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Minutes of the Financial Stability Oversight Council
October 16, 2018
PRESENT:
Steven T. Mnuchin, Secretary of the Treasury and Chairperson of the Financial Stability
Oversight Council (Council)
Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System (Federal
Reserve)
Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation (FDIC)
Jay Clayton, Chairman, Securities and Exchange Commission (SEC)
J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission (CFTC)
J. Michael Mulvaney, Acting Director, Bureau of Consumer Financial Protection (Bureau)
Melvin Watt, Director, Federal Housing Finance Agency (FHFA)
Joseph Otting, Comptroller of the Currency, Office of the Comptroller of the Currency (OCC)
(by telephone)
J. Mark McWatters, Chairman, National Credit Union Administration (NCUA)
Thomas E. Workman, Independent Member with Insurance Expertise
Ken Phelan, Acting Director, Office of Financial Research (OFR), Department of the Treasury
(non-voting member)
Steven Dreyer, Director, Federal Insurance Office, Department of the Treasury (non-voting
member)
Charles G. Cooper, Commissioner, Texas Department of Banking (non-voting member)
Eric Cioppa, Superintendent, Maine Bureau of Insurance (non-voting member)
Melanie Lubin, Securities Commissioner, Maryland Office of the Attorney General, Securities
Division (non-voting member)
GUESTS:
Department of the Treasury (Treasury)
Craig Phillips, Counselor to the Secretary
David Malpass, Under Secretary for International Affairs
Brian Callanan, Deputy General Counsel
Bimal Patel, Deputy Assistant Secretary for the Council
Eric Froman, Principal Deputy Assistant General Counsel (Banking and Finance) and Executive
Director of the Council
Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight Council
Board of Governors of the Federal Reserve System
Randal Quarles, Vice Chairman for Supervision
Andreas Lehnert, Director, Division of Financial Stability
Federal Deposit Insurance Corporation
Travis Hill, Senior Advisor to the Chairman

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Securities and Exchange Commission
Elad Roisman, Commissioner
Commodity Futures Trading Commission
Eric Pan, Director, Office of International Affairs
Bureau of Consumer Financial Protection
Brian Johnson, Acting Deputy Director
Federal Housing Finance Agency
Sandra Thompson, Deputy Director, Division of Housing Mission and Goals
Comptroller of the Currency
Grace Dailey, Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank
Examiner
National Credit Union Administration
Ralph Monaco, Chief Economist
Office of the Independent Member with Insurance Expertise
Diane Fraser, Senior Policy Advisor
Federal Reserve Bank of New York
John Williams, President and Chief Executive Officer (by telephone)
Office of Financial Research
Stacey Schreft, Deputy Director for Research and Analysis
Federal Insurance Office
Steven Seitz, Deputy Director
Texas Department of Banking
James Cooper, Senior Vice President for Policy, Conference of State Bank Supervisors
Maine Bureau of Insurance
Mark Sagat, Assistant Director, Financial Policy and Legislation, National Association of
Insurance Commissioners
Maryland Office of the Attorney General, Securities Division
Christopher Staley, Counsel, North American Securities Administrators Association

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PRESENTERS:
2018 Annual Report
• Bimal Patel, Deputy Assistant Secretary for the Council, Treasury
• Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight
Council, Treasury
• Adam Minson, Analytical Coordinator, Federal Reserve Bank of New York (available for
questions)
Brexit
• J. Christopher Giancarlo, Chairman, CFTC
• David Malpass, Under Secretary for International Affairs, Treasury
Update on Annual Reevaluation of Nonbank Financial Company Designation
• Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight
Council, Treasury
Alternative Reference Rates
• Randal Quarles, Vice Chairman for Supervision, Federal Reserve
• Ken Phelan, Acting Director, OFR
Executive Session
The Chairperson called the executive session of the meeting of the Council to order at
approximately 1:20 P.M.
The Chairperson began by welcoming Eric Cioppa, Superintendent of the Maine Bureau of
Insurance, to his first Council meeting. The Chairperson then outlined the meeting agenda,
which had previously been distributed to the members together with other materials. The agenda
for the executive session of the meeting included (1) the Council’s 2018 annual report, (2) an
update on Brexit, and (3) an update on the annual reevaluation of the designation of a nonbank
financial company.
1. 2018 Annual Report
The Chairperson then introduced the first agenda item, the Council’s 2018 annual report, and
turned to Bimal Patel, Deputy Assistant Secretary for the Council at Treasury; Stephen
Ledbetter, Director of Policy in the Office of the Financial Stability Oversight Council at
Treasury; and Adam Minson, Analytical Coordinator at the Federal Reserve Bank of New York.
Mr. Patel summarized the timeline and process for drafting the annual report. He and Mr.
Ledbetter then provided an update regarding the topics and recommendations in the current draft
of the report, and they described interagency staff deliberations regarding the draft.
Members of the Council then discussed certain topics to be included in the report.

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2. Brexit
The Chairperson then introduced the next agenda item, a discussion of the end of the
membership of the United Kingdom (U.K.) in the European Union (Brexit). He then turned to J.
Christopher Giancarlo, Chairman of the CFTC, for a presentation.
Chairman Giancarlo described potential risks to firms and derivatives markets arising from
Brexit. He first noted that a significant amount of derivatives activity is cleared in London. He
then described potential risks if the U.K. leaves the European Union on March 29, 2019, without
a withdrawal agreement with the European Union (referred to as a “hard Brexit”). He stated that
a hard Brexit would have an immediate and significant impact on the global financial system,
including U.S. banks. He stated that U.S. non-financial institutions would also be affected, and
that the effects could be long-lasting. He noted that recent reports by the Bank of England and
the International Monetary Fund also highlighted these risks.
Chairman Giancarlo then described four key risks related to a hard Brexit. First, he stated that if
U.K. central counterparties are not recognized by European authorities by the time of Brexit,
European firms could be forced to move their outstanding derivatives contracts away from U.K.
central counterparties. He noted that this shift could impose substantial costs on market
participants. Second, he stated that U.K. firms could lose authorization to continue to service
existing bilateral, uncleared swaps and insurance contracts. Third, he stated that firms in the
European Union could lose their ability to use U.K.-based exchanges for hedging and risk
management and could be forced to find alternative contracts at other exchanges. He noted that
affected derivatives markets could include interest rates, energy, and metals. Fourth, he stated
that if derivatives contract parties bilaterally amend their contracts due to Brexit, the
amendments could potentially be viewed as the creation of new swaps for regulatory purposes,
which could create additional challenges for firms.
David Malpass, Under Secretary for International Affairs at Treasury, then described recent
international discussions aiming to resolve issues related to Brexit. He also described goals for
these discussions and preparations for potential spillovers related to Brexit.
Jay Clayton, Chairman of the SEC, noted that capital markets faced similar Brexit-related issues
as those described by Chairman Giancarlo. He also noted that the potential negative effects from
Brexit could start to manifest before March. He stated that the SEC was encouraging SECregistered firms to evaluate the potential effects Brexit could have on them.
3. Update on Annual Reevaluation of Nonbank Financial Company Designation
The Chairperson then introduced the next agenda item, an update on the annual reevaluation of a
nonbank financial company, Prudential Financial, Inc. (Prudential), that the Council had
previously designated under section 113 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Chairman Clayton recused himself from participating in the
discussion, and Elad Roisman, SEC Commissioner, participated in the discussion. The
Chairperson then introduced Stephen Ledbetter, Director of Policy in the Office of Financial
Stability Oversight Council at Treasury.
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Mr. Ledbetter stated that staff of Council members and member agencies had completed their
analysis and recommended that the Council rescind its designation of Prudential. He then
presented on staff’s analysis and conclusions regarding Prudential. He first described the
exposures of customers, counterparties, and other market participants to Prudential. He noted
that aggregate capital markets exposures to Prudential had not changed significantly, but that the
exposures of global systemically important banks and other large bank holding companies had
decreased. He also described exposures arising from Prudential’s institutional and retail
insurance products. Mr. Ledbetter then explained the potential for risks arising from a forced
asset liquidation by Prudential in the event of the company’s material financial distress. He
described the volume of the company’s general account liabilities that are available for
immediate withdrawal and Prudential’s capital markets transactions that could be terminated by
counterparties. He explained analyses that had been conducted to evaluate the range of potential
outcomes in the event of a forced asset liquidation by Prudential. He stated that these analyses
indicated that there was not a significant risk that a forced asset liquidation by Prudential would
disrupt trading in key markets or cause significant losses or funding problems for other firms
with similar asset holdings.
Mr. Ledbetter then explained that Prudential’s market share in its key businesses had been stable
since the Council’s designation of the company in 2013. He stated that while the company was a
leading provider of insurance and retirement products, the provision of these services by
Prudential was not critical to the functioning of the U.S. economy or financial system. Mr.
Ledbetter then noted that Prudential’s legal structure remains complex, but that in light of staff’s
conclusions regarding its other analyses, the difficulty to resolve Prudential did not lead to a
conclusion that Prudential’s material financial distress could pose a threat to U.S. financial
stability. Finally, Mr. Ledbetter noted that since the Council’s designation of Prudential a
number of changes had occurred in the company’s regulation, including that under New Jersey
law, the New Jersey Department of Banking and Insurance is Prudential’s group-wide
supervisor.
Council members then asked questions and had a discussion, including regarding Prudential’s
use of derivatives; changes in state insurance regulation for large, internationally active
insurance organizations; and potential challenges associated with the failure of Prudential. Mel
Watt, Director of the FHFA, stated that he was submitting a separate written statement regarding
the statutory standards for the designation of a nonbank financial company.
The Chairperson then presented to the Council the following resolution regarding the
reevaluation of the Council’s designation of Prudential.
WHEREAS, section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “DFA”) authorizes the Financial Stability Oversight Council (the “Council”) to determine
that a nonbank financial company shall be supervised by the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) and shall be subject to enhanced prudential standards
if the Council determines that material financial distress at the nonbank financial company, or
the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the

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nonbank financial company, could pose a threat to the financial stability of the United States;
and
WHEREAS, section 113(d) of the DFA requires the Council not less frequently than annually to
reevaluate each determination regarding a nonbank financial company under section 113 and
rescind any such determination if the Council determines that the nonbank financial company no
longer meets the standards for a determination under section 113; and
WHEREAS, the Council issued a final rule and accompanying interpretive guidance (the “Rule
and Guidance”), codified at 12 C.F.R. Part 1310, and adopted supplemental procedures on
February 4, 2015, that describe the processes and procedures by which the Council will
reevaluate each currently effective determination; and
WHEREAS, on September 19, 2013, the Council made a final determination, in accordance with
the DFA and the Rule and Guidance, that Prudential Financial, Inc. (Prudential) shall be
supervised by the Federal Reserve and shall be subject to enhanced prudential standards under
the DFA; and
WHEREAS, in connection with the Council’s reevaluation of its determination regarding
Prudential, the Council provided Prudential an opportunity to submit written materials to the
Council to contest the Council’s determination and to meet with the staffs of the Council
members and their agencies; and
WHEREAS, Prudential submitted materials to the Council in connection with the Council’s
reevaluation of its determination regarding Prudential; and
WHEREAS, the Council has considered a broad range of information available through existing
public and regulatory sources, as well as information submitted to the Council by Prudential;
and
WHEREAS, based on the reevaluation of the Council’s determination regarding Prudential, the
staffs of the Council members and their agencies recommend that the Council rescind its
determination regarding Prudential; and
WHEREAS, the members of the Council have considered the issues and the record in connection
with the following actions.
NOW, THEREFORE, BE IT RESOLVED, that, based on the information, considerations, and
analysis set forth in the attached “Notice and Explanation of the Basis for the Financial Stability
Oversight Council’s Rescission of Its Determination Regarding Prudential Financial, Inc.” (the
“Basis”), and on a review of the administrative record, the Council hereby determines that
Prudential no longer meets the standards for a determination under section 113 of the DFA and
hereby rescinds its determination, pursuant to section 113 of the DFA, that material financial
distress at Prudential could pose a threat to the financial stability of the United States and that
Prudential shall be supervised by the Federal Reserve and shall be subject to prudential
standards, in accordance with Title I of the DFA.
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BE IT FURTHER RESOLVED, that the Council has considered and hereby approves the Basis
and authorizes the Basis to be sent to Prudential.
BE IT FURTHER RESOLVED, that the Council hereby authorizes the Basis to be released to the
public, with such redactions of confidential, sensitive, or nonpublic information as the
Chairperson or his designee deems appropriate.
BE IT FURTHER RESOLVED, that the Council hereby delegates authority to the Chairperson,
or his designee, to make technical, nonsubstantive, or conforming changes to the text of the
Basis.
The Chairperson asked for a motion to approve the resolution, which was made and seconded.
The Council approved the resolution by unanimous vote, with Commissioner Roisman
participating in the vote. Eric Cioppa, Superintendent of the Maine Bureau of Insurance,
expressed his support for the rescission of the designation.
The Chairperson adjourned the executive session of the meeting at approximately 2:12 P.M.
Public Session
The Chairperson called the open session of the meeting of the Council to order at approximately
2:18 P.M.
The Chairperson then outlined the agenda for the open session, which included (1) alternative
reference rates and the collection of data on centrally cleared repurchase agreements; (2) Brexit;
and (3) a vote on the minutes of the Council’s meeting on September 12, 2018.
1. Alternative Reference Rates and the Collection of Data on Centrally Cleared
Repurchase Agreements
The Chairperson introduced Randal Quarles, Vice Chairman for Supervision at the Federal
Reserve, to provide an update on the work of the Alternative Reference Rates Committee
(ARRC). Mr. Quarles noted that the Council has warned for several years that the small number
of transactions underpinning reference rates like the London Interbank Offered Rate (LIBOR)
raise financial stability concerns. He stated that in view of this risk, the Council had
recommended that U.S. regulators work with market participants to identify alternative reference
rates that are anchored in observable transactions and develop plans to move to these new
benchmarks in a smooth and orderly transition. Mr. Quarles then described the creation in 2014
of the ARRC, which was asked to identify a robust, transactions-based alternative to U.S. dollar
LIBOR and develop a plan that would encourage the voluntary use of its recommended rate.
Mr. Quarles stated that the ARRC had selected the Secured Overnight Financing Rate (SOFR) as
its recommended alternative to U.S. dollar LIBOR. He explained that in making this
recommendation, the ARRC had placed a high weight on selecting the most robust rate possible.
He said that SOFR represents the largest rates market at a single maturity in the world, with an
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average of more than $750 billion of daily transactions underlying it, reflecting an accurate
measure of the private sector risk-free rate and a market that performed stably even during the
financial crisis.
Mr. Quarles cautioned that even as the ARRC worked to make its selection, the risks to LIBOR
that the Council had warned of became much more material. He noted that last year, the Chief
Executive Officer of the United Kingdom’s Financial Conduct Authority (FCA) announced that
he had reached an agreement with the remaining LIBOR panel banks to continue their
submissions on a voluntary basis until the end of 2021. Mr. Quarles noted that despite
encouragement from the FCA, two banks had left the U.S. dollar panel in recent years. He said
that it is far from clear that enough banks will continue submitting to allow for LIBOR’s
publication. He stated that even if LIBOR continues to be published, the FCA is required to
judge whether it is reliably and accurately representative. If the FCA finds that it is not, Mr.
Quarles said that European Union-supervised entities would then be prohibited from using
LIBOR in new swap and debt transactions, which would severely diminish LIBOR’s liquidity
and usefulness.
Mr. Quarles said that many participants in cash markets referencing LIBOR have come to
understand that business as usual may no longer be workable. He stated that with the start of
SOFR’s production six months ago, a wide range of market participants had worked to (1)
steadily build liquidity in SOFR futures; (2) offer clearing of SOFR swaps; (3) add SOFR to the
list of hedge accounting benchmarks; and (4) issue $10 billion in floating rate debt referencing
SOFR.
Mr. Quarles noted that some market participants will likely choose to continue to use LIBOR
despite these risks. He said that it will be crucial that they incorporate safer contractual fallback
language. He noted that the language in most legacy contracts does not envision and does not
allow for economically appropriate terms in the event that LIBOR permanently stops
publication. He stated that ARRC has launched two consultations that will enable it to make
recommendations for safer language for cash products and that several more consultations are in
process. He stated that ISDA is also consulting on safer language for derivatives, but that ISDA
should offer a consultation on U.S. dollar LIBOR next year in order to give market participants
time to prepare.
Mr. Quarles said that the Council had supported the ARRC’s work, and that it was important for
the Council to continue to do so. He also noted that the LIBOR transition raises a number of
questions related to banking regulations, such as swap margin requirements and market risk
rules, that should be considered as regulators work with the private sector in seeking a smooth
transition. He said that the Federal Reserve and the CFTC’s Market Risk Advisory Committee
are working to address these issues. He said that federal and state regulators are also working
through the Federal Financial Institutions Examination Council to coordinate efforts on
communication and education of supervised financial institutions and examiners about what is
happening to LIBOR and its potential effect on institutions and financial products.
Mr. Quarles said that the Federal Reserve encourages banks to understand the upcoming LIBOR
transition and how it will affect them. He said that although the Federal Reserve was not
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currently planning to follow regulators in the United Kingdom by sending formal letters to the
chief executive officers of its supervised entities, supervisory teams at large firms were including
LIBOR in their routine monitoring discussions. He also stated that supervisory teams at regional
and community banks had been advised to engage with firms regarding LIBOR. He said that as
the LIBOR transition date approaches, the Federal Reserve will expect to see an appropriate
level of preparedness at the banks it supervises and will ask further questions about firms’
readiness to adopt the new industry standards on reference rates.
Mr. Quarles concluded by saying that with the active engagement of market participants and the
continued support of Council members, he believes that the ARRC’s plans will materially lessen
the risks to the U.S. financial system related to LIBOR, and that the next four years will be
crucial in ensuring that this is the case.
Following Mr. Quarles’s presentation, Ken Phelan, Acting Director of the OFR, presented on a
proposed data collection by the OFR and the proposed use of the data to support the calculation
of reference rates.
Mr. Phelan noted that the OFR had published a notice of proposed rulemaking in July 2018
requesting public comment on a proposed rule that would establish a data collection covering
centrally cleared transactions in the U.S. market for repurchase agreements (repos). He noted
that the OFR had consulted with the Council twice previously on the schedule for the proposed
collection, in September 2016 and November 2017. He stated that under the proposed rule, the
OFR would collect daily transactional information on general- and specific-collateral repos
cleared by central counterparties. He said that the two primary purposes of the proposed
collection are to (1) enhance the ability of the Council and the OFR to identify and monitor risks
to U.S. financial stability; and (2) support the calculation of alternative reference rates, currently
the SOFR and the Broad General Collateral Rate (BGCR). Mr. Phelan then described public
comments on the proposed rule, noting that all the public comments supported OFR issuing a
rule to collect this data. He stated that the OFR was reviewing the feedback and expected to
issue a final rule in the coming months.
Mr. Phelan said that under the proposal, the Federal Reserve Bank of New York would act as the
OFR’s collection agent and would collect the data directly from reporting firms on behalf of the
OFR. He noted that Federal Reserve Bank of New York currently publishes the SOFR and
BGCR in cooperation with the OFR, relying on voluntary data submissions. He stated that the
OFR proposed sharing the data collected under the proposed rule with the Federal Reserve Bank
of New York, apart from its role as the OFR’s collection agent, to enable the Federal Reserve
Bank of New York to calculate reference rates using the collected data. Mr. Phelan said that as a
result, the proposed collection would provide an ongoing source of data to the Federal Reserve
Bank of New York on U.S. cleared repo transactions for the SOFR and BGCR, and that it would
also expand the fields and transactions available for rate production and monitoring. He stated
that the OFR anticipates that after a mandatory collection based on the OFR’s rule is in place, the
Federal Reserve Bank of New York would discontinue its existing limited voluntary data feed
and rely instead on the more expansive mandatory collection under the OFR’s rule.
Mr. Phelan noted that the Dodd-Frank Act generally requires the Council’s approval before the
OFR shares data and information with any entity other than the Council and its member
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agencies. As a result, he stated that the OFR was requesting the Council’s authorization to share
the data collected under the final rule with the Federal Reserve Bank of New York. He noted
that the data shared with the Federal Reserve Bank of New York is required to be maintained
with at least the same level of security used by the OFR.
After Mr. Phelan completed his remarks, the Chairperson highlighted two points regarding the
work of the ARRC and the development of SOFR. First, he said that the goal is a market-led
transition away from LIBOR. He noted that the LIBOR issue affects a broad range of market
participants and that the Council was looking to the market to coalesce around constructive
solutions. Second, he said that while the end of 2021 is a frequently cited date in the LIBOR
transition discussion, market participants should not wait to think about transition. The
Chairperson noted that the sooner market participants act, the easier the transition will be.
The Chairperson then invited Jerome Powell, the Chairman of the Federal Reserve, to comment
on the presentations.
Mr. Powell expressed his support for the work of the ARRC in organizing the transition to
SOFR. He also expressed support for both the OFR’s proposed rule on data collection, which
Mr. Powell said would help support the transition to SOFR, and for the OFR’s proposal to share
data collected under the proposed rule with the Federal Reserve Bank of New York.
The Chairperson then presented to the Council the following resolution approving the sharing of
certain data and information by the Office of Financial Research.
WHEREAS, under section 153(a) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”), the purposes and duties of the Office of Financial
Research (the “OFR”) include to support the Financial Stability Oversight Council (the
“Council”) in fulfilling the purposes and duties of the Council, and to support member agencies,
by collecting data on behalf of the Council, standardizing the types and formats of data reported
and collected, and performing other related services; and
WHEREAS, under section 153(b) of the Dodd-Frank Act, the OFR may not share data and
information with any individual or entity except the Council, member agencies, and the Bureau
of Economic Analysis without the permission of the Council; and
WHEREAS, the OFR has issued for public comment a proposed rule pursuant to which the OFR
would collect data covering centrally cleared transactions in the U.S. repurchase agreement
market (the “Repo Data”); and
WHEREAS, the primary purposes of the OFR’s proposed rule are to (1) enhance the ability of
the Council and the OFR to identify and monitor risks to financial stability and (2) support the
calculation of certain alternative reference rates by the Federal Reserve Bank of New York (the
“FRBNY”); and
WHEREAS, the Council has previously made recommendations related to the importance of a
smooth transition to alternative reference rates and regarding the collection of data on securities
financing transactions.
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NOW, THEREFORE, BE IT RESOLVED, that the Council hereby authorizes the OFR to share
with the FRBNY any Repo Data collected under the final rule the OFR adopts regarding the
collection of the Repo Data, provided that such Repo Data shall be maintained by the FRBNY
with at least the same level of security as is used by the OFR; and
BE IT FURTHER RESOLVED, that the Council hereby delegates authority to the Chairperson,
or his designee, to take such other actions incident and related to the foregoing as the
Chairperson, or his designee, may deem necessary or appropriate to fulfill the Council’s
objectives in connection with the foregoing.
The Chairperson asked for a motion to approve the resolution, which was made and seconded.
The Council approved the resolution by unanimous vote.
2. Brexit
The Chairperson then introduced David Malpass, Under Secretary for International Affairs at
Treasury, for a presentation on Brexit.
Mr. Malpass described potential risks to economic activity and financial stability arising from
Brexit. He stated that U.S. representatives were hopeful that U.K. and European Union
authorities would successfully negotiate a withdrawal agreement, which would provide a
transition period and an orderly exit of the U.K. from the European Union. Mr. Malpass noted
that if a withdrawal agreement is not concluded, it would precipitate a so-called hard Brexit
scenario. He said that Treasury and financial regulators were working with counterparts in the
U.K. and European Union on a variety of measures to encourage a smooth transition.
Mr. Malpass then outlined three economic goals of the U.S. government in connection with
Brexit: (1) ensuring that potential spillover effects, particularly in the event of a hard Brexit, are
mitigated; (2) preserving deep and liquid global capital markets; and (3) supporting Europe’s
efforts to deepen its capital markets and foster a deeper economic relationship between the
European Union and the U.K., to mitigate potential market fragmentation after Brexit.
Mr. Malpass then outlined three main concerns in relation to Brexit: (1) the potential for a “cliff
edge” effect if there is no transition period; (2) how to preserve market access if there is a loss of
passporting authorizations, or if there is a challenge to equivalence in outcomes-based regulatory
assessments; and (3) ensuring contract continuity, particularly regarding derivatives contracts,
which may require a public-sector solution.
Mr. Malpass concluded by noting that even if the U.K. and European Union secure a timely
withdrawal agreement with a transition period, uncertainties remain in the Brexit process, and
that Treasury and the Council would continue to engage in monitoring.
The Chairperson then invited other members of the Council to comment. Chairman Powell
noted that the Federal Reserve holds regular discussions with counterparts in the U.K. and
European Union to minimize potential economic and financial markets disruptions of Brexit. He
stated that Brexit is a complicated process, and that it is difficult to quantify its economic impact,
but that a disorderly Brexit would have spillover effects in the United States. He stated that U.S.
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global systemically important banks with material U.K. exposures are implementing business
continuity plans in response to Brexit, under the assumption that they may lose their passporting
rights to the European Union. He noted that a slowdown in the European economy following
Brexit could indirectly affect U.S. banks and their profitability. He stated that the Federal
Reserve was also monitoring legal developments that may affect the financial sector, such as the
continuity of over-the-counter derivatives contracts. He noted that due to the uncertainty
surrounding Brexit, the Federal Reserve would continue to support strong capital levels at U.S.
banks and strong risk management standards at critical financial market infrastructures.
Chairman Giancarlo then expressed concern that a hard Brexit would have a severe, negative
impact on U.S. banks, which he said account for 40 to 60 percent of activity in global derivatives
markets. He highlighted four concerns in the case of a hard Brexit: (1) derivatives central
counterparties based in the U.K. being forced to offboard firms from the remaining 27 European
Union member states (EU 27) and move their clearing away from the U.K., which could occur as
much as 90 days before a final Brexit date; (2) U.K. firms losing authorization to service
uncleared over-the-counter contracts with EU 27 counterparties; (3) EU 27 firms losing the
ability to use U.K. exchanges for hedging and risk management; and (4) the impact on legacy
swap contracts. He stated that Brexit raises a number of financial stability risks, which arise
from moving potentially trillions of dollars of notional amount of swaps exposures across central
counterparties in Europe in a matter of weeks. He stated that these risks include the potential for
fire sales, with non-EU 27 financial institutions experiencing difficulties absorbing EU 27 open
positions, and the potential for bank distress arising from the write-down of swaps positions.
Finally, Jay Clayton, Chairman of the Securities and Exchange Commission, stated that the
material consequences of Brexit could begin to appear before March 2019. He noted that firms
may choose to move operations or novate contracts in anticipation of Brexit. He highlighted the
SEC’s activities related to Brexit, including monitoring public companies’ disclosures and
financial services firms’ activities as they evaluate whether they can continue to service their
customers.
3. Resolution Approving the Minutes of the Meeting Held on September 12, 2018
BE IT RESOLVED, by the Financial Stability Oversight Council (the “Council”), that the
minutes attached hereto of the meeting held on September 12, 2018 of the Council are hereby
approved.
The Chairperson asked for a motion to approve the resolution, which was made and seconded.
The Council approved the resolution by unanimous vote.
The Chairperson adjourned the meeting at approximately 2:46 P.M.

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