(Adds a comment from SEC Chair Mary Jo White, more details
about the report and reactions)
By Emily Stephenson and Sarah N. Lynch
WASHINGTON May 7 The U.S. financial risk
council on Wednesday raised red flags about new, potentially
risky practices by asset managers and nonbank mortgage
servicers, which they said are not regulated as carefully as
The sectors were highlighted by the Financial Stability
Oversight Council in a report published on Wednesday.
The council is a group of financial regulators established
by the 2010 Dodd-Frank law. The group watches out for market
risks and imposes additional regulation on large "systemic"
firms whose collapse could harm the financial system.
The group issues a report every year that explores the
landscape of financial activity and warns about new risks.
Previous reports have mentioned activities by nonbank
mortgage servicers and asset managers, but did not detail all of
the risks included this year.
Regulators said they are concerned that some traditional
bank activities are moving to nonbank firms that are not subject
to capital and liquidity requirements.
The focus on asset management activity will likely frustrate
the industry, which fears the FSOC might designate large firms
such as BlackRock or Fidelity as "systemic."
A U.S. Treasury study last fall found that certain
activities by asset managers could pose systemic risks. Funds
say the study is flawed.
The FSOC's new report questions an activity by asset
managers that was mentioned only briefly in the Treasury report.
At issue are indemnifications that asset managers offer some
clients involved in securities lending activities to guard
against the risk of borrower defaults.
Although asset managers do receive collateral in exchange
for the securities they lend, the report raises concerns that
indemnifications could still leave asset managers at risk
because they are not required to set aside capital.
"The indemnification that asset managers provide may be a
source of stress on their own balance sheets, while at the same
time resulting in lower protection for the lenders relative to
the indemnities provided by banks," the report says.
The report does not name firms, but BlackRock, for example,
disclosed in November 2013 that it had indemnified $115 billion
worth of securities-lending loan balances for clients and that
it held $121 billion in cash and securities as collateral
The issue of indemnification could come up on May 19, when
the FSOC hosts a public meeting on potential risks posed by
SEC Chair Mary Jo White, an FSOC member who voted to release
the report, would not comment after the meeting on whether her
agency would look into new rules around indemnification or
"In terms of all of our registrants we regulate, we are
obviously looking across issues ...compliance issues as well as
systemic risk issues," White said.
Wednesday's report also raises concerns about a shift in
mortgage servicing activity to nonbanks.
Mortgage servicers handle borrowers' accounts, processing
payments and handling foreclosure proceedings. Some banks have
sold their servicing businesses in recent years to nonbank firms
such as Ocwen Financial Corp and Nationstar Mortgage
The report says nonbank servicers do not have the same
capital, liquidity or risk oversight as banks. As a result, it
said the failure of a nonbank servicer could hurt investors in
A person familiar with the matter said the mention of
specific industries in the report did not mean firms were headed
toward systemic designation. But outside observers warned that
could be the result.
"We believe this was an intentional effort to signal nonbank
servicers that they are at risk of a ... designation if they get
too big or too dominant," Jaret Seiberg of Guggenheim Securities
said in a research note.
(Reporting by Emily Stephenson and Sarah N. Lynch; Additional
reporting by Ashley Lau in New York; Editing by Karey Van Hall
and Sandra Maler)