Last week, MainFT jumped on the potentially wild implications of an obscure but explosive provision buried deep in the Trump administration’s budget bill.
Section 899 of the bill passed by House of Representatives last week would let the US to impose additional taxes on companies and investors from countries that it deems to have “discriminatory” tax policies. As Deutsche Bank’s George Saravelos put it, it represents the potential “weaponisation of US capital markets”, given the trillions that overseas investors have in the US.
Well, here’s another one hidden-away humdinger, which you can find roughly midway through the ca 160k word “One Big Beautiful Bill Act”:
SEC. 50005. FINANCIAL RESEARCH FUND.
Section 155 of the Financial Stability Act of 2010 (12 U.S.C. 5345) is amended by adding at the end the following:
(e) Limitation on Assessments and the Financial Research Fund.
(1) Limitation on assessments. —— Assessments may not be collected under subsection (d) if the assessments would result in
(A) the Financial Research Fund exceeding the average annual budget amount; or
(B) the total assessments collected during a single fiscal year exceeding the average annual budget amount.
(2) Transfer of excess funds. — Any amounts in the Financial Research Fund exceeding the average annual budget amount shall be deposited into the general fund of the Treasury.
(3) Average annual budget amount defined.–In this subsection the term ‘average annual budget amount’ means the annual average, over the 3 most recently completed fiscal years, of the expenses of the Council in carrying out the duties and responsibilities of the Council that were paid by the Office using amounts obtained through assessments under subsection (d).
This is . . . potentially quite problematic, if we’ve read this right.
US legal-political jargon is hard to parse, but Alphaville’s understanding is that this could in practice kill the US Treasury’s Office of Financial Research, a body set up as a kind of early-warning system for financial crises after 2008. Here’s how, and why that would be a big deal.
The Financial Research Fund referenced in Section 50005 finances both the operations of the Financial Stability Oversight Council — an overarching body that includes all the main US financial regulators and is chaired by the US Treasury Secretary — and the OFR that supports it. The FRF gets its money from a small annual levy on big US banks.
The bill seems to place a cap on these charges, equal to the average annual budget of the “Council”, which presumably means FSOC in this context. But FSOC’s budget is tiny compared to the OFR, which consumes the lion’s share of the money raised by the Financial Research Fund’s bank charges.
By seemingly restricting those charges to a maximum of only FSOC’s average annual budget, the budget bill would de facto kill the OFR by defunding it, without the hassle of having to actually pass any legislation to do so formally (a favourite playbook of the Trump administration)
Again, it’s hard to be sure, given the bill’s messy language, but our interpretation of the wording seems to match that of the Congressional Budget Office and the Congressional Research Service. As the latter noted, with Alphaville’s emphasis below:
. . . Section 50005 would limit both these annual assessments and the FRF balance to the average FSOC budget over the previous three years, which from FY2023 to FY2025 were $16 million (assuming FSOC’s transfer to the Federal Deposit Insurance Corporation would qualify). Fund balances above the limit would be transferred to the Treasury General Fund. This compares to FSOC’s and OFR’s combined estimated obligations of $136 million, OFR assessments of $124 million in FY2025, and an FRF unobligated balance of $74 million as of April 2025. Thus, this section would lead to significant decrease in annual assessments and OFR (and potentially FSOC) spending. CBO estimates that this section would decrease the deficit by $292 million over 10 years.
The whole point of the original 2010 Dodd-Frank Act was to bring together America’s stupidly complex patchwork of regulators and prevent the kind of cataclysmic failures that contributed to the 2008 financial crisis. But to do so it needed data, research and analysis, which was why the OFR was set up inside the US Treasury.
You could argue that FSOC can continue to play the same overarching, convening role of financial regulators without the OFR there to aid it. Some of its research is inevitably duplicative of work done elsewhere in the federal government, or by the likes of the IMF. Moreover, $16mn should be enough to finance some rump-FSOC/OFR staffing. Alternately, the Treasury could seek additional funding through the normal budgeting avenues to maintain the OFR.
However, if nothing changes it would definitely require jettisoning all the information collection, cleaning, dissemination and analysis that the OFR does. Its data, technology and research centres cost about $83mn a year, and produce good stuff like its Hedge Fund Monitor and Money Market Fund Monitor (Alphaville used the former for this story, and the latter for an upcoming one). The OFR also played a pivotal role in getting the Legal Entity Identifier database off the ground.
Most consequentially, the OFR plays an important role in collecting the much of the data that underpins the Secured Overnight Financing Rate — Libor’s successor as the world’s most important interest rate benchmark.
Unlike Libor, SOFR is an interest rate benchmark derived from actual financial transactions, rather than vibes and whatever was convenient for some traders’ P&L. Specifically, it is based on the overnight US repo markets, where US Treasuries serve as collateral for short-term loans between banks and other financial institutions.
The New York Federal Reserve is SOFR’s administrator, but the crucial raw data comes from the Bank of New York Mellon, the Fixed Income Clearing Corporation — and the OFR. Whoops.
In other words, after years of hard work by regulators, central bankers and finance ministry officials around the world to wean the global financial system off its LIBOR’s dependency, the Trump administration could now be sabotaging its main successor just as it is begins to gain traction.
In a statement to FT Alphaville regarding the budget bill’s impact on the OFR, and the potential knock-on impact on SOFR, a Treasury spokesperson would only say: “Treasury regards its role in ensuring the proper functioning of financial markets as one of its upmost priorities.”
It’s true that even if the OFR becomes a zombie agency, its SOFR data collection/warehousing role could in theory be simply picked up by somebody else, perhaps the New York Federal Reserve itself. But this repo data is very messy, and there are probably myriad legal ownership issues involved. Shifting SOFR data collection from one agency to another is therefore almost certainly not a straightforward process.
Is the defunding of the OFR and the potential damage to SOFR intended, or just a snafu? It’s hard to say. But the OFR’s motto is “a transparent, accountable, and resilient financial system”. It seems like none of those things are desirable in America in 2025.
https://www.ft.com/content/7962a211-a663-4ec0-99ed-1bde012bb0d8
