Financial Market Utilities, 18445-18454 [2011-7812]
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Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules
Conditioning Engineers, Inc., 1791
Tullie Circle, NE., Atlanta, GA 30329,
(404) 636–8400, ashrae@ashrae.org, or
https://www.ashrae.org.
(1) American National Standards
Institute/American Society of Heating,
Refrigeration, and Air-Conditioning
Engineers Standard 29–2009, (‘‘ASHRAE
Standard 29–2009’’), ‘‘Method of Testing
Automatic Ice Makers,’’ IBR approved
for § 431.134.
(2) [Reserved].
4. Section 431.134 is revised to read
as follows:
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(1) For batch type automatic
commercial ice-making heads, remote
condensing (but not remote compressor)
automatic commercial ice makers, and
remote condensing and remote
compressor automatic commercial ice
makers; the energy use and condenser
water use will be reported as measured
in this paragraph (b), including the
energy and water consumption, as
applicable, of the ice-making
mechanism, the compressor, and the
condenser or condensing unit.
(2)(i) For continuous type automatic
commercial ice makers, determine the
energy use and condenser water use by
multiplying the energy consumption or
condenser water use as measured in this
paragraph (b) by the ice quality
adjustment factor, determined using the
following equation:
[Regulation HH; Docket No. R–1412]
the Federal Reserve System (the
‘‘Board’’) is required to promulgate riskmanagement standards governing the
operations related to the payment,
clearing, and settlement activities of
certain financial market utilities
(‘‘FMUs’’) that are designated as
systemically important by the Financial
Stability Oversight Council (the
‘‘Council’’). In addition, under section
806(e) of the Dodd-Frank Act, the Board
is required to prescribe regulations
setting forth the standards for
determining when advance notice is
required to be provided by a designated
FMU for which the Board is the
Supervisory Agency when the
designated FMU proposes to change its
rules, procedures, or operations that
could materially affect the nature or
level of risks presented by the
designated FMU. The Board is
proposing new Part 234 to Title 12 of
the Code of Federal Regulations to
implement these provisions of the
Dodd-Frank Act.
RIN 7100–AD71
DATES:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Facsimile: (202) 452–3819 or (202)
452–3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FOR FURTHER INFORMATION CONTACT:
Jennifer A. Lucier, Manager (202) 872–
7581, Division of Reserve Bank
Operations and Payment Systems;
Christopher W. Clubb, Senior Counsel
(202) 452–3904, or Kara L. Handzlik,
Senior Attorney (202) 452–3852, Legal
Division; for users of
Telecommunications Device for the Deaf
(TDD) only, contact (202) 263–4869.
SUPPLEMENTARY INFORMATION:
§ 431.134 Uniform test methods for the
measurement of energy and water
consumption of automatic commercial ice
makers.
(a) Scope. This section provides the
test procedures for measuring, pursuant
to EPCA, the energy use in kilowatt
(ii) Determine the calorimeter
constant as specified in the ‘‘Procedure
for Determining Ice Quality’’ in section
A.3 of normative annex A of ASHRAE
Standard 29–2009 (incorporated by
reference, see § 431.133).
(3) For batch and continuous type
automatic ice makers with multiple
capacity settings, determine the energy
use and condenser water use by
performing the test procedures in this
section at the highest capacity setting.
The energy consumption and condenser
water use may optionally be determined
by testing the multiple capacity
automatic commercial ice makers at
both the highest and the lowest capacity
settings and averaging the two results.
[FR Doc. 2011–7728 Filed 4–1–11; 8:45 am]
BILLING CODE 6450–01–P
FEDERAL RESERVE SYSTEM
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12 CFR Part 234
Comments on this notice of
proposed rulemaking must be received
by May 19, 2011.
Financial Market Utilities
Board of Governors of the
Federal Reserve System.
ACTION: Notice of proposed rulemaking.
AGENCY:
Under section 805(a)(1)(A) of
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ‘‘DoddFrank Act’’), the Board of Governors of
SUMMARY:
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You may submit comments,
identified by Docket No. R–1412 and
RIN No. AD–7100–AD71, by any of the
following methods:
• Agency Web site: https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm.
ADDRESSES:
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EP04AP11.005
hours per 100 pounds of ice (kWh/100
lb ice) and the condenser water use in
gallons per 100 pounds of ice (gal/100
lb ice) of automatic commercial ice
makers with capacities between 50 and
4,000 pounds of ice per 24 hours.
(b) Testing and Calculations. Measure
the energy use and the condenser water
use of each covered product by
conducting the test procedures set forth
in AHRI Standard 810–2007, section 3,
‘‘Definitions,’’ section 4, ‘‘Test
Requirements,’’ and section 5, ‘‘Rating
Requirements’’ (incorporated by
reference, see § 431.133). Where AHRI
Standard 810–2007 references
‘‘ASHRAE Standard 29,’’ ASHRAE
Standard 29–2009 shall be used
(incorporated by reference, see
§ 431.133).
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Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules
I. Background
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A. Financial Market Utilities
FMUs, such as payment systems,
central securities depositories, and
central counterparties, are critical
components of the nation’s financial
system. FMUs are multilateral
organizations that provide the essential
infrastructure to clear and settle
payments and other financial
transactions, upon which the financial
markets and the broader economy rely
to function effectively. Financial
institutions, such as banks, participate
in FMUs pursuant to a common set of
rules and procedures, a technical
infrastructure, and a risk-management
framework. The basic risks that FMUs
must manage include credit risk,
liquidity risk, settlement risk,
operational risk, and legal risk. These
risks arise between financial institutions
and FMUs as they settle payments and
other financial transactions. The FMUs
and their participating institutions are
responsible for managing these risks on
an individual and a collective basis.
Financial stability requires that the
financial infrastructure, including
FMUs, be robust and well managed. If
a systemically important FMU fails to
perform as expected or fails to measure,
monitor, and manage its risks
effectively, it could pose significant risk
to its participants and the financial
system more broadly. For example, the
inability of an FMU to complete
settlement on time could create credit or
liquidity problems for its participants or
other FMUs. An FMU, therefore, should
have an appropriate and robust riskmanagement framework, including
sound governance arrangements, and
appropriate policies and procedures to
measure, monitor, and manage its risks.
B. Dodd-Frank Wall Street Reform and
Consumer Protection Act
Title VIII of the Dodd-Frank Act,
titled the ‘‘Payment, Clearing, and
Settlement Supervision Act of 2010,’’
was enacted to mitigate systemic risk in
the financial system and to promote
financial stability, in part, through
enhanced supervision of designated
FMUs.1 Under section 803, an FMU is
defined as a person that manages or
operates a multilateral system for the
purpose of transferring, clearing, or
settling payments, securities, or other
financial transactions among financial
institutions or between financial
institutions and the person. Pursuant to
section 804 of the Dodd-Frank Act, the
Council is required to designate those
1 The Dodd-Frank Act, Public Law 111–203, 124
Stat. 1376, was signed into law on July 21, 2010.
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FMUs that the Council determines are,
or are likely to become, systemically
important.2 Designation by the Council
makes an FMU subject to the
supervisory framework set out in Title
VIII.
Section 805(a)(1)(A) of the DoddFrank Act requires the Board to
prescribe, by rule or order, riskmanagement standards governing the
operations related to the payment,
clearing, and settlement activities of
certain designated FMUs. With respect
to a designated FMU that is a
derivatives clearing organization
registered under section 5b of the
Commodity Exchange Act or a clearing
agency registered under section 17A of
the Securities Exchange Act of 1934
(collectively, ‘‘designated clearing
entities’’), the Commodity Futures
Trading Commission (‘‘CFTC’’) or the
Securities and Exchange Commission
(‘‘SEC’’), respectively, may each
prescribe regulations, in consultation
with the Council and the Board,
containing applicable risk-management
standards.3
In prescribing the standards, section
805(a)(1) requires the Board to take into
consideration relevant international
standards and existing prudential
requirements.4 In addition, as set out in
section 805(b) of the Dodd-Frank Act,
the objectives and principles for the
risk-management standards are to (1)
promote robust risk management, (2)
promote safety and soundness, (3)
reduce systemic risks, and (4) support
the stability of the broader financial
system. Section 805(c) of the DoddFrank Act also states that riskmanagement standards may address
areas such as (1) risk-management
policies and procedures, (2) margin and
collateral requirements, (3) participant
or counterparty default policies and
procedures, (4) the ability to complete
timely clearing and settlement of
financial transactions, (5) capital and
financial resource requirements for
2 For these purposes, section 803(9) of the DoddFrank Act defines ‘‘systemically important’’ as a
situation in which the failure of or a disruption to
the functioning of an FMU could create, or increase,
the risk of significant liquidity or credit problems
spreading among financial institutions or markets
and thereby threaten the stability of the financial
system of the United States. 12 U.S.C. 5462(9). The
Council issued an advance notice of proposed
rulemaking on the criteria for FMU designations on
November 23, 2010 (see 75 FR 79982 (Dec. 21,
2010)).
3 Dodd-Frank Act section 805(a)(2) 12 U.S.C.
5464(a)(2).
4 Section 805(a)(2) similarly requires the CFTC
and SEC to take into consideration relevant
international standards and existing prudential
requirements when prescribing regulations
containing risk-management standards for
designated clearing entities.
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designated FMUs, and (6) other areas
that are necessary to achieve the
objectives and principles for riskmanagement standards in section
805(b). Designated FMUs are required to
conduct their operations in compliance
with the applicable risk-management
standards.
In addition to compliance with the
applicable risk-management standards,
section 806(e)(1)(B) of the Dodd-Frank
Act requires a designated FMU to
provide at least 60 days’ advance notice
to its Supervisory Agency (as defined
below) of any proposed change to its
rules, procedures, or operations that
could, as defined in rules of each
Supervisory Agency, materially affect
the nature or level of risks presented by
the designated FMU. Each Supervisory
Agency must prescribe regulations that
define and describe the standards for
determining when such advance notice
is required. Under section 803(8) of the
Dodd-Frank Act, a ‘‘Supervisory
Agency’’ means the federal agency that
has primary jurisdiction over a
designated FMU under federal banking,
securities, or commodity futures laws.5
II. Explanation of Proposed Rules
A. Authority, Purpose, and Scope
Proposed § 234.1(a) clarifies that
sections 805, 806, and 810 of the DoddFrank Act provide the statutory
authority for the Board to promulgate
the proposed part. Proposed § 234.1(b)
explains that the proposed rules include
risk-management standards for
designated FMUs and that this part does
not apply to designated clearing entities
governed by the risk-management
standards promulgated by the CFTC or
the SEC, as appropriate. Proposed
§ 234.1(b) also clarifies that the
requirements and procedures in this
part for a designated FMU that proposes
to make a change to its rules,
procedures, or operations that could
materially affect the nature or level of
risks presented by the designated FMU
apply only to designated FMUs for
which the Board is the Supervisory
Agency.
B. Definitions
The proposed rule includes
definitions that are necessary to
implement the rules. Several definitions
(including ‘‘designated financial market
5 A Supervisory Agency includes the SEC and
CFTC with respect to their respective designated
clearing entities (as defined above), the appropriate
federal banking agencies with respect to FMUs that
are institutions described in section 3(q) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(q)),
and the Board with respect to a designated FMU
this is otherwise not subject to the jurisdiction of
any of the agencies listed above.
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Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules
utility,’’ ‘‘financial market utility,’’ and
‘‘Supervisory Agency’’) reference the
statutory language in section 803 of the
Dodd-Frank Act. Other proposed
definitions (including ‘‘central
counterparty,’’ ‘‘central securities
depository,’’ and ‘‘payment system’’) are
based on similar terms used in the riskmanagement standards issued by the
Committee on Payment and Settlement
Systems (the ‘‘CPSS’’) and the Technical
Committee of the International
Organization of Securities Commissions
(‘‘IOSCO’’), which are discussed in detail
below. The Board is requesting
comment on all aspects of the proposed
definitions except those defined in the
Dodd-Frank Act. In particular, the Board
requests comment on whether the
definitions are clear and sufficiently
detailed and whether additional
definitions are needed to implement the
proposed rules.
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C. Risk-Management Standards for
Designated FMUs
As noted above, in prescribing riskmanagement standards for designated
FMUs, section 805(a) of the Dodd-Frank
Act directs the Board to take into
consideration relevant international
standards and existing prudential
requirements. The current international
standards most relevant to risk
management of FMUs are the standards
developed by the CPSS and IOSCO.6 In
2001, the CPSS published a set of
principles for the design and operation
of systemically important payment
systems (the ‘‘Core Principles’’). That
same year the CPSS and IOSCO jointly
issued a set of minimum standards for
securities settlement systems (the
‘‘Recommendations for Securities
Settlement Systems’’). In 2004, the CPSS
and IOSCO jointly published
recommendations for the risk
management of central counterparties
(the ‘‘Recommendations for Central
Counterparties,’’ and collectively with
the Recommendations for Securities
Settlement Systems, the ‘‘CPSS–IOSCO
Recommendations’’). The Board has
adopted the three sets of standards in its
Policy on Payment System Risk (‘‘PSR
policy’’). Furthermore, the Board has
been guided by this policy, in
conjunction with relevant laws and
other Federal Reserve policies, when
exercising its authority in (1)
6 See full reports for the Core Principles for
Systemically Important Payment Systems (Core
Principles) (https://www.bis.org/publ/cpss43.htm)
and the CPSS–IOSCO Recommendations for
Securities Settlement Systems (Recommendations
for Securities Settlement Systems) (https://
www.bis.org/publ/cpss46.htm) and Central
Counterparties (https://www.bis.org/publ/
cpss64.htm) (Recommendations for Central
Counterparties).
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supervising state member banks, Edge
and agreement corporations, bank
holding companies, and clearinghouse
arrangements, including the exercise of
authority under the Bank Service
Company Act, where applicable; (2)
setting or reviewing the terms and
conditions for use of Federal Reserve
payment and settlement services by
system operators and participants; (3)
developing and applying policies for the
provision of intraday credit to Reserve
Bank account holders; and (4)
interacting with other domestic and
foreign financial system authorities on
payments and settlement risk issues.7
Thus, the Board has had several years
experience with interpreting and
applying the three sets of standards to
payment, clearing, and settlement
systems.
The Board believes that the Core
Principles and the CPSS–IOSCO
Recommendations further the objectives
and principles for designated FMU
standards set out in section 805(b) of the
Dodd-Frank Act. These international
standards were formulated by central
banks and securities regulators to
promote sound risk-management
practices, encourage the safe design and
operation of relevant FMUs, reduce
systemic risk, and, in certain instances,
improve selected market practices or
actions by regulators. The Federal
Reserve collaborated with participating
financial system authorities in
developing the three sets of standards.
In addition, the SEC and CFTC
participated in the development of the
CPSS–IOSCO Recommendations. The
Core Principles and Recommendations
for Securities Settlement Systems are
also part of the Financial Stability
Board’s Compendium of Standards,
which has been widely recognized,
supported, and endorsed by U.S.
authorities as integral to strengthening
the stability of the financial system.
Furthermore, while the
Recommendations for Central
Counterparties have not been
recognized formally by the Financial
Stability Board, they are widely
accepted and applied by central banks
and market regulators around the world.
The Board, therefore, believes that the
Core Principles and CPSS–IOSCO
Recommendations are an appropriate
basis for risk-management standards for
designated FMUs, and the Board is
proposing to adopt by regulation a set of
standards based on the Core Principles
7 See the full PSR policy at https://
www.federalreserve.gov/paymentsystems/
psr_policy.htm. The Board requested comment on
these standards prior to adopting them as part of its
PSR policy. See 71 FR 36800 (June 28, 2006) and
72 FR 2518 (Jan. 19, 2007).
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and CPSS–IOSCO Recommendations to
implement section 805(a) of the DoddFrank Act.
The Board believes, however, that it
should adopt a modified version of the
standards for the purpose of section
805(a). In particular, the Board is
proposing to adopt by regulation only
those Core Principles and CPSS–IOSCO
Recommendations, or portions thereof,
that directly apply to an FMU’s riskmanagement or operational framework,
rather than those standards that apply
more generally to financial markets (for
example, market convention, presettlement activities) or regulators (for
example, regulation and oversight). The
Board acknowledges that the scope of
the standards is broad. For example, the
Core Principles and the CPSS–IOSCO
Recommendations contain a standard
requiring a clear and well founded legal
framework, which includes legislation
and administrative rulemaking. While
the Board acknowledges that an FMU
cannot control or dictate legislation or
regulatory rulemaking, it expects that a
designated FMU will manage its legal
risk within the context of current
applicable statutes and regulations, in
ways such as ensuring that its rules,
procedures, and contractual provisions
are clear and accessible to participants
and such rules, procedures, and
contractual provisions will be
enforceable with a high degree of
certainty. In order to facilitate
compliance, designated FMUs may refer
to the CPSS and CPSS–IOSCO
documents for background.
The Board expects to interpret and
apply the proposed standards consistent
with its interpretation and application
of those standards under its existing
PSR policy. For instance, when
considering the adequacy of risk
controls or the sufficiency of financial
resources that a payment system, central
securities depository, or central
counterparty would require to complete
timely settlement in the event the
participant with the largest settlement
obligation is unable to complete
settlement, the Board usually has
interpreted the term ‘‘participant’’ to
mean the largest family of affiliated
participants where there is more than
one affiliated participant.8 Furthermore,
the Board would continue to expect a
central securities depository that
extends intraday credit to its
participants to institute risk controls
that cover fully its credit risk exposure
to all participants, not only the
participant with the largest payment
8 See, for example, proposed standards in
§§ 234.3(a)(5) and 234.4(a)(18).
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Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules
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obligation.9 In addition, the Board
would expect a designated FMU to meet
the sound practices set forth in the
‘‘Interagency Paper on Sound Practices
to Strengthen the Resilience of the U.S.
Financial System’’ as one element of
complying with the risk-management
standards in proposed §§ 234.3(a)(7) and
234.4(a)(4).10 Specifically, a designated
FMU should develop the capacity to
recover and resume its payment,
clearing, and settlement activities
within the business day on which the
disruption occurs with the overall goal
of achieving recovery and resumption
within two hours after an event.11 The
Board requests comment on whether
these provisions need further definition
in the text of the proposed standards.
The Board believes that the adoption
of risk-management standards under
Title VIII that are based on the current
international standards will have
several important benefits, including
easing the potential burden for
designated FMUs to comply with the
standards; reducing potential conflicts
among regulators regarding prudential
requirements; providing a common
framework among relevant regulators for
overseeing and assessing the risks and
risk management of FMUs with crossmarket, cross-border, or cross-currency
operations; aiding international efforts
to strengthen the risk management of
critical FMUs; and reducing systemic
risk.
The Board requests comment on the
set of standards set out in the proposed
rule and the use of CPSS and CPSS–
IOSCO documents as further
information. In particular, given the
familiarity of most FMUs with the
existing relevant international
standards, the Board requests comment
on whether the proposed standards
provide sufficient guidance for
designated FMUs to comply with the
standards pursuant to Title VIII of the
Dodd-Frank Act.
The CPSS and IOSCO are currently
reviewing the three sets of international
standards. This review is intended to
strengthen and clarify the standards
based on experience with the Core
Principles and CPSS–IOSCO
Recommendations since their
publication and to incorporate lessons
learned during the recent financial
9 See
proposed standard in § 234.4(a)(15).
interagency paper is available at https://
www.federalreserve.gov/boarddocs/SRLETTERS/
2003/SR0309a1.pdf.
11 This interpretation is consistent with the
Board’s supervision of banking organizations that
are core clearing and settlement organizations or act
as large-value payment system operators. See
Supervision and Regulation letter 03–9 (May 28,
2003) at https://www.federalreserve.gov/boarddocs/
srletters/2003/sr0309.htm.
10 The
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crisis. The CPSS and IOSCO published
a consultative report on March 10, 2011;
final international standards are
expected in early 2012.12 At that time,
the Board anticipates that it will review
the new standards, consult with other
appropriate agencies and the Council,
and likely seek public comment on the
adoption of revised standards for
designated FMUs under section 805(a)
of the Dodd-Frank Act based on the new
international standards.
Payment systems. Proposed § 234.3(a)
sets out risk-management standards for
designated FMUs that operate as
payment systems, in accordance with
section 805(a) of the Dodd-Frank Act.
The Board is proposing a set of
standards based on the Core Principles
for such designated FMUs. The Core
Principles are widely accepted by the
international regulatory community,
and numerous payment systems around
the world already follow them. These
standards address the types of areas of
supervisory concern for designated
FMUs set out in section 805(c) of the
Dodd-Frank Act. For example, the
standards address risk-management
policies and procedures, participant
default policies and procedures, and the
ability to complete timely settlement of
payments.
Proposed § 234.3(b) clarifies that the
Board will apply the standards set out
in proposed § 234.3(a) in its supervision
of designated FMUs that operate as
payment systems and for which the
Board is the Supervisory Agency. All
designated FMUs are expected to
employ a risk-management framework
that is appropriate for their risks, so the
Board may require a particular
designated FMU to exceed the standards
set out in the proposed rules in this
notice. To that end, § 234.3(b) states that
the Board may, by order, apply
heightened risk-management standards
to a particular FMU in response to the
risks presented by that FMU.
The Board requests comment on all
aspects of the appropriateness of the
proposed standards for designated
FMUs that are payment systems,
including whether there are any areas of
supervisory concern regarding a
payment system’s operations that are
not sufficiently addressed by the
proposed rules. The Board also requests
comment on whether the proposed
standards achieve the statutory
objectives outlined above to (1) promote
robust risk management, (2) promote
safety and soundness, (3) reduce
12 See consultative report for Principles for
Financial Market Infrastructures at https://
www.bis.org/publ/cpss94.htm.
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systemic risks, and (4) support the
stability of the broader financial system.
Central securities depositories and
central counterparties. Proposed
§ 234.4(a) of the proposed rule sets out
risk-management standards for
designated FMUs that operate as central
securities depositories or central
counterparties, in accordance with
section 805(a) of the Dodd-Frank Act.
Each proposed standard states whether
it is applicable to a central securities
depository, a central counterparty, or
both.
Most designated FMUs that operate as
central securities depositories or central
counterparties will be designated
clearing entities subject to the riskmanagement standards promulgated by
the CFTC or SEC. The Board is
proposing standards for designated
FMUs that operate as central securities
depositories, central counterparties, or
both, to address the unlikely event that
a designated FMU operates as a central
securities depository or central
counterparty and is not required to be
registered as a clearing agency or
derivatives clearing organization with
the SEC or CFTC, respectively. Pursuant
to section 805(a)(1) of the Dodd-Frank
Act, the Board’s risk-management
standards apply to any designated FMU
that is otherwise not subject to the
jurisdiction of the SEC or the CFTC.13
The Board is proposing a set of
standards for such designated FMUs
that is based on the majority of the
CPSS–IOSCO Recommendations
presented in a modified format.
Specifically, the Board is proposing to
prescribe only those portions of the
CPSS–IOSCO Recommendations that
apply directly to FMUs, rather than
those portions that apply to market
convention, pre-settlement activities,
and regulation and oversight, which are
outside the control of the individual
FMUs and are more appropriately
addressed by other entities.14 While the
Board endorses the CPSS–IOSCO
13 12
U.S.C. 5464(a)(1).
Board is not proposing to include the
following CPSS–IOSCO Recommendations as riskmanagement standards for designated FMUs:
Recommendations 2 (trade confirmation), 3
(settlement cycles), 4 (central counterparties), 5
(securities lending), 12 (protection of customers’
securities), and 18 (regulation and oversight) of the
Recommendations for Securities Settlement
Systems and recommendation 15 (regulation and
oversight) in the Recommendations for Central
Counterparties. In addition, the Board is not
proposing to prescribe a rule to adopt
Recommendation 16 in the Recommendations for
Securities Settlement Systems (communication
procedures and standards) because the Board
believes that at this time the purpose of this
recommendation is sufficiently captured in the
proposed risk-management standard regarding the
efficient operation of a central securities depository.
14 The
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Recommendations in their entirety as a
policy matter, its primary interest for
purposes of this rulemaking is in those
recommendations related to the clearing
and settlement aspects of financial
transactions, including the delivery of
securities or other financial instruments
against payment, and related risks. In
addition, the standards in the
Recommendations for Securities
Settlement Systems and the
Recommendations for Central
Counterparties that overlap significantly
have been consolidated to avoid
repetition.
Finally, the Board has modified the
margin-related standards set forth in the
Recommendations for Central
Counterparties by adding two
components on testing set forth in
proposed § 234.4(a)(17). The
components added by the Board are
consistent with the frequencies
recommended in the explanatory text of
the Recommendations for Central
Counterparties; however, proposed
§ 234.4(a)(17)(i) would introduce more
specific parameters on who may
conduct model validations for central
counterparties.15 In conducting
supervision of central counterparties,
the Board typically has required systems
to employ a qualified, independent
party to conduct validations of proposed
and existing models to evaluate the
performance of the model, along with
parameters and assumptions, in a range
of scenarios. The Board believes that in
order for the validator to offer
independent, unbiased conclusions and
recommendations, the model validation
should be performed by a person who
is not responsible for developing the
margin model and does not report to a
person who performs these functions. A
central counterparty’s margin model is a
critical component in its riskmanagement framework and should be
tested rigorously and validated at least
annually to ensure it is performing
reliably and achieving the desired
coverage. The Board requests comment
on whether the proposed rule for model
validation is sufficiently clear. The
Board also requests comment on all
aspects of the proposed rule, including
15 Proposed § 234.4(a)(17)(i)—(ii) are generally
consistent with Recommendations 4 and 5 in the
Recommendations for Central Counterparties.
Proposed rule 234.4.(17)(i) is based on
Recommendation 5 (financial resources), paragraph
4.5.4, that recommends that a central counterparty
conduct comprehensive stress tests involving a full
validation of model parameters and assumptions at
least annually. Proposed § 234.4(17)(ii) is based on
Recommendation 4 (margin requirements),
paragraph 4.4.2, that states that margin models and
parameters should be reviewed and backtested
regularly (at least quarterly) to assess the reliability
of the methodology in achieving the desired
coverage.
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the proposed frequency and whether a
model validation should be triggered as
a result of any material change to a
central counterparty, such as revisions
to the margin model, introduction of
new products, or formation of new
margining arrangements (for example,
portfolio or cross-margining).
The Board believes that the standards
in proposed § 234.4(a) appropriately
address the types of areas of supervisory
concern set out in section 805(c) of the
Dodd-Frank Act. For example, the
standards address collateral
requirements and the ability to complete
timely clearing and settlement of
financial transactions for central
securities depositories, and margin
requirements and counterparty default
policies and procedures for central
counterparties.
Proposed § 234.4(b) clarifies that the
Board will apply the standards in
proposed § 234.4(a) in its supervision of
designated FMUs that operate as a
central securities depository or a central
counterparty and for which the Board is
the Supervisory Agency. A designated
FMU should comply with the standards
that are applicable to it as determined
by its function as a central securities
depository, a central counterparty, or
both. In addition, proposed § 234.4(b)
states that the Board may, by order,
apply heightened risk-management
standards to a particular FMU in
response to the risks presented by that
FMU, for the same reasons as discussed
above regarding heightened standards
for designated FMUs operating as
payment systems.
The Board requests comment on all
aspects of the proposed standards for
designated FMUs that act as central
securities depositories or central
counterparties, including whether there
are any areas of supervisory concern
regarding the operations of a central
securities depository or a central
counterparty that are not sufficiently
addressed by the proposed rules. The
Board also requests comment on
whether these standards achieve the
statutory objectives outlined above to (1)
promote robust risk management, (2)
promote safety and soundness, (3)
reduce systemic risks, and (4) support
the stability of the broader financial
system.
The Board also requests comment on
all aspects of proposed rules in §§ 234.3
and 234.4, but, in particular, the Board
requests comment on the following
specific issues:
• Under §§ 234.3(a)(5), 234.4(a)(2),
234.4(a)(15), and 234.4(a)(18), should
the Board require designated FMUs to
maintain sufficient financial resources
to withstand the default by the
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18449
participant with the largest exposure or
obligation in extreme but plausible
market conditions, where participant
means the family of affiliated
participants where there is more than
one affiliated participant (‘‘cover one’’);
or should the Board require sufficient
financial resources to withstand defaults
by the two participants, plus any
affiliated participants, with the largest
exposures or obligations in extreme but
plausible market conditions (‘‘cover
two’’)? Should the Board require that
financial resource requirements be
different for certain types of designated
FMUs in the same category, such as
central counterparties, depending on the
risk and other characteristics of the
particular products that it clears or
settles? What competitive impacts, if
any, should the Board consider?
• How would a cover two
requirement compare with the current
practices of payment, clearing, and
settlement systems? What would be the
expected incremental financial resource
costs, separately including incremental
liquidity costs on the system, and its
participants, in connection with
potentially increasing the current cover
one requirement to a cover two
requirement?
D. Material Changes to Rules,
Procedures, or Operations Requiring
Advanced Notice
As noted above, section 806(e)(1) of
the Dodd-Frank Act requires a
designated FMU to provide 60 days’
advance notice to its Supervisory
Agency of any changes to its rules,
procedures, or operations that
‘‘materially affect the nature or level of
risks presented.’’ Section 806(e) further
requires each Supervisory Agency to
describe in a rule what changes are
considered material and thus would
require advance notice by the
designated FMU. The Board is currently
evaluating the manner in which these
types of advance notice should be
submitted. The Board will provide
guidance at a future date regarding the
advance notice submission procedures.
Proposed § 234.5(a) requires
designated FMUs for which the Board is
the Supervisory Agency to provide the
Board with 60 days’ advance notice of
any proposed change to its rules,
procedures, or operations that could
materially affect the nature or level of
risks presented by the designated FMU.
The proposed rule includes procedural
requirements regarding such notices,
such as the required contents of the
notices and the procedures and timing
for the methods for approving such
changes. These provisions of the
proposed rules essentially reiterate
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similar provisions in section 806(e) of
the Dodd-Frank Act.
As required by section 806(e), the
Board is proposing to define under
§ 234.5(c) changes that ‘‘materially affect
the nature or level of risks presented’’ as
those that could be reasonably expected
to affect the performance of payment,
clearing, or settlement functions or the
overall nature or level of risk (including
credit, liquidity, settlement, legal, or
operational risks) presented by the
designated FMU. Under this proposed
definition, material changes would
generally include changes that may
affect the designated FMU’s ability or
approach to measure or manage the
risks posed by or to itself. Material
changes also include changes to the
designated FMU’s design that not only
affect the FMU and its direct
participants, but, even when properly
implemented, could also affect the
financial system more broadly. For
example, given the operational and risk
interdependencies of a designated FMU,
it is possible that attempts to reduce or
limit one type of risk could lead to the
concentration or creation of different
risks. Material changes, therefore, are
not limited to those changes that would
adversely affect or increase the risks of
the FMU, and include those that may
transfer or transform risks.
To assist designated FMUs in
determining whether a proposed change
is material, the Board’s proposed rule
sets out a non-exclusive list of changes
that would be considered material and
require advance notice to the Board.
Under the proposed rule, material
changes would include, but not be
limited to, changes that affect
participant eligibility or access criteria;
product eligibility; risk management;
settlement failure or default procedures;
financial resources; business continuity
and disaster recovery plans; daily or
intraday settlement procedures; the
scope of services, including the addition
of a new service or discontinuation of
an existing service; technical design or
operating platform, which result in
nonroutine changes to the underlying
technological framework for payment,
clearing, or settlement functions; or
governance.
The proposed rule also includes a
non-exclusive list of routine changes to
a designated FMU’s rules, procedures,
or operations that will not be deemed to
materially affect an FMU’s nature or
level of risks or impact or cause
disruption to the financial system more
broadly. The Board believes the relevant
safety and soundness issues associated
with these routine changes are more
appropriately addressed through
ongoing communications with the
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designated FMU rather than through the
formal advance notice process under
section 806(e) of the Dodd-Frank Act.
For the purposes of the advance notice
provision, changes that would not be
deemed to materially affect the FMU’s
risks include, but are not limited to,
changes to an existing rule, procedure,
or operation that do not modify the
contractual rights or obligations of the
designated FMU or persons using its
payment, clearing, or settlement
services; changes to an existing
procedure, control, or service that do
not adversely affect the safeguarding of
securities, collateral, or funds in the
custody or control of the designated
FMU or for which it is responsible;
routine technology systems upgrades;
changes related solely to the
administration of the designated FMU
or related to the routine, daily
administration, direction, and control of
employees; or clerical changes and other
nonsubstantive revisions to rules,
procedures, or other documentation.
The material and nonmaterial lists are
not exhaustive regarding the types of
changes that the Board may deem
material under section 806(e). There
would be many proposed changes to a
designated FMU’s rules, procedures, or
operations that are not included in
either list. If a designated FMU had any
question regarding whether a particular
change to a rule, procedure, or
operation, which was not covered by
either list, met the general materiality
standard, the Board anticipates that the
FMU would contact Board staff.
The Board requests comment on all
aspects of the proposed rule regarding
changes to rule, procedures, or
operations of a designated FMU. The
Board requests comment on whether the
proposed rule’s provisions regarding the
requirements, content, and timing of
advance notices of proposed changes are
clear. In addition, the Board requests
comment on whether the proposed nonexclusive illustrative lists for material
and nonmaterial changes to an FMU’s
rules, procedures, or operations would
be helpful to designated FMUs in
determining whether advance notice of
such changes is required. The Board
also requests comment on whether there
are any areas or items on either list that
should be deleted as inappropriate.
Finally, the Board requests comment on
whether there are other areas or items
that appropriately should be added to
either list as material or not material to
an FMU’s risks. In responding to these
questions, commenters are requested to
explain why they believe an item or area
on either list should be deleted or
added.
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III. Administrative Law Matters
A. Regulatory Flexibility Act Analysis
Congress enacted the Regulatory
Flexibility Act (the ‘‘RFA’’) (5 U.S.C. 601
et seq.) to address concerns related to
the effects of agency rules on small
entities, and the Board is sensitive to the
impact its rules may impose on small
entities. The RFA requires agencies
either to provide an initial regulatory
flexibility analysis with a proposed rule
or to certify that the proposed rule will
not have a significant economic impact
on a substantial number of small
entities. In accordance with section 3(a)
of the RFA, the Board has reviewed the
proposed regulation. In this case, the
proposed rule would apply to FMUs
that are identified and designated by the
Council as systemically important to the
U.S. financial system. Based on current
information, the Board believes that the
payment system FMUs that would likely
be designated by the Council would not
be ‘‘small entities’’ for purposes of the
RFA, and so, the proposed rule likely
would not have a significant economic
impact on a substantial number of small
entities (5 U.S.C. 605(b)). The authority
to designate systemically important
FMUs, however, resides with the
Council, rather than the Board, and the
Board cannot therefore be assured of the
identity of the FMUs that the Council
may designate in the future.
Accordingly, an Initial Regulatory
Flexibility Analysis has been prepared
in accordance with 5 U.S.C. 603, based
on current information. The Board will,
if necessary, conduct a final regulatory
flexibility analysis after consideration of
comments received during the public
comment period.
1. Statement of the need for,
objectives of, and legal basis for, the
proposed rule. The Board is proposing
a regulation to implement certain
provisions of Title VIII of the DoddFrank Act. Section 805(a)(1)(A) of the
Dodd-Frank Act requires the Board to
promulgate risk-management standards
governing the operations related to the
payment, clearing, and settlement
activities of designated FMUs. The
proposed rule clarifies that the Board
would apply the standards set out in the
proposed rule to designated FMUs for
which the Board is the Supervisory
Agency. In addition, under section
806(e) of the Dodd-Frank Act, the Board
is required to prescribe regulations
setting forth the standards for
determining when advance notice is
required to be provided by a designated
FMU for which the Board is the
Supervisory Agency that proposes to
change its rules, procedures, or
operations that could materially affect
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the nature or level of risks presented by
the designated FMU. The Board believes
that the proposed regulation
implements Congress’s requirement that
the Board prescribe regulations that
carry out the purposes of Title VIII of
the Dodd-Frank Act.
2. Small entities affected by the
proposed rule. The proposed rule would
affect FMUs that the Council designates
as systemically important to the U.S.
financial system. The Board estimates
that fewer than five large-value payment
systems would meet these conditions
and be affected by this proposed rule.
Pursuant to regulations issued by the
Small Business Administration (the
‘‘SBA’’) (13 CFR 121.201), a ‘‘small
entity’’ includes an establishment
engaged in providing financial
transaction processing, reserve and
liquidity services, or clearinghouse
services with an average revenue of $7
million or less (NAICS code 522320).
Based on current information, the Board
does not believe that any of the payment
systems that would likely be designated
by the Council would be ‘‘small entities’’
pursuant to the SBA regulation. The
Board does not at this time believe that,
pursuant to section 803(8) of the DoddFrank Act, it would be the Supervisory
Agency for any FMU that operates as a
central securities depository or a central
counterparty and that would likely be
designated by the Council. The Board
seeks information and comment on the
number of small entities to which the
proposed rule would apply.
3. Projected reporting, recordkeeping,
and other compliance requirements.
The proposed rule imposes certain
reporting and recordkeeping
requirements for a designated FMU.
(See, for example, § 234.3(a)(3) of the
proposed rule (requiring clearly defined
procedures for the management of credit
risks and liquidity risks), §§ 234.5(a)(1)
and (2) of the proposed rule (requiring
advance notice of changes that could
materially affect the nature or level of
risks presented by the designated FMU),
and §§ 234.5(a)(2) and (3) of the
proposed rule (requiring notice of an
emergency change implemented by a
designated FMU).) The proposed rule
also contains a number of compliance
requirements, including the standards
that the designated FMU must meet,
such as having a well-founded legal
basis under all relevant jurisdictions
and having rules and procedures that
enable participants to understand
clearly the FMU’s impact on each of the
financial risks they incur by
participation in it. Payment systems
under the Board’s jurisdiction
(including certain payment systems the
Board believes could be designated as
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systemically important) generally
already have implemented these
standards, so the proposed rule would
not likely impose additional costs on
those payment systems. The Board seeks
information and comment on any costs,
compliance requirements, or changes in
operating procedures that would arise
from the application of the proposed
rule.
4. Identification of duplicative,
overlapping, or conflicting Federal
rules. The Board does not believe that
any Federal rules conflict with the
proposed rule. There is an overlap
between the risk-management standards
for FMUs in the proposed rule and the
Board’s PSR policy; however, the
proposed standards are consistent with
the PSR policy. The Board seeks
comment regarding any statutes or
regulations that would duplicate,
overlap, or conflict with the proposed
rule.
5. Significant alternatives to the
proposed rule. The Board is unaware of
any significant alternatives to the
proposed rule that accomplish the
stated objectives of the Dodd-Frank Act
and that minimize any significant
economic impact of the proposed rule
on small entities. FMUs that are
designated as systemically important by
the Council and present similar risk
profiles should be held to consistent
standards. Promoting uniform standards
for designated FMUs is one of the stated
purposes of Title VIII of the Dodd-Frank
Act.16 The standards in the proposed
rule are being proposed for adoption in
part because the payment systems that
would likely be designated by the
Council are already familiar with the
international standards and could
implement them with relatively less
burden than if the Board adopted a
wholly new and unfamiliar set of
standards at this time. Similarly, the
standards in the proposed rule for
central securities depositories and
central counterparties are a consolidated
and streamlined compilation. They are
based on the CPSS–IOSCO
Recommendations, and most central
securities depositories and central
counterparties are already familiar with
them. The Board requests comment on
whether there are additional ways to
reduce regulatory burden on small
entities associated with this proposed
rule.
B. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR 1320, Appendix A.1), the Board
reviewed the proposed rule under the
16 See
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18451
authority delegated to the Board by the
Office of Management and Budget. For
purposes of calculating burden under
the Paperwork Reduction Act, a
‘‘collection of information’’ involves 10
or more respondents. Any collection of
information addressed to all or a
substantial majority of an industry is
presumed to involve 10 or more
respondents (5 CFR 1320.3(c),
1320.3(c)(4)(ii)). The Board estimates
there are fewer than 10 respondents,
and these respondents do not represent
all or a substantial majority of the
participants in payment, clearing, and
settlement systems. Therefore, no
collections of information pursuant to
the Paperwork Reduction Act are
contained in the proposed rule.
IV. Statutory Authority
Pursuant to the authority in Title VIII
of the Dodd-Frank Act, particularly
sections 805(a) and 806(e) (12 U.S.C.
5464(a) and 5465(e)), the Board
proposes to adopt part 234 to govern
designated financial market utilities
(Regulation HH).
V. Text of Proposed Rules
List of Subjects in 12 CFR Part 234
Banks, Banking, Credit, Electronic
funds transfers, Financial market
utilities, Securities.
Authority and Issuance
For the reasons set forth in the
preamble, the Board proposes to amend
12 CFR, Chapter II by adding part 234
as set forth below.
PART 234—DESIGNATED FINANCIAL
MARKET UTILITIES (REGULATION HH)
Sec.
234.1 Authority, purpose, and scope
234.2 Definitions
234.3 Standards for payment systems
234.4 Standards for central securities
depositories and central counterparties
234.5 Changes to rules, procedures, or
operations
Authority: 12 U.S.C. 5461 et seq.
§ 234.1
Authority, purpose, and scope.
(a) Authority. This part is issued
under the authority of sections 805, 806,
and 810 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act) (Pub. L. 111–203, 124
Stat. 1376; 12 U.S.C. 5464, 5465, and
5469).
(b) Purpose and scope. This part
establishes risk-management standards
governing the operations related to the
payment, clearing, and settlement
activities of designated financial market
utilities. The risk-management
standards do not apply, however, to a
designated financial market utility that
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is a derivatives clearing organization
registered under section 5b of the
Commodity Exchange Act (7 U.S.C. 7a–
1) or a clearing agency registered with
the Securities and Exchange
Commission under section 17A of the
Securities Exchange Act of 1934 (15
U.S.C. 78q–1), which are governed by
the risk-management standards
promulgated by the Commodity Futures
Trading Commission or the Securities
and Exchange Commission,
respectively, for which each is the
Supervisory Agency (as defined in
§ 234.2). In addition, this part sets out
requirements and procedures for a
designated financial market utility that
proposes to make a change to its rules,
procedures, or operations that could
materially affect the nature or level of
risks presented by the designated
financial market utility and for which
the Board is the Supervisory Agency.
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§ 234.2
Definitions.
(a) Central counterparty means a
designated financial market utility that
interposes itself between the
counterparties to trades, acting as the
buyer to every seller and the seller to
every buyer.
(b) Central securities depository
means a designated financial market
utility that holds securities in custody to
enable securities transactions to be
processed by means of book entries or
a designated financial market utility that
enables securities to be transferred and
settled by book entry either free of or
against payment.
(c) Designated financial market utility
means a financial market utility (as
defined in paragraph (d) of this section)
that the Financial Stability Oversight
Council has designated as systemically
important under section 804 of the
Dodd-Frank Act (12 U.S.C. 5463).
(d) Financial market utility has the
same meaning as the term is defined in
section 803(6) of the Dodd-Frank Act
(12 U.S.C. 5462(6)).
(e) Payment system means a
designated financial market utility that
consists of a set of payment instructions,
procedures, and rules for the transfer of
funds among system participants.
(f) Supervisory Agency has the same
meaning as the term is defined in
section 803(8) of the Dodd-Frank Act
(12 U.S.C. 5462(8)).
§ 234.3
Standards for payment systems.
(a) A designated financial market
utility that operates as a payment
system should meet or exceed the
following risk-management standards
with respect to its payment, clearing,
and settlement activities:
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(1) The payment system should have
a well-founded legal basis under all
relevant jurisdictions.
(2) The payment system’s rules and
procedures should enable participants
to have a clear understanding of the
payment system’s impact on each of the
financial risks they incur through
participation in it.
(3) The payment system should have
clearly defined procedures for the
management of credit risks and liquidity
risks, which specify the respective
responsibilities of the payment system
operator and the participants and which
provide appropriate incentives to
manage and contain those risks.
(4) The payment system should
provide prompt final settlement on the
day of value, preferably during the day
and at a minimum at the end of the day.
(5) A payment system in which
multilateral netting takes place should,
at a minimum, be capable of ensuring
the timely completion of daily
settlements in the event of an inability
to settle by the participant with the
largest single settlement obligation.
(6) Assets used for settlement should
preferably be a claim on the central
bank; where other assets are used, they
should carry little or no credit risk and
little or no liquidity risk.
(7) The payment system should
ensure a high degree of security and
operational reliability and should have
contingency arrangements for timely
completion of daily processing.
(8) The payment system should
provide a means of making payments
that is practical for its users and
efficient for the economy.
(9) The payment system should have
objective and publicly disclosed criteria
for participation, which permit fair and
open access.
(10) The payment system’s
governance arrangements should be
effective, accountable, and transparent.
(b) Designated financial market
utilities that operate as payment systems
and for which the Board is the
Supervisory Agency must meet or
exceed the risk-management standards
in § 234.3(a). The Board, by order, may
apply heightened risk-management
standards to an individual designated
financial market utility in accordance
with the risks presented by the
designated financial market utility.
§ 234.4 Standards for central securities
depositories and central counterparties.
(a) A designated financial market
utility that operates as a central
securities depository or a central
counterparty should meet or exceed the
following risk-management standards
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with respect to its payment, clearing,
and settlement activities:
(1) The central securities depository
or central counterparty should have a
well-founded, transparent, and
enforceable legal framework for each
aspect of its activities in all relevant
jurisdictions.
(2) The central securities depository
or central counterparty should require
participants to have sufficient financial
resources and robust operational
capacity to meet obligations arising from
participation in the central securities
depository or central counterparty. The
central securities depository or central
counterparty should have procedures in
place to monitor that participation
requirements are met on an ongoing
basis. The central securities depository’s
or central counterparty’s participation
requirements should be objective and
publicly disclosed, and permit fair and
open access.
(3) The central securities depository
or central counterparty should hold
assets in a manner whereby risk of loss
or of delay in its access to them is
minimized. Assets invested by a central
securities depository or central
counterparty should be held in
instruments with minimal credit,
market, and liquidity risks.
(4) The central securities depository
or central counterparty should identify
sources of operational risk and
minimize them through the
development of appropriate systems,
controls, and procedures; have systems
that are reliable and secure, and have
adequate, scalable capacity; and have
business continuity plans that allow for
timely recovery of operations and
fulfillment of the central securities
depository’s or central counterparty’s
obligations.
(5) The central securities depository
or central counterparty should employ
money settlement arrangements that
eliminate or strictly limit its settlement
bank risks, that is, its credit and
liquidity risks from the use of banks to
effect money settlements with its
participants and should require funds
transfers to the central securities
depository or central counterparty be
final when effected.
(6) The central securities depository
or central counterparty should be costeffective in meeting the requirements of
participants while maintaining safe and
secure operations.
(7) The central securities depository
or central counterparty should evaluate
the potential sources of risks that can
arise when the central securities
depository or central counterparty
establishes links either cross-border or
domestically to settle transactions or
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clear trades, and ensure that the risks
are managed prudently on an ongoing
basis.
(8) The central securities depository
or central counterparty should have
governance arrangements that are clear
and transparent to fulfill public interest
requirements and to support the
objectives of owners and participants
and should promote the effectiveness of
a central securities depository’s or
central counterparty’s risk-management
procedures.
(9) The central securities depository
or central counterparty should provide
market participants with sufficient
information for them to identify and
evaluate accurately the risks and costs
associated with using its services.
(10) The central securities depository
or central counterparty should establish
default procedures that ensure that the
central securities depository or central
counterparty can take timely action to
contain losses and liquidity pressures
and to continue meeting its obligations
and should provide for key aspects of
the default procedures to be publicly
available.
(11) The central securities depository
or central counterparty should ensure
that final settlement occurs no later than
the end of the settlement day and
should require that intraday or real-time
finality be provided where necessary to
reduce risks.
(12) The central securities depository
or central counterparty should eliminate
principal risk by linking securities
transfers to funds transfers in a way that
achieves delivery versus payment.
(13) The central securities depository
or central counterparty should state its
obligations with respect to physical
deliveries, and the risks from these
obligations should be identified and
managed.
(14) The central securities depository
should immobilize or dematerialize
securities certificates and transfer them
by book entry to the greatest extent
possible.
(15) The central securities depository
should institute risk controls that
include collateral requirements and
limits, and ensure timely settlement in
the event that the participant with the
largest payment obligation is unable to
settle when the central securities
depository extends intraday credit.
(16) The central counterparty should
measure its credit exposures to its
participants at least once a day and limit
its exposures to potential losses from
defaults by its participants in normal
market conditions so that the operations
of the central counterparty would not be
disrupted and non-defaulting
participants would not be exposed to
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losses that they cannot anticipate or
control.
(17) The central counterparty should
use margin requirements to limit its
credit exposures to participants in
normal market conditions and use riskbased models and parameters to set
margin requirements and review them
regularly. Specifically, the central
counterparty should—
(i) Provide for annual model
validation consisting of evaluating the
performance of the clearing agency’s
margin models and the related
parameters and assumptions associated
with such models by a qualified person
who does not perform functions
associated with the clearing agency’s
margin models (except as part of the
annual model validation) and does not
report to such a person.
(ii) Review and backtest margin
models and parameters at least
quarterly.
(18) The central counterparty should
maintain sufficient financial resources
to withstand, at a minimum, a default
by the participant to which it has the
largest exposure in extreme but
plausible market conditions.
(b) Designated financial market
utilities that operate as central securities
depositories or central counterparties
and for which the Board is the
Supervisory Agency must meet or
exceed the risk-management standards
in § 234.4(a). The Board, by order, may
apply heightened risk-management
standards to individual designated
financial market utilities in accordance
with the risks presented by the
designated financial market utility.
§ 234.5 Changes to rules, procedures, or
operations.
(a) Advance notice.
(1) A designated financial market
utility shall provide at least 60-days
advance notice to the Board of any
proposed change to its rules,
procedures, or operations that could
materially affect the nature or level of
risks presented by the designated
financial market utility.
(2) The notice of the proposed change
shall describe—
(i) The nature of the change and
expected effects on risks to the
designated financial market utility, its
participants, or the market; and
(ii) How the designated financial
market utility plans to manage any
identified risks.
(3) The Board may require the
designated financial market utility to
provide additional information
necessary to assess the effect the
proposed change would have on the
nature or level of risks associated with
PO 00000
Frm 00035
Fmt 4702
Sfmt 4702
18453
the utility’s payment, clearing, or
settlement activities and the sufficiency
of any proposed risk-management
techniques.
(4) A designated financial market
utility shall not implement a change to
which the Board has an objection.
(5) The Board will notify the
designated financial market utility of
any objection within 60 days from the
later of—
(i) The date the Board receives the
notice of proposed change; or
(ii) The date the Board receives any
further information it requests for
consideration of the notice.
(6) A designated financial market
utility may implement a change if it has
not received an objection to the
proposed change within 60 days of the
later of—
(i) The date the Board receives the
notice of proposed change; or
(ii) The date the Board receives any
further information it requests for
consideration of the notice.
(7) With respect to proposed changes
that raise novel or complex issues, the
Board may, by written notice during the
60-day review period, extend the review
period for an additional 60 days. Any
extension under this paragraph will
extend the time periods under
paragraphs (a)(5) and (a)(6) to 120 days.
(8) A designated financial market
utility may implement a proposed
change before the expiration of the
applicable review period if the Board
notifies the designated financial market
utility in writing that the Board does not
object to the proposed change and
authorizes the designated financial
market utility to implement the change
on an earlier date, subject to any
conditions imposed by the Board.
(b) Emergency changes.
(1) A designated financial market
utility may implement a change that
would otherwise require advance notice
under this section if it determines that—
(i) An emergency exists; and
(ii) Immediate implementation of the
change is necessary for the designated
financial market utility to continue to
provide its services in a safe and sound
manner.
(2) The designated financial market
utility shall provide notice of any such
emergency change to the Board as soon
as practicable and no later than 24 hours
after implementation of the change.
(3) In addition to the information
required for changes requiring advance
notice in paragraph (a)(2) of this section,
the notice of an emergency change shall
describe:
(i) The nature of the emergency; and
(ii) The reason the change was
necessary for the designated financial
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Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules
market utility to continue to provide its
services in a safe and sound manner.
(4) The Board may require
modification or rescission of the change
if it finds that the change is not
consistent with the purposes of the
Dodd-Frank Act or any applicable rules,
order or standards prescribed under
section 805(a) of the Dodd-Frank Act.
(c) Materiality.
(1) The term ‘‘materially affect the
nature or level of risks presented’’ in
paragraph (a)(1) of this section means
matters as to which there is a reasonable
possibility that the change could
materially affect the performance of
clearing, settlement, or payment
functions or the overall nature or level
of risk presented by the designated
financial market utility.
(2) A change to rules, procedures, or
operations that would materially affect
the nature or level of risks presented
includes, but is not limited to, changes
that affect the following:
(i) Participant eligibility or access
criteria;
(ii) Product eligibility;
(iii) Risk management;
(iv) Settlement failure or default
procedures;
(v) Financial resources;
(vi) Business continuity and disaster
recovery plans;
(vii) Daily or intraday settlement
procedures;
(viii) The scope of services, including
the addition of a new service or
discontinuation of an existing service;
(ix) Technical design or operating
platform, which results in non-routine
changes to the underlying technological
framework for payment, clearing, or
settlement functions; or
(x) Governance.
(3) A change to rules, procedures, or
operations that does not meet the
conditions of paragraph (c)(2) of this
section and would not materially affect
the nature or level of risks presented
includes, but is not limited to the
following:
(i) A change that does not modify the
contractual rights or obligations of the
designated financial market utility or
persons using its payment, clearing, or
settlement services;
(ii) A change to an existing procedure,
control, or service that does not
adversely affect the safeguarding of
securities, collateral, or funds in the
custody or control of the designated
financial market utility or for which it
is responsible;
(iii) A routine technology systems
upgrade;
(iv) A change related solely to the
administration of the designated
financial market utility or related to the
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18:37 Apr 01, 2011
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routine, daily administration, direction,
and control of employees; or
(v) A clerical change and other nonsubstantive revisions to rules,
procedures, or other documentation.
By order of the Board of Governors of the
Federal Reserve System, March 29, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011–7812 Filed 4–1–11; 8:45 am]
BILLING CODE 6210–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2011–0318; Directorate
Identifier 2010–CE–033–AD]
RIN 2120–AA64
Airworthiness Directives; Burl A.
Rogers (Type Certificate Previously
Held by William Brad Mitchell and
Aeronca, Inc.) Models 15AC and
S15AC Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to adopt a new
airworthiness directive (AD) for the
products listed above. This proposed
AD would require repetitive inspections
of the upper and lower main wing spar
cap angles for cracks and/or corrosion
and installing inspection access panels.
This AD would also require replacing
the wing spar cap angles if moderate or
severe corrosion is found and applying
corrosion inhibitor. This proposed AD
was prompted by reports of
intergranular exfoliation and corrosion
of the upper and/or lower wing main
spar cap angles found on the affected
airplanes. We are proposing this AD to
detect and correct cracks, intergranular
exfoliation and corrosion in the wing
main spar cap angles, which could
result in reduced strength of the wing
spar and the load carrying capacity of
the wing. This could lead to wing
failure and consequent loss of control.
DATES: We must receive comments on
this proposed AD by May 19, 2011.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
SUMMARY:
PO 00000
Frm 00036
Fmt 4702
Sfmt 4702
Room W12–140, 1200 New Jersey
Avenue, SE., Washington, DC 20590.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and
5 p.m., Monday through Friday, except
Federal holidays.
For service information identified in
this proposed AD, contact Burl’s
Aircraft, LLC, P.O. Box 671487,
Chugiak, Alaska 99567–1487; phone:
(907) 688–3715; fax (907) 688–5031;
e-mail burl@biginalaska.com; Internet:
https://www.burlac.com. You may
review copies of the referenced service
information at the FAA, Small Airplane
Directorate, 901 Locust, Room 301,
Kansas City, MO 64106. For information
on the availability of this material at the
FAA, call (816) 329–4148.
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov; or in person at the
Docket Management Facility between
9 a.m. and 5 p.m., Monday through
Friday, except Federal holidays. The AD
docket contains this proposed AD, the
regulatory evaluation, any comments
received, and other information. The
street address for the Docket Office
(phone: 800–647–5527) is in the
ADDRESSES section. Comments will be
available in the AD docket shortly after
receipt.
FOR FURTHER INFORMATION CONTACT: Eric
Wright, Aerospace Engineer, FAA,
Anchorage Aircraft Certification Office,
222 W. 7th Ave., #14, Anchorage,
Alaska 99513; telephone: (907) 271–
2648; fax: (907) 271–6365; e-mail:
eric.wright@faa.gov.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to send any written
relevant data, views, or arguments about
this proposal. Send your comments to
an address listed under the ADDRESSES
section.
Include ‘‘Docket No. FAA–2011–0318;
Directorate Identifier 2010–CE–033–AD’’
at the beginning of your comments. We
specifically invite comments on the
overall regulatory, economic,
environmental, and energy aspects of
this proposed AD. We will consider all
comments received by the closing date
and may amend this proposed AD
because of those comments.
We will post all comments we
receive, without change, to https://
www.regulations.gov, including any
personal information you provide. We
will also post a report summarizing each
substantive verbal contact we receive
about this proposed AD.
E:\FR\FM\04APP1.SGM
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Agencies
[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Proposed Rules]
[Pages 18445-18454]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-7812]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 234
[Regulation HH; Docket No. R-1412]
RIN 7100-AD71
Financial Market Utilities
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: Under section 805(a)(1)(A) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the ``Dodd-Frank Act''), the Board
of Governors of the Federal Reserve System (the ``Board'') is required
to promulgate risk-management standards governing the operations
related to the payment, clearing, and settlement activities of certain
financial market utilities (``FMUs'') that are designated as
systemically important by the Financial Stability Oversight Council
(the ``Council''). In addition, under section 806(e) of the Dodd-Frank
Act, the Board is required to prescribe regulations setting forth the
standards for determining when advance notice is required to be
provided by a designated FMU for which the Board is the Supervisory
Agency when the designated FMU proposes to change its rules,
procedures, or operations that could materially affect the nature or
level of risks presented by the designated FMU. The Board is proposing
new Part 234 to Title 12 of the Code of Federal Regulations to
implement these provisions of the Dodd-Frank Act.
DATES: Comments on this notice of proposed rulemaking must be received
by May 19, 2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1412 and
RIN No. AD-7100-AD71, by any of the following methods:
Agency Web site: https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jennifer A. Lucier, Manager (202) 872-
7581, Division of Reserve Bank Operations and Payment Systems;
Christopher W. Clubb, Senior Counsel (202) 452-3904, or Kara L.
Handzlik, Senior Attorney (202) 452-3852, Legal Division; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
[[Page 18446]]
I. Background
A. Financial Market Utilities
FMUs, such as payment systems, central securities depositories, and
central counterparties, are critical components of the nation's
financial system. FMUs are multilateral organizations that provide the
essential infrastructure to clear and settle payments and other
financial transactions, upon which the financial markets and the
broader economy rely to function effectively. Financial institutions,
such as banks, participate in FMUs pursuant to a common set of rules
and procedures, a technical infrastructure, and a risk-management
framework. The basic risks that FMUs must manage include credit risk,
liquidity risk, settlement risk, operational risk, and legal risk.
These risks arise between financial institutions and FMUs as they
settle payments and other financial transactions. The FMUs and their
participating institutions are responsible for managing these risks on
an individual and a collective basis.
Financial stability requires that the financial infrastructure,
including FMUs, be robust and well managed. If a systemically important
FMU fails to perform as expected or fails to measure, monitor, and
manage its risks effectively, it could pose significant risk to its
participants and the financial system more broadly. For example, the
inability of an FMU to complete settlement on time could create credit
or liquidity problems for its participants or other FMUs. An FMU,
therefore, should have an appropriate and robust risk-management
framework, including sound governance arrangements, and appropriate
policies and procedures to measure, monitor, and manage its risks.
B. Dodd-Frank Wall Street Reform and Consumer Protection Act
Title VIII of the Dodd-Frank Act, titled the ``Payment, Clearing,
and Settlement Supervision Act of 2010,'' was enacted to mitigate
systemic risk in the financial system and to promote financial
stability, in part, through enhanced supervision of designated FMUs.\1\
Under section 803, an FMU is defined as a person that manages or
operates a multilateral system for the purpose of transferring,
clearing, or settling payments, securities, or other financial
transactions among financial institutions or between financial
institutions and the person. Pursuant to section 804 of the Dodd-Frank
Act, the Council is required to designate those FMUs that the Council
determines are, or are likely to become, systemically important.\2\
Designation by the Council makes an FMU subject to the supervisory
framework set out in Title VIII.
---------------------------------------------------------------------------
\1\ The Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376, was
signed into law on July 21, 2010.
\2\ For these purposes, section 803(9) of the Dodd-Frank Act
defines ``systemically important'' as a situation in which the
failure of or a disruption to the functioning of an FMU could
create, or increase, the risk of significant liquidity or credit
problems spreading among financial institutions or markets and
thereby threaten the stability of the financial system of the United
States. 12 U.S.C. 5462(9). The Council issued an advance notice of
proposed rulemaking on the criteria for FMU designations on November
23, 2010 (see 75 FR 79982 (Dec. 21, 2010)).
---------------------------------------------------------------------------
Section 805(a)(1)(A) of the Dodd-Frank Act requires the Board to
prescribe, by rule or order, risk-management standards governing the
operations related to the payment, clearing, and settlement activities
of certain designated FMUs. With respect to a designated FMU that is a
derivatives clearing organization registered under section 5b of the
Commodity Exchange Act or a clearing agency registered under section
17A of the Securities Exchange Act of 1934 (collectively, ``designated
clearing entities''), the Commodity Futures Trading Commission
(``CFTC'') or the Securities and Exchange Commission (``SEC''),
respectively, may each prescribe regulations, in consultation with the
Council and the Board, containing applicable risk-management
standards.\3\
---------------------------------------------------------------------------
\3\ Dodd-Frank Act section 805(a)(2) 12 U.S.C. 5464(a)(2).
---------------------------------------------------------------------------
In prescribing the standards, section 805(a)(1) requires the Board
to take into consideration relevant international standards and
existing prudential requirements.\4\ In addition, as set out in section
805(b) of the Dodd-Frank Act, the objectives and principles for the
risk-management standards are to (1) promote robust risk management,
(2) promote safety and soundness, (3) reduce systemic risks, and (4)
support the stability of the broader financial system. Section 805(c)
of the Dodd-Frank Act also states that risk-management standards may
address areas such as (1) risk-management policies and procedures, (2)
margin and collateral requirements, (3) participant or counterparty
default policies and procedures, (4) the ability to complete timely
clearing and settlement of financial transactions, (5) capital and
financial resource requirements for designated FMUs, and (6) other
areas that are necessary to achieve the objectives and principles for
risk-management standards in section 805(b). Designated FMUs are
required to conduct their operations in compliance with the applicable
risk-management standards.
---------------------------------------------------------------------------
\4\ Section 805(a)(2) similarly requires the CFTC and SEC to
take into consideration relevant international standards and
existing prudential requirements when prescribing regulations
containing risk-management standards for designated clearing
entities.
---------------------------------------------------------------------------
In addition to compliance with the applicable risk-management
standards, section 806(e)(1)(B) of the Dodd-Frank Act requires a
designated FMU to provide at least 60 days' advance notice to its
Supervisory Agency (as defined below) of any proposed change to its
rules, procedures, or operations that could, as defined in rules of
each Supervisory Agency, materially affect the nature or level of risks
presented by the designated FMU. Each Supervisory Agency must prescribe
regulations that define and describe the standards for determining when
such advance notice is required. Under section 803(8) of the Dodd-Frank
Act, a ``Supervisory Agency'' means the federal agency that has primary
jurisdiction over a designated FMU under federal banking, securities,
or commodity futures laws.\5\
---------------------------------------------------------------------------
\5\ A Supervisory Agency includes the SEC and CFTC with respect
to their respective designated clearing entities (as defined above),
the appropriate federal banking agencies with respect to FMUs that
are institutions described in section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q)), and the Board with respect to a
designated FMU this is otherwise not subject to the jurisdiction of
any of the agencies listed above.
---------------------------------------------------------------------------
II. Explanation of Proposed Rules
A. Authority, Purpose, and Scope
Proposed Sec. 234.1(a) clarifies that sections 805, 806, and 810
of the Dodd-Frank Act provide the statutory authority for the Board to
promulgate the proposed part. Proposed Sec. 234.1(b) explains that the
proposed rules include risk-management standards for designated FMUs
and that this part does not apply to designated clearing entities
governed by the risk-management standards promulgated by the CFTC or
the SEC, as appropriate. Proposed Sec. 234.1(b) also clarifies that
the requirements and procedures in this part for a designated FMU that
proposes to make a change to its rules, procedures, or operations that
could materially affect the nature or level of risks presented by the
designated FMU apply only to designated FMUs for which the Board is the
Supervisory Agency.
B. Definitions
The proposed rule includes definitions that are necessary to
implement the rules. Several definitions (including ``designated
financial market
[[Page 18447]]
utility,'' ``financial market utility,'' and ``Supervisory Agency'')
reference the statutory language in section 803 of the Dodd-Frank Act.
Other proposed definitions (including ``central counterparty,''
``central securities depository,'' and ``payment system'') are based on
similar terms used in the risk-management standards issued by the
Committee on Payment and Settlement Systems (the ``CPSS'') and the
Technical Committee of the International Organization of Securities
Commissions (``IOSCO''), which are discussed in detail below. The Board
is requesting comment on all aspects of the proposed definitions except
those defined in the Dodd-Frank Act. In particular, the Board requests
comment on whether the definitions are clear and sufficiently detailed
and whether additional definitions are needed to implement the proposed
rules.
C. Risk-Management Standards for Designated FMUs
As noted above, in prescribing risk-management standards for
designated FMUs, section 805(a) of the Dodd-Frank Act directs the Board
to take into consideration relevant international standards and
existing prudential requirements. The current international standards
most relevant to risk management of FMUs are the standards developed by
the CPSS and IOSCO.\6\ In 2001, the CPSS published a set of principles
for the design and operation of systemically important payment systems
(the ``Core Principles''). That same year the CPSS and IOSCO jointly
issued a set of minimum standards for securities settlement systems
(the ``Recommendations for Securities Settlement Systems''). In 2004,
the CPSS and IOSCO jointly published recommendations for the risk
management of central counterparties (the ``Recommendations for Central
Counterparties,'' and collectively with the Recommendations for
Securities Settlement Systems, the ``CPSS-IOSCO Recommendations''). The
Board has adopted the three sets of standards in its Policy on Payment
System Risk (``PSR policy''). Furthermore, the Board has been guided by
this policy, in conjunction with relevant laws and other Federal
Reserve policies, when exercising its authority in (1) supervising
state member banks, Edge and agreement corporations, bank holding
companies, and clearinghouse arrangements, including the exercise of
authority under the Bank Service Company Act, where applicable; (2)
setting or reviewing the terms and conditions for use of Federal
Reserve payment and settlement services by system operators and
participants; (3) developing and applying policies for the provision of
intraday credit to Reserve Bank account holders; and (4) interacting
with other domestic and foreign financial system authorities on
payments and settlement risk issues.\7\ Thus, the Board has had several
years experience with interpreting and applying the three sets of
standards to payment, clearing, and settlement systems.
---------------------------------------------------------------------------
\6\ See full reports for the Core Principles for Systemically
Important Payment Systems (Core Principles) (https://www.bis.org/publ/cpss43.htm) and the CPSS-IOSCO Recommendations for Securities
Settlement Systems (Recommendations for Securities Settlement
Systems) (https://www.bis.org/publ/cpss46.htm) and Central
Counterparties (https://www.bis.org/publ/cpss64.htm) (Recommendations
for Central Counterparties).
\7\ See the full PSR policy at https://www.federalreserve.gov/paymentsystems/psr_policy.htm. The Board requested comment on these
standards prior to adopting them as part of its PSR policy. See 71
FR 36800 (June 28, 2006) and 72 FR 2518 (Jan. 19, 2007).
---------------------------------------------------------------------------
The Board believes that the Core Principles and the CPSS-IOSCO
Recommendations further the objectives and principles for designated
FMU standards set out in section 805(b) of the Dodd-Frank Act. These
international standards were formulated by central banks and securities
regulators to promote sound risk-management practices, encourage the
safe design and operation of relevant FMUs, reduce systemic risk, and,
in certain instances, improve selected market practices or actions by
regulators. The Federal Reserve collaborated with participating
financial system authorities in developing the three sets of standards.
In addition, the SEC and CFTC participated in the development of the
CPSS-IOSCO Recommendations. The Core Principles and Recommendations for
Securities Settlement Systems are also part of the Financial Stability
Board's Compendium of Standards, which has been widely recognized,
supported, and endorsed by U.S. authorities as integral to
strengthening the stability of the financial system. Furthermore, while
the Recommendations for Central Counterparties have not been recognized
formally by the Financial Stability Board, they are widely accepted and
applied by central banks and market regulators around the world. The
Board, therefore, believes that the Core Principles and CPSS-IOSCO
Recommendations are an appropriate basis for risk-management standards
for designated FMUs, and the Board is proposing to adopt by regulation
a set of standards based on the Core Principles and CPSS-IOSCO
Recommendations to implement section 805(a) of the Dodd-Frank Act.
The Board believes, however, that it should adopt a modified
version of the standards for the purpose of section 805(a). In
particular, the Board is proposing to adopt by regulation only those
Core Principles and CPSS-IOSCO Recommendations, or portions thereof,
that directly apply to an FMU's risk-management or operational
framework, rather than those standards that apply more generally to
financial markets (for example, market convention, pre-settlement
activities) or regulators (for example, regulation and oversight). The
Board acknowledges that the scope of the standards is broad. For
example, the Core Principles and the CPSS-IOSCO Recommendations contain
a standard requiring a clear and well founded legal framework, which
includes legislation and administrative rulemaking. While the Board
acknowledges that an FMU cannot control or dictate legislation or
regulatory rulemaking, it expects that a designated FMU will manage its
legal risk within the context of current applicable statutes and
regulations, in ways such as ensuring that its rules, procedures, and
contractual provisions are clear and accessible to participants and
such rules, procedures, and contractual provisions will be enforceable
with a high degree of certainty. In order to facilitate compliance,
designated FMUs may refer to the CPSS and CPSS-IOSCO documents for
background.
The Board expects to interpret and apply the proposed standards
consistent with its interpretation and application of those standards
under its existing PSR policy. For instance, when considering the
adequacy of risk controls or the sufficiency of financial resources
that a payment system, central securities depository, or central
counterparty would require to complete timely settlement in the event
the participant with the largest settlement obligation is unable to
complete settlement, the Board usually has interpreted the term
``participant'' to mean the largest family of affiliated participants
where there is more than one affiliated participant.\8\ Furthermore,
the Board would continue to expect a central securities depository that
extends intraday credit to its participants to institute risk controls
that cover fully its credit risk exposure to all participants, not only
the participant with the largest payment
[[Page 18448]]
obligation.\9\ In addition, the Board would expect a designated FMU to
meet the sound practices set forth in the ``Interagency Paper on Sound
Practices to Strengthen the Resilience of the U.S. Financial System''
as one element of complying with the risk-management standards in
proposed Sec. Sec. 234.3(a)(7) and 234.4(a)(4).\10\ Specifically, a
designated FMU should develop the capacity to recover and resume its
payment, clearing, and settlement activities within the business day on
which the disruption occurs with the overall goal of achieving recovery
and resumption within two hours after an event.\11\ The Board requests
comment on whether these provisions need further definition in the text
of the proposed standards.
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\8\ See, for example, proposed standards in Sec. Sec.
234.3(a)(5) and 234.4(a)(18).
\9\ See proposed standard in Sec. 234.4(a)(15).
\10\ The interagency paper is available at https://www.federalreserve.gov/boarddocs/SRLETTERS/2003/SR0309a1.pdf.
\11\ This interpretation is consistent with the Board's
supervision of banking organizations that are core clearing and
settlement organizations or act as large-value payment system
operators. See Supervision and Regulation letter 03-9 (May 28, 2003)
at https://www.federalreserve.gov/boarddocs/srletters/2003/sr0309.htm.
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The Board believes that the adoption of risk-management standards
under Title VIII that are based on the current international standards
will have several important benefits, including easing the potential
burden for designated FMUs to comply with the standards; reducing
potential conflicts among regulators regarding prudential requirements;
providing a common framework among relevant regulators for overseeing
and assessing the risks and risk management of FMUs with cross-market,
cross-border, or cross-currency operations; aiding international
efforts to strengthen the risk management of critical FMUs; and
reducing systemic risk.
The Board requests comment on the set of standards set out in the
proposed rule and the use of CPSS and CPSS-IOSCO documents as further
information. In particular, given the familiarity of most FMUs with the
existing relevant international standards, the Board requests comment
on whether the proposed standards provide sufficient guidance for
designated FMUs to comply with the standards pursuant to Title VIII of
the Dodd-Frank Act.
The CPSS and IOSCO are currently reviewing the three sets of
international standards. This review is intended to strengthen and
clarify the standards based on experience with the Core Principles and
CPSS-IOSCO Recommendations since their publication and to incorporate
lessons learned during the recent financial crisis. The CPSS and IOSCO
published a consultative report on March 10, 2011; final international
standards are expected in early 2012.\12\ At that time, the Board
anticipates that it will review the new standards, consult with other
appropriate agencies and the Council, and likely seek public comment on
the adoption of revised standards for designated FMUs under section
805(a) of the Dodd-Frank Act based on the new international standards.
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\12\ See consultative report for Principles for Financial Market
Infrastructures at https://www.bis.org/publ/cpss94.htm.
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Payment systems. Proposed Sec. 234.3(a) sets out risk-management
standards for designated FMUs that operate as payment systems, in
accordance with section 805(a) of the Dodd-Frank Act. The Board is
proposing a set of standards based on the Core Principles for such
designated FMUs. The Core Principles are widely accepted by the
international regulatory community, and numerous payment systems around
the world already follow them. These standards address the types of
areas of supervisory concern for designated FMUs set out in section
805(c) of the Dodd-Frank Act. For example, the standards address risk-
management policies and procedures, participant default policies and
procedures, and the ability to complete timely settlement of payments.
Proposed Sec. 234.3(b) clarifies that the Board will apply the
standards set out in proposed Sec. 234.3(a) in its supervision of
designated FMUs that operate as payment systems and for which the Board
is the Supervisory Agency. All designated FMUs are expected to employ a
risk-management framework that is appropriate for their risks, so the
Board may require a particular designated FMU to exceed the standards
set out in the proposed rules in this notice. To that end, Sec.
234.3(b) states that the Board may, by order, apply heightened risk-
management standards to a particular FMU in response to the risks
presented by that FMU.
The Board requests comment on all aspects of the appropriateness of
the proposed standards for designated FMUs that are payment systems,
including whether there are any areas of supervisory concern regarding
a payment system's operations that are not sufficiently addressed by
the proposed rules. The Board also requests comment on whether the
proposed standards achieve the statutory objectives outlined above to
(1) promote robust risk management, (2) promote safety and soundness,
(3) reduce systemic risks, and (4) support the stability of the broader
financial system.
Central securities depositories and central counterparties.
Proposed Sec. 234.4(a) of the proposed rule sets out risk-management
standards for designated FMUs that operate as central securities
depositories or central counterparties, in accordance with section
805(a) of the Dodd-Frank Act. Each proposed standard states whether it
is applicable to a central securities depository, a central
counterparty, or both.
Most designated FMUs that operate as central securities
depositories or central counterparties will be designated clearing
entities subject to the risk-management standards promulgated by the
CFTC or SEC. The Board is proposing standards for designated FMUs that
operate as central securities depositories, central counterparties, or
both, to address the unlikely event that a designated FMU operates as a
central securities depository or central counterparty and is not
required to be registered as a clearing agency or derivatives clearing
organization with the SEC or CFTC, respectively. Pursuant to section
805(a)(1) of the Dodd-Frank Act, the Board's risk-management standards
apply to any designated FMU that is otherwise not subject to the
jurisdiction of the SEC or the CFTC.\13\
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\13\ 12 U.S.C. 5464(a)(1).
---------------------------------------------------------------------------
The Board is proposing a set of standards for such designated FMUs
that is based on the majority of the CPSS-IOSCO Recommendations
presented in a modified format. Specifically, the Board is proposing to
prescribe only those portions of the CPSS-IOSCO Recommendations that
apply directly to FMUs, rather than those portions that apply to market
convention, pre-settlement activities, and regulation and oversight,
which are outside the control of the individual FMUs and are more
appropriately addressed by other entities.\14\ While the Board endorses
the CPSS-IOSCO
[[Page 18449]]
Recommendations in their entirety as a policy matter, its primary
interest for purposes of this rulemaking is in those recommendations
related to the clearing and settlement aspects of financial
transactions, including the delivery of securities or other financial
instruments against payment, and related risks. In addition, the
standards in the Recommendations for Securities Settlement Systems and
the Recommendations for Central Counterparties that overlap
significantly have been consolidated to avoid repetition.
---------------------------------------------------------------------------
\14\ The Board is not proposing to include the following CPSS-
IOSCO Recommendations as risk-management standards for designated
FMUs: Recommendations 2 (trade confirmation), 3 (settlement cycles),
4 (central counterparties), 5 (securities lending), 12 (protection
of customers' securities), and 18 (regulation and oversight) of the
Recommendations for Securities Settlement Systems and recommendation
15 (regulation and oversight) in the Recommendations for Central
Counterparties. In addition, the Board is not proposing to prescribe
a rule to adopt Recommendation 16 in the Recommendations for
Securities Settlement Systems (communication procedures and
standards) because the Board believes that at this time the purpose
of this recommendation is sufficiently captured in the proposed
risk-management standard regarding the efficient operation of a
central securities depository.
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Finally, the Board has modified the margin-related standards set
forth in the Recommendations for Central Counterparties by adding two
components on testing set forth in proposed Sec. 234.4(a)(17). The
components added by the Board are consistent with the frequencies
recommended in the explanatory text of the Recommendations for Central
Counterparties; however, proposed Sec. 234.4(a)(17)(i) would introduce
more specific parameters on who may conduct model validations for
central counterparties.\15\ In conducting supervision of central
counterparties, the Board typically has required systems to employ a
qualified, independent party to conduct validations of proposed and
existing models to evaluate the performance of the model, along with
parameters and assumptions, in a range of scenarios. The Board believes
that in order for the validator to offer independent, unbiased
conclusions and recommendations, the model validation should be
performed by a person who is not responsible for developing the margin
model and does not report to a person who performs these functions. A
central counterparty's margin model is a critical component in its
risk-management framework and should be tested rigorously and validated
at least annually to ensure it is performing reliably and achieving the
desired coverage. The Board requests comment on whether the proposed
rule for model validation is sufficiently clear. The Board also
requests comment on all aspects of the proposed rule, including the
proposed frequency and whether a model validation should be triggered
as a result of any material change to a central counterparty, such as
revisions to the margin model, introduction of new products, or
formation of new margining arrangements (for example, portfolio or
cross-margining).
---------------------------------------------------------------------------
\15\ Proposed Sec. 234.4(a)(17)(i)--(ii) are generally
consistent with Recommendations 4 and 5 in the Recommendations for
Central Counterparties. Proposed rule 234.4.(17)(i) is based on
Recommendation 5 (financial resources), paragraph 4.5.4, that
recommends that a central counterparty conduct comprehensive stress
tests involving a full validation of model parameters and
assumptions at least annually. Proposed Sec. 234.4(17)(ii) is based
on Recommendation 4 (margin requirements), paragraph 4.4.2, that
states that margin models and parameters should be reviewed and
backtested regularly (at least quarterly) to assess the reliability
of the methodology in achieving the desired coverage.
---------------------------------------------------------------------------
The Board believes that the standards in proposed Sec. 234.4(a)
appropriately address the types of areas of supervisory concern set out
in section 805(c) of the Dodd-Frank Act. For example, the standards
address collateral requirements and the ability to complete timely
clearing and settlement of financial transactions for central
securities depositories, and margin requirements and counterparty
default policies and procedures for central counterparties.
Proposed Sec. 234.4(b) clarifies that the Board will apply the
standards in proposed Sec. 234.4(a) in its supervision of designated
FMUs that operate as a central securities depository or a central
counterparty and for which the Board is the Supervisory Agency. A
designated FMU should comply with the standards that are applicable to
it as determined by its function as a central securities depository, a
central counterparty, or both. In addition, proposed Sec. 234.4(b)
states that the Board may, by order, apply heightened risk-management
standards to a particular FMU in response to the risks presented by
that FMU, for the same reasons as discussed above regarding heightened
standards for designated FMUs operating as payment systems.
The Board requests comment on all aspects of the proposed standards
for designated FMUs that act as central securities depositories or
central counterparties, including whether there are any areas of
supervisory concern regarding the operations of a central securities
depository or a central counterparty that are not sufficiently
addressed by the proposed rules. The Board also requests comment on
whether these standards achieve the statutory objectives outlined above
to (1) promote robust risk management, (2) promote safety and
soundness, (3) reduce systemic risks, and (4) support the stability of
the broader financial system.
The Board also requests comment on all aspects of proposed rules in
Sec. Sec. 234.3 and 234.4, but, in particular, the Board requests
comment on the following specific issues:
Under Sec. Sec. 234.3(a)(5), 234.4(a)(2), 234.4(a)(15),
and 234.4(a)(18), should the Board require designated FMUs to maintain
sufficient financial resources to withstand the default by the
participant with the largest exposure or obligation in extreme but
plausible market conditions, where participant means the family of
affiliated participants where there is more than one affiliated
participant (``cover one''); or should the Board require sufficient
financial resources to withstand defaults by the two participants, plus
any affiliated participants, with the largest exposures or obligations
in extreme but plausible market conditions (``cover two'')? Should the
Board require that financial resource requirements be different for
certain types of designated FMUs in the same category, such as central
counterparties, depending on the risk and other characteristics of the
particular products that it clears or settles? What competitive
impacts, if any, should the Board consider?
How would a cover two requirement compare with the current
practices of payment, clearing, and settlement systems? What would be
the expected incremental financial resource costs, separately including
incremental liquidity costs on the system, and its participants, in
connection with potentially increasing the current cover one
requirement to a cover two requirement?
D. Material Changes to Rules, Procedures, or Operations Requiring
Advanced Notice
As noted above, section 806(e)(1) of the Dodd-Frank Act requires a
designated FMU to provide 60 days' advance notice to its Supervisory
Agency of any changes to its rules, procedures, or operations that
``materially affect the nature or level of risks presented.'' Section
806(e) further requires each Supervisory Agency to describe in a rule
what changes are considered material and thus would require advance
notice by the designated FMU. The Board is currently evaluating the
manner in which these types of advance notice should be submitted. The
Board will provide guidance at a future date regarding the advance
notice submission procedures.
Proposed Sec. 234.5(a) requires designated FMUs for which the
Board is the Supervisory Agency to provide the Board with 60 days'
advance notice of any proposed change to its rules, procedures, or
operations that could materially affect the nature or level of risks
presented by the designated FMU. The proposed rule includes procedural
requirements regarding such notices, such as the required contents of
the notices and the procedures and timing for the methods for approving
such changes. These provisions of the proposed rules essentially
reiterate
[[Page 18450]]
similar provisions in section 806(e) of the Dodd-Frank Act.
As required by section 806(e), the Board is proposing to define
under Sec. 234.5(c) changes that ``materially affect the nature or
level of risks presented'' as those that could be reasonably expected
to affect the performance of payment, clearing, or settlement functions
or the overall nature or level of risk (including credit, liquidity,
settlement, legal, or operational risks) presented by the designated
FMU. Under this proposed definition, material changes would generally
include changes that may affect the designated FMU's ability or
approach to measure or manage the risks posed by or to itself. Material
changes also include changes to the designated FMU's design that not
only affect the FMU and its direct participants, but, even when
properly implemented, could also affect the financial system more
broadly. For example, given the operational and risk interdependencies
of a designated FMU, it is possible that attempts to reduce or limit
one type of risk could lead to the concentration or creation of
different risks. Material changes, therefore, are not limited to those
changes that would adversely affect or increase the risks of the FMU,
and include those that may transfer or transform risks.
To assist designated FMUs in determining whether a proposed change
is material, the Board's proposed rule sets out a non-exclusive list of
changes that would be considered material and require advance notice to
the Board. Under the proposed rule, material changes would include, but
not be limited to, changes that affect participant eligibility or
access criteria; product eligibility; risk management; settlement
failure or default procedures; financial resources; business continuity
and disaster recovery plans; daily or intraday settlement procedures;
the scope of services, including the addition of a new service or
discontinuation of an existing service; technical design or operating
platform, which result in nonroutine changes to the underlying
technological framework for payment, clearing, or settlement functions;
or governance.
The proposed rule also includes a non-exclusive list of routine
changes to a designated FMU's rules, procedures, or operations that
will not be deemed to materially affect an FMU's nature or level of
risks or impact or cause disruption to the financial system more
broadly. The Board believes the relevant safety and soundness issues
associated with these routine changes are more appropriately addressed
through ongoing communications with the designated FMU rather than
through the formal advance notice process under section 806(e) of the
Dodd-Frank Act. For the purposes of the advance notice provision,
changes that would not be deemed to materially affect the FMU's risks
include, but are not limited to, changes to an existing rule,
procedure, or operation that do not modify the contractual rights or
obligations of the designated FMU or persons using its payment,
clearing, or settlement services; changes to an existing procedure,
control, or service that do not adversely affect the safeguarding of
securities, collateral, or funds in the custody or control of the
designated FMU or for which it is responsible; routine technology
systems upgrades; changes related solely to the administration of the
designated FMU or related to the routine, daily administration,
direction, and control of employees; or clerical changes and other
nonsubstantive revisions to rules, procedures, or other documentation.
The material and nonmaterial lists are not exhaustive regarding the
types of changes that the Board may deem material under section 806(e).
There would be many proposed changes to a designated FMU's rules,
procedures, or operations that are not included in either list. If a
designated FMU had any question regarding whether a particular change
to a rule, procedure, or operation, which was not covered by either
list, met the general materiality standard, the Board anticipates that
the FMU would contact Board staff.
The Board requests comment on all aspects of the proposed rule
regarding changes to rule, procedures, or operations of a designated
FMU. The Board requests comment on whether the proposed rule's
provisions regarding the requirements, content, and timing of advance
notices of proposed changes are clear. In addition, the Board requests
comment on whether the proposed non-exclusive illustrative lists for
material and nonmaterial changes to an FMU's rules, procedures, or
operations would be helpful to designated FMUs in determining whether
advance notice of such changes is required. The Board also requests
comment on whether there are any areas or items on either list that
should be deleted as inappropriate. Finally, the Board requests comment
on whether there are other areas or items that appropriately should be
added to either list as material or not material to an FMU's risks. In
responding to these questions, commenters are requested to explain why
they believe an item or area on either list should be deleted or added.
III. Administrative Law Matters
A. Regulatory Flexibility Act Analysis
Congress enacted the Regulatory Flexibility Act (the ``RFA'') (5
U.S.C. 601 et seq.) to address concerns related to the effects of
agency rules on small entities, and the Board is sensitive to the
impact its rules may impose on small entities. The RFA requires
agencies either to provide an initial regulatory flexibility analysis
with a proposed rule or to certify that the proposed rule will not have
a significant economic impact on a substantial number of small
entities. In accordance with section 3(a) of the RFA, the Board has
reviewed the proposed regulation. In this case, the proposed rule would
apply to FMUs that are identified and designated by the Council as
systemically important to the U.S. financial system. Based on current
information, the Board believes that the payment system FMUs that would
likely be designated by the Council would not be ``small entities'' for
purposes of the RFA, and so, the proposed rule likely would not have a
significant economic impact on a substantial number of small entities
(5 U.S.C. 605(b)). The authority to designate systemically important
FMUs, however, resides with the Council, rather than the Board, and the
Board cannot therefore be assured of the identity of the FMUs that the
Council may designate in the future. Accordingly, an Initial Regulatory
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603,
based on current information. The Board will, if necessary, conduct a
final regulatory flexibility analysis after consideration of comments
received during the public comment period.
1. Statement of the need for, objectives of, and legal basis for,
the proposed rule. The Board is proposing a regulation to implement
certain provisions of Title VIII of the Dodd-Frank Act. Section
805(a)(1)(A) of the Dodd-Frank Act requires the Board to promulgate
risk-management standards governing the operations related to the
payment, clearing, and settlement activities of designated FMUs. The
proposed rule clarifies that the Board would apply the standards set
out in the proposed rule to designated FMUs for which the Board is the
Supervisory Agency. In addition, under section 806(e) of the Dodd-Frank
Act, the Board is required to prescribe regulations setting forth the
standards for determining when advance notice is required to be
provided by a designated FMU for which the Board is the Supervisory
Agency that proposes to change its rules, procedures, or operations
that could materially affect
[[Page 18451]]
the nature or level of risks presented by the designated FMU. The Board
believes that the proposed regulation implements Congress's requirement
that the Board prescribe regulations that carry out the purposes of
Title VIII of the Dodd-Frank Act.
2. Small entities affected by the proposed rule. The proposed rule
would affect FMUs that the Council designates as systemically important
to the U.S. financial system. The Board estimates that fewer than five
large-value payment systems would meet these conditions and be affected
by this proposed rule. Pursuant to regulations issued by the Small
Business Administration (the ``SBA'') (13 CFR 121.201), a ``small
entity'' includes an establishment engaged in providing financial
transaction processing, reserve and liquidity services, or
clearinghouse services with an average revenue of $7 million or less
(NAICS code 522320). Based on current information, the Board does not
believe that any of the payment systems that would likely be designated
by the Council would be ``small entities'' pursuant to the SBA
regulation. The Board does not at this time believe that, pursuant to
section 803(8) of the Dodd-Frank Act, it would be the Supervisory
Agency for any FMU that operates as a central securities depository or
a central counterparty and that would likely be designated by the
Council. The Board seeks information and comment on the number of small
entities to which the proposed rule would apply.
3. Projected reporting, recordkeeping, and other compliance
requirements. The proposed rule imposes certain reporting and
recordkeeping requirements for a designated FMU. (See, for example,
Sec. 234.3(a)(3) of the proposed rule (requiring clearly defined
procedures for the management of credit risks and liquidity risks),
Sec. Sec. 234.5(a)(1) and (2) of the proposed rule (requiring advance
notice of changes that could materially affect the nature or level of
risks presented by the designated FMU), and Sec. Sec. 234.5(a)(2) and
(3) of the proposed rule (requiring notice of an emergency change
implemented by a designated FMU).) The proposed rule also contains a
number of compliance requirements, including the standards that the
designated FMU must meet, such as having a well-founded legal basis
under all relevant jurisdictions and having rules and procedures that
enable participants to understand clearly the FMU's impact on each of
the financial risks they incur by participation in it. Payment systems
under the Board's jurisdiction (including certain payment systems the
Board believes could be designated as systemically important) generally
already have implemented these standards, so the proposed rule would
not likely impose additional costs on those payment systems. The Board
seeks information and comment on any costs, compliance requirements, or
changes in operating procedures that would arise from the application
of the proposed rule.
4. Identification of duplicative, overlapping, or conflicting
Federal rules. The Board does not believe that any Federal rules
conflict with the proposed rule. There is an overlap between the risk-
management standards for FMUs in the proposed rule and the Board's PSR
policy; however, the proposed standards are consistent with the PSR
policy. The Board seeks comment regarding any statutes or regulations
that would duplicate, overlap, or conflict with the proposed rule.
5. Significant alternatives to the proposed rule. The Board is
unaware of any significant alternatives to the proposed rule that
accomplish the stated objectives of the Dodd-Frank Act and that
minimize any significant economic impact of the proposed rule on small
entities. FMUs that are designated as systemically important by the
Council and present similar risk profiles should be held to consistent
standards. Promoting uniform standards for designated FMUs is one of
the stated purposes of Title VIII of the Dodd-Frank Act.\16\ The
standards in the proposed rule are being proposed for adoption in part
because the payment systems that would likely be designated by the
Council are already familiar with the international standards and could
implement them with relatively less burden than if the Board adopted a
wholly new and unfamiliar set of standards at this time. Similarly, the
standards in the proposed rule for central securities depositories and
central counterparties are a consolidated and streamlined compilation.
They are based on the CPSS-IOSCO Recommendations, and most central
securities depositories and central counterparties are already familiar
with them. The Board requests comment on whether there are additional
ways to reduce regulatory burden on small entities associated with this
proposed rule.
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\16\ See 12 U.S.C. 5461(b)(1)(A).
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B. Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320, Appendix A.1), the Board reviewed the proposed rule
under the authority delegated to the Board by the Office of Management
and Budget. For purposes of calculating burden under the Paperwork
Reduction Act, a ``collection of information'' involves 10 or more
respondents. Any collection of information addressed to all or a
substantial majority of an industry is presumed to involve 10 or more
respondents (5 CFR 1320.3(c), 1320.3(c)(4)(ii)). The Board estimates
there are fewer than 10 respondents, and these respondents do not
represent all or a substantial majority of the participants in payment,
clearing, and settlement systems. Therefore, no collections of
information pursuant to the Paperwork Reduction Act are contained in
the proposed rule.
IV. Statutory Authority
Pursuant to the authority in Title VIII of the Dodd-Frank Act,
particularly sections 805(a) and 806(e) (12 U.S.C. 5464(a) and
5465(e)), the Board proposes to adopt part 234 to govern designated
financial market utilities (Regulation HH).
V. Text of Proposed Rules
List of Subjects in 12 CFR Part 234
Banks, Banking, Credit, Electronic funds transfers, Financial
market utilities, Securities.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR, Chapter II by adding part 234 as set forth below.
PART 234--DESIGNATED FINANCIAL MARKET UTILITIES (REGULATION HH)
Sec.
234.1 Authority, purpose, and scope
234.2 Definitions
234.3 Standards for payment systems
234.4 Standards for central securities depositories and central
counterparties
234.5 Changes to rules, procedures, or operations
Authority: 12 U.S.C. 5461 et seq.
Sec. 234.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the authority of sections
805, 806, and 810 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376; 12
U.S.C. 5464, 5465, and 5469).
(b) Purpose and scope. This part establishes risk-management
standards governing the operations related to the payment, clearing,
and settlement activities of designated financial market utilities. The
risk-management standards do not apply, however, to a designated
financial market utility that
[[Page 18452]]
is a derivatives clearing organization registered under section 5b of
the Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency
registered with the Securities and Exchange Commission under section
17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1), which are
governed by the risk-management standards promulgated by the Commodity
Futures Trading Commission or the Securities and Exchange Commission,
respectively, for which each is the Supervisory Agency (as defined in
Sec. 234.2). In addition, this part sets out requirements and
procedures for a designated financial market utility that proposes to
make a change to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
designated financial market utility and for which the Board is the
Supervisory Agency.
Sec. 234.2 Definitions.
(a) Central counterparty means a designated financial market
utility that interposes itself between the counterparties to trades,
acting as the buyer to every seller and the seller to every buyer.
(b) Central securities depository means a designated financial
market utility that holds securities in custody to enable securities
transactions to be processed by means of book entries or a designated
financial market utility that enables securities to be transferred and
settled by book entry either free of or against payment.
(c) Designated financial market utility means a financial market
utility (as defined in paragraph (d) of this section) that the
Financial Stability Oversight Council has designated as systemically
important under section 804 of the Dodd-Frank Act (12 U.S.C. 5463).
(d) Financial market utility has the same meaning as the term is
defined in section 803(6) of the Dodd-Frank Act (12 U.S.C. 5462(6)).
(e) Payment system means a designated financial market utility that
consists of a set of payment instructions, procedures, and rules for
the transfer of funds among system participants.
(f) Supervisory Agency has the same meaning as the term is defined
in section 803(8) of the Dodd-Frank Act (12 U.S.C. 5462(8)).
Sec. 234.3 Standards for payment systems.
(a) A designated financial market utility that operates as a
payment system should meet or exceed the following risk-management
standards with respect to its payment, clearing, and settlement
activities:
(1) The payment system should have a well-founded legal basis under
all relevant jurisdictions.
(2) The payment system's rules and procedures should enable
participants to have a clear understanding of the payment system's
impact on each of the financial risks they incur through participation
in it.
(3) The payment system should have clearly defined procedures for
the management of credit risks and liquidity risks, which specify the
respective responsibilities of the payment system operator and the
participants and which provide appropriate incentives to manage and
contain those risks.
(4) The payment system should provide prompt final settlement on
the day of value, preferably during the day and at a minimum at the end
of the day.
(5) A payment system in which multilateral netting takes place
should, at a minimum, be capable of ensuring the timely completion of
daily settlements in the event of an inability to settle by the
participant with the largest single settlement obligation.
(6) Assets used for settlement should preferably be a claim on the
central bank; where other assets are used, they should carry little or
no credit risk and little or no liquidity risk.
(7) The payment system should ensure a high degree of security and
operational reliability and should have contingency arrangements for
timely completion of daily processing.
(8) The payment system should provide a means of making payments
that is practical for its users and efficient for the economy.
(9) The payment system should have objective and publicly disclosed
criteria for participation, which permit fair and open access.
(10) The payment system's governance arrangements should be
effective, accountable, and transparent.
(b) Designated financial market utilities that operate as payment
systems and for which the Board is the Supervisory Agency must meet or
exceed the risk-management standards in Sec. 234.3(a). The Board, by
order, may apply heightened risk-management standards to an individual
designated financial market utility in accordance with the risks
presented by the designated financial market utility.
Sec. 234.4 Standards for central securities depositories and central
counterparties.
(a) A designated financial market utility that operates as a
central securities depository or a central counterparty should meet or
exceed the following risk-management standards with respect to its
payment, clearing, and settlement activities:
(1) The central securities depository or central counterparty
should have a well-founded, transparent, and enforceable legal
framework for each aspect of its activities in all relevant
jurisdictions.
(2) The central securities depository or central counterparty
should require participants to have sufficient financial resources and
robust operational capacity to meet obligations arising from
participation in the central securities depository or central
counterparty. The central securities depository or central counterparty
should have procedures in place to monitor that participation
requirements are met on an ongoing basis. The central securities
depository's or central counterparty's participation requirements
should be objective and publicly disclosed, and permit fair and open
access.
(3) The central securities depository or central counterparty
should hold assets in a manner whereby risk of loss or of delay in its
access to them is minimized. Assets invested by a central securities
depository or central counterparty should be held in instruments with
minimal credit, market, and liquidity risks.
(4) The central securities depository or central counterparty
should identify sources of operational risk and minimize them through
the development of appropriate systems, controls, and procedures; have
systems that are reliable and secure, and have adequate, scalable
capacity; and have business continuity plans that allow for timely
recovery of operations and fulfillment of the central securities
depository's or central counterparty's obligations.
(5) The central securities depository or central counterparty
should employ money settlement arrangements that eliminate or strictly
limit its settlement bank risks, that is, its credit and liquidity
risks from the use of banks to effect money settlements with its
participants and should require funds transfers to the central
securities depository or central counterparty be final when effected.
(6) The central securities depository or central counterparty
should be cost-effective in meeting the requirements of participants
while maintaining safe and secure operations.
(7) The central securities depository or central counterparty
should evaluate the potential sources of risks that can arise when the
central securities depository or central counterparty establishes links
either cross-border or domestically to settle transactions or
[[Page 18453]]
clear trades, and ensure that the risks are managed prudently on an
ongoing basis.
(8) The central securities depository or central counterparty
should have governance arrangements that are clear and transparent to
fulfill public interest requirements and to support the objectives of
owners and participants and should promote the effectiveness of a
central securities depository's or central counterparty's risk-
management procedures.
(9) The central securities depository or central counterparty
should provide market participants with sufficient information for them
to identify and evaluate accurately the risks and costs associated with
using its services.
(10) The central securities depository or central counterparty
should establish default procedures that ensure that the central
securities depository or central counterparty can take timely action to
contain losses and liquidity pressures and to continue meeting its
obligations and should provide for key aspects of the default
procedures to be publicly available.
(11) The central securities depository or central counterparty
should ensure that final settlement occurs no later than the end of the
settlement day and should require that intraday or real-time finality
be provided where necessary to reduce risks.
(12) The central securities depository or central counterparty
should eliminate principal risk by linking securities transfers to
funds transfers in a way that achieves delivery versus payment.
(13) The central securities depository or central counterparty
should state its obligations with respect to physical deliveries, and
the risks from these obligations should be identified and managed.
(14) The central securities depository should immobilize or
dematerialize securities certificates and transfer them by book entry
to the greatest extent possible.
(15) The central securities depository should institute risk
controls that include collateral requirements and limits, and ensure
timely settlement in the event that the participant with the largest
payment obligation is unable to settle when the central securities
depository extends intraday credit.
(16) The central counterparty should measure its credit exposures
to its participants at least once a day and limit its exposures to
potential losses from defaults by its participants in normal market
conditions so that the operations of the central counterparty would not
be disrupted and non-defaulting participants would not be exposed to
losses that they cannot anticipate or control.
(17) The central counterparty should use margin requirements to
limit its credit exposures to participants in normal market conditions
and use risk-based models and parameters to set margin requirements and
review them regularly. Specifically, the central counterparty should--
(i) Provide for annual model validation consisting of evaluating
the performance of the clearing agency's margin models and the related
parameters and assumptions associated with such models by a qualified
person who does not perform functions associated with the clearing
agency's margin models (except as part of the annual model validation)
and does not report to such a person.
(ii) Review and backtest margin models and parameters at least
quarterly.
(18) The central counterparty should maintain sufficient financial
resources to withstand, at a minimum, a default by the participant to
which it has the largest exposure in extreme but plausible market
conditions.
(b) Designated financial market utilities that operate as central
securities depositories or central counterparties and for which the
Board is the Supervisory Agency must meet or exceed the risk-management
standards in Sec. 234.4(a). The Board, by order, may apply heightened
risk-management standards to individual designated financial market
utilities in accordance with the risks presented by the designated
financial market utility.
Sec. 234.5 Changes to rules, procedures, or operations.
(a) Advance notice.
(1) A designated financial market utility shall provide at least
60-days advance notice to the Board of any proposed change to its
rules, procedures, or operations that could materially affect the
nature or level of risks presented by the designated financial market
utility.
(2) The notice of the proposed change shall describe--
(i) The nature of the change and expected effects on risks to the
designated financial market utility, its participants, or the market;
and
(ii) How the designated financial market utility plans to manage
any identified risks.
(3) The Board may require the designated financial market utility
to provide additional information necessary to assess the effect the
proposed change would have on the nature or level of risks associated
with the utility's payment, clearing, or settlement activities and the
sufficiency of any proposed risk-management techniques.
(4) A designated financial market utility shall not implement a
change to which the Board has an objection.
(5) The Board will notify the designated financial market utility
of any objection within 60 days from the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it
requests for consideration of the notice.
(6) A designated financial market utility may implement a change if
it has not received an objection to the proposed change within 60 days
of the later of--
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it
requests for consideration of the notice.
(7) With respect to proposed changes that raise novel or complex
issues, the Board may, by written notice during the 60-day review
pe