On 8 January 2014, the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) published a consultation paper on “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (NBNI G-SIFIs). The consultation period closes on 7 April 2014.
The consultation details a framework which is broadly consistent with existing methodologies that apply to Global Systemically Important Banks (G-SIBs) and Global Systemically Important Insurers (G-SIIs). It adopts an indicator-based approach which applies to all NBNI financial entities above a Materiality Threshold and employs sector-specific methodologies for:
- Finance companies;
- Market intermediaries (securities broker-dealers) – focussed specifically on identifying and mitigating risks to capital, client assets and public confidence;
- Investment funds (covering all collective investment schemes (both open- and closed- ended), mutual funds, money market funds, exchange traded funds, private equity funds, venture capital funds and hedge funds, but not separately managed accounts); and
- “Other” NBNI financial entities – any corporation, partnership or other legal entity structure that is “primarily engaged in financial intermediation or in related auxiliary financial activities” and that is not explicitly covered by one of the above methodologies.
NBNI G-SIFI assessments will initially be conducted by national authorities with oversight from the FSB in order to ensure cross-jurisdictional consistency. Annually, the FSB and national authorities will determine a list of NBNI G-SIFIs, which will be published on the FSB website. Questions have arisen as to which entities will fall into the “other” category. On that subject, a recent risk magazine article suggests that Trafigura, Vitol, Cargill and other commodities trading houses are unlikely to be captured. With the exception of Glencor Xstrata, most will not exceed the Materiality Threshold. Furthermore it seems unlikely that they would either be regarded as being “primarily engaged in financial intermediation or in related auxiliary financial activities” or that the services they provide would be incapable of being provided by a substitute firm.
The basic set of indicators that are used to determine the existence of an NBNI G-SIFI are:
- Interconnectedness within the financial system;
- Complexity; and
- Global activities.
A more detailed summary of the indicators can be found via the link below.