Financial Market Utilities, 76973-76980 [2013-29711]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 78, Number 245 (Friday, December 20, 2013)]
[Rules and Regulations]
[Pages 76973-76980]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29711]


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FEDERAL RESERVE SYSTEM

12 CFR Part 234

[Regulation HH; Docket No. R-1455]
RIN 7100 AD-94


Financial Market Utilities

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rulemaking.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the ``Dodd-Frank Act'' or ``Act'') permits the Board of Governors of 
the Federal Reserve System (the ``Board'') to authorize a Federal 
Reserve Bank to establish and maintain an account for, and through the 
account provide certain financial services to, financial market 
utilities (``FMUs'') that are designated as systemically important by 
the Financial Stability Oversight Council (the ``Council''). In 
addition, the Dodd-Frank Act permits a Reserve Bank to pay interest on 
the balances maintained by or on behalf of a designated FMU. The Board 
is promulgating regulations to implement these provisions of the Dodd-
Frank Act.

DATES: This final rule is effective February 18, 2014.

FOR FURTHER INFORMATION CONTACT: Jeff Stehm, Senior Associate Director 
(202) 452-2217 or Stuart Sperry, Assistant Director (202) 452-3832, 
Division of Reserve Bank Operations and Payment Systems; Christopher W. 
Clubb, Special Counsel (202) 452-3904 or Kara L. Handzlik, Counsel 
(202) 452-3852, Legal Division; for users of Telecommunications Device 
for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. Dodd-Frank Wall Street Reform and Consumer Protection Act

    FMUs, such as payment systems, central securities depositories, and 
central counterparties, are critical components of the nation's 
financial system 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. 
FMUs operate multilateral systems in which financial institutions, such 
as banks, participate pursuant to a common set of rules and procedures, 
a technical infrastructure, and a risk-management framework.\1\
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    \1\ Under section 803 of the Act, 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. 12 U.S.C. 5462(6).
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    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

[[Page 76974]]

financial stability, in part, through an enhanced supervisory framework 
for FMUs designated as systemically important by the Council.\2\ 
Designation by the Council makes an FMU subject to the supervisory and 
risk reduction framework set out in Title VIII of the Dodd-Frank Act. 
This framework includes risk management standards, promulgated by the 
designated FMU's Supervisory Agency, that take into consideration 
relevant international standards and existing prudential requirements, 
with the objectives of promoting robust risk management and safety and 
soundness of the designated FMU, reducing systemic risks, and 
supporting the stability of the broader financial system.\3\ The 
framework also includes ex ante review of changes to the rules, 
procedures, or operations of a designated FMU that could materially 
affect the nature or level of risk presented by the designated FMU, 
enhanced annual examinations of designated FMUs, and enhanced 
enforcement and information collection provisions.
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    \2\ The Dodd-Frank Act, Public Law. 111-203, 124 Stat. 1376, was 
signed into law on July 21, 2010. Section 803(9) of the Act 
authorizes the Council to designate an FMU for enhanced supervision 
when the Council finds, among other things, that the failure of, or 
a disruption to the functioning of, an FMU would 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(3) and (9).
    \3\ Pursuant to section 803(8) of the Act, the ``Supervisory 
Agency'' generally means the Federal agency that has primary 
jurisdiction over a designated FMU under Federal banking, 
securities, or commodity futures law, including the Securities and 
Exchange Commission (SEC) with respect to a designated FMU that is a 
clearing agency registered with the SEC, the Commodity Futures 
Trading Commission (CFTC) with respect to a designated FMU that is a 
derivatives clearing organization registered with the CFTC, and the 
Board with respect to a designated FMU that is an institution 
subject to the Board's jurisdiction as described in section 3(q) of 
the Federal Deposit Insurance Act. The Board is also the Supervisory 
Agency for any designated FMU that is otherwise not subject to the 
jurisdiction of any agency as listed in section 803(8) of the Act.
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    In addition to these provisions, section 806(a) of the Act permits 
the Board to authorize a Federal Reserve Bank (``Reserve Bank'') to 
establish and maintain an account for a designated FMU and provide to 
the designated FMU the services listed in section 11A(b) of the Federal 
Reserve Act (12 U.S.C. 248a(b)) that the Reserve Bank is authorized to 
provide to a depository institution, subject to any applicable rules, 
orders, standards, or guidelines prescribed by the Board.\4\ The 
services listed in Section 11A(b) include wire transfers, settlement, 
and securities safekeeping, as well as services regarding currency and 
coin, check clearing and collection, and automated clearing house 
transactions. Section 806(c) of the Dodd-Frank Act permits a Reserve 
Bank to pay earnings on balances maintained by or on behalf of a 
designated FMU in the same manner and to the same extent as the Reserve 
Bank may pay earnings to a depository institution under the Federal 
Reserve Act, subject to any applicable rules, orders, standards, or 
guidelines prescribed by the Board.
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    \4\ Section 806(a) of the Act also permits the Board to 
authorize a Reserve Bank to establish deposit accounts under the 
first undesignated paragraph of section 13 of the Federal Reserve 
Act (12 U.S.C. 342).
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    On March 4, 2013, the Board published a notice of proposed 
rulemaking (``NPRM'') to amend Regulation HH by adding two new sections 
set to out the conditions and requirements for a Reserve Bank to open 
and maintain accounts for and provide financial services to designated 
FMUs, as well as to set out provisions regarding a Reserve Bank's 
payment of interest on the balances maintained by a designated FMU at 
the Reserve Banks. The public comment period for the NPRM closed on May 
3, 2013.

II. Summary of Public Comments and Analysis

    The Board received five comment letters on the NPRM.\5\ Comments 
were submitted by three entities that were designated FMUs or 
affiliates of designated FMUs, one banking trade association, and an 
individual at a university-based research center. The Board considered 
these comments in developing its final rule as discussed in more detail 
below.
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    \5\ The comment letters are available at https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R-1455&doc_ver=1.
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A. Section 234.1(b)--Purpose and Scope

    Proposed Sec.  234.1(b) clarified that Part 234 also includes 
standards, restrictions, and guidelines for the establishment and 
maintenance of an account at, and provision of financial services from, 
a Reserve Bank for a designated FMU. Proposed Sec.  234.1(b) also 
clarified that Part 234 confirms the terms under which a Reserve Bank 
may pay a designated FMU interest on the designated FMU's balances held 
at the Reserve Bank. The Board did not receive any comments regarding 
its proposed amendments to Sec.  234.1(b) and is adopting revised Sec.  
234.1(b) as proposed.

B. Section 234.6--Access to Reserve Bank Accounts and Services

    Generally sound financial condition. Proposed Sec.  234.6 set out 
the conditions and requirements for a Federal Reserve Bank to establish 
and maintain an account for, and provide services to, a designated FMU 
pursuant to section 806(a) of the Act. As noted in the NPRM, the 
proposed terms and conditions are designed to provide the Federal 
Reserve Bank and the Board with sufficient information to assess a 
designated FMU's ongoing condition as it pertains to the FMU's ability 
to settle promptly and to manage its settlement process and Reserve 
Bank account(s) safely.\6\ Proposed Sec.  234.6(b) required that a 
Reserve Bank ensure that its establishment and maintenance of an 
account for, or provision of services to, a designated FMU does not 
create undue credit, settlement, or other risks to the Reserve Bank 
and, in this regard, sets out minimum conditions that a designated FMU 
must meet, in the Reserve Bank's judgment, in order for the Reserve 
Bank to establish and maintain an account for, or provide services to, 
a designated FMU. The minimum requirements are set out in proposed 
Sec.  234.6(b)(1) through (4).
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    \6\ As noted in the NPRM, unlike depository institutions, 
designated FMUs do not have regular access to discount window 
lending, so the Board expects that Reserve Banks will provide 
accounts and services, and designated FMUs will structure their 
settlement processes and use of Reserve Bank accounts and services, 
in a manner that would seek to avoid inadvertent intraday account 
overdrafts where possible. Nevertheless, there may be instances 
where a designated FMU could incur an inadvertent overdraft. In such 
cases, the Board would expect a designated FMU to have the resources 
to promptly rectify any such overdrafts.
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    Proposed Sec.  234.6(b)(1) required the designated FMU to be in 
generally sound financial condition. One commenter supported the 
proposed requirements regarding sound financial condition. Two 
commenters opposed adoption of the ``generally sound financial 
condition'' standard. The commenters opposed generally stated that the 
designated FMU's compliance with requirements imposed by its own 
supervisor regarding financial resources and risk management should 
suffice for the Board's standard for a Reserve Bank's maintenance of an 
account for and provision of services to the designated FMU. In 
addition, the commenters stated that the imposition of the additional 
subjective ``generally sound'' condition could cause confusion in the 
market as to whether the designated FMU will remain eligible to rely on 
the Reserve Bank account and services. Alternatively, the commenters 
argued that, if the Board believes that a

[[Page 76975]]

designated FMU's eligibility to continue to benefit from a Reserve Bank 
account and services requires a financial condition standard in 
addition to that imposed by its supervisor, the Board should provide 
more clarity regarding the standard to permit the designated FMU and 
its participants to evaluate the risk that the designated FMU may lose 
access to the Reserve Bank account and services.
    After considering the public comments, the Board continues to 
believe that the sound financial condition requirement should be 
retained as a minimum condition for access to Reserve Bank accounts and 
services. Such a requirement is a basic condition similar to 
requirements placed on state-member banks.\7\ The condition makes clear 
that designated FMUs seeking to establish or maintain access to Reserve 
Bank accounts and services, at a minimum, must be solvent and capable 
of meeting their obligations arising through their use of Reserve Bank 
accounts and services. Although the requirements imposed by a 
designated FMU's Supervisory Agency regarding financial resources and 
risk management may be a key consideration, the design of the 
Supervisory Agency's financial requirements may not be focused on the 
impact of the designated FMU on its settlement bank. The Board believes 
that in order for the Reserve Bank to conduct its own risk management, 
it is important that the Reserve Bank have the ability to judge the 
financial condition of account holders on its balance sheet. A 
designated FMU's unexpected financial stress could have a negative 
impact on its ability to appropriately manage its Reserve Bank account.
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    \7\ Section 9(4) of the Federal Reserve Act (12 U.S.C. 322) 
requires the Board to consider the financial condition of any State 
bank applying for membership in the Federal Reserve System.
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    In response to the comments recommending more clarity regarding the 
generally sound financial condition requirement, the Board has inserted 
additional detail regarding the standard in the final rule. For 
purposes of access to Reserve Bank accounts and services pursuant to 
Regulation HH, the final rule clarifies that ``generally sound 
financial condition'' includes maintenance of sufficient working 
capital and cash flow to permit the designated FMU to continue as a 
going concern and to meet its current and projected operating expenses 
under a range of scenarios. In judging whether a designated FMU is in 
generally sound financial condition, therefore, the Reserve Bank will 
look to both the overall balance sheet solvency of the designated FMU 
as a ``going concern'' as well as its ability to meet its general 
business obligations through current and projected cash flows to 
provide the Reserve Bank with some indication that the accountholder is 
operating on a reasonably sound financial basis and will continue as a 
going concern, even in various financial stress scenarios. In reaching 
this judgment, the Reserve Bank will take into account the designated 
FMU's compliance with relevant financial resource requirements of its 
Supervisory Agency and the views of the Supervisory Agency regarding 
the overall financial condition of the designated FMU.
    Supervisory Agency requirements. Proposed Sec.  234.6(b)(2) 
required the designated FMU to be in compliance, based on information 
provided by the Supervisory Agency, with requirements imposed by the 
Supervisory Agency regarding financial resources, liquidity, 
participant default management, and other aspects of risk management. 
One commenter pointed out that proposed Sec.  234.6(b) made a 
designated FMU's compliance with the minimum conditions in proposed 
Sec.  234.6(b)(1) through (4) ``in the Federal Reserve Bank's 
judgment,'' and this could be interpreted as the Reserve Bank 
exercising its own judgment as to whether the designated FMU was in 
compliance with requirements imposed by its Supervisory Agency. The 
commenter also recommended that the final rule require an explicit 
statement from the Supervisory Agency as evidence of compliance with 
its rules and requirements instead of imposing the judgment of the 
Federal Reserve Bank in this determination.
    The Board did not intend the commenter's interpretation of these 
provisions and is revising the final rule to provide clarity. In the 
final rule, the requirement regarding compliance with the Supervisory 
Agency's requirements regarding financial resources, liquidity, 
participant default management, and other aspects of risk management 
has been moved to a separate sentence in the text of Sec.  234.6(b) and 
thus is not subject to the phrase ``in the Federal Reserve Bank's 
judgment,'' which covers the remaining conditions set out in Sec.  
234.6(b)(1) through (3). In addition, the requirement in the final rule 
clarifies that the designated FMU's compliance with the Supervisory 
Agency's regulatory and supervisory requirements is to be ``determined 
by the Supervisory Agency.'' Compliance with the Supervisory Agency's 
regulatory and supervisory requirements regarding financial resources, 
liquidity, participant default management, and other aspects of risk 
management is an important consideration for a Reserve Bank account and 
services, but the Board intends for the Reserve Bank to consult with 
the Supervisory Agency only in this regard and not for the Reserve Bank 
to conduct its own review for accounts and services purposes.
    Compliance with Board policies. Proposed Sec.  234.6(b)(3) required 
that a designated FMU be in compliance with Board orders and policies, 
Federal Reserve Bank operating circulars, and other applicable Federal 
Reserve requirements regarding the establishment and maintenance of a 
Reserve Bank account and the receipt of financial services from a 
Reserve Bank. One commenter stated that it is necessary and appropriate 
to require a designated FMU to be in compliance with these provisions. 
Another commenter noted that, in some cases, Board orders for granting 
certain types of FMUs access to Reserve Bank services may need to be 
tailored in a manner different than existing provisions applied to 
depository institutions, such as permitting ongoing multiple accounts. 
As noted in the NPRM, the Board expects that Reserve Banks would enter 
into account and service agreements with designated FMUs that are 
generally consistent with the provisions of existing Reserve Bank 
operating circulars for such services, but recognizes that there may be 
a need for some flexibility to tailor certain parts of such agreements 
or provide for certain restrictions because of the wide variety of 
organizations, operations, and business models presented by designated 
FMUs. As set out in proposed Sec. Sec.  234.6(a) and (b)(2), the 
Board's authorization order may, as necessary for a particular 
designated FMU, include authorization for the Reserve Bank to enter 
into an agreement with the designated FMU that provides for 
modification of the terms in existing operating circulars for the 
approved services and supersedes such operating circular terms. In 
order to provide clarity, the final rule states in Sec.  234.6(b)(2) 
that a designated FMU must be in compliance with Reserve Bank account 
agreements and, as applicable, operating circulars and other Federal 
Reserve requirements.
    Ongoing ability to meet account obligations. Proposed Sec.  
234.6(b)(4) required the Reserve Bank to determine that the designated 
FMU can demonstrate an ongoing ability, including during periods of 
market stress or a participant default, to meet all of its obligations 
under its agreement for a Reserve Bank account and services.

[[Page 76976]]

One commenter suggested that it would be useful for the Board to 
further clarify the criteria and expectations that will be used in 
assessing the adequacy of the demonstration of ongoing ability to meet 
account obligations and how such assessments will be conducted. This 
commenter expressed concern that inclusion of this requirement without 
further clarification presents the possibility of a new set of 
standards being established in parallel to the existing regulatory 
framework and substantially increasing regulatory uncertainty and 
burden for designated FMUs.
    The Board believes that it is important that a designated FMU 
seeking Reserve Bank accounts and services demonstrate an ability to 
(1) Maintain well-managed and well-controlled settlement operations, 
including the ability to monitor and process transactions throughout 
the day in a timely and controlled manner to and from its Reserve Bank 
account, (2) monitor and maintain account balances at all times during 
the day sufficient to avoid intraday overdrafts, and (3) mobilize 
liquid resources in a timely manner to fund its account as necessary 
given its intended use of the account and any regulatory requirements 
for sound and timely settlement of its transactions. In order to 
support these objectives and in response to the public comments, the 
Board has included in Sec.  234.6(b) of the final rule additional 
detail regarding the minimum condition for a designated FMU to have an 
ongoing ability to meet all of its obligations under its agreement for 
a Reserve Bank account and services. The final rule clarifies that a 
designated FMU's ongoing ability to meet its Reserve Bank account 
obligations includes maintaining (i) Sufficient liquid resources to 
meet its obligations under the account agreement; (ii) the operational 
capacity to ensure that such liquid assets are available to satisfy the 
account obligations on a timely basis in accordance with the account 
agreement; and (iii) sound money settlement processes designed to 
adequately monitor its Reserve Bank account on an intraday basis, 
process money transfers through its account in an orderly manner, and 
complete final money settlement no later than the value date.
    In assessing the adequacy of a designated FMU's ongoing ability to 
meet account obligations, the Board will look in the first instance to 
existing requirements imposed by a designated FMU's Supervisory Agency 
with regard to settlement, liquidity risk management and default 
procedures as well as operational risk management. The Board, however, 
may impose additional conditions, such as minimum balance requirements, 
restrictions on outgoing payments that would cause a designated FMU's 
account to be overdrawn, or limitations on receipt of securities 
against payment, on a designated FMU's use of Reserve Bank accounts and 
services if in the Board's judgment it believes the designated FMU's 
settlement practices introduce risk to the Reserve Bank.
    Termination of accounts or services. Proposed Sec.  234.6(e) stated 
that, in addition to any right that a Reserve Bank has to limit or 
terminate an account or the use of a service pursuant to an agreement, 
the Board may direct the Reserve Bank to impose limits, restrictions, 
or other conditions on the availability or use of a Reserve Bank 
account or service by a designated FMU, including directing the Reserve 
Bank to terminate the use of a particular service or to close the 
account. One commenter supported the termination provisions stating 
that account or service termination or restriction are consistent with 
sound risk management and supervisory oversight. Another commenter 
raised concerns that a designated FMU's access to a Reserve Bank 
account and services may be terminated during periods in which the 
accounts and services are critical and would be difficult for the 
designated FMU to replace. This commenter stated that market stability 
demands a clear statement by the Board in the final rule that (i) 
Termination would be based on clearly defined standards, (ii) a 
decision to terminate will consider not only risks of continuing to 
maintain the Reserve Bank account and services, but also the systemic 
effects of terminating them, and (iii) in the event of such 
termination, the Board will cooperate with the designated FMU to 
provide for a transition to private sector services that is as smooth 
and seamless as is reasonably possible.
    The Board is mindful of the critical role played by designated FMUs 
in the markets they serve and that an unanticipated termination of a 
designated FMU's access to an existing Reserve Bank account and 
services could have an adverse impact on the designated FMU and the 
market. The Board believes, however, that it must retain broad 
discretion to close an account or restrict services provided to an 
accountholder when it deems it necessary.\8\ In making a decision to 
direct a Reserve Bank to terminate a designated FMU's account or 
services, the Board would consider, among other factors, the impact 
that termination of a designated FMU's account and services would have 
on participants in the designated FMU and financial markets more 
broadly, as well as the risk presented by the designated FMU's account 
to the Federal Reserve. The Board would expect to balance the various 
factors involved in the decision before directing the Reserve Bank to 
terminate the account or service. In order to reflect this process, 
Sec.  234.6(d), the termination provision in the final rule, includes a 
sentence that requires a Reserve Bank to consult with the Board 
regarding continued maintenance of an account or provision of services 
if the Reserve Bank determines that a designated FMU no longer complies 
with one or more of the minimum conditions in Sec.  234.6(b). A 
decision by the Board to direct a Reserve Bank to restrict or terminate 
an account or service will be made only after considering all the 
relevant facts and circumstances.
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    \8\ The account arrangements that the Reserve Banks have with 
depository institutions also provide the Reserve Bank with the 
discretion to terminate an account without substantive 
preconditions. Section 2.10 of the Reserve Banks' Operating Circular 
1 (Account Relationships) permits the Reserve Bank to terminate an 
account ``at any time by notice to the Account Holder but will 
endeavor to give not less than five business days prior notice.''
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C. Section 234.7--Interest on Balances

    Proposed Sec.  234.7 clarified the authority of a Reserve Bank to 
pay interest on any balance that a designated FMU maintains in its 
account with that Reserve Bank. In particular, proposed Sec.  234.7(b) 
provides that interest paid by a Reserve Bank on balances maintained by 
a designated FMU in its Reserve Bank account shall be at the rate paid 
on balances maintained by depository institutions or another rate 
determined by the Board from time to time, not to exceed the general 
level of short-term interest rates. One commenter supported this 
section as an implementation of the statutory provisions of section 
806(c) of the Act. The Board did not receive any comments objecting to 
proposed Sec.  234.7, and the Board is adopting it in the final rule as 
proposed.

D. Miscellaneous Issues

    In addition to suggestions for revisions in the proposed text of 
the regulation as discussed above, commenters also raised various 
concerns regarding the impact of the proposal on various aspects of a 
designated FMU's business or operations and the financial markets more 
generally. These comments are discussed in more detail below.

[[Page 76977]]

    Protection of confidential supervisory information. One commenter 
raised concerns that the proposed rule suggested that confidential 
information regarding the designated FMU necessary to determine 
compliance with the proposed conditions would be shared with Reserve 
Bank personnel responsible for offering priced services, such as the 
Fedwire Funds Transfer service. The commenter suggested that the Board 
should do its own evaluation of a designated FMU's compliance with the 
conditions and then certify to the Reserve Bank that the designated FMU 
meets all the requirements for an account.
    Confidential information regarding a designated FMU that a Reserve 
Bank may assess to determine compliance with the proposed conditions 
generally cannot be shared with Reserve Bank personnel responsible for 
offering priced services under existing Board policies and 
requirements. The Federal Reserve has long exercised great care to 
avoid actual or apparent conflict between its role as a provider of 
services and its role as a regulator, supervisor, and lender.\9\ In 
particular, Reserve Bank personnel involved in monetary policy, bank 
supervision, or the lending function are generally prohibited from 
providing confidential information obtained in the course of their 
duties to Reserve Bank priced-service personnel.\10\ For example, in 
opening, maintaining, and terminating accounts for depository 
institutions, the Reserve Banks' credit risk management functions may 
review and assess certain confidential information, including 
confidential supervisory information, regarding the condition of the 
institution and risks it might pose to the Reserve Bank. The credit 
risk management function in a Reserve Bank, however, is prohibited from 
sharing such information with any priced-service personnel and must 
handle such information in accordance with the Board's requirements 
governing confidential information and its standards regarding price-
service activities. The Board's policies and requirements with regard 
to handling of confidential information also apply to the opening, 
maintenance, and termination of an account for a designated FMU.
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    \9\ See ``Standards Related to Priced-Service Activities of the 
Federal Reserve Banks'' (1984), which can be found at https://www.federalreserve.gov/paymentsystems/pfs_standards.htm.
    \10\ The policy provides an exception to this restriction when 
such action fulfills an important supervisory objective, preserves 
the integrity of the payment mechanism, or protects the assets of 
the Reserve Bank. In such cases, information will be provided on a 
need-to-know basis and only with the approval of senior management.
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    The Board also does not believe that doing its own evaluation of a 
designated FMU's compliance with the conditions for an account and then 
certifying to the Reserve Bank that the designated FMU meets all the 
requirements is the appropriate process. Accounts reflect deposit 
liabilities on the balance sheet of a Reserve Bank and risks associated 
with such accounts are borne by the Reserve Bank as the legal entity 
offering and maintaining such accounts. As such, the credit risk 
management functions in the Reserve Banks should have access to, and be 
able to perform, their own evaluation of a designated FMU's compliance 
with the conditions, both initially and on an ongoing basis.
    Reserve Bank accounts not mandatory. One commenter stated that 
payment systems and other settlement arrangements have managed without 
their own Reserve Bank accounts for decades and designated FMUs should 
not be forced to shift their current account arrangements to Reserve 
Bank accounts under the Regulation HH framework. Title VIII of the Act 
allows the Board to authorize Reserve Bank accounts for designated 
FMUs, but it does not require them. A designated FMUs certainly may 
determine for business purposes that it does not have a need for an 
account offered at a Reserve Bank under the authority of Sec.  806 of 
the Act. The Board or the Reserve Banks, however, may always require 
alteration of existing Reserve Bank account arrangements, even those 
maintained for designated FMUs under other authority, for legal, 
policy, or other purposes.
    Reserve Bank accounts covered by protection of netting contracts. 
One commenter stated that the Board should state as part of Regulation 
HH that any accounts covered by the regulation (and the corresponding 
credit balance accounts that the FMU would hold for the participants) 
would be exempt from garnishment, attachment, or similar process 
because any such action would amount to a ``stay, injunction, 
avoidance, moratorium, or similar proceeding or order'' that would 
``limit or delay application of otherwise enforceable netting 
contracts'' and thus prohibited under 12 U.S.C. 4405.
    Under 12 U.S.C. 4405, the statutory protection is applicable only 
with respect to netting contracts governed by 12 U.S.C. 4403 and 4404. 
Moreover, the stay in 12 U.S.C. 4405 is self-actuating and applies as a 
matter of law. The Board does not have rulemaking authority with 
respect to that provision. There may be designated FMUs with Reserve 
Bank accounts established under the Board's final rule that use netting 
contracts protected by 12 U.S.C. 4405, as well as designated FMUs with 
Reserve Bank accounts that do not have such netting contracts. However, 
section 4405 does not provide the Board with the authority to determine 
whether a garnishment, attachment, or similar process against a 
particular Reserve Bank account would amount to a violation of Sec.  
4405.
    Central counterparties under the Dodd-Frank Act regulatory regime. 
One commenter raised concerns regarding the new regulatory regime for 
central counterparties under the Dodd-Frank Act, the implications of 
granting these entities ``bank-like'' privileges at the Reserve Banks, 
and the possibility that one or more FMUs will be bailed out at 
taxpayer expense. The commenter suggested that the Board undertake an 
exhaustive regulatory analysis regarding designated FMUs having access 
to Reserve Bank accounts and services, and that such analysis should 
include the broader implications of the Dodd-Frank Act's transformation 
of the relationship between the Federal Reserve and designated FMUs, 
including Federal Reserve exposure to losses, such as through 
overdrafts, and competitive impacts. The commenter states that 
providing Reserve Bank accounts and services to designated FMUs would 
``blur the line between FMUs and banks and thus make it easier for the 
Federal Reserve to provide support to these institutions without public 
notice or accountability.'' The commenter suggests that the Board, 
before proceeding with this rulemaking, should consider revisiting the 
regulatory structure put in place by the Dodd-Frank Act because of the 
risks it causes CCPs to take on that could ultimately be borne by 
taxpayers.
    The Board does not believe that the provision of Reserve Bank 
accounts and services to designated FMUs grants these entities broad 
``bank-like'' privileges or makes it easier for these entities to 
receive support.\11\ The use of Reserve Bank accounts and services by 
designated FMUs is for the narrow purpose of providing these critical 
market infrastructures a safer and more transparent option to collect 
and hold the financial assets, such as margins,

[[Page 76978]]

required to cover their credit and liquidity risks. These financial 
assets are critical to the management of participant defaults and the 
mitigation of systemic risk in the financial system. Even within these 
narrow purposes, the Dodd-Frank Act provided authority to the Board to 
set any additional terms, conditions or limitations it believes 
necessary when authorizing a Reserve Bank to provide accounts and 
services to a designated FMU. The proposed rule in Sec.  234.6(b) 
provides a set of minimum conditions in this regard that are intended 
to prevent any ``undue credit, settlement, or other risk to the Reserve 
Bank'' in providing accounts and services to designated FMUs. The Board 
may also set additional conditions on a case-by-case basis under Sec.  
234.6(a). The Board does not believe that a designated FMU's access to 
Reserve Bank accounts and services is intended to serve as a gateway 
for the FMU to offer general banking services or engage in financial 
activities unrelated to its market clearing and settlement activities.
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    \11\ As noted above and in the NPRM, the Board expects that 
Reserve Banks will provide accounts and services, and designated 
FMUs will structure their settlement processes and use of Reserve 
Bank accounts and services, in a manner that would seek to avoid 
inadvertent intraday account overdrafts where possible. In addition, 
the Board would expect a designated FMU to have the resources to 
promptly rectify any such overdrafts.
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    The Board also does not believe that it can revisit the structure 
regarding central counterparties put in place by the Dodd-Frank Act. 
Rather, the Board is adopting regulations, as authorized by the Dodd-
Frank Act, to achieve the intended benefits of such accounts and 
services, while preventing any undue risks to the Reserve Banks.

III. Administrative Law Matters

A. Final Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.) 
generally requires an agency to perform an initial and a final 
regulatory flexibility analysis on the impact a rule is expected to 
have on small entities. However, under section 605(b) of the RFA, the 
regulatory flexibility analysis otherwise required under section 604 of 
the RFA is not required if an agency certifies, along with a statement 
providing the factual basis for such certification, that the rule will 
not have a significant economic impact on a substantial number of small 
entities. In this case, the final rule may apply to FMUs that are 
designated by the Council as systemically important to the U.S. 
financial system. Based on current information, the Board believes that 
the FMUs that have been and 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, a Final Regulatory Flexibility Analysis has 
been prepared in accordance with 5 U.S.C. 603, based on current 
information.
    1. Statement of the need for, objectives of, and legal basis for, 
the final rule. The Board is finalizing additional regulations to 
implement certain provisions of Title VIII of the Dodd-Frank Act. 
Pursuant to section 806(a) of the Act, Sec.  234.6 sets out conditions 
under which the Board would authorize a Federal Reserve Bank to 
establish and maintain an account for a designated FMU and provide the 
designated FMU services through the account. Pursuant to section 806(c) 
of the Dodd-Frank Act, Sec.  234.7 sets out conditions for a Reserve 
Bank to pay interest on the balances maintained by a designated FMU at 
the Reserve Banks.
    Under section 806 of the Act, all of these authorities are subject 
to any applicable rules or regulations that the Board may prescribe. 
The Board believes that the final regulations herein are necessary to 
provide guidance to the Federal Reserve Banks in implementing these 
authorities of the Act in an appropriate and uniform manner and to 
inform the affected institutions and the public of the conditions for 
obtaining Reserve Bank accounts and services. These regulations do not 
address Reserve Bank lending to designated FMUs in unusual or exigent 
circumstances pursuant to Dodd-Frank Act section 806(b).
    2. Small entities affected by the final rule. The final rule 
affects FMUs that the Council designates as systemically important to 
the U.S. financial system. The Council has designated eight FMUs that 
would meet these conditions and be affected by this final rule. 
Pursuant to regulations issued by the Small Business Administration 
(the ``SBA'') (13 CFR 121.201), a ``small entity'' includes an 
establishment engaged in (i) Financial transaction processing, reserve 
and liquidity services, and/or clearinghouse services with an average 
revenue of $35.5 million or less (NAICS code 522320); (ii) securities 
and/or commodity exchange activities with an average revenue of $35.5 
million or less (NAICS code 523210); and (iii) trust, fiduciary, and/or 
custody activities with an average revenue of $35.5 million or less 
(NAICS code 523991). Based on current information, the Board does not 
believe that any of the FMUs that have been or would likely be 
designated by the Council would be ``small entities'' pursuant to the 
SBA regulation.
    3. Summary of the significant issues raised by public comment on 
Board's initial Analysis, the Board's assessment of such issues, and a 
statement of any changes made as a result of such comments. The Board 
did not receive any public comments regarding its initial regulatory 
flexibility analysis for this rulemaking. In addition, the Board did 
not receive any comments from the Chief Counsel for Advocacy of the 
Small Business Administration in response to the proposed rule.
    4. Reporting, recordkeeping, and other compliance requirements. The 
final rule does not impose any explicit reporting or recordkeeping 
requirements, but does impose certain other compliance requirements for 
a designated FMU in order to receive the benefits of a Reserve Bank 
account and services. As noted above, section 234.6(b) establishes 
minimum conditions for a designated FMU to establish and maintain an 
account with a Reserve Bank or receive financial services from a 
Reserve Bank, such as being in generally good financial condition, 
being in compliance with Federal Reserve policies and other 
requirements regarding accounts and services, and having an ongoing 
ability to meet all its obligations under its agreement for a Reserve 
Bank account and services. In addition, pursuant to Dodd-Frank Act 
section 806(a) and section 234.6(a) of the final rule, the Board may 
impose other limitations, restrictions, or other requirements in its 
authorization to the Reserve Bank to establish the account for a 
particular designated FMU. Finally, other compliance requirements may 
be contained in the Reserve Bank's agreements for the account and 
services, including notice, reporting, or recordkeeping requirements 
with respect to particular designated FMU. The types of professional 
skills necessary to comply with these requirements may include 
accounting, legal, payments, and risk management. All of these skill 
sets should be available within a designated FMU's corporate structure.
    5. Significant alternatives to the final rule. The Board considered 
several alternatives to the provisions being adopted by this final 
rulemaking. As noted above, the Board believes promulgation of 
regulations is necessary to provide guidance to the Federal Reserve 
Banks in implementing sections 806(a) and (c) of the Dodd-Frank Act in 
an appropriate and uniform manner and to inform the affected 
institutions and the public of the minimum conditions

[[Page 76979]]

for obtaining Reserve Bank accounts and services. The Board considered 
alternatives forms of the regulations, in particular balancing the 
amount of detail included in the minimum requirements for Reserve Bank 
accounts and services to inform the designated FMUs of the minimum 
conditions as well as preserve flexibility for the Reserve Banks in 
applying the minimum conditions to designated FMUs that vary 
considerably in corporate structures, business models, and risk 
profiles. As discussed above in this notice, the Board has included 
more detail regarding specific minimum conditions in response to public 
comments that requested the designated FMUs be provided with more 
clarity regarding how the requirements would be applied. The Board 
believes that the provisions in the final rule strike the appropriate 
balance between these objectives.

B. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320, Appendix A.1), the Board reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget. The final rule contains no requirements subject to the PRA.

IV. Statutory Authority

    Pursuant to the authority in Title VIII of the Dodd-Frank Act and 
particularly sections 806(a) and (c) (12 U.S.C. 5465(a) and (c)), the 
Board proposes two new sections to part 234 (Regulation HH).

Text of Final Rules

List of Subjects in 12 CFR Part 234

    Banks, Banking, Commodity futures, Credit, Electronic funds 
transfers, Financial market utilities, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is amending 12 
CFR part 234, as set forth below.

PART 234--DESIGNATED FINANCIAL MARKET UTILITIES (REGULATION HH)

0
1. The authority citation for part 234 continues to read as follows:

    Authority: 12 U.S.C. 5461 et seq.

0
2. In Sec.  234.1 revise paragraph (b) to read as follows:


234.1  Authority, purpose, and scope.

* * * * *
    (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. 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 (as defined 
below). The risk management standards do not apply, however, to a 
designated financial market utility that 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. This part also sets out standards, 
restrictions, and guidelines regarding a Federal Reserve Bank 
establishing and maintaining an account for, and providing services to, 
a designated financial market utility. In addition, this part sets 
forth the terms under which a Reserve Bank may pay a designated 
financial market utility interest on the designated financial market 
utility's balances held at the Reserve Bank.

0
3. Add Sec. Sec.  234.6 and 234.7 to read as follows:

Sec.  234.6  Access to Federal Reserve Bank accounts and services.

    (a) This section applies to any designated financial market utility 
for which the Board may authorize a Federal Reserve Bank to open an 
account or provide services in accordance with section 806(a) of the 
Dodd-Frank Act. Upon receipt of Board authorization and subject to any 
limitations, restrictions, or other requirements established by the 
Board, a Federal Reserve Bank may enter into agreements governing the 
details of its accounts and services with a designated financial market 
utility, consistent with this section and any other applicable Board 
direction. The agreements may include, among other things, provisions 
regarding documentation to establish the account and receive services, 
conditions imposed on the account and services, service charges, 
reporting, accounting for activity in the account, liability and duty 
of care, and termination.
    (b) A Federal Reserve Bank should ensure that its establishment and 
maintenance of an account for or provision of services to a designated 
financial market utility does not create undue credit, settlement, or 
other risk to the Reserve Bank. In order to establish and maintain an 
account with a Federal Reserve Bank or receive financial services from 
a Federal Reserve Bank, the designated financial market utility must be 
in compliance with the Supervisory Agency's regulatory and supervisory 
requirements regarding financial resources, liquidity, participant 
default management, and other aspects of risk management, as determined 
by the Supervisory Agency. In addition, at a minimum, the designated 
financial market utility must, in the Federal Reserve Bank's judgment--
    (1) Be in generally sound financial condition, including 
maintenance of sufficient working capital and cash flow to permit the 
designated financial market utility to continue as a going concern and 
to meet its current and projected operating expenses under a range of 
scenarios;
    (2) Be in compliance with Board orders and policies, Federal 
Reserve Bank account agreements and, as applicable, operating 
circulars, and other applicable Federal Reserve requirements regarding 
the establishment and maintenance of an account at a Federal Reserve 
Bank and the receipt of financial services from a Federal Reserve Bank; 
and
    (3) Have an ongoing ability, including during periods of market 
stress or a participant default, to meet all of its obligations under 
its agreement for a Federal Reserve Bank account and services, 
including by maintaining--
    (i) Sufficient liquid resources to meet its obligations under the 
account agreement;
    (ii) The operational capacity to ensure that such liquid resources 
are available to satisfy the account obligations on a timely basis in 
accordance with the account agreement; and
    (iv) Sound money settlement processes designed to adequately 
monitor its Federal Reserve Bank account on an intraday basis, process 
money transfers through its account in an orderly manner, and complete 
final money settlement no later than the value date.
    (c) The Board will consult with the Supervisory Agency of a 
designated financial market utility prior to authorizing a Federal 
Reserve Bank to open an account, and periodically thereafter, to 
ascertain the views of the Supervisory Agency regarding the

[[Page 76980]]

designated financial market utility's compliance with the requirements 
in paragraph (b) of this section.
    (d) In addition to any right that a Reserve Bank has to limit or 
terminate an account or the use of a service pursuant to its account 
agreement, the Board may direct the Federal Reserve Bank to impose 
limits, restrictions, or other conditions on the availability or use of 
a Federal Reserve Bank account or service by a designated financial 
market utility, including directing the Reserve Bank to terminate the 
use of a particular service or to close the account. If the Reserve 
Bank determines that a designated financial market utility no longer 
complies with one or more of the minimum conditions in subsection (b), 
the Reserve Bank will consult with the Board regarding continued 
maintenance of the account and provision of services.


Sec.  234.7  Interest on balances.

    (a) A Federal Reserve Bank may pay interest on balances maintained 
by a designated financial market utility at the Federal Reserve Bank in 
accordance with this section and under such other terms and conditions 
as the Board may prescribe.
    (b) Interest on balances paid under this section shall be at the 
rate paid on balances maintained by depository institutions or another 
rate determined by the Board from time to time, not to exceed the 
general level of short-term interest rates.
    (c) For purposes of this section, ``short-term interest rates'' 
shall have the same meaning as the meaning provided for that term in 
Sec.  204.10(b)(3) of this chapter.

    By order of the Board of Governors of the Federal Reserve 
System, December 5, 2013.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2013-29711 Filed 12-19-13; 8:45 am]
BILLING CODE 6210-01-P