For example, SOFR swaps now
account for around 90% of daily volumes of
interest rate risk traded in the outright linear
swaps market, and average daily volumes in
SOFR futures are growing to surpass that of
Eurodollar futures. In cash markets, nearly
all new transactions in agency ARM MBS
and private floating rate notes have moved to
SOFR (Figure 3.3.2.2).
Many lending products have adopted Term
SOFR, which is derived from the activity in
futures markets for SOFR.73 The ARRC has
recognized the use of Term SOFR for certain
cash products, particularly business loans,
but has recommended limiting the use of
Term SOFR in derivatives and most other
cash markets. If more cash products were to
reference Term SOFR, it likely would cause
an increase in Term SOFR derivatives, which
could lead to a decline in the overnight
SOFR derivatives markets. The ARRC’s
recommendations are intended to ensure
the financial system’s stability by avoiding
use that is not in proportion to, or materially
detracts from, the depth of transactions in
the underlying SOFR derivatives market that
are essential to the construction of the Term
SOFR.
Credit-sensitive alternatives to SOFR, which
are based on the same or similar markets
to those that underlie LIBOR, have been
relatively little used by market participants.
The Council has continued to advise lenders,
borrowers, and other market participants

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

to consider SOFR-based rates and to conduct a
comprehensive evaluation before adopting any
alternative rate, warning that rates based on small
transaction volumes, especially if much lower
than the volume of instruments that reference a
given rate, could introduce risks. While banks will
not be criticized solely for choosing a different
rate,74 a number of Council members have
emphasized concerns with such credit-sensitive
rates being referenced in capital or derivatives
markets.
While new contracts have primarily transitioned
to using SOFR, existing or “legacy” LIBOR
contracts still exist. More recent cash products
referencing USD LIBOR have contractual fallback
language, and most uncleared derivatives
adhered to the International Swaps and
Derivatives Association’s Interbank Offered Rate
(ISDA IBOR) protocol to fall back to SOFR when
LIBOR ends, but many older LIBOR contracts
do not. Federal legislation passed this year has
addressed the risk posed by these contracts and
will significantly reduce the risks associated
with the end of LIBOR. Market participants
must also ensure that they are operationally
prepared for a large number of legacy LIBOR
contracts due to transition over a short period
next year. Accordingly, the ARRC has encouraged
market participants to actively transition legacy
contracts ahead of June 2023. The ARRC is also
working with DTCC and key market participants
to enhance DTCC’s Legal Notice System (LENS)
to ensure that rate changes in legacy LIBOR
securities can be effectively communicated to
investors.75

effectively communicated rates and conforming
changes where applicable.
Council members have emphasized that
derivatives and capital markets should continue
moving to SOFR, a broad and robust measure of
borrowing rates. While the Council recognizes
the usefulness of Term SOFR in certain business
lending transactions, it endorses the ARRC’s
recommendations to limit the use of Term SOFR
in other markets and strongly encourages market
participants to limit the usage of Term SOFR in
derivatives and most other cash markets.

3.3.3 Provision of Financial Services by Nonbank
Financial Institutions
Nonbank financial institutions are increasingly
providing financial services traditionally
provided by banks. The emergence of nonbank
financial institutions in certain markets has
fostered increased competition and innovation
and has increased access to capital markets
for households and corporations. However,
the growth of nonbank financial institutions
in certain marketplaces may introduce new
risks to the broader financial system. Given
the multifaceted nature of nonbank business
activities, these risks present themselves
differently across consumer products, business
lending, and mortgage origination and servicing.

Recommendations
In light of the large volume of legacy USD LIBOR
contracts outstanding, the Council advises firms
to take advantage of any existing contractual
terms or opportunities for renegotiation
to transition their remaining legacy LIBOR
contracts before June 30, 2023. The Council
advises responsible parties to communicate
any outstanding decisions regarding the rates
that outstanding legacy LIBOR contracts will
transition to and any conforming changes well
in advance of June 2023. The Council also
encourages securities issuers and trustees to use
the enhanced LENS system to ensure they have
Vulnerabilities, Significant Market Developments, and Council Recommendations

61

Nonbank Mortgage Companies

3.3.3.1 Transition of Mortgage Servicing Assets from Banks to
Nonbanks: 2011 – Q2 2022
2011

2014

Non-Bank
7%

Bank
93%

2Q 2022

Non-Bank
27%

Bank
73%

Non-Bank
55%

Bank
45%

Source: Inside Mortgage Finance; Federal Reserve, Report to Congress on
the Effect of Capital Rules on Mortgage Servicing Assets, June 2016

3.3.3.2 Nonbank Mortgage Originators Number of Companies,
Origination Volumes & Market Share: 2017 – 2021

Market Share

Companies
Reporting

Market Share

Organization
Growth

Licensee
Growth

Market Share

Change

Companies
Reporting

2021

State Licenses

2017

1

9,542

21%

10,889

10%

-1%

15%

-52%

2-25

2,595

26%

4,338

24%

89%

67%

-9%

26-50

163

23%

230

22%

102%

41%

-3%

50+

63

30%

73

44%

205%

16%

46%

Total

12,363

109%

26%

15,530

Source: NMLS MCR, CSBS

In recent years, mortgage servicing activity
has notably shifted out of the banking
sector and into nonbank mortgage servicing
companies. As of the second quarter of 2022,
nonbank companies service 55% of U.S.
mortgages compared to 6% in 2011 (Figure
3.3.3.1). Individual nonbank mortgage
servicing companies have also grown: as of
the second quarter of 2022, nonbank servicing
volume at the largest 10 nonbank servicers
averaged approximately $430 billion and, in
aggregate, represented 34% of the residential
mortgage market. These same figures for the
largest 10 nonbank servicers at the end of
2014 were an average portfolio of $180 billion
and a collective 18% total market share.76
The nonbank mortgage origination sector
has also increased dramatically in recent
years, marked by growth in the total number
of companies, origination volumes, and
the largest nonbank mortgage originators’
market share. Since 2017, the total number of
nonbank mortgage originators has increased
by 26%,77 driven primarily by adding over
1,700 smaller regional companies (Figure
3.3.3.2).78 However, the largest source of loan
origination growth has occurred at companies
operating nationwide. Over the same period,
nonbank mortgage originators operating
nationwide saw their origination volume grow
205%, and their market share increased from
30% to 44% of all nonbank originations.79
With mortgage originations declining from
their 2021 highs, there is evidence of nonbank
mortgage originators beginning to loosen
underwriting standards and innovate on
product offerings to maintain origination
volume.
Though their business models vary, most
nonbank mortgage companies rely on
short-term wholesale funding, making them
vulnerable to rollover risk.80 In addition,
many nonbank mortgage companies
have limited capital and loss-absorbing
capacity despite investing in difficult-tovalue mortgage servicing rights. Mortgage
servicers could face acute liquidity strains in
the event of widespread delinquencies. In

62

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

some cases, servicers have an obligation to
make payments to the investor regardless
of whether the borrower makes a mortgage
payment and must repurchase the mortgage
out of its MBS pool. During this period, the
mortgage servicer must also continue making
insurance payments, tax payments, and
occasionally homeowners’ association fees.
During a crisis, widespread delinquencies
could threaten the viability of nonbank
mortgage servicers because there can be a
substantial amount of time during which the
nonbank mortgage servicers must forward
these payments before the relevant mortgage
guarantor reimburses them.

3.3.3.3 Global Private Debt AUM
Trillions of US$
1.50

As Of: 2021

Trillions of US$
1.50

1.25

1.25

1.00

1.00

0.75

0.75

0.50

0.50

0.25

0.25

0.00

2000

2003

2006

2009

2012

2015

2018

2021

0.00

Source: Preqin

Looking forward, nonbank mortgage
companies could come under significant
pressure in the face of an economic downturn
and an increasing interest rate environment.
Rising interest rates will reduce mortgage
origination volumes, adversely impacting
earnings. Given their large market share,
this has the potential to restrict financing
in the housing market and interrupt
mortgage servicing operations, especially
for nonperforming loans, and might have
secondary effects on these servicers’
mortgage originations in the residential real
estate market.
Nonbank Business Lending
Nonbank lenders play an increasingly
significant role in providing credit to
nonfinancial businesses. The growth in
private debt has been partly fueled by
the retreat of banks from certain lending
activities. At the same time, yield-seeking
institutional investors have been willing to
assume higher credit and liquidity risks.
Private credit, defined as direct lending
by nonbanks to nonfinancial businesses,
makes up a growing segment of nonfinancial
business lending. Estimates place the size of
the global private credit market at over $1.2
trillion as of year-end 2021, up from roughly
$600 billion five years earlier (Figure 3.3.3.3).
Investors typically receive higher interest rates
as compensation for the loans’ lower liquidity
and higher credit risk. Businesses have,
Vulnerabilities, Significant Market Developments, and Council Recommendations

63

3.3.3.4 Distribution of Leveraged Loan Debt/EBITDA Ratios
Percent
100

As Of: 2022 Q3

Percent
100

80

at times, benefited from increased access,
limited disclosure requirements, and faster
execution in private credit markets.

80

The opacity of private credit markets makes
it difficult for regulators to assess the buildup
60
60
of risks in these markets. However, there are
indications that interconnections between
40
40
private credit markets and the broader
financial system have increased. For example,
20
20
some private equity firms, active in private
0
0
credit markets, are acquiring life insurers
2007 2009 2011
2013 2015 2017 2019 2021
or assuming life business through owned
6.00x or higher
4.00x – 4.99x
5.00x – 5.99x
Less than 4.00x
reinsurers to access and leverage longNote: Includes issuers with EBITDA>$50M.
Media and telecom loans
Note: Includes issuers with EBITDA>$50M. Media and
Source: S&P LCD
term assets. This intersection may increase
telecom loans excl. Prior to 2011, 2007-2021 data is
interconnectivity among nonbank lenders,
annual; 2022 data is through Q3.
insurers, and the broader financial sector
while exposing a growing investor base to
3.3.3.5 Leveraged Loan Transactions with EBITDA Adjustments
Adjustments
lending activities that may be subject to less
As Of: 2022 Q3
Percent
Percent
regulatory scrutiny.
60
60
50
40

M&A Transactions
LBO Transactions
All Transactions

50
40

30

30

20

20

10

10

0
2007

2010

Source: S&P LCD

2013

2016

2019

0
2022

Note: Media and telecom loans excluded prior to 2011.
Excludes existing tranches of add-ons, amendments
& restatements with no new money, as well as DIPs,
second liens and unsecured transactions. EBITDA
adjusted for prospective cost savings or synergies.

While the demand from nonbank investors
has helped support capital formation, it
may have also led to a deterioration of credit
quality among syndicated loan issuers.
Notably, the number of large corporate
highly leveraged deals, measured by total
debt to EBITDA of six times or higher, has
trended higher (Figure 3.3.3.4). At the same
time, firms have increased their reliance on
optimistic revenue growth projections and
cost savings synergies, as evidenced by the
number of loan transactions with EBITDA
adjustments (Figure 3.3.3.5). Finally, when
combined with weaker credit quality, weaker
financial maintenance covenants in leveraged
loans may mean lower recovery rates.
The market’s growth has been supported by
increased demand for yield from institutional
investors, mainly in the form of collateralized
loan obligations (CLOs), which had a total of
$910 billion outstanding in 2022.81 The capital
structure of CLOs has improved since the
2008 financial crisis, and the highest-rated
CLO tranches are better positioned to absorb
losses. However, underlying loans held in
these portfolios are more vulnerable because
borrowers generally have less subordinated
debt outstanding that could be a cushion
against potential losses. Additionally,

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CLOs are much more limited in their capacity
to support the lowest-rated assets in the loan
market, a group that will increase if downgrades
increase.
Fintech & Consumer Products
Technological advances and the growth of fintech
firms have the potential to increase efficiency,
introduce new product offerings, and broaden
access to financial services. Many new entrants
in the nonbank financial services markets offer
their products entirely or mostly online, reducing
the need for and costs of a brick-and-mortar
operation. The COVID-19 pandemic further
accelerated the fintech industry’s growth as
customers shifted away from brick-and-mortar
operations to digital channels. However, these
firms may not be subject to the same type
of financial services regulation with which
incumbent financial service providers must
comply, which could create financial stability
risks.
Buy Now, Pay Later
Buy now, pay later (BNPL) refers to a wide array
of retail financing, but the most ubiquitous and
popular model is the four-payment, no-interest
product, sometimes referred to as “pay-in-four”
or “split pay.” These short-term unsecured loans
allow consumers to split purchases into four
equal interest-free installments at the point of
sale, with the first installment due at checkout.82
BNPL’s popularity has soared in recent years,
with the volume of BNPL loans originating in the
U.S. rising from $2 billion in 2019 to $24 billion in
2021.83 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. Additionally, BNPL underwriting standards
are looser, and BNPL borrowers are more than
twice as likely to have an overdraft compared to
all adults.84 Delinquencies in the sector are rising;
10.5% of borrowers were charged at least one late
fee in 2021, up from 7.8% in 2020.85
Recommendations

conducted by different entities, has the same
regulatory outcome. Where gaps in the legislative
framework prevent implementing that principle,
the Council encourages the agencies to develop
proposals to address them.
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. In June, the Council
restarted regular meetings of its Nonbank
Mortgage Servicing Task Force, which discusses
and analyzes nonbank servicer risks and
concerns. In addition, to promote confidence
and improve safety and soundness for nonbanks,
FHFA and Ginnie Mae finalized and released
updated Enterprise seller/servicer and Ginnie
Mae issuer requirements on August 17, 2022.
Following the release of FHFA’s and Ginnie Mae’s
updated requirements, state regulators reviewed
the CSBS Model State Regulatory Prudential
Standards for Nonbank Mortgage Servicers issued
in July 2021 and determined their standards
remain substantially aligned with FHFA’s and
Ginnie Mae’s requirements.
The Council supports these recent actions and
encourages regulators to take additional steps
available to them within their authorities 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
delinquencies and foreclosures increase as
interest rates rise. In addition, the Council
recommends that relevant federal and state
regulators continue to enhance or establish
information-sharing protocols to enable
collaboration and communication in responding
to distress at a mortgage servicer.
The Council supports enhanced data collection
on nonbank lending to nonfinancial businesses to
provide additional insight into the potential risks
associated with the increase in private credit.

The Council recommends that member
agencies leverage existing authority to ensure
that the same activity with the same risk, when
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3.4 Operational and Technological
Risk
3.4.1

Cybersecurity

The financial sector is vulnerable to malicious
cyber incidents, including ransomware, other
malware attacks, denial-of-service attacks, data
breaches, and non-malicious cyber incidents.
Such incidents, if not prevented or mitigated,
can affect tens or even hundreds of millions of
Americans and result in financial losses totaling
billions of dollars due to disruption of operations,
theft, and recovery costs.
Although the U.S. financial system has not
experienced a destabilizing cybersecurity
incident, such an incident could potentially
threaten the stability of the U.S. financial system
through at least three channels:
•

First, the incident could disrupt key institutions with few or no substitutes, such as
central banks, exchanges, sovereign and
sub­sovereign creditors, including U.S. state
and local governments, custodian banks, and
payment clearing and settlement systems. It
could also disrupt other providers of critical
services such as fund administrators, pricing
or other data providers, specialty software
providers, or cloud service providers.

•

Second, the incident could compromise the
integrity of critical data and disrupt the stable
functioning of financial institutions and the
financial system. If data is corrupted on a
sufficiently large scale, it could lead firms not
to trust their internal information and information they are receiving from counterparties and thus disrupt system functionality. A
significant data corruption event would pose
further problems if a systemically important
failing firm had to be resolved. Determining
the accuracy of records or ascertaining the
financial standing of various counterparties,
depositors, and obligors may not be possible,
which would impede the firm’s resolution.

•

66

Third, a cybersecurity incident that causes a
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2 0 2 2 F S O C / / Annual Report

question the safety or liquidity of their assets
or transactions, leading to the significant
withdrawal of assets or activity from the markets. Additionally, a cybersecurity incident
involving the theft of sensitive data has privacy implications for consumers, which could
lead to identity theft and fraud, resulting in a
loss of confidence.
Foreign Conflicts
The financial sector is potentially vulnerable to
foreign conflicts and the activities of nation-state
actors – either directly or indirectly – due to its
interconnectedness with global financial markets
and reliance on international digital networks.
Therefore, the U.S. financial system relies on
the cyber resiliency of domestic institutions
and its international partners to protect the U.S.
economy.
The Russian war against Ukraine has been
accompanied by an increase in the number of
cyberattacks against the U.S. by pro-Russian
groups.86 The U.S. cyber defenses were bolstered
by the Department of Homeland Security’s
(DHS) Cybersecurity and Infrastructure Security
Agency’s (CISA) “Shields Up” program and
the ongoing effort of the G7 Cyber Expert
Group (CEG), which is co-chaired by the
U.S. Department of the Treasury’s Office of
Cybersecurity and Critical Infrastructure
Protection (OCCIP). OCCIP is the mandated
secretariat of the Financial and Banking
Information Infrastructure Committee (FBIIC),
and has hosted classified and unclassified
briefings with its private sector Financial
Services Sector Coordinating Council (FSSCC)
counterparts on the elevated Russian threat.
Additionally, OCCIP has produced a “Lessons
Learned” series to discuss best practices. These
programs helped public and private sector
financial institutions adopt a heightened posture
by focusing on key threats.
Thus far, there have been few successful
cyberattacks against the U.S. financial system
related to Russia’s war against Ukraine, and they
have proven to be negligible in both disruption
and impact.87 On October 25, 2022, Russian
hacktivist Killnet conducted a distributed denialof-service (DDoS) attack on the U.S. Treasury,

consisting of low-level DDoS activity targeting
Treasury’s critical infrastructure nodes.88 Similar
DDoS activity was then observed a couple of
days later across U.S. financial services firms.
Despite the wide net of the attack, no operational
disruption occurred due in part to the sector’s
coordination and speedy information-sharing
policies.

strengthen their security controls to mitigate
the risk of an operational disruption from a
ransomware event, many also have turned to
cyber insurance as a tool to mitigate financial
losses from ransomware attacks. A reported
83% of financial services organizations have at
least some cyber insurance coverage against
ransomware.100

International partners are also susceptible to
cyberattacks. For example, on February 15, 2022,
the web portal of Ukraine’s defense ministry
and the banking and terminal services at several
large state-owned lenders were disrupted in the
largest DDoS attacks to hit Ukraine to date.89
Despite its scale, the disruption was brief and
limited in scope. Although the Kremlin denied
involvement, the U.S. government publicly
attributed the incident to Russia.90

Insider Threat

Russia is by no means the only foreign
government seeking to disrupt the financial sector
to achieve geopolitical goals. China is a prevalent
malicious actor in this space, often using the
financial sector as both a vehicle for gathering
information and an attack vector. For example,
in November 2021, Taiwan’s financial sector was
hit by a months-long cyber espionage campaign
attributed to the Chinese state-sponsored group
APT10.91 Attackers ran malicious code on local
systems and installed a remote access Trojan
(RAT) that allowed them to maintain persistent
remote access to the infected systems, monitor
communications, and exfiltrate data.
Ransomware
Ransomware is a highly visible and costly threat
to U.S. financial firms.92 93 Ransomware attacks
continue to rise worldwide as ransomware as a
service (RaaS)94 lowers the technical bar.95 RaaS
has allowed more cyber criminals to deploy
ransomware with lower costs, higher payouts, and
wider profit margins.96 The use of ransomware
by nation-states and hacktivists continues to rise,
though these hackers tend to have lower payouts
and more ransomware-related data leaks.97 The
financial system remains a high-value target for
cybercriminals, with 55% of financial services
firms targeted in the last year,98 and ransomwarerelated data leaks in financial services almost
doubled.99 As financial firms have sought to

Cybersecurity researchers have noted the rise of
malicious insiders in the last year. For example,
one report predicted that up to “25 per cent of
ransomware attacks in 2022 will be deployed
by insiders, compared to less than 2 per cent in
2021.”101 The motive for such insiders appears
to be either monetary—as cybergangs will pay
high prices for insider access—or employee
discontent.102 Furthermore, even with the rise
in attacks involving malicious insiders, social
engineering attacks targeting non-malicious and
accidental insiders remain a common attack
vector that exploits users’ lack of awareness and
training to compromise systems. As a result,
the financial sector has paid more attention to
developing insider threat mitigation programs,
often mirroring the core components of the
National Institute of Standards and Technology
(NIST) Cybersecurity Framework: Identify,
Protect, Detect, Respond, and Recover.103 As
explained in SIFMA’s Insider Threat Best
Practices Guide, “every component in an
insider threat mitigation program should have
a distinctly human element. While external
cybersecurity threats can often be prevented
or detected primarily through technical tools,
those technological tools are insufficient to
avoid many insider threats. In many cases, the
only signals of an impending insider attack
are commonly exhibited human behaviors
that foreshadow the attacker’s intent.”104 Thus,
protecting against insider threats requires a
holistic approach that involves “technology, legal
advice, policy development, physical security, risk
awareness and training, and counterintelligence
resources.”105
Supply Chain
The past year has also highlighted the importance
of reviewing the resiliency of the sector’s supply
chain. In December 2021, the widely used

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67

Apache Log4j logging library was found to have
a vulnerability through which attackers could
infiltrate a network using Log4j and insert their
own Java code into the infected services.106 Well
into 2022, opportunistic cybercriminals and
nation-state actors (e.g. Chinese and Iranian
attack groups) used this vulnerability to steal data
and money. As standards move towards requiring
the disclosure of exploitation within days of
discovery, it will become increasingly important
to address cyber incidents in downstream
products more quickly. The sector should remain
vigilant, thoroughly vet its supply chain, and be
ready to respond immediately to new threats.107

Box F: Cyber Risk Data Collection
Council member agencies made significant
strides in 2022 in their efforts to collect better
data for managing cyber risk.108 The SEC, OCC,
Federal Reserve, FDIC, and NCUA all proposed
or finalized rules that will improve the cyber
data available to the agencies and allow them to
respond more quickly to cyber incidents.
In February, the SEC proposed a rule that would
require investment advisers to report “significant”
cyber incidents to the SEC on a confidential basis
within 48 hours after determining an incident
occurred.109 Investment advisers would be
required to report incidents that significantly
disrupt the adviser’s ability to maintain critical
operations or lead to unauthorized access to
adviser information where the compromised
data could substantially harm the adviser or a
client. The rule aims to help the SEC monitor
cyber incidents at investment advisers and
assess potential systemic risks stemming from
cyber risk. The data would be collected using a
new form, ADV-C, creating a structured data set
that would be comparable across incidents and
allow the SEC to improve its risk assessment and
monitoring of cyber risk.
In March, the SEC proposed a rule requiring
public companies to disclose material
cybersecurity incidents within four business
days after the registrant determines it has
experienced a material incident.110 According
to the proposed rule, a cybersecurity incident
is an unauthorized occurrence on a company’s
information systems that jeopardizes the
information system’s confidentiality, integrity, or
availability. A cybersecurity incident is material if
there is a substantial likelihood that a reasonable
shareholder would consider it important to an
investment or voting decision. Examples include
accidental data exposure, data breaches, and
unauthorized access to systems to steal or alter
data.

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In April, a rule issued by the OCC, Federal
Reserve, and FDIC became effective that requires
banking organizations to notify their primary
federal regulator of certain cyber incidents as
soon as possible and no later than 36 hours after
determining that an incident has occurred.111
The rule defines a computer-security incident
as an occurrence that results in actual harm
to an information system or the information
contained within it. Banks are generally required
to provide notice of incidents that have materially
disrupted or degraded—or are reasonably likely
to materially disrupt or degrade—the viability of
a banking organization’s operations, its ability
to deliver banking products and services, or
the stability of the financial sector. Examples of
cyber incidents that banks are required to report
include large-scale distributed denial-of-service
(DDoS) attacks that disrupt customer access for
an extended period, cyberattacks that disable
banking operations for an extended period, and
ransomware attacks that encrypt a core banking
system.

and assess cyber risk. For example, information
about technology services provided to financial
institutions, operational volumes supported, and
the interconnectedness and interdependencies of
those services could be useful in gauging systemwide cyber risk.

The NCUA issued a proposed rule in July
that requires federally insured credit unions
(FICU) to notify the agency within 72 hours
after a reportable cyber incident has occurred.
The definition of “reportable cyber incident”
encompasses substantial cyber incidents such
as the exposure of sensitive data, disruptions of
vital member services, and serious impacts on
operational systems and processes.112
The agencies’ actions are important steps forward
in their efforts to understand and manage
financial stability risks from cyberattacks. If
adopted, the SEC’s proposed rule for investment
advisors would create the first structured
cyber data set collected by a member agency,
providing opportunities for improved analytics
and risk monitoring. However, additional
information beyond what is collected through
cyber incident notification rules may be useful
for Council member agencies’ efforts to monitor

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69

Recommendations
Maintaining and improving the cybersecurity
resilience of the financial sector requires
continuous assessment of cyber vulnerabilities
and close cooperation across firms and
governments within the U.S. and internationally.
Building on the work of the Financial and Banking
Information Infrastructure Committee (FBIIC),
Financial Services Sector Coordinating Council
(FSSCC), and Financial Services Information
Sharing and Analysis Center (FS-ISAC) to
promote interagency information sharing
related to cyber risk, the Council recommends
undertaking additional work to understand and
mitigate cyber-related financial stability risks.
The Council supports the ongoing partnerships
between state and federal agencies and private
firms, including FBIIC, the FSSCC, and FS-ISAC.
Sharing timely and actionable cybersecurity
information can reduce the risk of cybersecurity
incidents and mitigate the impacts of those
that do occur. The Council encourages FBIIC
to continue working closely with Council
member agencies, state agencies, DHS, law
enforcement, and industry partners to conduct
regular cybersecurity exercises recognizing
interdependencies with other sectors, such as
telecommunications and energy. The Council
recommends that agencies carefully consider
how to share information, including confidential
supervisory information and classified
information.
Financial institutions have rapidly adopted
innovative technologies, including cloud
computing and artificial intelligence (AI). The
Council supports the domestic efforts of the FBIIC
Technology Working Group, which examines
how financial institutions are using emerging
technologies that may introduce new cyber
vulnerabilities into critical financial services
infrastructure. The Council also supports the
international effort by the G7 CEG Emerging
Threats/Opportunities Workstream to address
how new technologies, such as AI and quantum
computing affect the global financial system.

3.4.2

Third-Party Service Providers

Financial institutions have steadily increased
their reliance on service providers for a broad

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range of information technology services, from
video conferencing and collaboration software
to banking platforms that support internal
operations and business lines. In certain cases,
a financial institution’s use of these third-party
services supports critical functions or services at
the financial institutions, such as core banking
and general ledger. The Council has identified
the financial sector’s concentrated dependency
on a limited number of service providers, such as
cloud service providers, for critical information
technology services as a potential risk to financial
stability.
Cloud Services
According to a survey conducted in 2021 by the
American Bankers Association (ABA), more than
90% of surveyed banks stated that they maintain
at least some data, applications, or operations in
the cloud.113 However, of those surveyed, more
than 80% indicated they were in the “adoption” or
“early adoption” phase concerning cloud services,
with only 5% of respondent banks describing their
cloud use as mature.
According to a more recent survey, over twothirds of the surveyed banks want at least
30% of their applications and data to be in the
cloud in three years.114 This would represent
approximately triple the number of banks that
had achieved this level of cloud adoption at the
time of the survey.115 Similarly, a 2021 consulting
company survey of banks, including North
American financial institutions, estimated an
average of 8% of all banking workloads were
cloud-based.116 This same survey indicated 24%
of respondent banks located in North America
had partially migrated some core services to the
cloud.117
Industry research often cites “misconfiguration”
by cloud service users, such as financial
institutions, as the most common cause of
data breaches.118 Common misconfigurations
can impact overall operational resilience
because misconfigurations could be exploited
by malicious actors to negatively affect the
confidentiality, integrity, or availability of the
services used by some or all customers of the
technology service provider. In particular,
customers of cloud servicers are, in many cases,

responsible for configuring various aspects of
those services, depending on whether customers
are using the software as a service (SaaS),
platform as a service (PaaS), or infrastructure
as a service (IaaS).119 Financial institutions
can misconfigure PaaS and SaaS applications
through inappropriate user access, application
deployment, and data backup settings;
however, IaaS provides the opportunity for the
misconfiguration of data center resources more
foundationally.
Prosecutors stated that an individual behind a
major incident in 2019 scanned for common
misconfigurations among a leading cloud
services provider’s clients to identify potential
victims.120 Although the incident itself involved
many complex factors in addition to the
misconfiguration issue, the perpetrator of this
incident identified 30 similar misconfigurations
that she was able to exploit to steal data and
illicitly install crypto-asset mining software,
showing that exploitation of common
misconfigurations can be easily replicated across
a cloud service’s customers. Each aspect of
running applications in the IaaS environment
requires bespoke decisions at the design,
implementation, and monitoring stages. These
bespoke designs also require experienced
personnel in cybersecurity, financial institution
business processes, and cloud architecture.
Leveraging technology service providers,
especially cloud service providers, can give
financial institutions flexibility and scalability in
their IT environments. However, some IT skills
associated with traditional financial services’
IT environments are not easily transferrable to
cloud environments. Similarly, skills associated
with one provider or service do not necessarily
translate across other providers. As a result,
financial institutions may need to reskill or hire
new talent as they use new technology service
providers.
Many service providers adhere to a shared
responsibility model for security and system
configuration that requires clients to take on
some responsibilities for managing applications,
data, user access, and workloads. A client must

be capable of identifying and understanding
the line between the service provider’s
responsibilities and the client’s to manage the
risks of its particular cloud deployment. One
major report concluded: “Shared responsibility
masks the uneven maturity of organizations
and technologies on the user side of that shared
line, producing much more of a zigzag than a
clean line of responsibility.”121 The challenge of
managing shared responsibility resources may
be particularly acute for small and mediumsized financial institutions that must compete
for limited IT staffing resources, which could
eventually leave the industry on an uneven
footing in terms of resilience and security.
Errors or mistakes in software development,
deployment, and maintenance relative to
contracted underlying technology services can
potentially cause service outages at the service
providers. For example, an entire cloud service
provider’s region suffered an outage in December
2021 that disrupted several of the cloud service
provider’s services. The outage was caused by
an unexpected internal system behavior that
ultimately congested the network, leading to
further cascading issues resulting in the outage.122
The outage lasted several hours while the cloud
service provider’s engineers identified and
resolved the problems and made upgrades to
prevent the same type of issue from occurring
again. Although the compromise of SolarWinds
software used for managing and monitoring
on-premises and hosted cloud infrastructures
(December 2020) yielded no known operational
resilience impact to cloud service customers,
the incident revealed weaknesses in identity
and access management and privileged access
management that the threat actor used across
numerous customers’ cloud environments.123, 124
Exploitations like this could enable other malicious
activity that could potentially affect the operational
resilience of the users of those services.
Recommendations
The Council supports the ongoing collaboration
of member agencies to examine third-party
service providers and the services they provide
to the financial system. The agencies continue
to enhance their supervisory programs for

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71

cyber-related controls in key areas such as
core processing, payment services, and cloud
computing.
The Council supports continued risk
identification associated with service providers’
roles in the financial sector and their potential
impact on financial stability. The Council also
recommends that federal banking regulators
continue coordinating third-party service
provider examinations, work collaboratively with
states, and identify additional ways to support
information sharing among state and federal
regulators.
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.

Box G: The Use of Artificial
Intelligence (AI) in Financial Services
Artificial Intelligence (AI) is a set of technologies
that have been around for decades. However, its
use in financial services has increased in recent
years thanks to more advanced algorithms,
and data storage and processing power
improvements.
There is no single accepted definition of AI, but
it is often considered software that performs
tasks previously done by humans. For example,
a common type of AI is machine learning, which
updates its responses based on additional data
with little or no human intervention. There is
significant variety in AI methodologies and uses,
and there is not always a stark difference between
AI and more traditional quantitative modeling.
AI offers significant benefits, such as reducing
costs and improving efficiencies, identifying
more complex relationships, and improving
performance/accuracy. Financial institutions
use AI for various tasks, ranging from fraud
prevention and detection to customer service,
document review, and retail credit underwriting.
Some institutions use AI extensively, while others
take a more limited approach. Even within a
single institution, AI may be used to varying
degrees in different areas.
The use of AI, though, introduces certain risks.
Potential risks associated with AI include
safety-and-soundness risks – such as cyber and
model risks – and consumer compliance risks.
In addition, specific requirements to prevent
discrimination or bias that apply to tools, models,
or processes used in consumer compliance also
apply to AI.
Many AI approaches operate as “black boxes,”
which can create challenges in explaining how
the technology produces its output. This lack
of “explainability” can make it difficult to assess
the systems’ conceptual soundness, increasing
uncertainty about their suitability and reliability.

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3.5

A particular concern related to AI explainability is
the possibility that AI systems with explainability
challenges could produce and possibly mask
biased or inaccurate results. This could affect,
for example, consumer protection issues such
as fair lending. There are techniques to address
explainability challenges, which have their own
strengths and weaknesses.
Data play a very important role in AI because
of the high volumes of data typically involved
and because data often play a larger role in
driving the specifications – that is, determining
which variables are to be included and how they
are included – than in traditional quantitative
modeling. Data used for AI may come from
a wider variety of sources and may be less
structured (e.g., a collection of documents instead
of a formal dataset). With AI, data may also have
to be processed at higher frequencies. Thus, data
controls are vital to sound AI, including data
quality, suitability, and security/privacy. Another
potential issue with AI approaches is that they
can be “overfit,” which means they may adhere
too closely to the data on which they were trained
and not apply as well (or “generalize”) to new
conditions.
In March 2021, the Federal Reserve, OCC,
CFPB, FDIC, and NCUA issued an RFI on
AI to help them understand its use by their
supervised institutions and solicit views from
a wide range of stakeholders. In the RFI, those
agencies also noted some existing regulations
and guidance that apply to the use of AI. The
agencies received over 100 comment letters on
the RFI—from bankers, consumer advocates,
vendors, academics, and others—whose feedback
has been very helpful to supervisors as they
consider potential future policy steps for financial
institutions’ use of AI.

Climate-related Financial Risk

In October 2021, the Council identified climate
change as an emerging and increasing threat to
U.S. financial stability for the first time. Broadly
speaking, climate-related financial risks are
grouped into two categories: physical risks and
transition risks.
Physical risks generally refer to the harm to
people and property that can arise from acute
climate-related weather events like droughts,
floods, wildfires, heatwaves, and hurricanes,
or chronic changes over time, such as higher
average temperatures, changes in precipitation
patterns, sea level rise, persistent drought,
degradation of arable land, or ocean acidification.
Transition risks generally refer to stresses to
certain institutions or sectors that may arise
from the shift towards a lower greenhouse gas
(GHG) or net-zero economy, including changes
in policy, consumer and business sentiment, or
technological advances. The impact of transition
risks may result in added costs for some firms
and communities even as they reduce the overall
risk associated with physical risks. In addition, if
the transition is delayed or disorderly, the impact
on firms, market participants, individuals, and
communities is more likely to be disruptive.
Climate-related financial risk can manifest in the
form of traditional risks such as credit, market,
liquidity, operational, or legal risks. However,
member agencies are in the early stages of
understanding the specific channels through
which climate-related impacts can manifest as
financial risks.
Climate-related financial risks could contribute to
financial instability through numerous channels,
including financial intermediaries experiencing
significant losses, impairment of financial market
functioning, or the sudden and disruptive
repricing of assets. Physical and transition risks
associated with climate change will likely affect
households, communities, businesses, and
governments by damaging property, impeding
business activity, impacting income, and altering
the value of assets and liabilities.125 These effects
may be transmitted and amplified further via
interconnections in the economy and financial

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3.5.1 Transmission Channels Linking Climate Risks to Financial Stability
Transition risks
•
Technological changes
•
Policy shifts
•
Changes in consumer preference

CLIMATE RISKS

Physical risks
•
Chronic (e.g., sea level rise)
•
Acute (e.g., hurricanes)
IMPACT ON ECONOMIC
SECTORS AND
MACROECONOMY

FEEDBACK LOOP
THAT MAY
ADVERSELY
AFFECT ECONOMIC
AND FINANCIAL
STABILITY

IMPACTS ON
FINANCIAL
INSTITUTIONS AND
MARKETS

•
•
•
•

Damages to property
Business interruption
Effects on household and business income
Feedback across economy through
product and labor markets
•
•
•
•
•

Credit and market risks
Liquidity risks
Operational risks
Legal risks
Amplification through interconnections
and correlated exposures

Source: FSOC

system. As a result, the financial sector may
experience credit and market risks associated
with loss of income, defaults, changes in the
values of assets, inadequate liquidity, operational
risks associated with disruptions to infrastructure
or other channels, or legal risks. These outcomes
may lead financial institutions and insurance
providers to pull back from credit or insurance
provisions, potentially amplifying the initial
climate-related shock and threatening financial
stability (Figure 3.5.1).
Given the breadth of transmission channels
through which climate-related financial risk could
materialize, work is underway to understand
better and quantify the potential impacts on
financial institutions and markets. The staff-level
Climate-related Financial Risk Committee (CFRC)
and Council member agencies are working to
build capacity, address data gaps, and improve
methodological approaches to risk monitoring
(see Section 4.1.1).

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

Physical Risks
Real estate is emerging as an area of particular
scrutiny because of its critical role in the
economy and financial system, and the numerous
transmission channels through which physical
risk could affect it.
Climate-related events like wildfires and flooding
may result in damage that can reduce the value
of real estate. This may impact households126
and owners of commercial real estate, increasing
the probability of default and associated loss.
As markets factor these risks into pricing, real
estate exposed to physical risk could lose market
value even without direct damage.127 Because
households of lower socio-economic status are
often exposed to greater climate risk,128 this could
further exacerbate existing disparities in housing
values, for example, in low- or moderate-income
areas or majority-minority census tracts, thus
eroding generational wealth. Additionally, it
might also increase the costs associated with
housing, for example, insurance premiums and
the frequency and cost of repairs, thus further
increasing the homeownership challenges for
low-income communities.

The 5th National Risk Assessment: Fueling the Flames l © First Street Foundation

Given the potential impacts on housing
and mortgage markets, regions with a
significant amount of real estate exposed
to high levels of physical risk warrant close
monitoring. For example, climate change
has caused a doubling of forest fire areas
in the western United States between 1984
and 2015.129 Recent analysis suggests 71.8
million residential properties are already at
risk of wildfire,
and
this
number
The 5th National Risk Assessment:
Fueling the Flames
l © First
Street
Foundation is expected
to increase to 79.8 million by 2050, with a
significant concentration of risks in some
areas (Figure 3.5.2).130 For
Nationalgeographic
Overview
example, California, the most populous state,
has the second-highest wildfire incidence.131
As anotherAmong
example,
flooding is also an
properties with risk, annual
todayreal estate, with 23.5
increasinglikelihood
threatof wildfire
to U.S.
million properties at risk, which,
No data by some
0
0.55
2.67
estimates, is expected to rise to approximately
26 million properties over the next 30 years.132
Flood risk is also concentrated in some
geographic areas, with properties along
the Gulf and East Coasts likely to be most
impacted by flooding (Figure 3.5.3). 133

National Overview
3.5.2 Residential Properties at Risk of Wildfire – Percent Increase
in Annual Likelihood by 2050
Among properties with risk, annual
Among properties
with risk, annual
likelihood
of wildfire today

likelihood of wildfire today

0

0.55

No data

2.67
2.67

12

Among properties with risk, annual
Among properties
risk, annual
likelihood
of wildfire inwith
30 years

likelihood In
ofaddition
wildfire to
in informing
30 years probable ignition
Oklahoma, and Florida. There are lower

there are less fue

0
counts of historic wildfires in California

0.55
locations
in5.99
the model, past wildfires also

potential wildfire

than some other areas across the country

influence the model through their impact

of historical obse

(such as those in northeast Nevada), but

on the fuels which future potential wildfires

likelihood means

the wildfire burn probabilities nevertheless

may consume. Areas which have been

have relatively hig

tend to be elevated in California.

burned relatively recently in the past are

in the fuels used

less likely to burn, or may have less intense

specific reduction

flame lengths within the model as now

smaller disturbed

No data

Role of Insurance

Insurers play an important role in the financial
system in absorbing losses stemming from
physical risks. However, the increasing
incidence and severity of extreme weather
Source: First Street Foundation, The 5th National Risk Assessment, 2022
Oklahoma, and Florida. There are lower
In addition to informing probable
and there are less fuels present which future or The percentage increase between the
could affect the solvency
of insurers134ignition
counts of historic wildfires in California
locations in the model, past wildfires also
potential wildfires may use. The influence
current year and 30 years into the future in
the cost and availability
of coverage for
than some other areas across the country
influence the model through their impact
of historical observations on ignition
the average burn probabilities of properties
Projected
Flood 3.5.3
risk change
over timeIncrease in Properties with Substantial Flood Risk
homeowners
Inpotential
response
(such as those in northeast
Nevada), but and
onbusinesses.
the fuels which future
wildfiresto likelihood
that while an area may
with at least 0.03% risk is at least 100% in
Nationalmeans
Overview
the wildfire burn probabilities
neverthelesslosses,
may consume.
which haveare
beenraising
have relatively high risk levels, disturbances
many of
the counties
across
the country.
rising insured
someAreas
insurers
Percent
Change
in Properties
at
Substantial Risk, 2020-2050
tend to be elevatedrates,
in California.
burned
relatively
recently
in
the
past
are
in
the
fuels
used
in
the
model
allow
for
increasing policy exclusions, avoiding
less likely to burn, or may have less intense
specific reductions of risk within those
renewals in unprofitable
markets, and
flame lengths within the model as now
smaller disturbed areas.
implementing higher deductibles in areas with
significant exposure to extreme weather.135
These increases in premiums and changes in
market coverage are affecting the affordability
and availability of insurance coverage for
consumers in affected areas.136 137 In some
cases, government-run insurance programs
may step in where private insurance coverage
is insufficient, but these programs may also
be forced to raise rates to remain solvent,
affecting the availability and affordability
Source: First Street Foundation, The First National Flood Risk Assessment,
of insurance.138 From 2011 to 2021, nearly
2020
half of the economic damages from natural
disasters in the United States were uninsured,
resulting in a protection gap of 44%, or $435
First Street Foundation

l

The First National Flood Risk Assessment: Defining America’s Growing Risk

I

© 1st Street Foundation, Inc 2020

11

Percent Change in Properties at
Substantial Risk, 2020-2050*

-30% 0

WA
+6.0%

OR
+6.2%

MT
+4.7%

ND
+2.4%

ID
+7.7%

WY
+5.7%

NV
+6.1%

CA
+5.5%

CO
+2.4%

WI
+2.8%

SD
+0.6%

IA
0%

IL
+4.4%

OK
-1.6%

NM
+0.7%

TX
+15.9%

NY
+11.9%

MI
+4.5%

KS
+0.9%

AZ
+1.6%

No data

+260%

ME
VT
+7.6%
+2.1%

MN
+1.6%

NE
-0.3%

UT
+6.9%

+60%

MO
+1.8%

LA
+69.7%

OH
+5.4%

IN
+4.4%

KY.
+3.2%

TN
+3.2%

AR
+1.7%

MS
+9.8%

PA
+4.0%

AL
+6.2%.

WV
+1.5%

DC
+8.8%

VA
+13.1%

NH
+4.6%

MA
+11.4%

CT
+9.7%
NJ
+19.1%

RI
+14.7%

DE
+21%
MD
+14.8%

NC
+12.1%

SC
+16.7%

GA
+9.9%

FL
+18.6%

* Substantial risk is calculated as inundation 1 cm or more to the building in the 100 return period (1% annual risk). See methodology for full model details.

Vulnerabilities, Significant Market Developments, and Council Recommendations

75

billion.139 Ultimately, an increasing number
of properties may become uninsurable due
to the increasing severity and frequency of
climate-related events and the associated
changes in insurance policy structure, pricing,
and availability.

3.5.4 Flow-of-Risk ‘Waterfall’
Physical climate shock
May be chronic (higher temperatures)
or acute (severe storms)

Number of borrowers covered, degree
of coverage, and contract details

Borrower equity buffer
Ability and willingness to repay debt

Creditors
Including originators and any
purchasers/providers of risk
mitigation
Source: FSOC

Potential government assistance programs

Insurance coverage
(net of deductibles)

These uninsured losses have the potential to
spill over to other parts of the financial system
and real economy. Figure 3.5.4 depicts a
flow-of-risk ‘waterfall’ to help visualize how
the losses could flow through a stack of lossabsorption layers. In the event of an extreme
climate-related disaster, insurance companies
take the first loss net of deductibles if the
specific peril is covered. Non-covered losses
will adversely affect the impacted entities,
likely including borrowers who differ in ability
and willingness to absorb these remaining
losses. Any resulting defaults will push losses
into other parts of the financial system,
including losses to originators, securities
purchasers, and providers of risk mitigation
products. Government programs may provide
assistance to individuals, businesses, or
others suffering losses at any given stage,
potentially shifting losses to the government
and ultimately to the taxpayer. Bottom-up
exercises for specific regions, assets, and
types of peril are needed to understand the
potential financial impact of physical risks.
At the bottom of the flow-of-risk ‘waterfall,’
creditors may be exposed to uncovered
losses. Given their central role in the financial
system and real estate market, banks and
government-sponsored enterprises (GSEs)
exposures to uncovered losses are particularly
worth monitoring. As the GSEs’ mortgagerelated portfolio has increased in the years
following the 2008 financial crisis, their overall
exposure to climate-related financial risk may
also have increased. In light of increasing
flood and fire risk and changing dynamics
in insurance markets, additional attention
should be placed on monitoring the overlap
between such physical risks and mortgage
debt. And ultimately, it will be necessary to
understand how these physical risks translate
into financial risks to assess the resulting U.S.
financial stability risks fully.

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Transition Risks
In addition to the work underway to better
understand physical risk and its implications
for the financial system, Council members are
making progress in identifying and developing a
variety of methodologies to measure transition
risks.
One approach to estimating financial institutions’
exposures to transition risk relies on metrics
such as GHG emissions. For example, facilitylevel emissions data could be matched against
loan-level banking data to indicate large bank
exposure to higher-emitting borrowers. However,
emissions may be a noisy indicator of transition
risk. For example, the impacts of policies to
reduce emissions may vary significantly across
sectors, policy designs, and degrees of abatement.
Forward-looking approaches such as scenario
analysis that take these factors into account are
potentially more reliable but could be more
complex and require analyzing how changes
in climate variables may impact the type and
amount of future economic activity.
Council members continue collaborating toward
more granular, forward-looking methodologies to
assess transition risk exposures.

large banks proposed by the Federal Reserve,
OCC, and FDIC. The Council recommends state
and federal agencies continue to collect data
on and study climate-related financial risks and
how they might factor into appropriately tailored
supervisory expectations of regulated entities’ risk
management practices.
Financial regulators should continue to promote
consistent, comparable, and decision-useful
disclosures that allow investors and financial
institutions to consider climate-related financial
risks in their investment and lending decisions.
Examples include the SEC’s proposed rules
to enhance and standardize climate-related
disclosures for investors and the National
Association of Insurance Commissioners’ (NAIC)
updated Climate Risk Disclosure Survey.
The Council recommends enhanced coordination
of data and risk assessment through the CFRC.
The CFRC provides a forum for interagency
information sharing, coordination, and capacity
building. The newly established Climate-related
Financial Risk Advisory Committee (CFRAC) will
leverage expertise outside of the government to
understand climate-related financial risk.

Recommendations
The Council supports actions by member
agencies to improve the availability of data for
assessing climate-related financial risks such as
the CFTC’s RFI about the climate-related financial
risk associated with derivatives markets,140 FIO’s
proposed data collection from large writers of
homeowners insurance on their underwriting
metrics and related insurance policy
information,141 and the OFR’s work of the Climate
Data Hub.142 The Council recommends state and
federal agencies coordinate to identify, prioritize,
and procure data necessary for monitoring
climate-related financial risk.
The Council supports efforts to improve
assessments and risk management of climaterelated financial risks and vulnerabilities,
including the Federal Reserve’s pilot climate
scenario analysis exercise and the principles on
climate-related financial risk management at
Vulnerabilities, Significant Market Developments, and Council Recommendations

77

4
4.1

Council Activities and Regulatory Developments
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 that may
extend beyond any agency’s jurisdiction.
Climate-related Financial Risk
The Council recognizes the critical importance
of continuing to assess climate-related financial
risks to the financial system and promote the
resilience of the financial system to those risks.
In October 2021, the Council published a Report
on Climate-Related Financial Risk, which
recommended the formation of two committees
– a staff-level CFRC and an external advisory
committee, the CFRAC.
The CFRC began meeting regularly in February
2022 and serves as an active forum for interagency
information sharing, coordination, and capacity
building. Given the known gaps in climaterelated financial data, the continuing evolution in
methodologies to assess risk, and the challenges
of translating climate data into potential financial
impacts, the CFRC plays an important role in

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

enabling interagency staff to learn from one
another on emerging best practices. Targeted
working groups are focused on addressing data
gaps and identifying priority data needs for
member agencies, including working closely
with the OFR’s Climate Data Hub, advancing
collective understanding of scenario analysis, and
investigating metrics for risk assessment.
The CFRAC, established by the Council in October
2022, will help the Council receive information
and analysis on climate-related financial risks
from a broad array of stakeholders. The CFRAC’s
initial members include stakeholders from
a wide range of backgrounds, including the
financial services industry, non-governmental
research institutions, climate-related data and
analytics providers, non-profit organizations, and
academia. Committee members with expertise
in climate data and analysis will support the
Council and its member agencies in their efforts
to translate climate-related risks into economic
and financial impacts.
Nonbank Financial Intermediation
The Council continues to evaluate the
vulnerabilities posed by three types of nonbank
financial institutions (NBFIs): open-end mutual
funds, hedge funds, and MMFs. At the February
4, 2022, Council meeting, staff from member
agencies updated the Council on their progress
in analyzing and addressing the vulnerabilities
associated with these three types of NBFIs
through working groups and member agency
rulemaking. At that meeting, the Council also
issued a public statement supporting ongoing
member agency work on NBFIs.
Since the February 2022 meeting, the Council’s
Hedge Fund Working Group has deepened its
engagement with the IAWG, addressed certain
data gaps, and developed a risk monitoring
system to assess hedge fund-related risks to
the U.S. financial stability. The working group
presented its first risk assessment based on a pilot
version of the monitoring system to the Council at

the July 28, 2022, Council meeting and a second
assessment based on the completed system at the
November 4, 2022, meeting.
In addition, in June 2022, the Council restarted
meetings of its Nonbank Mortgage Servicing
Task Force, a staff-level working group including
staff from member agencies and additional
government agencies, such as the Department of
Housing and Urban Development. The Nonbank
Mortgage Servicing Task Force will facilitate
interagency coordination and additional market
monitoring of the risks posed to U.S. financial
stability by nonbank mortgage servicers.
Digital Assets
As part of its responsibility to identify emerging
risks to U.S. financial stability, the Council has
monitored and discussed developments in
the digital assets ecosystem as that ecosystem
has developed. In February 2022, the Council
identified digital assets as a priority area. In
October 2022, the Council published a Report
on Digital Asset Financial Stability Risks and
Regulation in response to Executive Order 14067,
Ensuring Responsible Development of Digital
Assets, which called on the Council to produce
a report outlining the specific financial stability
risks and regulatory gaps posed by various types
of digital assets and provide recommendations
to address such risks. The report details the
Council’s findings and recommendations (see
Section 3.1.5). The Council’s Digital Assets
Working Group met regularly and coordinated
throughout the drafting process.

4.1.2 Determinations Regarding Nonbank
Financial Companies
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 Dodd-Frank 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 risk-related factors

that the Council deems appropriate when
evaluating those companies.
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 eight meetings in 2022, 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 2022. Approximately every
two weeks, the Council’s Deputies Committee,
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 six other staff-level committees. The
other staff-level committees are the CFRC; the
Data Committee; the Financial Market Utilities
and Payment, Clearing, and Settlement Activities
Committee; the Nonbank Financial Companies
Designations Committee; the Regulation and
Resolution Committee; and the Systemic
Risk Committee. As noted in Section 4.1.1,
the Council also established its first advisory
committee, the CFRAC, in 2022. The Council
adopted its FY 2023 budget in September 2022.

4.2

Safety and Soundness

4.2.1 Enhanced Capital and Prudential Standards
and Supervision
On November 23, 2021, the Federal Reserve,
OCC, and FDIC issued a final rule that requires a
banking organization to notify its primary Federal
regulator of any “computer-security incident”
Council Activities and Regulatory Developments

79

that rises to the level of a “notification incident,”
as soon as possible and no later than 36 hours
after the banking organization determines that a
notification incident has occurred. The final rule
also requires a bank service provider to notify
each affected banking organization customer as
soon as possible when the bank service provider
determines that it has experienced a computersecurity incident that has caused, or is reasonably
likely to cause, a material service disruption or
degradation for four or more hours. The final
rule defines a “notification incident” to include
a computer-security incident that has materially
disrupted or degraded, or is reasonably likely
to materially disrupt or degrade, the viability of
a banking organization’s operations, its ability
to deliver banking products and services, or the
stability of the financial sector.
On December 10, 2021, the Federal Reserve
issued a letter to remind supervised firms of safe
and sound practices for counterparty credit risk
management in light of the Archegos Capital
Management default. The letter noted that in light
of the Archegos default and the context of firms’
relationships with investment funds, the Federal
Reserve is issuing guidance to remind firms of
the supervisory expectations in Interagency
Supervisory Guidance on Counterparty Credit
Risk Management and to make firms and
industry participants aware of practices that may
be inconsistent with safe and sound banking
practices.
On December 23, 2021, the NCUA issued a
final rule providing a simplified measure of
capital adequacy for federally insured, naturalperson credit unions (credit unions) classified
as complex (those with total assets greater than
$500 million). Under the final rule, a complex
credit union that maintains a minimum net
worth ratio and that meets other qualifying
criteria is eligible to opt into the complex credit
union leverage ratio (CCULR) framework if it has
a minimum net worth ratio of nine percent. A
complex credit union that opts into the CCULR
framework need not calculate a risk-based capital
ratio under the NCUA Board’s October 29, 2015,
risk-based capital final rule, as amended on
October 18, 2018. A qualifying complex credit
union that opts into the CCULR framework

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

and maintains the minimum net worth ratio is
considered well-capitalized. The final rule also
made several amendments to update the NCUA’s
October 29, 2015, risk-based capital final rule,
including addressing asset securitizations issued
by credit unions, clarifying the treatment of
off-balance sheet exposures, deducting certain
mortgage servicing assets from a complex credit
union’s risk-based capital numerator, revising the
treatment of goodwill, and amending other asset
risk weights.
On March 31, 2022, the FDIC issued a request
for comment (RFC) regarding the application of
the laws, practices, rules, regulations, guidance,
and statements of policy that apply to merger
transactions involving one or more insured
depository institutions, including the merger
between an insured depository institution and
a noninsured institution. The FDIC sought
comments regarding the effectiveness of the
existing framework in meeting the requirements
of Section 18(c) of the Federal Deposit Insurance
Act (known as the Bank Merger Act).
On July 28, 2022, the Federal Reserve issued
a proposed rule to implement the Adjustable
Interest Rate (LIBOR) Act. The proposed rule
would establish benchmark replacements for
contracts governed by United States law that
reference certain tenors of USD LIBOR (the
overnight and 1-, 3-, 6-, and 12-month tenors)
and that do not have terms that provide for
the use of a clearly defined and practicable
replacement benchmark rate following the first
London banking day after June 30, 2023. The
proposed rule also would provide additional
definitions and clarifications consistent with the
Adjustable Interest Rate (LIBOR) Act.

4.2.2

Dodd-Frank Act Stress Tests

On June 23, 2022, the Federal Reserve released
the results of its annual bank stress test, which
showed that banks continue to have strong
capital levels, allowing them to continue lending
to households and businesses during a severe
recession. A total of 34 banks were required
to participate in the 2022 stress test. All banks
tested remained above their minimum capital
requirements, despite total projected losses of
$612 billion. Under stress, the aggregate common

equity tier 1 capital ratio is projected to decline
by 2.7 percentage points to a minimum of 9.7%,
which is still more than double the minimum
requirement.

4.2.3

Resolution Planning and Orderly Liquidation

Under the Dodd-Frank Act, the U.S. Bankruptcy
Code is the statutory first option for resolution in
the event of the failure of a financial company.
Section 165(d) of the Dodd-Frank Act requires
nonbank financial companies designated by
the Council for supervision by the Federal
Reserve and certain BHCs—including certain
foreign banking organizations (FBOs) with U.S.
operations—to periodically submit plans to the
Council, Federal Reserve, and FDIC for their rapid
and orderly resolution under the U.S. bankruptcy
code in the event of material financial distress
or failure. 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.
In December 2021, the Federal Reserve and FDIC
received targeted resolution plan submissions
from 16 covered companies in categories II and III
of the agencies’ large bank regulatory framework.
On July 1, 2022, the Federal Reserve and FDIC
received resolution plan submissions from 55
foreign banking organizations in category IV of
the agencies’ large bank regulatory framework,
consisting of 50 reduced resolution plans and five
full resolution plans. On September 29, 2022, the
Federal Reserve and FDIC provided feedback to
Truist Financial Corporation regarding its initial
resolution plan submitted on September 29, 2021.
At that time, the Federal Reserve and FDIC also
announced that they anticipate issuing guidance
in 2023, which would be made available for public
comment, to assist the triennial full filers that are
not already the subject of resolution planning
guidance.

Furthermore, in 2022, 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

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 2022,
Treasury published a Report on the Effectiveness
of the Terrorism Risk Insurance Program (TRIP).
In the report, Treasury concluded that TRIP
has remained effective in making terrorism
risk insurance available and affordable in the
insurance marketplace and that the market for
terrorism risk insurance has been relatively stable,
with few observable changes over time in the
relevant benchmarks.
During 2022, all 50 states, the District of
Columbia, and the U.S. territories completed the
adoption of the NAIC’s Credit for Reinsurance
Model law and regulation, creating nationally
streamlined reinsurance supervision. The NAIC
adopted the 2022 Group Capital Calculation
template and Instructions and an updated
Liquidity Stress Testing Framework. The NAIC
also updated its Financial Condition Examiners
Handbook, utilized in all NAIC Accredited
jurisdictions, with additional guidance related to
cybersecurity and ransomware attacks impacting
insurers.
The NAIC made efforts to address the prolonged
low-interest rate environment and the
subsequent search for investment yield in the
insurance sector. The NAIC adopted Actuarial
Guidelines 53, which requires asset adequacy
testing of complex assets supporting certain
policyholder liabilities for life insurers. Similarly,
the NAIC increased transparency and reporting
requirements related to residual investment
tranches. The NAIC also increased the authority
of state regulators through the Purposes and
Procedures Manual of the NAIC Investment
Analysis Office, related to insurers’ assets that
would not be eligible for reporting as a bond.

Council Activities and Regulatory Developments

81

As private markets have expanded over the last
decade, alternative asset management firms have
reshaped their business models and increased
involvement in the life insurance sector. Some
alternative asset managers have increased their
access to books of annuities and life insurance
through acquisitions of insurers, while others
have used reinsurance to contractually assume
assets and liabilities associated with insurance
businesses. In light of the ongoing and expanding
presence of private equity-owned insurers in the
life insurance space, the NAIC adopted a list of
13 considerations pertaining to the ability of state
insurance regulators to adequately monitor and
assess the risks of these new entrants. The NAIC
also adopted new reporting requirements in the
investment schedules for investment transactions
with related parties. In addition to capturing
direct loans in related parties, it will also capture
information involving securitizations (or other
similar investments) where the related party is
a sponsor/originator, along with whether the
underlying investment is in a related party.
The NAIC also updated the Own Risk Solvency
Assessment guidance manual to incorporate
elements of the International Association of
Insurance Supervisors’ Common Framework
for the Supervision of Internationally Active
Insurance Groups. Finally, the NAIC added new
reporting requirements to gather additional
data on the insurance industry’s use of
cryptocurrencies, though such directly held
digital assets are not considered admitted assets
for capital purposes.

4.3 Financial Infrastructure,
Markets, and Oversight
4.3.1

Climate-Related Financial Risks

On August 31, 2021, following the May 20, 2021,
Executive Order on Climate-Related Financial
Risk, FIO issued a RFI to solicit public input on
FIO’s future work relating to the insurance sector
and climate-related financial risks. The request
also sought input on how FIO’s data collection
and dissemination authorities can best be used
by FIO in support of these priorities, as well as
to monitor and assess the insurance sector and
climate-related financial risks.

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On December 16, 2021, the OCC issued draft
principles designed to support the identification
and management of climate-related financial
risks by banks with more than $100 billion in
total consolidated assets. Consistent with the
Council’s Report on Climate-Related Financial
Risk, the OCC identified the effects of climate
change and the transition to a low-carbon
economy as presenting emerging risks to banks
and the financial system. The draft principles
provide a high-level framework for the safe and
sound management of exposures to climaterelated financial risks, consistent with the existing
risk management framework described in existing
OCC rules and guidance.
In April 2022, the NAIC Executive Committee
adopted a revised climate risk disclosure survey
consistent with the international Task Force
on Climate-Related Financial Disclosures
framework. The survey is currently administered
jointly by 15 states and the District of Columbia
to all licensed insurers that write at least $100
million in direct premiums annually within
those markets and applies group-wide (i.e.,
the disclosure captures information across the
footprint of the group, not just the legal entities
in these jurisdictions), capturing approximately
80% of the total U.S. market. Initial filings under
the new survey are due in November 2022. In
2022, the NAIC also adopted changes to the
Property Casualty Risk‐Based Capital Formula
to include projected modeled wildfire losses in
the information reported to regulators and are
developing a proposed capital charge for severe
convective storms. The NAIC also established
a Catastrophe Model Center of Excellence to
provide model documentation, education, and
training and conduct applied research using
catastrophe models to address regulatory climate
risk and resilience priorities.
On March 30, 2022, the FDIC issued an RFC on
draft principles that would provide a high-level
framework for the safe and sound management
of exposure to climate-related financial risks.
Although all financial institutions, regardless of
size, may have material exposures to climaterelated financial risks, these draft principles are
intended for the largest financial institutions,
those with over $100 billion in total consolidated

assets. The draft principles are substantively
similar to those issued by the OCC in December
2021 and are intended to support efforts by large
financial institutions to focus on key aspects of
climate-related financial risk management.
On April 11, 2022, the SEC proposed rule
changes that would require registrants to provide
certain climate-related information in their
registration statements and annual reports. The
proposed rules would provide investors with
more consistent, comparable, and decisionuseful climate-related information by requiring a
registrant to provide disclosures on the oversight
and governance undertaken by its board and
management, risk management, and strategy with
respect to climate-related risks; the registrant’s
climate-related targets or goals, if any; certain
disclosure related to greenhouse gas emissions;
and the current impact of climate-related events
and transition activities on the registrant’s
consolidated financial statements and related
expenditures.
On September 29, 2022, the Federal Reserve
announced that six of the nation’s largest banks
would participate in a pilot climate scenario
analysis exercise designed to enhance the ability
of supervisors and firms to measure and manage
climate-related financial risks. The pilot exercise
will be launched in early 2023 and is expected
to conclude around the end of the year. The
Federal Reserve anticipates publishing insights
gained from the pilot at an aggregate level,
reflecting what has been learned about climate
risk management practices and how insights from
scenario analysis will help identify potential risks
and promote risk management practices. No
firm-specific information will be released. There
will be no capital or supervisory implications
from the pilot.
On October 18, 2022, FIO issued an RFC on a
proposed collection of data from property and
casualty insurers regarding current and historical
underwriting data on homeowners’ insurance
to assess the potential for major disruptions
of private insurance coverage in regions of the
country that are particularly vulnerable to the
impacts of climate change. This work builds
on FIO’s 2021 climate RFI and will be part

of sequential and capacity-building efforts.
FIO’s initial steps are intended to consolidate
foundational knowledge that can be used in
future years to develop more comprehensive
approaches to address climate-related financial
risks.
On December 2, 2022, the Federal Reserve invited
comments on proposed principles providing
a high-level framework for the safe and sound
management of exposures to climate-related
financial risks for large banking organizations,
those with more than $100 billion in total assets.
They are substantially similar to proposals issued
by the OCC and FDIC. The Federal Reserve
intends to work with those agencies to promote
consistency in the supervision of large banks
through final interagency guidance.

4.3.2 Digital Assets, Payment Systems, and
Technological Innovation
On November 18, 2021, the OCC issued an
interpretive letter regarding the authority of
a bank to engage in certain cryptocurrency
activities. The interpretive letter clarified that
the activities addressed in prior OCC interpretive
letters (i.e., OCC Interpretive Letters 1170, 1172,
and 1174) are legally permissible for a bank to
engage in, provided the bank can demonstrate,
to the satisfaction of its supervisory office, that it
has controls in place to conduct the activity in a
safe and sound manner. The letter further stated
that a bank should notify its supervisory office,
in writing, of its intention to engage in any of the
activities addressed in the interpretive letters. The
bank should not engage in the activities until it
receives written notification of the supervisory
office’s non-objection. In deciding whether to
grant supervisory non-objection, the supervisory
office will evaluate the adequacy of the bank’s
risk management systems, controls, and risk
measurement systems to enable the bank to
engage in the proposed activities safely and
soundly.
In December 2021, the NCUA issued a letter to
federally insured credit unions (FICUs) to provide
clarity about the already existing authority of
FICUs to establish relationships with third-party
providers that offer digital asset services to the
FICUs’ members (including services provided
Council Activities and Regulatory Developments

83

by third parties to allow FICU members to buy,
sell, and hold uninsured digital assets with
the third-party provider outside of the FICU),
provided certain conditions are met. The letter
stated that FICUs must comply with applicable
laws and should follow safe-and-sound business
practices in the provision of digital asset services
through third-party arrangements. FICUs should
fully evaluate the risks involved with digital
asset activities, including legal risks, reputation
risks, and economic risks. The letter stated that
in light of the rapidly changing technological
environment and the variety of digital asset
products and services available, FICUs should
actively monitor that they, and the thirdparty service providers they facilitate member
relationships with, remain in ongoing compliance
with all laws. FICUs should ensure that effective
risk measurement, monitoring, and control
practices are in place to successfully manage such
third-party arrangements once established.
On March 31, 2022, the SEC issued Staff
Accounting Bulletin No. 121, which expresses
the views of the staff regarding the accounting
for obligations to safeguard crypto-assets an
entity holds for platform users. The bulletin is
applicable to, among other entities, those that file
reports pursuant to Sections 13(a) or 15(d) of the
Exchange Act and entities that have submitted or
filed a registration statement under the Securities
Act or the Exchange Act that is not yet effective.
On April 7, 2022, the FDIC issued a financial
institution letter to address the engagement
by FDIC-supervised institutions in cryptorelated activities. The letter stated that cryptorelated activities may pose significant safety
and soundness risks and financial stability and
consumer protection concerns. Moreover,
these risks and concerns are evolving as cryptorelated activities are not yet fully understood.
The FDIC noted that there is little consistency
in the definitions associated with many cryptoassets and crypto-related activities, which makes
it difficult to categorically identify these assets
and activities. Further, the structure and scope
of these activities are rapidly changing and
expanding. As a result, of the dynamic nature
of crypto-related activities, it is difficult for
institutions, as well as the FDIC, to adequately

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assess the safety and soundness, financial
stability, and consumer protection implications
without considering each crypto-related activity
on an individual basis. Therefore, the FDIC
requested all FDIC-supervised institutions that
are considering engaging in crypto-related
activities to notify the FDIC of their intent and
to provide all necessary information that would
allow the FDIC to engage with the institution
regarding related risks. The letter advised that
any FDIC-supervised institution that is already
engaged in crypto-related activities should
promptly notify the FDIC and encouraged
institutions notifying the FDIC to also notify their
state regulator.
On July 29, 2022, the FDIC issued a Fact Sheet
for the public and an Advisory to FDIC-insured
institutions regarding FDIC deposit insurance and
dealings with crypto companies to address certain
misrepresentations about FDIC deposit insurance
related to crypto-assets. The Fact Sheet stated
that some crypto companies have represented to
their customers that their products are eligible
for FDIC deposit insurance coverage, which may
lead customers to believe, mistakenly, that their
money or investments are safe. The FDIC noted
in the Advisory that inaccurate representations
about deposit insurance by non-banks, including
crypto companies, may confuse nonbank
customers and cause them to mistakenly believe
they are protected against any type of loss.
On August 16, 2022, the Federal Reserve issued a
supervisory letter to supervised firms providing
additional information for banking organizations
engaging or seeking to engage in crypto-assetrelated activities. The letter outlined the steps
Federal Reserve-supervised banks should take
before engaging in crypto-asset-related activities,
such as assessing whether such activities are
legally permissible and determining whether
any regulatory filings are required. Additionally,
the letter stated that Federal Reserve-supervised
banking organizations should notify the Federal
Reserve before engaging in crypto-asset-related
activities. The letter also emphasized that Federal
Reserve-supervised banking organizations should
have adequate systems and controls in place to
conduct crypto-asset-related activities in a safe
and sound manner prior to commencing such
activities.

On August 19, 2022, the Federal Reserve approved
final guidelines for Federal Reserve Banks to
utilize in evaluating requests for access to Federal
Reserve Bank master accounts and services. The
final guidelines followed a supplemental notice
and proposed guidelines that were issued on
March 8, 2022.

4.3.3 Derivatives, Swap Data Repositories,
Regulated Trading Platforms, Central
Counterparties, and Financial Market Utilities
On May 11, 2022, the SEC issued a proposed set
of rules (Regulation SE) and forms under the
Exchange Act that would create a regime for the
registration and regulation of security-based
swap execution facilities (SBSEFs) and address
other issues relating to security-based swap (SBS)
execution generally. One of the rules proposed as
part of Regulation SE would implement a part of
the Dodd-Frank Act that is intended to mitigate
conflicts of interest at SBSEFs and national
securities exchanges that trade SBS. Other rules
proposed as part of Regulation SE would address
the cross-border application of the Exchange
Act’s trading venue registration requirements
and the trade execution requirement for SBS. In
addition, the SEC proposed to amend an existing
rule to exempt, from the Exchange Act definition
of “exchange,” certain registered clearing agencies
as well as registered SBSEFs that provide a
marketplace only for SBS. The SEC also proposed
a new rule that, while affirming that an SBSEF
would be a broker under the Exchange Act,
would exempt a registered SBSEF from certain
broker requirements. Finally, the SEC proposed
certain new rules and amendments to its Rules
of Practice to allow persons who are aggrieved by
certain actions by an SBSEF to apply for review
by the SEC. The SEC also withdrew all previously
proposed rules regarding these subjects.
On August 24, 2022, the CFTC issued a final rule
modifying its existing interest rate swap clearing
requirement regulations under applicable
provisions of the Commodity Exchange Act
(CEA) due to the global transition from reliance
on certain interbank offered rates (IBORs) (e.g.,
LIBOR) that have been, or will be, discontinued
as benchmark reference rates to alternative
reference rates, which are predominantly
overnight, nearly risk-free reference rates (RFRs).

The amendments updated the set of interest
rate swaps that are required to be submitted for
clearing pursuant to the CEA and the CFTC’s
regulations to a derivatives clearing organization
(DCO) that is registered under the CEA or to a
DCO that has been exempted from registration
under the CEA, to reflect the market shift away
from swaps that reference IBORs to swaps that
reference RFRs.
On October 5, 2022, the Federal Reserve issued
a proposed rule to amend the requirements
relating to operational risk management in the
Federal Reserve’s Regulation HH, which applies
to certain financial market utilities that have been
designated as systemically important (designated
FMUs) by the Council under Title VIII of the
Dodd-Frank Act. The proposal would update,
refine, and add specificity to the operational
risk management requirements in Regulation
HH to reflect changes in the operational risk,
technology, and regulatory landscapes in which
designated FMUs to operate since the Federal
Reserve last updated the risk management
requirements in 2014. The proposal would also
adopt specific incident-notification requirements.

4.3.4

Securities and Asset Management

On February 8, 2022, the SEC issued a proposed
rule to amend certain rules that govern money
market funds under the Investment Company Act
of 1940. The proposed amendments are designed
to improve the resilience and transparency of
money market funds. The proposal would remove
the liquidity fee and redemption gate provisions
in the existing rule, which would eliminate
an incentive for preemptive redemptions
from certain money market funds and could
encourage funds to more effectively use their
existing liquidity buffers in times of stress. The
proposal would also require institutional prime
and institutional tax-exempt money market
funds to implement swing pricing policies and
procedures to require redeeming investors to bear
the liquidity costs of their decisions to redeem.
The SEC also proposed to increase the daily liquid
asset and weekly liquid asset minimum liquidity
requirements to 25% and 50%, respectively, to
provide a more substantial buffer in the event
of rapid redemptions. The proposal would
amend certain reporting requirements on Forms
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85

N-MFP and N-CR to improve the availability
of information about money market funds, as
well as make certain conforming changes to
Form N-1A to reflect the proposed changes to
the regulatory framework for these funds. In
addition, the SEC proposed rule amendments
to address how money market funds with stable
net asset values should handle a negative interest
rate environment. Finally, the SEC proposed rule
amendments to specify how funds must calculate
weighted average maturity and weighted average
life.

commodity pool operator or commodity trading
adviser. As with the February 17, 2022, proposed
rule, the amendments are designed to enhance
the Council’s ability to monitor systemic risk and
bolster the SEC’s regulatory oversight of private
fund advisers and investor protection efforts.
In connection with the amendments to Form
PF, the SEC proposes to amend a rule under
the Investment Advisers Act of 1940 to revise
instructions for requesting a temporary hardship
exemption.

On February 17, 2022, the SEC issued a proposed
rule to amend Form PF, the confidential reporting
form for certain SEC-registered investment
advisers to private funds, to require current
reporting upon the occurrence of key events.
The proposed amendments also would decrease
the reporting threshold for large private equity
advisers and require these advisers to provide
additional information to the SEC about the
private equity funds they advise. Finally, the SEC
proposed to amend requirements concerning
how large liquidity advisers report information
about the liquidity of funds they advise. The
proposed amendments are designed to enhance
the Council’s ability to monitor systemic risk and
bolster the SEC’s regulatory oversight of private
fund advisers and investor protection efforts.

On March 18, 2022, the SEC issued a proposed
rule to amend Rule 3b-16 under the Exchange
Act, which defines certain terms used in the
statutory definition of “exchange” under Section
3(a)(1) of the Exchange Act to include systems
that offer the use of non-firm trading interest
and communication protocols to bring together
buyers and sellers of securities. In addition, the
SEC re-proposed amendments to its regulations
under the Exchange Act, which were initially
proposed in September 2020, to enable alternative
trading systems (ATSs) to take into consideration
systems that may fall within the definition of
“exchange” because of the amendments proposed
in 2022. The SEC re-proposed, with certain
revisions, amendments to its regulations for
ATSs that trade government securities as defined
under Section 3(a)(42) of the Exchange Act or
repurchase and reverse repurchase agreements
on government securities. The SEC also proposed
to amend Form ATS-N for NMS Stock ATSs, which
would require existing NMS Stock ATSs to amend
their existing disclosures. In addition, the SEC
proposed to amend the fair access rule for ATSs.
The SEC also proposed to require electronic filing
of and to modernize Form ATS-R and Form ATS,
which would require existing Form ATS filers to
amend their existing disclosures. Further, the
SEC re-proposed amendments to its regulations
regarding systems compliance and integrity
to apply to ATSs that meet certain volume
thresholds in U.S. Treasury Securities or in a debt
security issued or guaranteed by a U.S. executive
agency or government-sponsored enterprise.

On February 24, 2022, the SEC issued a proposed
rule to shorten the standard settlement cycle
for most broker-dealer transactions from two
business days after the trade date (T+2) to one
business day after the trade date (T+1). To
facilitate a T+1 standard settlement cycle, the SEC
also proposed new requirements for processing
institutional trades by broker-dealers, investment
advisers, and certain clearing agencies. These
requirements are designed to protect investors,
reduce risk, and increase operational efficiency.
The SEC proposed to require compliance with
a T+1 standard settlement cycle, if adopted, by
March 31, 2024.
On September 1, 2022, the SEC and CFTC issued a
proposed rule to amend Form PF, the confidential
reporting form for certain SEC-registered
investment advisers to private funds, including
those that also are registered with the CFTC as a

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Treasury Market Structure

On April 18, 2022, the SEC issued a proposed rule
to further define the phrase “as a part of a regular
business” as used in the statutory definitions

of “dealer” and “government securities dealer”
under Sections 3(a)(5) and 3(a)(44), respectively,
of the Exchange Act. The proposed rules would
define three qualitative standards designed to
more specifically identify activities of certain
market participants who assume dealer-like roles,
specifically, persons whose trading activity in
the market “has the effect of providing liquidity”
to other market participants. In addition,
proposed Rule 3a44-2, which would apply only to
government securities dealers, would include a
quantitative standard. This quantitative standard
would establish a bright-line test, under which
a person engaging in certain specified levels of
activity would be deemed to be buying and selling
government securities “as a part of a regular
business,” regardless of whether it meets any of
the qualitative standards. A person whose activity
meets the quantitative or any of the qualitative
standards would be a dealer and so subject to
the Exchange Act registration requirements,
regardless of whether the liquidity provision is a
chosen consequence of its activities.
On October 25, 2022, the SEC issued a proposed
rule to amend the standards applicable to covered
clearing agencies for U.S. Treasury securities
to require that such covered clearing agencies
have written policies and procedures reasonably
designed to require that every direct participant
of the covered clearing agency submit for
clearance and settlement all eligible secondary
market transactions in U.S. Treasury securities
to which it is a counterparty. In addition, the
SEC proposed additional amendments to the
Covered Clearing Agency Standards with respect
to risk management. These requirements are
designed to protect investors, reduce risk, and
increase operational efficiency. Finally, the SEC
proposed to amend the broker-dealer customer
protection rule to permit margin required and on
deposit with covered clearing agencies for U.S.
Treasury securities to be included as a debit in the
reserve formulas for accounts of customers and
proprietary accounts of broker-dealers, subject to
certain conditions.

4.3.5

Accounting Standards

On March 28, 2022, the Financial Accounting
Standards Board (FASB) issued ASU 2022-01,
“Derivatives and Hedging (ASC Topic 815): Fair

Value Hedging – Portfolio Layer Method.” ASU
2022-01 establishes the portfolio-layer method,
which expands an entity’s ability to achieve fair
value hedge accounting for hedges of financial
assets in a closed portfolio.
On March 31, 2022, the FASB issued Accounting
Standards Update (ASU) 2022-02, “Financial
Instruments – Credit Losses (Topic 326): Troubled
Debt Restructurings and Vintage Disclosures.”
ASU 2022-02 eliminates the accounting guidance
for troubled debt restructurings by creditors that
have adopted Accounting Standards Codification
(ASC) Topic 326 and enhances disclosures for
certain loan refinancings and restructurings when
a borrower is experiencing financial difficulty.

4.3.6 Bank Secrecy Act/Anti-Money Laundering
Regulatory Reform
On March 16, 2022, the OCC issued a final rule
amending its suspicious activity report (SAR)
regulations to harmonize its legal authority
to issue exemptions from its SAR regulations
with Financial Crimes Enforcement Network’s
(FinCEN) preexisting authority. The rule
establishes processes for the OCC to facilitate
changes related to SAR regulations required by
the Anti-Money Laundering Act of 2020 and grant
relief to banks that develop innovative solutions
intended to meet Bank Secrecy Act requirements
more efficiently and effectively.
On September 30, 2022, FinCEN issued a final
rule requiring certain entities to file with FinCEN
reports that identify two categories of individuals:
the beneficial owners of the entity and individuals
who have filed an application with specified
governmental authorities to create the entity
or register it to do business. These regulations
implement Section 6403 of the Corporate
Transparency Act, enacted as part of the National
Defense Authorization Act for Fiscal Year 2021,
and describe who must file a report, what
information must be provided, and when a report
is due. These requirements are intended to help
prevent and combat money laundering, terrorist
financing, corruption, tax fraud, and other illicit
activity while minimizing the burden on entities
doing business in the United States.

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87

4.4 Mortgages and Consumer
Protection
4.4.1

Mortgages and Housing Finance

On December 8, 2021, the CFPB issued a final
rule amending Regulation Z, which implements
the Truth in Lending Act, generally to address the
anticipated sunset of LIBOR, which is expected
to be discontinued for most U.S. dollar (USD)
tenors in June 2023. Some creditors currently
use USD LIBOR as an index for calculating rates
for open-end and closed-end products. The
CFPB amended the open-end and closed-end
provisions to provide examples of replacement
indices for LIBOR indices that meet certain
Regulation Z standards. The CFPB also
amended Regulation Z to permit creditors for
home equity lines of credit (HELOCs) and card
issuers for credit card accounts to transition
existing accounts that use a LIBOR index to a
replacement index on or after April 1, 2022, if
certain conditions are met. This final rule also
addressed change-in-terms notice provisions
for HELOCs and credit card accounts and how
they apply to accounts transitioning away from
using a LIBOR index. Lastly, the CFPB amended
Regulation Z to address how the rate reevaluation
provisions applicable to credit card accounts
apply to the transition from using a LIBOR index
to a replacement index.
On March 16, 2022, FHFA issued a final rule
amending the Enterprise Regulatory Capital
Framework (ERCF) by refining the prescribed
leverage buffer amount and credit risk transfer
securitization framework for Fannie Mae and
Freddie Mac. The final rule also made technical
corrections to various provisions of the ERCF that
was published on December 17, 2020.
On August 17, 2022, FHFA and Ginnie Mae
finalized and released updated Enterprise seller/
servicer and Ginnie Mae issuer requirements.
The Enterprise seller/servicer requirements
were updated to promote confidence and
improve safety and soundness for nonbanks by
enhancing the definitions of capital and liquidity;
more accurately capturing liquidity needs by
differentiating by remittance type; reducing
procyclicality in the liquidity requirements

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by (1) eliminating the Non-Performing Loan
liquidity add-on that existed in the previous
requirements and (2) requiring a liquidity buffer
that can be drawn on during times of stress; and
incorporating lessons learned from the COVID-19
pandemic, including establishing requirements to
address origination pipeline risk, as the previous
requirements focused primarily on mortgage
servicing.
On August 31, 2022, FHFA announced it would
conduct a comprehensive review of the Federal
Home Loan Bank (FHLBank) System beginning
in the fall of 2022. As part of the review process,
FHFA hosted two public listening sessions and
a series of regional roundtable discussions to
consider and evaluate the mission, membership
eligibility requirements, and operational
efficiencies of the FHLBanks. FHFA heard from
stakeholders on the FHLBanks’ role or potential
role in addressing housing finance, community
and economic development, affordability, and
other related issues.

4.4.2

Consumer Protection

On May 17, 2022, the CFPB issued a circular that
addresses prohibited practices on claims about
FDIC insurance. The circular noted that firms
may violate federal law if they misuse the name
or logo of the FDIC or make false or misleading
representations about deposit insurance. The
issue has taken on renewed importance with the
emergence of financial technologies – such as
crypto-assets, including stablecoins – and the
risks posed to consumers if they are lured to these
or other financial products or services through
misrepresentations or false advertising.
On June 2, 2022, the FDIC issued a final rule
to implement section 18(a)(4) of the Federal
Deposit Insurance Act. Section 18(a)(4) prohibits
any person from misusing the name or logo of
the FDIC or from engaging in false advertising
or making knowing misrepresentations about
deposit insurance. The FDIC has observed an
increasing number of instances where financial
services providers or other entities or individuals
have misused the FDIC’s name or logo or have
made false or misleading representations about
deposit insurance. The final rule establishes
the process by which the FDIC will identify and

investigate conduct that may violate section 18(a)
(4), the standards under which such conduct
will be evaluated, and the procedures which the
FDIC will follow when formally and informally
enforcing the provisions of section 18(a)(4).
On August 11, 2022, the CFPB issued a circular
confirming that financial companies may violate
federal consumer financial protection law when
they fail to safeguard consumer data. The circular
provides guidance to consumer protection
enforcers, including examples of when firms
can be held liable for lax data security protocols.
The CFPB noted that it is increasing its focus
on the potential misuse and abuse of personal
financial data. As part of this effort, the circular
explains how and when firms may be violating
the Consumer Financial Protection Act with
respect to data security. Specifically, financial
companies are at risk of violating the Act if they
fail to have adequate measures to protect against
data security incidents. The circular also provides
examples of widely implemented data security
practices. While the circular does not suggest
that particular security practices are specifically
required under the Act, it notes some examples
where the failure to implement certain data
security measures might increase the risk that a
firm’s conduct triggers liability under the Act.

4.5 Data Scope, Quality, and
Accessibility
4.5.1

Data Scope

Global adoption of the Legal Entity Identifier
(LEI), which enables the unique and transparent
identification of legal entities participating in
financial transactions, continues to grow. In
the United States, the LEI is used in regulatory
reporting mandated by the Federal Reserve,
CFPB, SEC, CFTC, and OFR, among others.
Once OTC derivative transaction data are brought
together across jurisdictions, the LEI, unique
transaction identifier (UTI), unique product
identifier (UPI), and the harmonized critical data
elements (CDE) fields can improve the ability to
monitor financial stability through analysis of
counterparty exposure and risk positioning at
various levels of aggregation.

In October 2020, the Financial Stability Board
(FSB) transferred the role of international
governance body for the UTI, UPI, and CDE to
the Regulatory Oversight Committee (ROC).
The ROC is a group of more than 70 regulatory
authorities worldwide that oversee the Global
LEI Foundation (GLEIF). In December 2021, the
responsibility for providing secretariat services to
the ROC was transferred from the FSB to the OFR,
with support from the People’s Bank of China.
ROC secretariat staff play an important role in the
day-to-day mechanics of regulatory governance
of the LEI, UPI, UTI, and CDE.

4.5.2

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 Federal
Reserve, OCC, CFPB, SEC, FDIC, CFTC, and
OFR. A focus of Council members is the work
on “Level 2” LEI data. This is data submitted by
legal entities acquiring an LEI regarding their
“direct accounting consolidating parent” and
their “ultimate accounting consolidating parent.”
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. Level 2
LEI data provides the direct counterparties to a
transaction and the affiliated entities and can
improve the ability to perform a risk assessment
of the transaction counterparties
Additionally, this past year, the ROC continued
to work closely with the GLEIF as the GLEIF
continues to develop its LEI digital strategy.
Toward this purpose, Council members
contributed to the ROC’s analysis of a new work
item proposal under Technical Committee
68 of the International Organization for
Standardization (ISO) to develop Part 3 of the
LEI standard (ISO 17442). This proposal, which
was put forth by the GLEIF, pertains to what
the GLEIF refers to as “verifiable LEIs” (vLEIs).
vLEIs provide automated remote verification
of legal entities owning LEIs –– that is, they
cryptographically prove that an LEI is owned by
the organization signing with or presenting the
credential.

Council Activities and Regulatory Developments

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5

Select Council Member Agency Publications
on Financial and Regulatory Developments

CFPB. Buy Now, Pay Later: Market trends
and consumer impacts. Washington: CFPB,
2022. https://www.consumerfinance.gov/dataresearch/research-reports/buy-now-pay-latermarket-trends-and-consumer-impacts/.
CFPB. Complaint Bulletin: An analysis of
consumer complaints related to cryptoassets. Washington: CFPB, 2022. https://www.
consumerfinance.gov/data-research/researchreports/complaint-bulletin-analysis-of-consumercomplaints-related-to-crypto-assets/.
CFPB. The Convergence of Payments and
Commerce: Implications for Consumers.
Washington: CFPB, 2022. https://www.
consumerfinance.gov/data-research/researchreports/the-convergence-of-payments-andcommerce-implications-for-consumers/.
CFPB. Supervisory Highlights (Issue 28, Fall
2022). Washington: CFPB, 2022. https://
www.consumerfinance.gov/data-research/
research-reports/supervisory-highlights-issue28-fall-2022.
FDIC. FDIC Quarterly Banking Profile (Third
Quarter 2022). Washington: FDIC, 2022.
https://www.fdic.gov/analysis/quarterly-bankingprofile/qbp/2022sep/.
FDIC. 2022 Risk Review. Washington: FDIC,
2022. https://www.fdic.gov/analysis/riskreview/2022-risk-review.html.
FDIC. Supervisory Insights. Washington:
FDIC, 2022. https://www.fdic.gov/regulations/
examinations/supervisory/insights/past.html.
FHFA. 2021 Report to Congress. Washington:
FHFA, 2022. https://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/FHFA-2021-AnnualReport-to-Congress.pdf.

FHFA. Annual Performance Plan for Fiscal Year
2023. Washington: FHFA, 2022. https://www.
fhfa.gov/AboutUs/Reports/ReportDocuments/
FY2023_APP.pdf.
FHFA. August 2022 Foreclosure Prevention,
Refinance, and Federal Property Manager’s
Report. Washington: FHFA, 2022. https://www.
fhfa.gov/AboutUs/Reports/ReportDocuments/
August2022-FPR-Refi-FPM-Report.pdf.
FIO. Annual Report on the Insurance Industry.
Washington: FIO, 2022. https://home.treasury.
gov/system/files/311/2022%20Federal%20
Insurance%20Office%20Annual%20Report%20
on%20the%20Insurance%20Industry%20
%281%29.pdf.
FIO. Report on the Effectiveness of the
Terrorism Risk Insurance Program. Washington:
FIO, 2022. https://home.treasury.gov/system/
files/311/2022%20Program%20Effectiveness%20
Report%20%28FINAL%29.pdf.
Federal Reserve. Financial Stability Report (May
2022). Washington: Federal Reserve, 2022.
https://www.federalreserve.gov/publications/
files/financial-stability-report-20220509.pdf.
Federal Reserve. Financial Stability Report
(November 2022). Washington: Federal
Reserve, 2022. https://www.federalreserve.
gov/publications/files/financial-stabilityreport-20221104.pdf.
Federal Reserve. Supervision and Regulation
Report (May 2022). Washington: Federal
Reserve, 2022. https://www.federalreserve.
gov/publications/files/202205-supervision-andregulation-report.pdf.

Select Council Member Agency Publications on Financial and Regulatory Developments

91

Federal Reserve. Supervision and Regulation
Report (November 2022). Washington: Federal
Reserve, 2022. https://www.federalreserve.
gov/publications/files/202211-supervision-andregulation-report.pdf.
FSOC. Report on Digital Assets Financial
Stability Risks and Regulation. Washington:
FSOC, 2022. https://home.treasury.goc/system/
files/261/FSOC-Digital-Assets-Report-2022.pdf.
OCC. Interest Rate Risk Statistics Report.
Washington: OCC, 2022. https://occ.gov/
publications-and-resources/publications/
interest-rate-risk-statistics-reports/files/interestrate-risk-statistics-report-fall-2022.html.
OCC. Semiannual Risk Perspective.
Washington: OCC, 2022. https://www.occ.
gov/publications-and-resources/publications/
semiannual-risk-perspective/index-semiannualrisk-perspective.html.
OFR. 2022 Annual Report to Congress.
Washington: OFR, 2022. Report Forthcoming.
SEC. Money Market Funds in the Treasury
Market. Washington: SEC, 2022. https://www.
sec.gov/files/mmfs-treasury-market-090122.pdf.
SEC. Prime MMFs’ Asset Composition and
Asset Sales. Washington: SEC, 2022. https://
www.sec.gov/files/mmf-asset-sales-2023-jun-23.
pdf.
SEC. Private Funds Statistics. Washington:
SEC, 2022. https://www.sec.gov/divisions/
investment/private-funds-statistics.
U.S. Department of the Treasury. Enhancing the
Resilience of the U.S. Treasury Market: 2022
Staff Progress Report. Washington: Treasury,
2022. https://home.treasury.gov/system/
files/136/2022-IAWG-Treasury-Report.pdf.

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6

Abbreviations

ABA

American Bankers Association

ABCP

Asset-Backed Commercial Paper

AFS

Available For Sale

AI

CFTC

Commodity Futures Trading
Commission

CIF

Collective Investment Funds

Artificial Intelligence

CISA

AOCI

Accumulated Other Comprehensive
Income

Cybersecurity and Infrastructure
Security Agency

CIT

Collective Investment Trusts

ARM

Adjustable-Rate Mortgage

CLO

Collateralized Loan Obligation

ARM MBS

Adjustable-Rate Mortgage
Mortgage-Backed Security

CMBS

Commercial Mortgage-Backed Security

CME

Chicago Mercantile Exchange Inc.

ARRC

Alternative Reference Rates
Committee

CMG

Crisis Management Group

ATS

Alternative Trading System

Council

Financial Stability Oversight Council

BHC

Bank Holding Company

CP

Commercial Paper

BNPL

Buy Now, Pay Later

CPMI

Committee on Payments and Market
Infrastructures

BOE

Bank of England

CRE

Commercial Real Estate

CARES Act

Coronavirus Aid, Relief, and Economic
Security Act

CSBS

Conference of State Bank Supervisors

CBDC

Central Bank Digital Currency

DB

Defined Benefit
Derivatives Clearing Organization

CCAR

Comprehensive Capital Analysis and
Review

DCO
DDoS

Distributed Denial of Service

CCP

Central Counterparty

DHS

Department of Homeland Security

CCULR

Complex Credit Union Leverage Ratio

CD

Certificate of Deposit

CDE

Critical Data Element

CDS

Credit Default Swap

CEA

Commodity Exchange Act

CEG

Cyber Expert Group

CET1

Common Equity Tier 1 Capital

CFPB

Dodd-Frank Dodd-Frank Wall Street Reform and
Act
Consumer Protection Act
DSB

Derivatives Service Bureau

DTCC

Depository Trust & Clearing
Corporation

EBITDA

Earnings Before Interest, Taxes,
Depreciation, and Amortization

EME

Emerging Market Economy

Consumer Financial Protection Bureau

ERCF

CFRC

Climate-related Financial Risk
Committee

Enterprise Regulatory Capital
Framework

ERISA

CFRAC

Climate-related Financial Risk Advisory
Committee

Employee Retirement Income Security
Act

ETF

Exchange-Traded Fund
Abbreviations

93

Exchange
Act

94

Ginnie Mae

Government National Mortgage
Association

Fannie Mae Federal National Mortgage Association

GLEIF

Global LEI Foundation

FASB

Financial Accounting Standards Board

GNE

Gross Notional Exposure

FBIIC

Financial and Banking Information
Infrastructure Committee

GSD

Government Securities Division

FBO

Foreign Banking Organization

GSE

Government-Sponsored Enterprise

FDIC

Federal Deposit Insurance Corporation

G-SIB

Global Systemically Important Bank

Federal
Reserve

Board of Governors of the Federal
Reserve System

HELOC

Home Equity Line of Credit

HFWG

Hedge Fund Working Group

FHFA

Federal Housing Finance Agency

HTM

Held-to-maturity

FHLBank

Federal Home Loan Bank

IaaS

Infrastructure as a Service

FICC

Fixed Income Clearing Corporation

IAWG

FICU

Federally Insured Credit Union

Inter-Agency Working Group for
Treasury Market Surveillance

IBORs

Interbank Offered Rates

FIMA

Foreign and International Monetary
Authority

IHC

Intermediate Holding Company

FinCEN

Financial Crimes Enforcement Network

IMF

International Monetary Fund

FINRA

Financial Industry Regulatory Authority

IOSCO

FIO

Federal Insurance Office

International Organization of Securities
Commissions

FMU

Financial Market Utility

ISDA

International Swaps and Derivatives
Association

FOMC

Federal Open Market Committee

FRBNY

Federal Reserve Bank of New York

ISDA IBOR

International Swaps and Derivatives
Association’s Interbank Offered Rate

Freddie
Mac

Federal Home Loan Mortgage
Corporation

ISO

Organization for Standardization

LDI

Liability-driven Investments

FRM

Fixed-Rate Mortgage

LEI

Legal Entity Identifier

FSB

Financial Stability Board

LENS

Legal Notice System

FS-ISAC

Financial Services Information Sharing
and Analysis Center

LIBOR

London Interbank Offered Rate

FSOC

Financial Stability Oversight Council

LME

London Metal Exchange
Mortgage-Backed Security

FSSCC

Financial Services Sector Coordinating
Council

MBS
MBSD

Mortgage-Backed Securities Division

FX

Foreign Exchange

MMF

Money Market Mutual Fund

GAV

Gross Asset Value

MOVE

Merrill Lynch Option Volatility Estimate

GCF

General Collateral Financing

mREIT

Mortgage REITs

GDP

Gross Domestic Product

MSR

Mortgage Servicing Right

GHG

Greenhouse Gas

NAIC

National Association of Insurance
Commissioners

Securities Exchange Act of 1934

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

NAV

Net Asset Value

SD

Swap Dealer

NBFI

Nonbank Financial Institution

SDR

Swap Data Repository

NCDs

Negotiable Certificates of Deposit

SEC

Securities and Exchange Commission

NCUA

National Credit Union Administration

NIM

Net Interest Margin

SI>1 CCPs

NIST

National Institute of Standards and
Technology

CCPs Considered Systemically
Important in More than One
Jurisdiction

SIFMA

NMDB

National Mortgage Database

Securities Industry and Financial
Markets Association

NMS

National Market System

SOFR

Secured Overnight Financing Rate

SRC

Systemic Risk Committee

NSCC

National Securities Clearing
Corporation

SRF

Standing Repo Facility

OCC

Office of the Comptroller of the
Currency

STIFs

Short-term Investment Funds

OC Corp

Options Clearing Corporation

TRACE

Trade Reporting and Compliance
Engine

OCCIP

Office of Cybersecurity and Critical
Infrastructure Protection

TR

Trade Repository

Treasury

U.S. Department of the Treasury

OFR

Office of Financial Research

TRIP

Terrorism Risk Insurance Program

ON RRP

Overnight Reverse Repurchase
Agreement Facility

UK

United Kingdom

OTC

Over-the-Counter

UPI

Unique Product Identifier

PaaS

Platform as a Service

USD

U.S. dollar

P&C

Property and Casualty

UTI

Unique Transaction Identifier

PRT

Pension Risk Transfer

VIX

Chicago Board Options Exchange
Market Volatility Index

RaaS

Ransomware as a Service

vLEI

Verifiable LEIs

REIT

Real Estate Investment Trust

YCC

Yield Curve Control

Repo

Repurchase Agreement

RFI

Request for Information

RFRs

Risk-Free Reference Rates

RMBS

Residential Mortgage-Backed Security

ROC

Regulatory Oversight Committee

RWAs

Risk-Weighted Assets

S&P

Standard & Poor’s

SaaS

Software as a Service

SBS

Security-Based Swap

SBSEF

Security-Based Swap Execution Facility

Abbreviations

95

7

Glossary

Accumulated Other Comprehensive Income
(AOCI)
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.

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.

Affiliate

Clearing Bank

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; (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.

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.

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.
Bilateral Repo
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 through Fixed Income Clearing

Collateral
Any asset pledged by a borrower to guarantee
payment of a debt.
Collateralized Loan Obligation (CLO)
A securitization vehicle backed predominantly by
commercial loans.
Commercial Paper (CP)
Short-term (maturity of up to 270 days),
unsecured corporate debt.
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.

Glossary

97

Comprehensive Capital Analysis and Review
(CCAR)
An annual exercise by the Federal Reserve to
ensure that institutions have robust, forwardlooking capital planning processes that account
for their unique risks and sufficient capital
to continue operations throughout times of
economic and financial stress.
Credit Default Swap (CDS)
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 (DB) Plan
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.
Digital Asset
Digital asset refers to two categories of products:
“central bank digital currencies” (CBDCs)
and crypto-assets. Crypto-assets are privatesector digital assets that depend primarily on
cryptography and distributed ledger or similar
technology.
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.
Federal Funds Rate
The interest rate at which depository institutions
borrow overnight from lenders in the federal
funds market. The FOMC sets a target range

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for the level of the overnight federal funds rate.
The FRBNY then uses open market operations
to influence the rate so that it trades within the
target range.
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 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.
Futures Contract
An agreement to purchase or sell a commodity
for delivery in the future: (1) at a price that is
determined at the 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.
Government-Sponsored Enterprise (GSE)
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).

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.
Initial Margin
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.

market abuse and financial fraud; and provision
of higher-quality and more accurate financial
data.
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.
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.

Interest Rate Swap

Loan-to-Value Ratio

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.

The ratio of a loan amount to the value of the asset
that the loan funds is typically expressed as a
percentage. This is a key metric when considering
a mortgage’s collateralization level.

Intermediate Holding Company (IHC)
A company established or designated by a foreign
banking organization (FBO) under the Federal
Reserve Board’s Regulation YY. Regulation
YY requires that an FBO with U.S. non-branch
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

Margin
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.
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.
Mortgage-Backed Security (MBS)
An asset-backed security backed by a pool of
mortgages. Investors in the security receive
payments derived from the interest and principal
payments on the underlying mortgages.
Mortgage Servicing Company
A company that acts as an agent for mortgage
holders by collecting and distributing mortgage
cash flows. Mortgage servicers also manage
Glossary

99

defaults, modifications, settlements, foreclosure
proceedings, and various notifications to
borrowers and investors.
Mortgage Servicing Right (MSR)
The right to service a mortgage loan or a portfolio
of mortgage loans.
Municipal Bond
A bond issued by states, cities, counties,
local governmental agencies, or certain
nongovernment issuers to finance certain general
or project-related activities.

Primary Dealer

An investment company’s total assets minus its
total liabilities.

A financial institution that is a trading
counterparty of the FRBNY. Primary dealers are
expected to participate in open market operations
conducted by the Federal Reserve and to bid
on a pro-rata basis in all Treasury auctions at
reasonably competitive prices.

Net Interest Margin (NIM)

Public Debt

Net interest income as a percent of interestearning assets.

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.

Net Asset Value (NAV)

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 missionrelated 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.
Over-the-Counter (OTC)
A method of trading which does not involve a
registered exchange. An OTC trade could occur

100

on purely a bilateral basis or could involve some
degree 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).

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

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 assets under management.
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.
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 onbalance sheet, off-balance 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.

institutional investors. Examples include large
checkable and time deposits, brokered CDs, CP,
Federal Home Loan Bank borrowings, and repos.
Stablecoins
Digital assets that purport to maintain a stable
value relative to a national currency or other
reference asset or assets.
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 (SD)
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.
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.

Short-term Wholesale Funding
Short-term funding instruments not covered by
deposit insurance which are typically issued to
Glossary

101

Tri-Party Repo
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.
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
short-term volatility based on S&P equity index
option prices.
Yield Curve
A graphical representation of the relationship
between bond yields and their respective
maturities.

102

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8

List of Charts

A.1

Nominal Trade-Weighted U.S. Dollar Index........................................................................................................ 13

A.2

Portfolio Flows to EMEs..................................................................................................................................... 13

A.3

Shares of Commodity Importers and Exporters................................................................................................. 14

A.4

Advanced Economies 10-Year Sovereign Yields................................................................................................ 14

3.1.1.1

Conduit CMBS Delinquency and Foreclosure Rate............................................................................................ 18

3.1.1.2

Delinquency Rate by Property Type................................................................................................................... 18

3.1.1.3

Vacancy Rate by Property Type......................................................................................................................... 18

3.1.2.1

Monthly House Price Growth............................................................................................................................ 20

3.1.2.2 Residential Purchase and Refinance Levels..................................................................................................... 20
3.1.2.3 Real House Prices Relative to Long-Term Trend............................................................................................... 20
3.1.2.4 30-Year MBS Spread.......................................................................................................................................... 21
B.1

Mortgage Rate (30-Year Fixed-Rate Average)................................................................................................... 22

3.1.3.1

Nonfinancial Corporate Debt as Percent of GDP.............................................................................................. 23

3.1.3.2 Gross Issuance of Corporate Bonds................................................................................................................. 24
3.1.3.3 Corporate Bond Yields...................................................................................................................................... 24
3.1.3.4 Corporate Bond Spreads.................................................................................................................................. 24
3.1.3.5 Maturity Profile of U.S. Nonfinancial Corporate Debt....................................................................................... 25
3.1.3.6 Institutional Leveraged Loans Outstanding...................................................................................................... 25
3.1.4.1

CP and NCDs Outstanding.................................................................................................................................27

3.1.4.2 CP Outstanding by Issuer Type..........................................................................................................................27
3.1.4.3 CP Investors.......................................................................................................................................................27
3.1.4.4 3-Month CP Interest Rate Spreads................................................................................................................... 28
List of Charts

103

3.1.4.5 Repo Rates....................................................................................................................................................... 29
3.1.4.6 Repo Borrowing Outstanding........................................................................................................................... 29
3.1.4.7 Repo Volumes................................................................................................................................................... 29
3.1.4.8 Sponsored Repo Activity................................................................................................................................... 30
3.1.4.9 Overnight Reverse Repo Facility........................................................................................................................ 31
3.1.5.1

Bitcoin Price...................................................................................................................................................... 32

3.2.1.1

Total Assets by BHC Type/IHC........................................................................................................................... 35

3.2.1.2 Common Equity Tier 1 Ratios............................................................................................................................ 35
3.2.1.3 Return on Assets............................................................................................................................................... 35
3.2.1.4 Payout Rates at U.S. G-SIBs.............................................................................................................................. 36
3.2.1.5 AOCI as a Percent of Equity.............................................................................................................................. 36
3.2.1.6 Held-to-Maturity Securities............................................................................................................................... 36
C.1

Bank NIM and Fed Funds Rates: 2013 - 2022.................................................................................................. 38

C.2

Bank Asset Composition: 2014 and 2022......................................................................................................... 39

C.3

Realized Interest Rate Risk Hedging by Life Insurers: 2008 - 2022................................................................. 39

C.4

U.S. Total Retirement Entitlements................................................................................................................... 40

C.5

State and Local DB Total Assets by Z.1 Category............................................................................................... 41

C.6

Private DB Total Assets by Z.1 Category............................................................................................................. 41

3.2.2.1 Investment Company Asset Growth................................................................................................................. 42
3.2.2.2 GNE/NAV........................................................................................................................................................... 43
3.2.2.3 GAV/NAV........................................................................................................................................................... 43
3.2.2.4 Hedge Fund Industry Concentration................................................................................................................. 43
3.2.2.5 Monthly Equity Mutual Fund Flows................................................................................................................... 45
3.2.2.6 Monthly Bond Mutual Fund Flows.................................................................................................................... 45

104

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3.2.2.7 MMFs Total Net Assets by Fund Type............................................................................................................... 46
3.2.2.8 Prime MMF Exposures.......................................................................................................................................47
3.2.2.9 MMF Weighted Average Maturity..................................................................................................................... 48
3.2.2.10 Prime MMF Gross Yields................................................................................................................................... 48
3.2.3.1 DTCC Clearing Fund Requirements................................................................................................................... 51
3.2.3.2 Initial Margin: U.S. Exchange Traded Derivatives............................................................................................. 52
3.2.3.3 Initial Margin: Centrally Cleared OTC Derivatives............................................................................................. 52
E.1

Relative Price of Selected Futures Contracts.................................................................................................... 54

E.2

Aggregate Initial Margin by Asset Class........................................................................................................... 54

E.3

Aggregate Initial Margin by Region ................................................................................................................. 55

E.4

Normalized Margin of Futures Contracts ......................................................................................................... 55

3.3.1.1

Net Issuance of Treasury Securities.................................................................................................................. 56

3.3.1.2 Federal Debt Held by the Public....................................................................................................................... 56
3.3.1.3 U.S. Treasury Yields...........................................................................................................................................57
3.3.1.4 Intraday Volatility for 10-Year Treasury Yields....................................................................................................57
3.3.1.5 MOVE Index and 2-Year Treasury Yield..............................................................................................................57
3.3.1.6 Total TRACE Treasury Weekly Trading Volumes................................................................................................ 58
3.3.2.1 Progress in Transition to SOFR......................................................................................................................... 60
3.3.2.2 Syndicated Lending.......................................................................................................................................... 60
3.3.3.1 Transition of Mortgage Servicing Assets from Banks to Nonbanks: 2011 – Q2 2022....................................... 62
3.3.3.2 Nonbank Mortgage Originators Number of Companies, Origination Volumes & Market Share: 2017 – 2021.. 62
3.3.3.3 Global Private Debt AUM.................................................................................................................................. 63
3.3.3.4 Distribution of Leveraged Loan Debt/EBITDA Ratios........................................................................................ 64
3.3.3.5 Leveraged Loan Transactions with EBITDA Adjustments.................................................................................. 64

List of Charts

105

106

3.5.1

Transmission Channels Linking Climate Risks to Financial Stability..................................................................74

3.5.2

Residential Properties at Risk of Wildfire – Percent Increase in Annual Likelihood by 2050............................75

3.5.3

Projected Increase in Properties with Substantial Flood Risk...........................................................................75

3.5.4

Flow-of-Risk ‘Waterfall’......................................................................................................................................76

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

9

Endnotes

1

FRBNY calculations of People’s Bank of China data accessed via CEIC. https://www.ceicdata.com/en.

2

Board of Governors of the Federal Reserve System, Z.1 – Financial Accounts, Tables L.219 and L.220
as of 2Q2022. https://www.federalreserve.gov/releases/z1/. Pre-pandemic is Q4 2019 unless otherwise noted.

3

Antoniades, A. “Commercial Bank Failures During the Great Recession: The Real (Estate) Story” BIS
Working Papers No. 530 (2015, November) https://www.bis.org/publ/work530.pdf.

4

FDIC. Data based on calculations using FFIEC Reports of Condition and Income.

5

FDIC. FDIC Quarterly. Volume 16, Number 3, Washington: FDIC, 2022. https://www.fdic.gov/analysis/
quarterly-banking-profile/fdic-quarterly/index.html.

6

“America’s Red-Hot Warehouse Market Shows Signs of Cooling.” Wall Street Journal (October 14,
2022). https://www.wsj.com/articles/americas-red-hot-warehouse-market-shows-signs-of-cooling11665739801?mod=business_minor_pos19 and “E-Commerce Warehouse Market Starts to Cool” Wall
Street Journal (October 18, 2022). https://www.wsj.com/articles/e-commerce-warehouses-commercialproperty-hot-spots-start-to-cool-11666051637.

7

U.S. Bureau of Economic Analysis.

8

Federal Reserve Bank of New York. Quarterly Report on Household Credit and Debt. New York: FRB
NY, 2022. https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2022Q2.

9

FSOC 2021 Annual Report. Washington: FSOC, 69-70, 2021. https://home.treasury.gov/system/
files/261/FSOC2021AnnualReport.pdf.

10

Federal Housing Finance Agency. National Mortgage Database. 2022.

11

National Association of Realtors. Existing Home Sales. 2022. https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales.

12

SIFMA. “US Mortgage Backed Securities Statistics.” (November 7, 2022). https://www.sifma.org/resources/research/us-mortgage-backed-securities-statistics/.

13

JPMorgan. North American Fixed-Income Strategy. U.S. Fixed Income Markets Weekly: Agency MBS,
(September 30, 2022).

14

Bank for International Settlements. Establishing viable capital markets. Basel: BIS, 2019. https://www.
bis.org/publ/cgfs62.pdf.

15

Board of Governors of the Federal Reserve System. Nonfinancial Corporate Business; Debt Securities
and Loans; Liability, Level. 2022. Distributed by Federal Reserve Economic Data. https://fred.stlouisfed.org/series/BCNSDODNS.

16

Moody’s Analytics. Default & Recovery Analytics. 2022.

17

Securities and Exchange Commission. Money Market Fund Reforms. Proposed Rule, Washington:
SEC, 87 Federal Register, No. 26 (February 8, 2022).

18

DTCC Solutions LLC, an affiliate of The Depository Trust & Clearing Corporation. This publication
includes data licensed from DTCC Solutions LLC, an affiliate of The Depository Trust & Clearing
Corporation. Neither DTCC Solutions LLC nor any of its affiliates shall be responsible for any errors
Endnotes

107

or omissions in any DTCC data included in this publication, regardless of the cause and, in no event,
shall DTCC or any of its affiliates be liable for any direct, indirect, special or consequential damages,
costs, expenses, legal fees, or losses (including lost income or lost profit, trading loses and opportunity costs) in connection with this publication.

108

19

Baklanova, Viktoria, Isaac Kuznits, and Trevor Tatum. 2021. “Primer: Money Market Funds and the
Repo Market.” SEC, Washington, (February 18, 2021). https://www.sec.gov/files/mmfs-and-the-repomarket-021721.pdf.

20

Rising interest rates may negatively impact the market value of firms’ securities portfolios, resulting in
diminished availability or more expensive repo financing for these portfolios.

21

The Federal Reserve is also a significant participant in the repo market. The Overnight Reverse Repo
Facility (ON RRP) balance was $2.329 trillion as of June 30, 2022. See: Federal Reserve Bank of New
York. Overnight Reverse Repurchase Agreements: Treasury Securities Sold by the Federal Reserve
in the Temporary Open Market Operations. 2022. Distributed by Federal Reserve Economic Data.
https://fred.stlouisfed.org/series/RRPONTSYD.

22

For a discussion of vulnerabilities at central counterparties that are important to repo markets, see:
Board of Governors of the Federal Reserve System. Financial Stability Report. Washington: Federal
Reserve, 2021. https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf.

23

For additional information regarding the development of repo markets, their role in the 2008 financial
crisis, and post-2008 reforms, see: Mullin, John. 2020. “The Repo Market is Changing (and What Is
a Repo, Anyway?).” Federal Reserve Bank of Richmond. https://www.richmondfed.org/publications/
research/econ_focus/2020/q1/federal_reserve.

24

For additional descriptions of these facilities, see: Afonso, Gara, et al. 2022. “The Fed’s Latest Tool:
A Standing Repo Facility.” Federal Reserve Bank of New York Liberty Street Economics, (January 13,
2022). https://libertystreeteconomics.newyorkfed.org/2022/01/the-feds-latest-tool-a-standing-repofacility/ and Board of Governors of the Federal Reserve System. Foreign and International Monetary
Authorities (FIMA) Repo Facility. Washington, Federal Reserve, 2022. https://www.federalreserve.gov/
monetarypolicy/fima-repo-facility.htm.

25

Federal Reserve Bank of New York. 2022. “Repo and Reverse Repo Agreements.” Federal Reserve
Bank of New York. https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements. For additional discussion of the Federal Reserve’s
standing repo and ON RRP facilities in current monetary policy implementation, see: Ennis, Huberto
and Jeff Huther. 2021. “The Fed’s Evolving Involvement in the Repo Markets.” Federal Reserve Bank
of Richmond Economic Brief 21, no. 31 (September). https://www.richmondfed.org/publications/research/economic_brief/2021/eb_21-31.

26

The White House. Ensuring Responsible Development of Digital Assets. Washington, D.C.: Exec.
Order No. 14067, 3 C.F.R. 87 Fed. Reg. 14143. March 9, 2022, https://www.whitehouse.gov/
briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

27

Weil, Jonathan. 2022. “FTX Disclosed Related-Party Transactions but Didn’t Name Names.” Wall
Street Journal (November 18, 2022). https://www.wsj.com/articles/ftx-disclosed-related-party-transactions-but-didnt-name-names-11668750387.

28

Declaration of John J. Ray III in Support of Chapter 11 Petitions and First Day Pleadings, In re: FTX
Trading Ltd., et al., No. 22-11068-JTD (Bankr. D. Del. Nov. 17, 2022). https://oversight.house.gov/sites/
democrats.oversight.house.gov/files/2022-11-18.RK%20to%20Bankman-Fried%20and%20Ray-FTX%20
re%20FTX%20Crypto.pdf.

29

White, Molly. 2022. “Excerpts from letters to the judge in the Voyager Digital bankruptcy case.” blog.
mollywhite.net, (July 23, 2022). https://blog.mollywhite.net/voyager-letters/. (See, e.g., Doc 108, filed
July 19, 2022: “I write as an unsecured creditor who has deposited her entire life savings into the
USDC stablecoin under the consistent confirmation of CEO Stephen Ehrlich that we owned our assets.

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

I would have NEVER in a million years taken my hard earned money and put it into an asset that I
believed I was not the custodian of. I am not a gambler...”) and White, Molly. 2022. “Excerpts from
letters to the judge in the Celsius Network bankruptcy case.” blog.mollywhite.net, (July 22, 2022).
https://blog.mollywhite.net/celsius-letters/.
30

Faverio, Michelle, and Navid Massarat. 2022. “46% of Americans who have invested in cryptocurrency say it’s done worse than expected.” Pew Research Center, (August 23, 2022). https://www.pewresearch.org/fact-tank/2022/08/23/46-of-americans-who-have-invested-in-cryptocurrency-say-its-doneworse-than-expected/.

31

Royal, James. 2022 “Popularity of Cryptocurrency Plummets among Millennials in 2022.” Bankrate, (September 28, 2022). https://www.bankrate.com/investing/cryptocurrency-popularity-declines-among-millennials-survey-shows.

32

Federal Reserve. Economic Well-Being of U.S. Households in 2021. Washington: Federal Reserve,
2022. https://www.federalreserve.gov/publications/files/2021-report-economic-well-being-us-households-202205.pdf and Kharif, Olga. 2020. “Bitcoin Whales’ Ownership Concentration Is Rising
During Rally.” Bloomberg, New York (November 8, 2020). https://www.bloomberg.com/news/articles/2020-11-18/bitcoin-whales-ownership-concentration-is-rising-during-rally.

33

NASAA. 2022 “NASAA Reveals Top Investor Threats for 2022.” NASAA, Washington, (January
10, 2022), https://www.nasaa.org/61477/nasaa-reveals-top-investor-threats-for-2022/ and NASAA.
2022. NASAA 2022 Enforcement Report, Washington, 2022. https://www.nasaa.org/wp-content/uploads/2022/09/2022-Enforcement-Report-FINAL.pdf, pp. 5, 14-16.

34

CFPB. 2022. Complaint Bulletin: An Analysis of Consumer Complaints Related to Crypto-Assets.
Washington: CFPB. https://files.consumerfinance.gov/f/documents/cfpb_complaint-bulletin_crypto-assets_2022-11.pdf.

35

Fletcher, Emma. 2022. “Reports show scammers cashing in on crypto craze.” FTC Consumer Protection Data Spotlight, (June 3, 2022). https://www.ftc.gov/news-events/data-visualizations/data-spotlight/2022/06/reports-show-scammers-cashing-crypto-craze.

36

FSOC. Report on Digital Asset Financial Stability Risks and Regulation. Washington: FSOC, 2022.
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.

37

This includes BHCs with total consolidated assets above $100 billion, including U.S. global systematically important banks (G-SIBs), large complex BHCs, large noncomplex BHCs, and other BHCs.

38

Examples include the Housing and Economic Recovery Act (2008), the Dodd-Frank Wall Street Reform
and Consumer Protection Act (2010), and Basel III (2010).

39

Jones, Alexander. 2022. “Banks Remain Uniquely Vulnerable to Sophisticated Cyber-Attacks”. International Banker (June 28, 2022). https://internationalbanker.com/technology/banks-remain-uniquely-vulnerable-to-sophisticated-cyber-attacks/.

40

As documented in the academic literature, a rising rate environment often leads to increases in NIM
(Samuelson, 1945). Many loans are variable rate and automatically reprice, and historically, banks with
a strong deposit franchise have been able to delay the pass-through of rates on deposits (Drechsler,
Savov, and Schnabl, 2021) and Samuelson, Paul. 1945. “The Effect of Interest Rate Increases on the
Banking System.” American Economic Review 35: 16-27. Drechsler, Itamar, Alexi Savov, and Phillip
Schnabl. 2021. “Banking on Deposits: Maturity Transformation without Interest Rate Risk.” Journal of
Finance 76, no. 3 (June): 1091-1143. https://doi.org/10.1111/jofi.13013.

41

Banks are also exposed negatively to interest rate risk in the sense that the market value of their equity tends to fall when interest rates increase (Flannery and James, 1984; English, Van den Heuvel and
Zakrajsek, 2018). Paul (2022) extends this work and shows that banks’ stock prices fall in response
to unexpected increases in rates but rise if term premia increase. Flannery, Mark J., and Christopher
M. James. 1984. “The Effect of Interest Rate Changes on the Common Stock Returns of Financial
Institutions.” Journal of Finance 39, no.4 (September): 1141-1153. https://doi.org/10.2307/2327618.
Endnotes

109

English, William B., Skander Van den Heuvel, and Egon Zakrajsek. 2018. “Interest Rate Risk and Bank
Equity Valuations.” Journal of Monetary Economics 98, issue C (September 12, 2018). https://doi.
org/10.1016/j.jmoneco.2018.04.010. Paul, Pascal. 2022. “Banks, Maturity Transformation, and Monetary Policy,” Federal Reserve Bank of San Francisco Working Paper 2020-07. https://doi.org/10.24148/
wp2020-07.

110

42

This evidence is consistent with Driscoll and Judson (2013), who show that deposit rates are likely to
lag increases in policy and market rates in tightening cycles. and, Driscoll, John C., and Ruth Judson.
2013. “Sticky Deposit Rates.” FEDS Working Paper no. 2013-80 (October 10, 2013). https://dx.doi.
org/10.2139/ssrn.2357993.

43

Liability-driven investing (LDI) is an investment strategy focused on making asset allocation decisions
based on the current and future liabilities of the pension plan using, for example, laddered bond portfolios, interest rates swaps, or repurchase agreements.

44

Limited data disclosures make it difficult to quantify the size or the use of these contracts. According to recent reports, some of the largest funds such as California Public Employees’ Retirement
System (CALPERS) and Teacher Retirement System of Texas, now allow limited borrowing against
assets to meet their expected rate of return targets Rabouin, Dion, and Heather Gillers. 2022. “Pension Funds Plunge Into Riskier Bets—Just as Markets Are Struggling.” Wall Street Journal, June 26,
2022. https://www.wsj.com/articles/pension-funds-plunge-into-riskier-betsjust-as-markets-are-struggling-11656274270.

45

On average, PPFs held less than 0.8% in cash allocations.

46

Industry reports state that the overall size of the LDI market in the U.S is between $1.2 - $1.9 trillion
dollars (for all clients). According to preliminary data from eVestment, about half of these products are
bought by corporate sponsors and involved long bond portfolios.

47

During the 2012 to 2020 period, corporate sponsors transferred around $100 billion in pension
obligations to insurance companies (Klinger et al., 2022). Klinger, Sven, Suresh M. Sundaresan,
and Michael A. Moran. 2022. “Corporate Pension Risk Transfers.” (June 15, 2022). https://dx.doi.
org/10.2139/ssrn.4137429.

48

Securities and Exchange Commission, Division of Investment Management, Analytics Office. Private
Fund Statistics. Washington: SEC, 2021. https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q4.pdf.

49

The term “qualifying hedge funds” refers to funds with at least $500 million of net assets as of the last
fiscal quarter.

50

As a family office, Archegos was not subject to the Investment Advisers Act of 1940 by statute, and
therefore did not make certain regulatory filings.

51

Year-to-date outflows from hybrid funds totaled $64 billion. ICI, Trends in Mutual Fund Activity: Monthly Trends in Mutual Fund Investing, Washington: ICI, September 2022. https://www.ici.org/research/
stats/trends.

52

Ibid.

53

Securities and Exchange Commission. “SEC Proposes Enhancements to Open-End Fund Liquidity
Framework,” 2022-199, November 2, 2022. https://www.sec.gov/news/press-release/2022-199.

54

The comment period for proposed money market reforms ended on April 11, 2022. Among the proposed rule changes was the removal of the liquidity fee and redemption gate provisions and the requirement for certain money market funds to implement swing pricing policies and procedures. While
fees and gates were intended to disincentivize runs on money market funds and preserve liquidity,
these provisions instead may have incentivized investor redemptions and negatively altered fund
manager behavior. Even though no money market fund imposed a fee or gate in March 2020, some
investors may have feared that if they were not the first to exit their fund, there was a risk that they

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

could be subject to gates or fees, and this anticipatory, risk-mitigating perspective potentially further
accelerated redemptions. During the comment period, several banks and industry groups submitted
comments on the proposed amendments, many expressing concerns with swing pricing. SEC. Money
Market Fund Reforms. Proposed Rule, Washington: SEC, 87 Federal Register, no. 26 (February 8,
2022). https://www.federalregister.gov/documents/2022/02/08/2021-27532/money-market-fund-reforms.
55

SEC Form N-MFP, OFR Money Market Fund Monitor. https://www.financialresearch.gov/money-market-funds/.

56

Insurance is important for financial risk management, but there are other options such as hedging
through financial derivatives or withdrawing from activities where insurance is not available that individuals and firms use to manage risk.

57

The protection gap will always exist because the private insurance industry does not offer insurance
to cover all economic losses.

58

AIR Worldwide Corporation. Global Modeled Catastrophe Losses. Boston: AIR, 2020. https://www.
air-worldwide.com/siteassets/Publications/WhitePapers/documents/2020airglobalmodeledcatastrophelosses.pdf.

59

Lloyd’s. Closing the gap: Insuring your business against evolving cyber threats. London: Lloyd’s, June
2017. https://assets.lloyds.com/assets/pdf-lloyds-cyber-closing-the-gap-full-report-final/1/pdf-lloyds-cyber-closing-the-gap-full-report-final.pdf and The Geneva Association. Understanding and Addressing
Global Insurance Protection Gaps. Zurich: The Geneva Association, April 2018. https://www.genevaassociation.org/sites/default/files/research-topics-document-type/pdf_public/understanding_and_
addressing_global_insurance_protection_gaps.pdf. Swiss Re Institute. Cyber insurance: strengthening resilience for the digital transformation. Zurich: Swiss Re Institute, November 2022. https://www.
swissre.com/dam/jcr:6fd9f6dd-4631-4d9f-9c3b-5a3b79b321c0/2022-11-08-sri-expertise-publicationcyber-insurance-strengthening-resilience.pdf.

60

FICC consists of two divisions, the Government Securities Division (GSD) and the Mortgage-backed
Securities Division (MBSD). GSD provides CCP services for its customers for the U.S. government
securities market, and MBDS provides CCP services to the U.S. mortgage-backed securities market.
NSCC serves as a CCP for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded products, and unit investment trusts.

61

Central Counterparty Financial Resources for Recovery and Resolution. Washington: FSB, 2022.
https://www.fsb.org/2022/03/central-counterparty-financial-resources-for-recovery-and-resolution/.

62

Internal CFTC calculations.

63

The London Metal Exchange. Member Notice: Suspension of LME Nickel Market. London: LME (March
8, 2022). https://www.lme.com/api/sitecore/MemberNoticesSearchApi/Download?id=9be362b4-fa9e41d5-b6a0-c4f1e7892e4c.

64

The London Metal Exchange. Member Notice: Nickel Market Update. London: LME (March 8, 2022).
https://www.lme.com/api/sitecore/MemberNoticesSearchApi/Download?id=7f00b96e-136a-4896-9a43f57e671dffea.

65

Congressional Budget Office. Monthly Budget Review: September 2022. Washington: CBO, 2022.
https://www.cbo.gov/publication/58493.

66

Inter-Agency Working Group on Treasury Market Surveillance. Recent Disruptions and Potential
Reforms in the U.S. Treasury Market: A Staff Progress Report. Washington: U.S. Department of the
Treasury, 2021. https://home.treasury.gov/news/press-releases/jy0470.

67

U.S. Department of the Treasury. “Remarks by Under Secretary for Domestic Finance Nellie Liang at
the Securities Industry and Financial Markets Association’s Prudential and Capital Board Subcommittee.” New York, September 22, 2022. https://home.treasury.gov/news/press-releases/jy0970.
Endnotes

111

112

68

U.S. Department of the Treasury. “Inter-Agency Working Group Releases New Report on Treasury
Market Resilience Efforts,” November 10, 2022. https://home.treasury.gov/news/press-releases/jy1091.

69

Federal Reserve Bank of New York. All-to-All Trading in the U.S. Treasury Market. New York: Federal
Reserve Bank of New York, 2022. https://www.newyorkfed.org/research/staff_reports/sr1036.

70

U.S. Department of the Treasury. “Remarks by Under Secretary for Domestic Finance Nellie Liang at
the 2022 Treasury Market Conference,” New York, November 16, 2022. https://home.treasury.gov/
news/press-releases/jy1110.

71

The remaining LIBOR contracts include 1-day, 1-month, 3-month, 6-month, and 12-month. The UK
Financial Conduct Authority has noted that it could compel the administrator of LIBOR to produce a
“synthetic” USD LIBOR rate for a temporary period of time after June 2023, but that this rate would
not be representative of the market that LIBOR is meant to reflect and would only be published to aid
the transition of legacy USD LIBOR contracts issued outside of the United States that otherwise would
have difficulties being renegotiated by June 2023. Similar synthetic versions of yen and sterling LIBOR have been published this year. Financial Conduct Authority. “FCA announces decision on cessation of 1- and 6-month synthetic sterling LIBOR at end-March 2023,” September 9, 2022, https://www.
fca.org.uk/news/statements/fca-decision-cessation-1-6-month-synthetic-sterling-libor.

72

Federal Reserve Bank of New York. Secured Overnight Financing Rate Data. 2022. Published by the
Federal Reserve Bank of New York. https://www.newyorkfed.org/markets/reference-rates/sofr.

73

CME term rates are produced for 1-, 3-, 6-, and 12-month tenors.

74

See 12 U.S.C. 5805

75

More information on the LENS system and the ARRC’s work with DTCC can be found in the ARRC’s
Legacy LIBOR Playbook, published on July 11, 2022. Alternative Reference Rates Committee, New
York Fed. LIBOR Legacy Playbook. New York: ARRC, 2022. https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2022/LIBOR_Legacy_Playbook.pdf. More information on the DTCC’s
resources regarding revisions to the LENS system can be found at https://www.dtcc.com/settlement-and-asset-services/issuer-services/libor-transition.

76

Inside Mortgage Finance. https://www.insidemortgagefinance.com/.

77

Nunes, F. Some Lenders Won’t Survive the Purchase Mortgage Market of 2022. Housing Wire, April
14, 2022. https://www.housingwire.com/articles/some-lenders-wont-survive-the-purchase-mortgagemarket-of-2022/.

78

Smaller regional companies are those that are licensed in 2-25 states.

79

Finkelstein, B. “Nonbanks Dominate Top 2021 Mortgage Lender List.” National Mortgage News,
March 28, 2022. https://www.nationalmortgagenews.com/list/nonbanks-dominate-top-2021-mortgagelender-list.

80

The FHFA is considering allowing nonbanks mortgage companies to have access to advances from
the FHLBanks which would be an additional liquidity source. This proposal is in the comment period
with listening sessions scheduled for end of Q3 2022.

81

National Association of Insurance Commissioners. U.S. Insurers’ CLO Exposure Continues Double-Digit Increase for Year-End 2021 Albeit at a Slower Pace. Capital Market Special Report; Kansas City, MO:
NAIC, 2021, p. 6. https://content.naic.org/sites/default/files/capital-markets-special-reports-CLO-YE%20
2021.pdf.

82

Consumer Financial Protection Bureau. The Convergence of Payments and Commerce: Implications
for Consumers. Washington: CFPB, 2022. https://files.consumerfinance.gov/f/documents/cfpb_convergence-payments-commerce-implications-consumers_report_2022-08.pdf.

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83

Consumer Financial Protection Bureau. Buy Now, Pay Later: Market Trends and Consumer Impacts.
Washington: CFPB, 2022. https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf.

84

Moody’s Analytics. Buy Now, Pay Later... Hopefully. New York: Moody’s, 2022. https://www.
moodysanalytics.com/articles/pa/2022/buy_now_pay_later_hopefully.

85

Consumer Financial Protection Bureau. Buy Now, Pay Later.

86

Microsoft. Special Report: Ukraine: An overview of Russia’s cyberattack activity in Ukraine. Redmond:
2022. https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RE4Vwwd.
Orenstein, Mitchell. 2022. “Russia’s Use of Cyberattacks: Lessons from the Second Ukraine War.”
Foreign Policy Research Institute (June 7, 2022). https://www.fpri.org/article/2022/06/russias-use-ofcyberattacks-lessons-from-the-second-ukraine-war/.

87

Cybersecurity and Infrastructure Security Agency. FBI Releases PIN on Ransomware Straining Local
Governments and Public Services. Washington: CISA, 2022. https://www.cisa.gov/uscert/ncas/current-activity/2022/03/31/fbi-releases-pin-ransomware-straining-local-governments-and-public.

88

Lawder, David. 2022. “U.S. Treasury thwarted attack by Russian hacker group last month-official.”
Reuters (November 1, 2022). https://www.reuters.com/article/usa-treasury-cyber-idCAKBN2RR36W.

89

Feiner, Lauren. 2022. “Cyberattack hits Ukrainian banks and government websites.” CNBC (February 23, 2022). https://www.cnbc.com/2022/02/23/cyberattack-hits-ukrainian-banks-and-government-websites.html.

90

Blinken, Antony J. “Attribution of Russia’s Malicious Cyber Activity Against Ukraine.” Press Statement,
Department of State. Washington, May 10, 2022. https://www.state.gov/attribution-of-russias-malicious-cyber-activity-against-ukraine/.

91

Carnegie Endowment for International Peace. Timeline of Cyber Incidents Involving Financial Institutions. Washington: Carnegie Endowment for International Peace, 2022. https://carnegieendowment.
org/specialprojects/protectingfinancialstability/timeline.

92

Mahendru, Puja. 2022. “The State of Ransomware in Financial Services 2022.” Sophos, August
10, 2022. https://news.sophos.com/en-us/2022/08/10/the-state-of-ransomware-in-financial-services-2022/.

93

G7. Fundamental Elements of Ransomware Resilience for the Financial Sector. G7, 2022.
https://www.bundesbank.de/resource/blob/745304/67440393f3e0b53ea417c874eafe14e7/
mL/2022-10-13-g7-fundamental-elements-ransomware-data.pdf.

94

Palo Alto Networks, Unit 42. Ransomware Threat Report 2022. Santa Clara: Unit 42, 2022. https://
www.paloaltonetworks.com/content/dam/pan/en_US/assets/pdf/reports/2022-unit42-ransomware-threat-report-final.pdf.

95

Baker, Kurt. 2022. “Ransome As A Service (RAAS) Explained.” Crowdstrike (February 7, 2022).
https://www.crowdstrike.com/cybersecurity-101/ransomware/ransomware-as-a-service-raas/.

96

Microsoft. Microsoft Digital Defense Report. Redmond: Microsoft, 2021. https://query.prod.cms.rt.microsoft.com/cms/api/am/binary/RWMFIi?id=101738.

97

Ibid.

98

Mahendru, Puja. 2022. “The State of Ransomware in Financial Services 2022.”

99

CrowdStrike Intelligence. 2022 Global Threat Report. Sunnyvale: CrowdStrike, 2022. https://
go.crowdstrike.com/rs/281-OBQ-266/images/Report2022GTR.pdf.

100

Mahendru, Puja. 2022. “The State of Ransomware in Financial Services 2022.”
Endnotes

113

114

101

Kumar, Ajay. 2022. “Insider Risks, Ransomware and Nation-state Attacks Could Worsen the Risk
Landscape in 2022.” CPO Magazine (May 11, 2022). https://www.cpomagazine.com/cyber-security/
insider-risks-ransomware-and-nation-state-attacks-could-worsen-the-risk-landscape-in-2022/.

102

Ibid.

103

NIST. 2018. “Framework for Improving Critical Infrastructure Cybersecurity, Version 1.1.” Gaithersburg, MD: NIST, 2018. https://nvlpubs.nist.gov/nistpubs/CSWP/NIST.CSWP.04162018.pdf.

104

Securities Industry and Financial Markets Association. INSIDER THREAT BEST PRACTICES GUIDE,
2ND EDITION. New York: SIFMA, 2018. https://www.sifma.org/wp-content/uploads/2018/02/insider-threat-best-practices-guide.pdf, pp. 5-6.

105

Ibid. p. 16.

106

CrowdStrike Intelligence. 2022 Global Threat Report. https://go.crowdstrike.com/rs/281-OBQ-266/
images/Report2022GTR.pdf.

107

G7. Fundamental Elements for Third Party Cyber Risk Management in the Financial Sector. G7:
2022. https://www.bundesbank.de/resource/blob/624828/91c47c36b53ca366e2950881591de0ab/
mL/2022-10-13-g7-fundamental-elements-cybersecurity-data.pdf.

108

Earlier this year, Congress also recognized the importance of cyber incident reporting when it enacted the Cyber Incident Reporting for Critical Infrastructure Act (CIRCIA), signed by President Biden in
March 2022. Cybersecurity and Infrastructure Security Agency. CYBER INCIDENT REPORTING FOR
CRITICAL INFRASTRUCTURE ACT OF 2022 (CIRCIA). Washington: CISA, 2022. https://www.cisa.gov/
circia.

109

Securities and Exchange Commission. Cybersecurity Risk Management for Investment Advisers,
Registered Investment Companies, and Business Development Companies. Proposed Rule, Washington: SEC, 87 Federal Register, no.46 (March 9, 2022). https://www.federalregister.gov/documents/2022/03/09/2022-03145/cybersecurity-risk-management-for-investment-advisers-registered-investment-companies-and-business.

110

Securities and Exchange Commission. Cybersecurity Risk Management, Strategy, Governance, and
Incident Disclosure. Proposed Rule, Washington: SEC, 87 Federal Register, no. 56 (March 23, 2022).
https://www.federalregister.gov/documents/2022/03/23/2022-05480/cybersecurity-risk-management-strategy-governance-and-incident-disclosure.

111

Federal Deposit Insurance Corporation, Federal Reserve System, and Office of the Comptroller of the
Currency. Computer-Security Incident Notification Requirements for Banking Organizations and Their
Bank Service Providers. Washington, 86 Federal Register, no. 66424 (November 23, 2021). https://
www.federalregister.gov/documents/2021/11/23/2021-25510/computer-security-incident-notification-requirements-for-banking-organizations-and-their-bank.

112

National Credit Union Administration. Cyber Incident Notification Requirements for Federally Insured
Credit Unions. Proposed Rule, Washington: NCUA, 87 Federal Register, no. 45029 (July 27, 2022).
https://www.federalregister.gov/documents/2022/07/27/2022-16013/cyber-incident-notification-requirements-for-federally-insured-credit-unions.

113

American Bankers Association. Cloud Computing in the U.S. Banking Industry. 2021. ABA. https://
www.aba.com/member-tools/industry-solutions/insights/cloud-computing-in-the-us-banking-industry.

114

Publicis Sapient, and Google Cloud. Future of Cloud in Banking: How leading banks accelerate digital
transformation with cloud. Paris: Publicus Sapient, 2022. https://www.publicissapient.com/industries/
financial-services/google-cloud-banking-report.

115

Ibid.

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116

Accenture. Banking Cloud Altimeter Volume 1: What does it mean to be a bank in the cloud? Dublin:
Accenture, 2022. https://bankingblog.accenture.com/banking-cloud-altimeter-magazine/volume-1what-does-banking-cloud-mean.

117

Ibid.

118

Cloud Security Alliance. The State of Cloud Security 2020 Report: Understanding Misconfiguration
Risk. Seattle: CSA, 2020. https://cloudsecurityalliance.org/blog/2020/05/05/the-state-of-cloud-security-2020-report-understanding-misconfiguration-risk/.

119

IBM Cloud Education. 2021. “IaaS versus PaaS versus SaaS.” IBM Cloud Learn Hub (September 2,
2021). https://www.ibm.com/cloud/learn/iaas-paas-saas.

120

Seals, Tara. 2022. “Capital One Attacker Exploited Misconfigured AWS Databases.” Dark Reading,
(June 20, 2022). https://www.darkreading.com/attacks-breaches/capital-one-attacker-exploited-misconfigured-aws-databases.

121

Herr, Trey, et al. 2021. “Broken trust: Lessons from Sunburst.” Atlantic Council: Breaking Trust, (March
2021). https://www.atlanticcouncil.org/in-depth-research-reports/report/broken-trust-lessons-from-sunburst/.

122

Amazon Web Services. 2021. “Summary of the AWS Service Event in the Northern Virginia (USEAST-1) Region.” AWS, (December 10, 2021). https://aws.amazon.com/message/12721/.

123

Columbus, Louis. 2021. “SolarWinds breach exposes hybrid multicloud security weaknesses.”
Venturebeat, (May 16, 2021). https://venturebeat.com/2021/05/15/solarwinds-breach-exposes-hybrid-multi-cloud-security-weaknesses/.

124

For further reading on identity and access management (IAM) and privileged access management
(PAM), see: Abdullahi, Aminu. 2021. “IAM vs PAM: What Are the Differences?” CIO Insight, (November 3, 2021). https://www.cioinsight.com/security/iam-vs-pam/.

125

For a fuller description of these channels, see: FSOC. Report on Climate-Related Financial Risk.
Washington: FSOC, 2021. https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf.

126

Cerdá, José J., and Raluca A. Roman. “Climate Change and Consumer Finance: A Very Brief Literature Review.” Federal Reserve Bank of Philadelphia Working Paper Series, October 2021. https://
www.semanticscholar.org/paper/Climate-Change-and-Consumer-Finance%3A-A-Very-Brief-CanalsCerd%C3%A1-Roman/e20e43476df7235ed6f8e6d9dc3d9f7edd8bf959.

127

Addoum, Jawad M., Piet Eichholtz, Eva Steiner, and Erkan Yönder. 2021. “Climate Change and Commercial Real Estate: Evidence from Hurricane Sandy.” http://dx.doi.org/10.2139/ssrn.3206257.

128

For further information, see Staff Reports, Federal Reserve Bank of New York, Understanding the Linkages between Climate Change and Inequality in the United States, No. 991 (November 2021). https://
www.newyorkfed.org/research/staff_reports/sr991.html.

129

Abatzoglou, John T., and A. Park Williams. “Impact of anthropogenic climate change on wildfire
across western US forests.” Proceedings of the National Academy of Sciences 113, no. 42 (2016):
11770-11775. https://doi.org/10.1073/pnas.1607171113.

130

Risk Factor. “Risk across the United States: Fire Factor.” Risk Factor, November 2022, https://riskfactor.com/. See also endnotes 131 and 132. For further detail on sources and methodology, see: First
Street Foundation. First Street Foundation Wildfire Model. New York: FSF, May 2022. https://assets.
firststreet.org/uploads/2022/05/First_Street_Foundation_Wildfire_Technical_Methodology.pdf. Figure 3.5.2 is reproduced by permission from the First Street Foundation report. The 5th National Risk
Assessment: Fueling the Flames. New York: FSF, 2022. https://doi.org/10.5281/zenodo.6564773.

131

U.S. Department of Agriculture. Wildfire Likelihood. 2022. https://wildfirerisk.org/explore/2/06/.

132

“Learn how risks are calculated.” Risk Factor, November 2022. https://riskfactor.com/.
Endnotes

115

116

133

For further detail on methodology, see: First Street Foundation. First Street Foundation Flood Model.
New York: FSF, 2020. https://assets.firststreet.org/uploads/2020/06/FSF_Flood_Model_Technical_
Documentation.pdf. Figure 3.5.3 is reproduced by permission from the First Street Foundation report.
The First National Flood Risk Assessment: Defining America’s Growing Risk. New York: FSF, 2020.
https://doi.org/10.5281/zenodo.4740940.

134

See, for example, recent bankruptcies in Louisiana. Finch, Michael. 2022. “Ninth insurer in Louisiana
goes under; here’s what it means for 1,500 open claims.” Nola.com, (September 26, 2022). https://
www.nola.com/news/business/article_70791e32-3dc1-11ed-98d3-57c09e5237a1.html.

135

Zawacki, Tim. 2022. “US Property & Casualty Insurance Market Report: Climate, cyberrisks to drive
expansion.” S&P Global, New York, (August 23, 2022). https://www.spglobal.com/marketintelligence/
en/news-insights/research/us-p-and-c-insurance-market-report-climate-cyberrisks-to-drive-expansion.

136

Center for Insurance Policy and Research. Extreme Weather and Property Insurance: Consumer
Views. Kansas City: CIPR, 2021. https://content.naic.org/sites/default/files/CIPR%20Consumer%20
property%20ins%20report%208-21_0.pdf.

137

The highest increases in home insurance rates were 18.5%, 18.1%, and 17.5%, in Arkansas, Washington,
and Colorado, respectively, according to recent analysis: Howard, Pat. 2022. “Home insurance prices
are rising even faster than inflation.” Policygenius (July 12, 2022). https://www.policygenius.com/
homeowners-insurance/home-insurance-pricing-report-july-2022/.

138

For example, the majority of the flood insurance in the United States is provided by the National Flood
Insurance Program. However, the increased incidence and cost of flooding is also putting increasing pressure on the National Flood Insurance Program to meet its obligations. While the NFIP was
largely solvent until the early 2000s, its financial condition has deteriorated since that time. Changes
to NFIP’s risk rating methodology in 2021 to improve their financial position have resulted in higher
premiums for policyholders with 9% of policyholders dropping their coverage. See: The Coalition for
Sustainable Flood Insurance. An Evaluation of Risk Rating 2.0 Impacts on National Flood Insurance
Program Affordability. CSFI, 2022. https://csfi.info/wp-content/uploads/2022/09/CSFI-White-Paper-An-Evaluation-of-Risk-Rating-2.0-Impacts-on-National-Flood-Insurance-Program-Affordability.pdf
and Frank, Thomas. 2022. “Hundreds of thousands drop flood insurance as rates rise.” Climate
Wire, (August 17, 2022). https://www.eenews.net/articles/hundreds-of-thousands-drop-flood-insuranceas-rates-rise/.

139

Swiss Re Group. 2022. “How natural catastrophes are impacting 10 countries and the world.” Swiss
Re Group, Armonk, (March 30, 2022). https://www.swissre.com/risk-knowledge/mitigating-climate-risk/
natcat-country-profiles-infographic.html#/countries/us.

140

Request For Information, Climate-Related Financial Risk, Commodity Futures Trading Commission,
Federal Register Vol. 87, No. 110 (June 2022). https://www.cftc.gov/sites/default/files/2022/06/202212302a.pdf.

141

Agency Information Collection Activities; Proposed Collection; Comment Request; Federal Insurance
Office Climate-Related Financial Risk Data Collection, 87 Fed. Reg. 64,134 (October 21, 2022). https://
www.federalregister.gov/documents/2022/10/21/2022-22880/agency-information-collection-activities-proposed-collection-comment-request-federal-insurance.

142

OFR Fact Sheet, Climate Data and Analytics Hub, Office of Financial Research. (June, 2022). https://
www.financialresearch.gov/press-releases/files/OFR_Climate_data_and_analytics_hub_fact_sheet.pdf.

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