Fed Adopts Rule Clarifying Steps to Tag Nonbanks for Oversight

The U.S. Federal Reserve said on Wednesday that it had approved a final rule to clarify the process the new U.S. risk council will follow when it begins designating nonbank financial firms for heightened oversight.

A group of regulators known as the Financial Stability Oversight Council is responsible for determining which nonbank firms are so critical that their failure could threaten the financial system.

The rule sets requirements for determining when a company is "predominantly engaged in financial activities,'' part of the process laid out by the 2010 Dodd-Frank financial oversight law.

The final rule largely mirrors an earlier proposal, with the change that engaging in physically settled derivatives transactions will not count as a financial activity, the Fed said.

Regulators have not yet designated nonbank firms as systemically important, although three firms are said to be in the final stages of consideration.

Mary Miller, Treasury undersecretary for domestic finance, said at a conference in March that she hoped the council would vote on designations in ``the next few months.''

Business groups argued last year that the risk council could face lawsuits if it tried to designate firms without finishing the ``predominantly engaged'' rule. A person familiar with the matter, however, said the Fed's adoption of the rule will not affect ongoing talks over designating certain firms.

In addition, the FSOC has previously disagreed with the business groups' position, saying the rulemaking was not ``essential'' to the FSOC's designation process.

The stability council is set to meet in a closed-door session on Thursday. The new rule takes effect on May 6.