U.S. to Unveil Criteria for Picking ‘Systemic’ Firms

U.S. regulators Tuesday are set to give nervous insurance companies, mutual funds and other big players in financial markets a better idea of whether they will be tapped for the same type of additional government scrutiny facing large U.S. banks.

None of these industries are eager to be on the receiving end of the added attention that comes with being named “systemic” and have spent the past year lobbying to be ignored.

The concern is that new scrutiny will mean new restrictions that could hit firms’ bottom lines.

Tuesday the Financial Stability Oversight Council is scheduled to release a new proposal on how it will determine which non-bank firms are important enough to the financial system that they merit greater oversight by the Federal Reserve.

Also Tuesday, banking regulators are scheduled to vote on a proposal banning most proprietary trading done by banks, known as the Volcker rule.

Both rules are highly anticipated parts of the 2010 Dodd-Frank financial oversight law.

Companies that are tapped for greater Fed supervision will be designated systemically important financial institutions (SIFIs), and will be subject to new capital and liquidity rules.

They will also be required to draft detailed plans on how they could be broken up if the company falters and is seized by the government.

The SIFI rule is in large part a response to the market havoc caused during the 2007-2009 financial crisis by American International Group Inc, an insurer not overseen by banking regulators.

Bank holding companies with more than $50 billion in assets, such as Goldman Sachs and JPMorgan Chase , are automatically subject to the added scrutiny.

For months insurance, hedge fund, and mutual fund lobbying groups have been working to convince regulators that their industries do not hold the potential to wreak havoc on financial markets.

The Managed Funds Association, for instance, said in a letter to regulators in February that “it is highly unlikely that any hedge fund is systemically significant at this time.”

It is unclear when FSOC will get around to naming SIFIs, but it is not expected before next year.

In another area of critical importance to major financial players, the board of the Federal Deposit Insurance Corp will officially release Tuesday a proposed version of the Volcker rule.

The rule aims to prevent banks from recklessly engaging in risky trades by prohibiting them from trading for their own profit in securities, derivatives and certain other financial instruments.

The law contains some exemptions to the ban for trades done to make markets for customers and for those used to hedge against certain risks.

How these exemptions are crafted will have a major impact on large banks such as Goldman and Morgan Stanley .

A draft of the proposed Volcker rule leaked last week and it received a mixed reaction from industry groups.

The Securities Industry and Financial Markets Association, for instance, raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.

(Reporting by Dave Clarke, Editing by Carol Bishopric)