Clarity still sought on systemic risk rules

Private equity firms are still unsure which among them will fall under heightened Federal Reserve scrutiny despite systemic risk rulemaking passed this week.

The US Financial Stability Oversight Council (FSOC) passed rules this week designed to clarify which non-bank financial firms will be subject to systemic risk oversight from the Federal Reserve. 

However, multiple legal sources said the rules are still too ambiguous to determine what private equity firms will fall subject. 

Private equity firms with more than $50 billion in assets that meet certain other criteria are suspected to fall under the final rule, but it remains unclear how that size threshold will be calculated, said one Washington DC-based private equity lawyer. . 

“The rule appears to suggest funds will not be counted towards the investment advisor, but other language in the rule suggests the opposite.”

The rules passed largely mimic proposals issued last October, which includes emergency capital provisions and more orderly procedures in the event of insolvency for covered firms. 

Aside from a size threshold, covered firms will also meet any one or more of the following thresholds: A 15-to-1 leverage ratio; $3.5 billion of derivative liabilities; $20 billion in total debt outstanding; $30 billion in gross notional credit-default swaps outstanding; or a 10 percent ratio of short-term debt to assets.

But here too it remains unclear whether those thresholds would fall to the parent firm or funds under management, said legal sources.  

The FSOC has reserved the right to include firms of any size or scope into the Federal Reserve’s remit. The board said it would review firms’ ‘Form PF’ disclosures – which private firms must submit to the US Securities and Exchange Commission for systemic risk assessment purposes – as a way of determining if private equity funds need heightened scrutiny from the central bank.