As a prelude to the Financial Stability Oversight Council issuing long-anticipated designations of “systemically important financial institutions,” a final rule issued last week by the Federal Reserve Board has detailed the criteria used when considering that designation for a “nonbank financial company.”

Under the Dodd-Frank Act, the FSOC may subject a nonbank financial company to supervision by the Board and consolidated prudential standards only if it is "predominantly engaged in financial activities” and it is determined that financial distress—or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities —could pose a threat to the financial stability of the United States

Among the factors the FSOC must consider is the extent and nature of the company's transactions and relationships with other significant nonbank financial companies and significant bank holding companies. If designated, those nonbank financial companies will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corporation on the company's credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company.

The final rule, issued last week and effective on May 6, defines the term “predominantly engaged in financial activities” as whether 85 percent or more of the company's revenues or assets are related to activities that are defined as financial in nature under the Bank Holding Company Act. A firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.