A one-size-fits-all reporting requirement is ill-suited for the diverse NDFI industry
Washington, D.C. – MFA recommended the Board of Governors of the Federal Reserve System (FRB) adopt a flexible, risk-based approach to its Form FR Y-14Q reporting requirements in a comment letter submitted today. The letter is in response to proposed amendments to Form FR Y-14Q that would collect additional information on bank lending to nondepository financial institutions (NDFIs).
“MFA supports the Fed collecting data to protect the safety and soundness of the banking system. However, the one-size-fits-all reporting requirements in the proposed amendments ignore the diversity of NDFIs and will result in the Fed collecting junk data that does not reflect the banks’ counterparty risks,” said Bryan Corbett, MFA President and CEO. “The Fed should adopt a flexible, risk-based approach in the proposed amendments, requiring banks only to report NDFI data they are already collecting. This will allow the Fed to better monitor for systemic risk while not increasing the reporting burdens on banks and their counterparties.”
MFA supports the FRB’s goals of effective bank oversight by collecting additional information on Form FR Y-14Q. However, imposing rigid, one-size-fits-all reporting requirements on banks and their counterparties would be ineffective. The NDFI industry is incredibly diverse in terms of strategies, asset levels, borrowing needs, and risk profiles. The prescriptive reporting requirements in the proposed amendments would force banks to provide irrelevant and unnecessary information about their counterparties that would not improve the safety and soundness of the banking system and would increase the strain on banks and NDFIs.
The amendments should instead take a flexible, risk-based approach. Banks should be required to report to regulators the financial information they already collect from their counterparties. Due to the diversity of NDFIs, banks are best positioned to understand the counterparty data needed to properly evaluate the creditworthiness of a specific NDFI. Collecting data banks already require NDFIs to provide would reduce regulatory burdens on banks and NDFIs while ensuring the FRB is only receiving the most relevant information.
MFA’s letter highlights that the prescriptive reporting requirements in the proposal will require NDFIs, including private funds, to report information that is not applicable to their business:
Unlike commercial enterprises, NDFIs typically do not generate profit from sales of assets or services. As such, many of the fields in the current Form FR Y-14Q are inapplicable or immaterial to most NDFIs and the FRB would gain no utility in collecting such disclosures, even where they are reportable in a financial statement. If the FRB only required banks to report information the bank currently receives, many of these items would be filtered out by market practice or GAAP financial requirements, but if that recommendation is not implemented, given the limited value of many of these items, we would recommend adding de minimis qualitative or quantitative qualifiers on these items, either specific to NDFIs or widely applicable. Fields we would recommend qualifying include:
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- Net Sales (Current and Prior Year);
- Operating Income;
- Depreciation & Amortization;
- Accounts Receivable (A/R) (Current and Prior Year);
- Inventory (Current and Prior Year);
- Current Assets (Current and Prior Year);
- Tangible Assets;
- Fixed Assets;
- Accounts Payable (Current and Prior Year);
- Retained Earnings; and
- Capital Expenditures.
…Assigning a de minimis threshold would allow the FRB to capture NDFIs that may execute unique strategies that implicate these items, but would avoid the redundancy of having other NDFIs track and disclose items that are not relevant to their strategy.
The letter also emphasizes that tailored disclosures would not increase the risk of banks evading reporting requirements:
First, as noted, the banks have an interest in ensuring they receive the information they need to evaluate the credit risk of any loan they make, so their interests are aligned with the FRB’s. Second, the reporting requirements in Form FR Y-14Q are secondary to the bank’s regulatory obligation to properly account for counterparty credit risk, which is also supervised by the FRB (or other bank regulators)… Lastly, and most importantly, if the FRB determines that a bank is “evading” the reporting requirement by amending its counterparty’s required disclosures, the bank would be violating its existing regulatory obligations, and the FRB has the authority to require the bank to revert to its original practice and/or take additional action against the bank.
Read the full comment letter here.
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About the global alternative asset management industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $5.5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About MFA
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over $3.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
