Policy on Payment System Risk, 2838-2850 [2014-00681]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 79, Number 11 (Thursday, January 16, 2014)]
[Notices]
[Pages 2838-2850]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00681]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1478]


Policy on Payment System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement; request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is proposing to revise part I of its Federal Reserve Policy on Payment 
System Risk (PSR policy), which sets forth the Board's views, and 
related principles and minimum standards, regarding the management of 
risk in payment, clearing, and settlement systems. These revisions are 
proposed in light of the Principles for Financial Market 
Infrastructures (PFMI), the international risk-management standards for 
financial market infrastructures (FMIs) published in 2012.\1\ These 
revisions are also proposed in light of the enhanced supervisory 
framework for designated financial market utilities as set forth in 
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (``Dodd-Frank Act'' or ``Act''). In particular, certain 
revisions are intended to clarify that designated financial market 
utilities for which the Board is the Supervisory Agency under Title 
VIII of the Act are required to comply with Regulation HH and not the 
risk-management or transparency expectations set out in the policy.
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    \1\ An FMI is a multilateral system among participating 
institutions, including the operator of the system, used for the 
purposes of clearing, settling, or recording payments, securities, 
derivatives, or other financial transactions.
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    The Board is proposing to (1) revise the Board's existing minimum 
risk-management standards in the PSR policy to reflect the PFMI, which 
now represents the relevant set of international standards; (2) include 
all central securities depositories, securities settlement systems, and 
central counterparties in the scope of part I of the PSR policy; (3) 
introduce trade repositories to the scope of part I of the PSR policy; 
(4) clarify the Board's risk-management expectations for six mutually 
exclusive categories of FMI; (5) replace the existing self-assessment 
framework with a broader disclosure expectation; and (6) recognize 
responsibility E from the PFMI, in addition to other relevant 
international guidance, as the basis for cooperation with other 
authorities in regulating, supervising, and overseeing FMIs. The Board 
also proposes several conforming and technical changes to the 
introduction, the discussion of risks in payment, clearing, and 
settlement systems, and part I of the PSR policy.

DATES: Comments are due on or before March 31, 2014.

ADDRESSES: You may submit comments, identified by Docket No. OP-1478, 
by any of the following methods:
     Agency Web site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of message.
     Facsimile: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, 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, Deputy Associate 
Director (202) 872-7581, Emily A. Caron, Senior Financial Services 
Analyst (202) 452-5261, or Kathy C. Wang, Senior Financial Services 
Analyst (202) 872-4991, Division of Reserve Bank Operations and Payment 
Systems; Christopher W. Clubb, Special Counsel (202) 452-3904 or Kara 
L. Handzlik, Counsel (202) 452-3852,

[[Page 2839]]

Legal Division; for users of Telecommunications Device for the Deaf 
(TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    In adopting the PSR policy, the Board's objectives have been to 
foster the safety and efficiency of payment, clearing, and settlement 
systems. Part I of the current policy sets forth the Board's views, and 
related principles and minimum standards, regarding the management of 
risks in payment, clearing, and settlement systems, including those 
operated by the Federal Reserve Banks (Reserve Banks).\2\ In setting 
out its views, the Board seeks to encourage these systems and their 
primary regulators to take the standards in this policy into 
consideration in the design, operation, monitoring, and assessment of 
these systems. The Board is guided by part I when exercising its 
supervisory and regulatory authority over entities under its 
jurisdiction, providing accounts and services, participating in 
cooperative oversight and similar arrangements, and providing Federal 
Reserve intraday credit to eligible account holders. Part I is not 
intended to exert or create supervisory or regulatory authority over 
any particular class of institutions or arrangements where the Board 
does not have such authority.
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    \2\ Part II governs the provision of intraday credit in accounts 
at the Reserve Banks and sets out the general methods used by the 
Reserve Banks to control their intraday credit exposures.
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    Since the early 1980s, the Board has published and periodically 
revised a series of policies encouraging the reduction and management 
of risks in payment and securities settlement systems.\3\ In 1992, the 
Board issued its first ``Policy Statement on Payments System Risk,'' 
which provided a comprehensive statement of its previously adopted 
policies regarding payment system risk reduction, including risk 
management in private large-dollar funds transfer networks, private 
delivery-against-payment securities settlement systems, offshore dollar 
clearing and netting systems, and private small-dollar clearing and 
settlement systems.\4\ Over time, the Board has updated the PSR policy 
to reflect the evolution of payment, clearing, and settlement systems 
that participate in the financial system; incorporate relevant 
international risk-management standards developed by central banks and 
market regulators as the baseline for its expectations; and improve 
transparency in the systems that are subject to its authority.\5\
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    \3\ See 50 FR 21120, (May 22, 1985); 52 FR 29255 (Aug. 6, 1987); 
54 FR 26104 and 26092 (June 21, 1989); and 54 FR 26092 (June 21, 
1989).
    \4\ 57 FR 40455 (Sept. 3, 1992).
    \5\ In 1994, the Board incorporated the Lamfalussy Minimum 
Standards that were set out in the Report of the Committee on 
Interbank Netting Schemes of the Central Banks of the Group of Ten 
Countries, published by the Bank for International Settlements in 
November 1990. 59 FR 67534 (Dec. 29, 1994). See the report at https://www.bis.org/publ/cpss04.pdf.
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    Specifically, in 2004, the Board incorporated two key sets of 
standards into the PSR policy: the Committee on Payment and Settlement 
Systems (CPSS) report on the Core Principles for Systemically Important 
Payment Systems (CPSIPS), which extended and replaced the Lamfalussy 
Minimum Standards, and the CPSS and Technical Committee of the 
International Organization of Securities Commissions (IOSCO) report on 
Recommendations for Securities Settlement Systems (RSSS), which 
provided risk-management standards for securities settlement 
systems.\6\ The CPSS and IOSCO built upon the RSSS and developed the 
Recommendations for Central Counterparties (RCCP) in 2004, which 
provided specific standards for central counterparties; the Board 
incorporated these standards in its PSR policy in 2007.\7\
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    \6\ 69 FR 69926 (Dec. 1, 2004). The CPSIPS and RSSS are 
available at https://www.bis.org/publ/cpss43.htm and https://www.bis.org/publ/cpss46.htm, respectively. The Federal Reserve 
participated in the development of the CPSIPS, and the Federal 
Reserve, the U.S. Securities and Exchange Commission (SEC), and the 
U.S. Commodity Futures Trading Commission (CFTC) participated in the 
development of the RSSS. The CPSIPS and RSSS were adopted as part of 
the Financial Stability Board's (FSB's) Key Standards for Sound 
Financial Systems, which are widely recognized and endorsed by U.S. 
authorities as integral to strengthening global financial stability. 
The FSB is an international forum that was established to develop 
and promote the implementation of effective regulatory, supervisory 
and other financial sector policies. The FSB includes the U.S. 
Department of the Treasury, the Board, and the SEC.
    \7\ 72 FR 2518 (Jan. 19, 2007). The RCCP is available at https://www.bis.org/publ/cpss64.htm. In addition to the Federal Reserve, the 
SEC and the CFTC participated in the development of the RCCP. The 
report was adopted as part of the FSB's Key Standards for Sound 
Financial Systems.
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    In the 2007 revisions, the Board established an expectation for 
certain payment, clearing, and settlement systems to disclose publicly 
self-assessments against the standards incorporated in the policy, as 
appropriate. The Board expected these self-assessments to contain 
sufficient information to allow users and other stakeholders to 
identify, understand, and evaluate the risks of using the system's 
services. In addition to disclosing this information, systems were 
asked to assign themselves a rating with respect to observance of the 
standards. Systems were expected to review and update their self-
assessments at least once every two years.
    Title VIII of the Dodd-Frank Act. Title VIII of the Dodd-Frank Act 
established an enhanced supervisory framework for payment, clearing, 
and settlement systems, defined as financial market utilities under the 
Act, that are designated by the Financial Stability Oversight Council 
(Council) as systemically important.\8\ Among other things, Title VIII 
directs the Board to prescribe, by rule or order, risk-management 
standards for certain designated financial market utilities, including 
those for which the Board is the Supervisory Agency, taking into 
consideration relevant international standards and existing prudential 
requirements.\9\ In July 2012, the Board adopted by regulation 
(Regulation HH) risk-management standards based on the CPSIPS, RSSS, 
and RCCP.\10\
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    \8\ The term ``financial market utility'' is defined in Title 
VIII as ``any 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)). Financial market utilities are a subset of FMIs. 
For example, trade repositories are excluded from the definition of 
a financial market utility.
    \9\ The term ``Supervisory Agency'' is defined in Title VIII as 
the ``Federal agency that has primary jurisdiction over a designated 
financial market utility under Federal banking, securities, or 
commodity futures laws'' (12 U.S.C. 5462(8)). Currently, the Board 
is the Supervisory Agency for two financial market utilities that 
have been designated by the Council--The Clearing House Payments 
Company, L.L.C., on the basis of its role as operator of the 
Clearing House Interbank Payments System, and CLS Bank 
International; these designated financial market utilities are 
subject to the risk-management standards promulgated by the Board 
under section 805(a)(1)(A). These standards also apply to any 
designated financial market utility for which another Federal 
banking agency is the appropriate Title VIII Supervisory Agency. At 
this time, there are no designated financial market utilities in 
this category.
    \10\ 77 FR 45907 (Aug. 2, 2012).
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    CPSS-IOSCO PFMI. In April 2012, CPSS and IOSCO published the PFMI, 
which updated, harmonized, strengthened, and replaced the existing 
standards in the CPSIPS, RSSS, and RCCP.\11\ The PFMI sets forth 24 
risk-management and related principles for payment systems that are 
systemically

[[Page 2840]]

important, central securities depositories, securities settlement 
systems, central counterparties, and trade repositories. The report 
addresses areas such as legal risk, governance, credit and liquidity 
risks, operational risk, general business risk, and other types of 
risk. The report also addresses the interdependencies between and among 
the individual risks, recognizing that attempts to mitigate one type of 
risk might give rise to another. In some cases, a principle will build 
upon others or multiple principles will reference a common theme. 
Therefore, the 24 principles are designed to be applied as a set, and 
not on a stand-alone basis, because of the significant interaction 
among the principles.
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    \11\ The PFMI is available at https://www.bis.org/publ/cpss101a.pdf. In the final rule for Regulation HH, the Board stated 
that it anticipated reviewing the PFMI, consulting with other 
appropriate agencies and the Council, and seeking public comment on 
the adoption of revised standards for designated financial market 
utilities based on the new international standards. See 77 FR 45907, 
45908-09 (Aug. 2, 2012). Concurrent with this proposal, the Board is 
issuing proposed revisions to Regulation HH that take into 
consideration the PFMI.
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    The 24 principles are organized such that each principle comprises 
(1) a headline standard, (2) a list of key considerations that further 
elaborate on the headline standard, and (3) accompanying explanatory 
notes that discuss the objective and rationale of the principle and 
provide additional guidance on how the principle may be implemented. 
Some headline standards and key considerations set out a specific 
minimum requirement to ensure that a minimum level of risk management 
is achieved across FMI types and across jurisdictions. The principles, 
however, do not typically prescribe a specific tool or arrangement to 
achieve their requirements in recognition that the means to satisfy a 
given requirement may vary by the type of entity or the market it 
serves.
    The PFMI contains new and heightened requirements and more-
extensive guidance for FMIs than did the previous set of international 
standards, such as providing more-extensive guidance on governance of 
an FMI and placing greater emphasis on transparency. It also requires 
that certain FMIs maintain a higher level of financial resources to 
address credit risk than in the past; it provides a separate set of 
requirements with respect to liquidity risk; and it contains higher 
requirements with respect to the type and frequency of testing to 
assess the sufficiency of financial resources to address both credit 
and liquidity risks. Additionally, the PFMI sets forth new requirements 
for FMIs to plan for recovery and orderly wind-down, to manage general 
business risk, to manage the risks associated with tiered 
participation, and for central counterparties to have rules and 
procedures that enable segregation and portability.
    In addition to the 24 principles, the PFMI sets out five 
responsibilities for authorities responsible for effective regulation, 
supervision, and oversight of FMIs, including central banks. The five 
responsibilities call for (A) FMIs to be subject to appropriate and 
effective regulation, supervision, and oversight, (B) FMI authorities 
to have the powers and resources necessary to carry out effectively 
their responsibilities with respect to FMIs, (C) FMI authorities to 
clearly define and disclose their policies with respect to FMIs, (D) 
FMI authorities to adopt the PFMI and apply it consistently, and (E) 
FMI authorities to cooperate with each other, as appropriate, in 
promoting the safety and efficiency of FMIs.
    Overall, the PFMI reflects more than a decade of experience with 
international standards for FMIs, important lessons from recent 
financial crises, and other relevant policy work by the international 
standard-setting bodies. The Federal Reserve, along with the U.S. 
Securities and Exchange Commission (SEC) and the U.S. Commodity Futures 
Trading Commission (CFTC), had a significant role in the development of 
this document. The report also reflects broad market input, including 
from U.S. FMIs and market participants.\12\
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    \12\ The CPSS and IOSCO published a consultative version of the 
PFMI in March 2011 and received 120 comment letters on that version. 
All designated financial market utilities, as well as many of their 
major participants, provided comment on the consultative version.
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    CPSS-IOSCO Disclosure Framework for FMIs. In December 2012, the 
CPSS and IOSCO followed up on the publication of the PFMI by publishing 
their report on the Principles for Financial Market Infrastructures: 
Disclosure Framework and Assessment Methodology (``disclosure 
framework'' and ``assessment methodology'').\13\ The disclosure 
framework prescribes the form and content of the disclosures expected 
of FMIs in principle 23 of the PFMI. The assessment methodology 
provides guidance to assessors for evaluating observance of the 24 
principles and five responsibilities set forth in the PFMI. The Federal 
Reserve, along with the SEC and the CFTC, had a significant role in the 
development of this document.
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    \13\ The disclosure framework and assessment methodology are 
available at https://www.bis.org/publ/cpss106.pdf.
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II. Discussion of Proposed Policy Changes

    The Board is proposing to revise part I of its PSR policy in light 
of the international risk-management standards in the PFMI. The Board 
is also revising part I in light of the enhanced supervisory framework 
for designated financial market utilities set forth in Title VIII of 
the Dodd-Frank Act. In particular, certain revisions are intended to 
clarify that designated financial market utilities that are required to 
comply with Regulation HH are not also subject to the risk-management 
or transparency expectations set out in the policy.
    The Board requests comments on its proposal to (1) revise the 
Board's existing minimum risk-management standards in the PSR policy to 
reflect the PFMI, (2) include all central securities depositories, 
securities settlement systems, and central counterparties in the scope 
of part I of the PSR policy, (3) introduce trade repositories to the 
scope of part I of the PSR policy, (4) clarify the Board's risk-
management expectations for six mutually exclusive categories of FMI, 
(5) replace the existing self-assessment framework with a broader 
disclosure expectation, and (6) recognize responsibility E from the 
PFMI, in addition to other relevant international guidance, as the 
basis for cooperation with other authorities in regulating, 
supervising, and overseeing FMIs. The Board also proposes several 
conforming and technical changes to the introduction, the discussion of 
risks in payment, clearing, settlement systems, and part I of the PSR 
policy.
    The Board proposes that the revised policy become effective when 
the final version is published in the Federal Register. The Board 
recognizes, however, that several of the expectations in the revised 
policy are new or heightened and may require additional time to 
implement, such as up to six months after finalization of the 
policy.\14\ These may include the revised expectations in section I.B.2 
on transparency and the expectation to manage risks arising in tiered 
participation arrangements under principle 19 in the appendix. They may 
also include certain aspects of principle 3 on framework for the 
comprehensive management of risks, principle 4 on credit risk, 
principle 7 on liquidity risk, and principle 15 on general business 
risk in the appendix.
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    \14\ The Board would monitor implementation with respect to 
these expectations through the supervisory process.
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1. Revise the Board's Existing Minimum Risk-Management Standards in the 
PSR Policy To Reflect the PFMI

    The Board proposes to incorporate the PFMI in part I of the PSR 
policy by incorporating the headline standards from the 24 principles 
with no modification as the relevant risk-

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management standards for all central securities depositories, 
securities settlement systems, central counterparties, and trade 
repositories, as well as certain payment systems. This approach is 
consistent with the Board's past actions to incorporate appropriate 
international standards for key payment, clearing, and settlement 
systems into its policy statement. The new headline standards will 
replace the existing standards from the CPSIPS, RSSS, and RCCP 
previously set out in sections I.C.1 and I.C.2 of the PSR policy. For 
readability, the Board is proposing to move the list of headline 
standards into an appendix to the policy.
    The Board believes these standards should be incorporated into part 
I of the PSR policy because the PFMI establishes an important framework 
for promoting sound risk management in FMIs, both domestically and 
internationally. The safety and efficiency of FMIs affect the safety 
and soundness of U.S. financial institutions and, in many cases, are 
vital to the financial stability of the United States. The Board has 
recognized and endorsed the PFMI as integral to strengthening the 
stability of the broader financial system. In addition, the Financial 
Stability Board (FSB) has replaced the CPSIPS, RSSS, and RCCP with the 
PFMI in its Key Standards for Sound Financial Systems.\15\ The Basel 
Committee on Banking Supervision (BCBS) considers the application of 
the PFMI to be an important factor in determining capital charges for 
bank exposures to central counterparties related to over-the-counter 
derivatives, exchange-traded derivatives, and securities financing 
transactions.\16\ Central banks and market regulators around the world 
are now taking steps to incorporate the PFMI into the legal and 
supervisory frameworks applicable to FMIs.\17\
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    \15\ For the FSB's Key Standards for Sound Financial Systems, 
see https://www.financialstabilityboard.org/cos/key_standards.htm.
    \16\ See BCBS, Capital Requirements for Bank Exposures to 
Central Counterparties, July 2012, (https://www.bis.org/publ/bcbs227.pdf) and BCBS, Capital Treatment of Bank Exposures to 
Central Counterparties, consultative document, June 2013 (https://www.bis.org/publ/bcbs253.pdf).
    \17\ Progress on implementation as of April 5, 2013, is 
reflected in CPSS-IOSCO, Implementation Monitoring of PFMIs--Level 1 
Assessment Report, August 2013 (https://www.bis.org/publ/cpss111.pdf).
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    In a separate, related Federal Register notice, the Board proposes 
to revise concurrently Regulation HH in consideration of the PFMI. The 
language proposed for the risk-management standards in the PSR policy 
is different from the language proposed in the revisions to Regulation 
HH. In the PSR policy, the Board proposes to maintain its long-standing 
approach of incorporating the headlines of the international standards 
with no modification. In implementing the PSR policy, the Board 
anticipates that it will be guided by the key considerations and 
explanatory notes of the PFMI. As an enforceable federal regulation, 
however, the text of Regulation HH requires a greater degree of 
clarity, so more detail was included in the regulatory text, including 
concepts from the key considerations and explanatory text of the PFMI.

2. Include all Central Securities Depositories, Securities Settlement 
Systems, and Central Counterparties in the Scope of Part I of the PSR 
Policy

    Consistent with the scope of the PFMI, the Board proposes to expand 
the scope of part I of the PSR policy to include all central securities 
depositories, securities settlement systems, and central 
counterparties, irrespective of the value or nature of transactions 
processed by the system. The scope of the current part I of the PSR 
policy includes only those central securities depositories, securities 
settlement systems, and central counterparties that expect to settle a 
daily aggregate gross value of U.S. dollar-denominated transactions 
exceeding $5 billion on any day during the next 12 months. The Board 
believes all of these types of FMIs should be within the scope of the 
policy because they perform activities that are critical to the 
functioning of the financial markets or support the transparency of the 
market they serve. As discussed further below, part I is not intended 
to exert supervisory or regulatory authority over any particular class 
of institutions or arrangements where the Board does not have such 
authority.
    The Board also proposes to revise part I of the PSR policy to 
reflect the functional definitions of ``securities settlement system'' 
and ``central securities depository'' in the PFMI. The current PSR 
policy is based on the definitions for these terms provided in the 
RSSS, which defines a securities settlement system as ``the full set of 
institutional arrangements for confirmation, clearance, and settlement 
of securities trades and safekeeping of securities'' and a central 
securities depository as ``an institution for holding securities that 
enables securities transactions to be processed by means of book 
entries.'' For consistency with the PFMI, the Board proposes to revise 
the policy to define securities settlement system more narrowly as an 
entity that ``enables securities to be transferred and settled by book 
entry and allows transfers of securities free of or against payment'' 
and to define a central securities depository as an entity that 
``provides securities accounts and central safekeeping services.''

3. Introduce Trade Repositories Into the Scope of Part I of the PSR 
Policy

    Consistent with the scope of the PFMI, the Board proposes to expand 
the scope of part I of the PSR policy to include trade repositories. 
(The Board notes that it does not have any direct supervisory authority 
over a trade repository at this time.) Trade repositories are entities 
that maintain a centralized electronic record of transaction data and 
have emerged as an important type of FMI, especially in the over-the-
counter derivatives market. This type of FMI improves market 
transparency by providing data to relevant authorities and the public 
in line with their respective information needs. Timely and reliable 
access to data stored in a trade repository can improve the ability of 
relevant authorities and the public to identify and evaluate potential 
risks to the broader financial system. Trade repositories should be 
expected to manage their risks in a manner consistent with the PFMI to 
help ensure that these public interest objectives are met.

4. Clarify the Board's Risk-Management Expectations for Six Mutually 
Exclusive Categories of FMI

    The Board proposes revisions to the PSR policy that define six 
mutually exclusive categories of FMI and set forth separately the 
Board's risk-management expectations for each category. Five of the 
proposed categories are set out in section I.B.1 of the revised policy; 
these are (1) the Fedwire Funds Service and the Fedwire Securities 
Service (collectively, Fedwire Services); (2) designated financial 
market utilities for which the Board is the Supervisory Agency under 
Title VIII of the Dodd-Frank Act; (3) other FMIs that are subject to 
the Board's supervisory authority under the Federal Reserve Act; (4) 
all other central securities depositories, securities settlement 
systems, central counterparties, and trade repositories; and (5) other 
systemically important offshore and cross-border payment systems. An 
additional category for other payment systems within the scope of the 
policy is set out in section I.C of the revised policy. The Board 
believes the categories are necessary to avoid confusion about how the 
policy addresses each category of FMI in light

[[Page 2842]]

of the changes to the scope of the policy and the passage of the Dodd-
Frank Act. The Board recognizes that other authorities may regulate 
FMIs within the scope of this policy, and the Board encourages these 
authorities to adopt policies consistent with the PFMI.
    Fedwire Services. The Board proposes a category in the PSR policy 
for the Fedwire Services. The Board expects that the Fedwire Services 
meet or exceed the standards set forth in the proposed appendix to the 
policy. The Board anticipates that it will be guided by the key 
considerations and explanatory notes in the PFMI, including the 
guidance on central bank-operated systems, in supervising the Fedwire 
Services. This expectation is consistent with past practice; the Board 
has historically recognized the critical role that the Fedwire Services 
play in the financial system and has required them to meet or exceed 
the applicable international standards incorporated into the PSR 
policy.
    Consistent with the previous international standards, the PFMI 
recognizes that flexibility in implementation is warranted for central 
bank-operated systems to meet the objectives of the standards because 
of central banks' roles as monetary authorities and liquidity 
providers. The Board believes that these principles may include 
principle 2 on governance, principle 3 on the framework for the 
comprehensive management of risks, principle 4 on credit risk, 
principle 5 on collateral, principle 7 on liquidity risk, principle 13 
on participant-default rules and procedures, principle 15 on general 
business risk, and principle 18 on access and participation 
requirements.\18\
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    \18\ Relevant references from the explanatory notes of the PFMI 
include paragraphs 1.23 and 3.2.7 and footnotes 45, 134, and 144.
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    One example of a principle where the Board proposes to allow 
flexibility in application for the Fedwire Services is principle 15 on 
general business risk. A key consideration in principle 15 requires 
FMIs to maintain viable recovery or orderly wind-down plans that 
consider general business risk and to hold sufficient liquidity and 
capital reserves to implement the plans. The Fedwire Services do not 
face the risk that a business shock would cause the service to wind 
down in a disorderly manner and disrupt the stability of the financial 
system. The Federal Reserve, as the central bank, would support a 
recovery or orderly wind-down of the service, as appropriate to meet 
public policy objectives. Therefore, the Board proposes not to require 
the Fedwire Services to develop recovery or orderly wind-down 
plans.\19\ In order to foster competition with private-sector FMIs, 
however, the Board proposes to require the Federal Reserve priced 
services to hold six months of the Fedwire Funds Service's current 
operating expenses as liquid financial assets and equity on the pro 
forma balance sheet.\20 21\ This balance sheet is used for imputing 
costs in the private-sector adjustment factor and, as a result, 
establishing Fedwire Funds Service fees.\22\ If it is necessary to 
impute additional assets and equity, the incremental cost would be 
incorporated into the pricing of Fedwire Funds Service fees. The Board 
may reexamine the six-month requirement in light of the final rule for 
Regulation HH and issues of competitive equity between private-sector 
systems and the Fedwire Funds Service.\23\
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    \19\ The Board also proposes not to require the Fedwire Services 
to develop recovery or orderly wind-down plans as required under 
principle 3 on framework for the comprehensive management of risks.
    \20\ As required by the Monetary Control Act of 1980, Board 
policy has historically required and will continue to require that 
the Fedwire Services be operated and priced in a manner that fosters 
competition, improves the efficiency of the payment mechanism, and 
lowers costs of these services to society. The Board established a 
set of pricing principles that governs the schedule of fees for the 
Federal Reserve priced services, including the Fedwire Services, 
that is consistent with these objectives. (12 U.S.C. 248a(c)(3); 
https://www.federalreserve.gov/paymentsystems/pfs_principles.htm).
    \21\ Consistent with the PFMI, the calculation of these current 
operating expenses would exclude depreciation and amortization 
expenses.
    \22\ Federal Reserve priced services fees are set to recover, 
over the long run, all direct and indirect costs and imputed costs, 
including financing costs, taxes, and certain other expenses, as 
well as the return on equity (profit) that would have been earned if 
a private business provided the services. The imputed costs and 
imputed profit are collectively referred to as the private-sector 
adjustment factor. The Board's current method for calculating the 
private-sector adjustment factor involves developing an estimated 
Federal Reserve priced services pro forma balance sheet using actual 
priced services assets and liabilities. The remaining components on 
the balance sheet, such as equity, are imputed as if these services 
were provided by a publicly traded firm. The capital structure of 
imputed equity is derived from the market for publicly traded firms, 
subject to minimum equity constraints consistent with those required 
by the Federal Deposit Insurance Corporation for a well-capitalized 
institution.
    \23\ The Board does not plan to impose this requirement on the 
Fedwire Securities Service. There are no competitors to the Fedwire 
Securities Service that would face such a requirement. Therefore, 
imposing such a requirement when pricing securities services would 
artificially increase the cost of these services, inconsistent with 
the intent of the Monetary Control Act of 1980 that services be 
provided at the lowest cost to society (see https://www.federalreserve.gov/paymentsystems/pfs_principles.htm).
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    Designated financial market utilities for which the Board is the 
Supervisory Agency under Title VIII of the Dodd-Frank Act. The Board 
proposes to include a category in the PSR policy for designated 
financial market utilities for which the Board is the Supervisory 
Agency under Title VIII of the Dodd-Frank Act. The proposed part I of 
the PSR policy states explicitly that these FMIs are expected to comply 
with the risk-management requirements in Regulation HH only. The 
discussion of this category in the policy is intended to clarify that 
designated financial market utilities subject to Regulation HH are not 
within the scope of the risk-management expectations set out in part I 
of the PSR policy.
    Other financial market infrastructures subject to the Board's 
supervisory authority under the Federal Reserve Act. The Board proposes 
to include a category for other private-sector FMIs that are subject to 
the Board's authority. This category would include FMIs that are 
chartered as state member banks, trust companies, and Edge or agreement 
corporations, other than those that are designated financial market 
utilities subject to Regulation HH. The Board expects these FMIs to 
meet or exceed the standards proposed in the appendix.
    All other central securities depositories, securities settlement 
systems, central counterparties, and trade repositories. The Board 
proposes to include a category for all other central securities 
depositories, securities settlement systems, central counterparties, 
and trade repositories, whether they are located within or outside of 
the United States, and encourages these FMIs to meet or exceed the 
standards proposed in the appendix. Consistent with the scope of the 
PFMI, the Board supports the application of the standards in the 
appendix to these FMIs, regardless of size, because they perform 
activities that are critical to market functioning or support the 
transparency of the market they serve. Where the Board does not have 
authority over a central securities depository, securities settlement 
system, central counterparty, or trade repository, the Board will be 
guided by this policy in its cooperative efforts with other FMI 
authorities.
    Other systemically important offshore and cross-border payment 
systems. The Board proposes a category for systemically important 
offshore and cross-border payment systems that are not included in any 
of the categories above. These systems may be used by U.S. financial 
institutions, clear or settle U.S. dollars, or have an impact on 
financial stability, more broadly. The Board encourages these payment 
systems to meet or exceed the standards proposed in the appendix. The 
Board will be guided by this policy in its

[[Page 2843]]

cooperative efforts with other payment system authorities.
    Other payment systems within the scope of the policy. The Board 
proposes a category in the revised policy for other payment systems 
that exceed the existing $5 billion daily transaction threshold (or 
equivalent) but that are not captured in the categories outlined above 
and in proposed section I.B.1 on risk management. The Board encourages 
these payment systems to comply with the general policy expectations 
previously set forth in section I.B. of the policy (section I.C. in the 
proposed revised policy).
    The current part I of the PSR policy follows an organizational 
approach that establishes general policy expectations for all payment, 
clearing, and settlement systems within the scope of the policy and 
then adds heightened expectations for systemically important systems. 
In light of the PFMI and Regulation HH, the Board is proposing to 
modify this approach to clarify its expectations. Under the proposed 
revisions, the general expectations would now be confined to ``other 
payment systems within the scope of the policy'' for purposes of 
simplicity and clarity. There would be no need to apply separately the 
general expectations to the other categories of FMIs. The general 
expectations themselves are consistent in substance with principles 1 
through 3 of the PFMI and would remain unchanged.

5. Replace the Existing Self-Assessment Framework With a Broader 
Disclosure Expectation

    The Board proposes to replace the existing self-assessment 
framework for systemically important systems, as previously set out in 
section I.C.3, with a broader expectation of public disclosure set out 
in proposed section I.B.2 on transparency. The Board would expect the 
FMIs addressed in section I.B.1 that are subject to its authority, 
except designated financial market utilities that are subject to 
Regulation HH, to complete the disclosure framework and to disclose 
their responses to the public.\24\ The Board also encourages FMIs that 
are not subject to its authority to disclose their responses to the 
disclosure framework and will work with the appropriate authorities to 
promote such disclosures.
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    \24\ The Board's proposed revised Regulation HH imposes an 
equivalent public disclosure requirement.
---------------------------------------------------------------------------

    The Board believes that comprehensive public disclosures by FMIs 
will promote increased understanding among participants, authorities, 
and the broader public of the activities of an FMI, its risk profile, 
and its risk-management practices and will thus support sound 
decisionmaking by FMIs and their stakeholders. Comprehensive 
disclosures will also facilitate the implementation and ongoing 
monitoring of observance of the risk-management standards in the 
appendix. Consequently, comprehensive disclosures are a means to 
achieve greater stability in the financial system.
    The Board believes that the disclosure framework is an appropriate 
template for these disclosures because it provides an international 
baseline that will promote consistent disclosures by FMIs around the 
world. The disclosure framework includes background information on the 
FMI's function and the market it serves, basic performance statistics 
for the FMI, and a description of the FMI's organization, legal and 
regulatory framework, system design, and operations as well as a 
narrative for each principle that summarizes the FMI's approach to 
observing the principle. The accompanying assessment methodology 
provides guiding questions that an FMI may use to guide the content and 
level of detail of its narrative. Unlike the existing self-assessment 
framework, however, the Board does not expect the FMI to assign itself 
a rating of observance for each standard.
    Many of the expectations in the existing self-assessment framework 
with respect to frequency of updates, review and approval, and 
publication of the disclosure will remain the same. The Board will 
continue to expect an FMI to update the relevant parts of its 
disclosure following changes to the FMI or the environment in which it 
operates that would significantly change the accuracy of its public 
disclosure. At a minimum, an FMI would be expected to review and update 
as warranted its disclosure every two years. The Board will continue to 
expect an FMI's senior management and board of directors to review and 
approve the FMI's disclosure. Lastly, the Board continues to expect the 
FMI to make its disclosure readily available to the public, such as by 
posting it on the FMI's public Web site.

6. Recognize Responsibility E From the PFMI, in Addition to Other 
Relevant International Guidance, as the Basis for Cooperation With 
Other Authorities

    The Board proposes to incorporate responsibility E from the PFMI in 
the PSR policy, in addition to existing international guidance, as the 
basis for its cooperation with other authorities in the regulation, 
supervision, and oversight of FMIs. The Board has a long-standing 
history of cooperation with other authorities. The Board believes that 
cooperative arrangements among authorities are an effective and 
practical means to promote effective risk management and transparency 
by FMIs. As stated in the proposed revisions, where the Board does not 
have statutory or exclusive authority over an FMI covered by the 
policy, the Board will be guided in its interactions with other 
domestic and foreign authorities by international principles on 
cooperative arrangements for the regulation, supervision, and oversight 
of FMIs, including responsibility E in the PFMI and part B of the CPSS 
Central Bank Oversight of Payment and Settlement Systems report.\25\ 
Accordingly, the Board proposes to create a new section I.D in the PSR 
policy to highlight and expand the existing discussion in the current 
policy of cooperation among authorities in regulating, supervising, and 
overseeing FMIs.
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    \25\ See CPSS, Central Bank Oversight of Payment and Settlement 
Systems, Part B on ``Principles for international cooperative 
oversight,'' May 2005, available at https://www.bis.org/publ/cpss68.htm.
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III. Request For Comment

    The Board requests comment on the proposed revisions to its PSR 
policy. Where possible, commenters should provide both quantitative 
data and detailed analysis in their comments, particularly with respect 
to suggested alternatives to the proposed revisions. Commenters should 
also explain the rationale for their suggestions. In particular, the 
Board requests comment on whether the revisions are sufficiently clear 
and achieve the Board's intended objectives. The Board also requests 
comment on the following specific questions:
    1. Should the Board incorporate only the headline standards from 
the PFMI in the PSR policy or should the Board also incorporate key 
considerations?
    2. Has the Board clearly articulated the applicability of the risk-
management expectations in the PSR policy to each category and type of 
FMI?
    3. Are there other risk-management expectations that the Board 
should include in the PSR policy?
    4. Should the Board provide specific standards for the Fedwire 
Services in an appendix to the PSR policy to clarify how the PFMI will 
be applied to these central bank-operated systems?
    5. Is the proposed application of principle 15 in the appendix to 
the Fedwire Funds Service appropriate? The Board considered the 
alternative of

[[Page 2844]]

requiring the Fedwire Funds Service to impute holdings of liquid 
financial assets and equity that are specific to Fedwire Funds Service 
itself to meet the requirement, but believes that it would likely be 
difficult to implement in practice. For the case in which an FMI is 
part of a larger legal entity, are there any reasonable methodologies 
for determining which of the liquid financial assets and equity held at 
the legal entity level belong to a particular service line?
    6. Are the proposed triggers for reviewing and updating a 
disclosure appropriate? If not, what other triggers would ensure 
published disclosures remain accurate?
    7. As discussed above, the Board recognizes that certain 
expectations in the policy may require additional time to implement. 
Besides those expectations listed above, are there other expectations 
that may require additional time to implement? Is six months sufficient 
to implement changes to meet these expectations?

IV. Administrative Law Matters

1. Competitive Impact Analysis

    The Board has established procedures for assessing the competitive 
impact of rule or policy changes that have a substantial impact on 
payment system participants.\26\ Under these procedures, the Board will 
assess whether a change would have a direct and material adverse effect 
on the ability of other service providers to compete effectively with 
the Federal Reserve in providing similar services due to differing 
legal powers or constraints, or due to a dominant market position of 
the Federal Reserve deriving from such differences. If no reasonable 
modifications would mitigate the adverse competitive effects, the Board 
will determine whether the anticipated benefits are significant enough 
to proceed with the change despite the adverse effects.
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    \26\ These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System,'' as revised 
in March 1990 (55 FR 11648 (Mar. 29, 1990)).
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    The proposed policy revisions provide that Reserve Bank systems 
will be treated similarly to private-sector systems and thus will have 
no material adverse effect on the ability of other service providers to 
compete effectively with the Reserve Banks in providing payment and 
securities settlement services. As stated above, there are several 
risk-management standards in the appendix for which flexibility in 
implementation will be necessary for the Fedwire Services given the 
Federal Reserve's legal framework and structure and its roles as 
monetary authority and liquidity provider. The Board recognizes, 
however, the critical role that the Fedwire Services play in the 
financial system and will require them to meet or exceed the applicable 
international standards incorporated into the PSR policy. Where 
appropriate to foster competition with private-sector systems, the 
Board proposes to incorporate the cost of certain requirements into the 
pricing of Fedwire Services. Furthermore, if the Board determines that 
its approach to applying the standards in the appendix to the Fedwire 
Services creates a competitive imbalance between the Fedwire Services 
and any private-sector competitors that provide similar services, the 
Board may reexamine the requirements for the Fedwire Services. 
Therefore, the Board believes the proposed policy will have no material 
adverse effect on the ability of other service providers to compete 
effectively with the Reserve Banks in providing payment and securities 
settlement services.

2. 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 proposed 
policy 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 payment, clearing, and 
settlement systems. Therefore, no collections of information pursuant 
to the Paperwork Reduction Act are contained in the proposed policy.

V. Federal Reserve Policy On Payment System Risk

Introduction

Risks In Payment, Clearing, Settlement, and Recording Systems

PART I. RISK MANAGEMENT FOR FINANCIAL MARKET INFRASTRUCTURES

A. Scope
B. Policy expectations for certain financial market infrastructures
1. Risk management
    a. Fedwire Services
    b. Designated financial market utilities for which the Board is the 
Supervisory Agency under Title VIII of the Dodd-Frank Act
    c. Other financial market infrastructures that are subject to the 
Board's supervisory authority under the Federal Reserve Act
    d. All other central securities depositories, securities settlement 
systems, central counterparties, and trade repositories
    e. Other systemically important offshore and cross-border payment 
systems
2. Transparency
C. General policy expectations for other payment systems within the 
scope of the policy
1. Establishment of a risk-management framework
    a. Identify risks clearly and set sound risk-management objectives
    b. Establish sound governance arrangements to oversee the risk-
management framework
    c. Establish clear and appropriate rules and procedures to carry 
out the risk-management objectives
    d. Employ the resources necessary to achieve the system's risk-
management objectives and implement effectively its rules and 
procedures
2. Other considerations for a risk-management framework
D. Cooperation with other authorities in regulating, supervising, and 
overseeing financial market infrastructures

PART II. FEDERAL RESERVE INTRADAY CREDIT POLICIES

APPENDIX--CPSS-IOSCO Principles for Financial Market Infrastructures

Introduction

    Financial market infrastructures (FMIs) are critical components 
of the nation's financial system. FMIs are multilateral systems 
among participating financial institutions, including the system 
operator, used for the purposes of clearing, settling, or recording 
payments, securities, derivatives, or other financial 
transactions.27 28 FMIs include payment

[[Page 2845]]

systems, central securities depositories, securities settlement 
systems, central counterparties, and trade repositories. The safety 
and efficiency of these systems may affect the safety and soundness 
of U.S. financial institutions and, in many cases, are vital to the 
financial stability of the United States. Given the importance of 
FMIs, the Board of Governors of the Federal Reserve System (Board) 
has developed this policy to set out the Board's views, and related 
standards, regarding the management of risks that FMIs present to 
the financial system and to the Federal Reserve Banks (Reserve 
Banks). In adopting this policy, the Board's objective is to foster 
the safety and efficiency of payment, clearing, settlement, and 
recording systems and to promote financial stability, more broadly.
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    \27\ This definition is based on the definition provided in the 
Committee on Payment and Settlement Systems (CPSS) and Technical 
Committee of the International Organization of Securities 
Commissions (IOSCO) report on Principles for Financial Market 
Infrastructures (PFMI), April 2012, available at https://www.bis.org/publ/cpss101.htm. Further, an FMI generally embodies one or more of 
the following characteristics: (1) A multilateral arrangement with 
three or more participants; (2) a set of rules and procedures, 
common to all participants, that govern the clearing (comparison 
and/or netting), settlement, or recording of payments, securities, 
derivatives, or other financial transactions; (3) a common technical 
infrastructure for conducting the clearing, settlement, or recording 
process; and (4) a risk-management or capital structure that takes 
into account the multilateral dependencies inherent in the system.
    \28\ The term ``financial institution,'' as used in this policy, 
refers to a broad array of organizations that engage in financial 
activity, including depository institutions, securities dealers, and 
futures commission merchants.
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    Part I of this policy sets out the Board's views, and related 
standards, regarding the management of risks in FMIs, including 
those operated by the Reserve Banks. In setting out its views, the 
Board seeks to encourage FMIs and their primary regulators to take 
the standards in this policy into consideration in the design, 
operation, monitoring, and assessment of these systems. The Board 
will be guided by this part, in conjunction with relevant laws, 
regulations, and other Federal Reserve policies, when exercising its 
supervisory and regulatory authority over FMIs or their 
participants, providing accounts and services to FMIs, participating 
in cooperative oversight and similar arrangements for FMIs with 
other authorities, or providing intraday credit to eligible Federal 
Reserve account holders. Designated financial market utilities 
subject to Regulation HH are not subject to the risk-management or 
transparency expectations set out in this policy.\29\
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    \29\ The term ``financial market utility'' is defined in Title 
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) as ``any 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.'' Trade repositories, which the Dodd-Frank Act defines as 
providing ``facilities for comparison of data respecting the terms 
of settlement of securities or futures transactions,'' are not 
included in the term ``financial market utility'' (12 U.S.C. 5462). 
Financial market utilities are, therefore, a subset of the broader 
set of entities defined as FMIs. Under Title VIII, financial market 
utilities are designated as systemically important by the Financial 
Stability Oversight Council. The Board's Regulation HH is discussed 
in section I.B.1.b below.
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    Part II of this policy governs the provision of intraday credit 
or ``daylight overdrafts'' in accounts at the Reserve Banks and sets 
out the general methods used by the Reserve Banks to control their 
intraday credit exposures.\30\ Under this part, the Board recognizes 
that the Federal Reserve has an important role in providing intraday 
balances and credit to foster the smooth operation of the payment 
system. The Reserve Banks provide intraday balances by way of 
supplying temporary, intraday credit to healthy depository 
institutions, predominantly through collateralized intraday 
overdrafts.\31\ The Board believes that such a strategy enhances 
intraday liquidity while controlling risk to the Reserve Banks. Over 
time, the Board aims to reduce the reliance of the banking industry 
on uncollateralized intraday credit by providing incentives to 
collateralize daylight overdrafts. The Board also aims to limit the 
burden of the policy on healthy depository institutions that use 
small amounts of intraday credit.
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    \30\ To assist depository institutions in implementing part II 
of this policy, the Board has prepared two documents, the Overview 
of the Federal Reserve's Payment System Risk Policy (Overview) and 
the Guide to the Federal Reserve's Payment System Risk Policy 
(Guide), which are available at https://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm. The Overview summarizes the 
Board's policy on the provision of intraday credit, including net 
debit caps and daylight overdraft fees, and is intended for use by 
institutions that incur only small amounts of daylight overdrafts. 
The Guide explains in detail how these policies apply to different 
institutions and includes procedures for completing a self-
assessment and filing a cap resolution, as well as information on 
other aspects of the policy.
    \31\ The term ``depository institution,'' as used in this 
policy, refers not only to institutions defined as depository 
institutions in 12 U.S.C. 461(b)(1)(A), but also to U.S. branches 
and agencies of foreign banking organizations, Edge and agreement 
corporations, trust companies, and bankers' banks, unless the 
context indicates a different reading.
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    Through this policy, the Board expects financial system 
participants, including private-sector FMIs and the Reserve Banks, 
to reduce and control settlement and other systemic risks arising in 
FMIs, consistent with the smooth operation of the financial system. 
This policy is also designed to govern the provision of intraday 
balances and credit while controlling the Reserve Banks' risk by (1) 
making financial system participants and FMIs aware of the types of 
basic risk that may arise in the payment, clearing, settlement, or 
recording process; (2) setting explicit risk-management 
expectations; (3) promoting appropriate transparency by FMIs to help 
inform participants and the public; and (4) establishing the policy 
conditions governing the provision of Federal Reserve intraday 
credit to eligible account holders. The Board's adoption of this 
policy in no way diminishes the primary responsibilities of 
financial system participants to address the risks that may arise 
through their operation of or participation in FMIs.

RISKS IN PAYMENT, CLEARING, SETTLEMENT, AND RECORDING SYSTEMS

    The basic risks in payment, clearing, settlement, and recording 
systems may include credit risk, liquidity risk, operational risk, 
and legal risk. In the context of this policy, these risks are 
defined as follows: \32\
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    \32\ The definitions of credit risk, liquidity risk, operational 
risk, and legal risk are consistent with those presented in the 
PFMI.
---------------------------------------------------------------------------

     Credit risk: the risk that a counterparty, whether a 
participant or other entity, will be unable to meet fully its 
financial obligations when due, or at any time in the future.
     Liquidity risk: the risk that a counterparty, whether a 
participant or other entity, will be unable to meet fully its 
financial obligations when due, although it may be able to do so in 
the future. An FMI, through its design or operation, may bear or 
generate liquidity risk in one or more currencies in its payment or 
settlement process. In this context, liquidity risk may arise 
between or among the system operator and the participants in the 
FMI, the system operator and other entities (such as settlement 
banks, nostro agents, or liquidity providers), the participants in 
the FMI and other entities, or two or more participants in the FMI.
     Operational risk: the risk that deficiencies in 
information systems or internal processes, human errors, management 
failures, or disruptions from external events will result in the 
reduction, deterioration, or breakdown of services provided by the 
FMI.\33\
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    \33\ Operational risk also includes physical threats, such as 
natural disasters and terrorist attacks, and information security 
threats, such as cyber attacks. Further, deficiencies in information 
systems or internal processes include errors or delays in 
processing, system outages, insufficient capacity, fraud, data loss, 
and leakage.
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     Legal risk: the risk of loss from the unexpected or 
uncertain application of a law or regulation.
    These risks also arise between financial institutions as they 
clear, settle, and record payments and other financial transactions 
and must be managed by institutions, both individually and 
collectively.\34\
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    \34\ Several existing regulatory and bank supervision guidelines 
and policies also are directed at financial institutions' management 
of the risks posed by interbank payment and settlement activity. For 
example, the Board's Regulation F (12 CFR Part 206) directs insured 
depository institutions to establish policies and procedures to 
avoid excessive exposures to any other depository institution, 
including exposures that may be generated through the clearing and 
settlement of payments.
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    Further, FMIs may increase, shift, concentrate, or otherwise 
transform risks in unanticipated ways. FMIs, for example, may pose 
systemic risk to the financial system because the inability of one 
or more of its participants to perform as expected may cause other 
participants to be unable to meet their obligations when due. The 
failure of one or more of an FMI's participants to settle their 
payments or other financial transactions as expected, in turn, could 
create credit or liquidity problems for participants and their 
customers, the system operator, other financial institutions, and 
the financial market the FMI serves. Thus, such a failure might lead 
ultimately to a disruption in the financial markets more broadly and 
undermine public confidence in the nation's financial system.
    Mitigating the risks that arise in FMIs is especially important 
because of the interdependencies such systems inherently create 
among financial institutions. In many cases, interdependencies are a 
normal part of an FMI's structure or operations. Although they can 
facilitate the safety and efficiency of

[[Page 2846]]

the FMI's payment, clearing, settlement, or recording processes, 
interdependencies can also present an important source or 
transmission channel of systemic risk. Disruptions can originate 
from any of the interdependent entities, including the system 
operator, the participants in the FMI, and other systems, and can 
spread quickly and widely across markets if the risks that arise 
among these parties are not adequately measured, monitored, and 
managed. For example, interdependencies often create complex and 
time-sensitive transaction and payment flows that, in combination 
with an FMI's design, can lead to significant demands for intraday 
credit or liquidity, on either a regular or an extraordinary basis.
    The Board recognizes that the Reserve Banks, as settlement 
institutions, have an important role in providing intraday balances 
and credit to foster the smooth operation and timely completion of 
money settlement processes among financial institutions and between 
financial institutions and FMIs. To the extent that the Reserve 
Banks are the source of intraday credit, they may face a risk of 
loss if such intraday credit is not repaid as planned. In addition, 
measures taken by Reserve Banks to limit their intraday credit 
exposures may shift some or all of the associated risks to financial 
institutions and FMIs.
    In addition, mitigating the risks that arise in certain FMIs is 
critical to the areas of monetary policy and banking supervision. 
The effective implementation of monetary policy, for example, 
depends on both the orderly settlement of open market operations and 
the efficient movement of funds throughout the financial system via 
the financial markets and the FMIs that support those markets. 
Likewise, supervisory objectives regarding the safety and soundness 
of financial institutions must take into account the risks FMIs, 
both in the United States and abroad, pose to financial institutions 
that participate directly or indirectly in, or provide settlement, 
custody, or credit services to, such systems.

PART I. RISK MANAGEMENT FOR FINANCIAL MARKET INFRASTRUCTURES

    This part sets out the Board's views, and related standards, 
regarding the management of risks in FMIs, including those operated 
by the Reserve Banks. The Board will be guided by this part, in 
conjunction with relevant laws, regulations, and other Federal 
Reserve policies, when exercising its authority in (1) supervising 
the Reserve Banks under the Federal Reserve Act; (2) supervising 
state member banks, Edge and agreement corporations, and bank 
holding companies, including the exercise of authority under the 
Bank Service Company Act, where applicable; (3) carrying out certain 
of its responsibilities under Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act); (4) 
setting or reviewing the terms and conditions for the use of Reserve 
Bank accounts and services; and (5) developing and applying policies 
for the provision of intraday liquidity to eligible Reserve Bank 
account holders.\35\ This part will also guide the Board, as 
appropriate, in its interactions and cooperative efforts with other 
domestic and foreign authorities that have responsibilities for 
regulating, supervising, or overseeing FMIs within the scope of this 
part. The Board's adoption of this policy is not intended to exert 
or create supervisory or regulatory authority over any particular 
class of institutions or arrangements where the Board does not have 
such authority.
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    \35\ 12 U.S.C. 248(j), 12 U.S.C. 5461 et seq.
---------------------------------------------------------------------------

A. Scope

    FMIs within the scope of part I include public- and private-
sector payment systems that expect to settle a daily aggregate gross 
value of U.S. dollar-denominated transactions exceeding $5 billion 
on any day during the next 12 months.\36\ \37\ FMIs within the scope 
of this part also include all central securities depositories, 
securities settlement systems, central counterparties, and trade 
repositories irrespective of the value or nature of the transactions 
processed by the system.\38\ These FMIs may be organized, located, 
or operated within the United States (domestic systems), outside the 
United States (offshore systems), or both (cross-border systems) and 
may involve currencies other than the U.S. dollar (non-U.S. dollar 
systems and multi-currency systems).\39\ The scope of the policy 
also includes any payment system based or operated in the United 
States that engages in the settlement of non-U.S. dollar 
transactions if that payment system would be otherwise subject to 
the policy.\40\
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    \36\ A ``payment system'' is a set of instruments, procedures, 
and rules for the transfer of funds between or among participants. 
Payment systems include, but are not limited to, large-value funds 
transfer systems, automated clearinghouse systems, check 
clearinghouses, and credit and debit card settlement systems. The 
scope of this policy also includes payment-versus-payment settlement 
systems for foreign exchange transactions.
    \37\ In determining whether it is included in the scope of this 
policy, a payment system should look at its projected ``next'' 
twelve-month period. ``Aggregate gross value of U.S. dollar-
denominated transactions'' refers to the total dollar value of 
individual U.S. dollar transactions settled in the payment system, 
which also represents the sum of total U.S. dollar debits (or 
credits) to all participants before or in absence of any netting of 
transactions.
    \38\ A ``central securities depository'' is an entity that 
provides securities accounts and central safekeeping services. A 
``securities settlement system'' is an entity that enables 
securities to be transferred and settled by book entry and allows 
transfers of securities free of or against payment. A ``central 
counterparty'' is an entity that interposes itself between 
counterparties to contracts traded in one or more financial markets, 
becoming the buyer to every seller and the seller to every buyer. A 
``trade repository'' is an entity that maintains a centralized 
electronic record of transaction data. These definitions are based 
on those in the PFMI.
    \39\ Non-U.S. dollar systems may be of interest to the Board if 
they are used by U.S. financial institutions or may have the ability 
to affect financial stability, more broadly.
    \40\ The daily gross value threshold will be calculated on a 
U.S. dollar equivalent basis.
---------------------------------------------------------------------------

    Part I does not apply to market infrastructures such as trading 
exchanges, trade-execution facilities, or multilateral trade-
compression systems. This part is also not intended to apply to 
bilateral payment, clearing, or settlement relationships, where an 
FMI is not involved, between financial institutions and their 
customers, such as traditional correspondent banking and government 
securities clearing services. The Board believes that these market 
infrastructures and relationships do not constitute FMIs for 
purposes of this policy and that risk-management issues associated 
with these market infrastructures and relationships are more 
appropriately addressed through other relevant supervisory and 
regulatory processes.

B. Policy Expectations for Certain Financial Market Infrastructures

    This section sets out the Board's views, and related standards, 
with respect to risk-management and transparency for the Reserve 
Banks' Fedwire Funds Service and Fedwire Securities Service 
(collectively, Fedwire Services), designated financial market 
utilities that are subject to Regulation HH, other FMIs that are 
subject to the Board's supervisory authority under the Federal 
Reserve Act, all other central securities depositories, securities 
settlement systems, central counterparties, and trade repositories, 
as well as other systemically important offshore and cross-border 
payment systems. Because these FMIs have the potential to be a 
source of risk or channel for the transmission of financial shocks 
across the financial system, or are critical to market transparency 
in the case of trade repositories, the Board believes these FMIs 
should have comprehensive risk management as well as a high degree 
of transparency.

1. Risk Management

    Authorities, including central banks, have promoted sound risk-
management practices by developing internationally accepted minimum 
standards that promote the safety and efficiency of FMIs. 
Specifically, the Committee on Payment and Settlement Systems (CPSS) 
and Technical Committee of the International Organization of 
Securities Commissions (IOSCO) report on Principles for Financial 
Market Infrastructures (PFMI) establishes minimum standards for 
payment systems that are systemically important, central securities 
depositories, securities settlement systems, central counterparties, 
and trade repositories in addressing areas such as legal risk, 
governance, credit and liquidity risks, general business risk, 
operational risk, and other types of risk.\41\ The PFMI reflects 
broad market input and has been widely recognized, supported, and 
endorsed by U.S. authorities, including the Federal Reserve, U.S. 
Securities and Exchange Commission (SEC), and U.S. Commodity Futures 
Trading Commission (CFTC). These standards are also part of the 
Financial Stability Board's (FSB's) Key Standards for Sound 
Financial Systems.\42\
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    \41\ In addition to these risk-management standards, the PFMI 
sets out responsibilities for authorities for FMIs, including 
central banks, in order to provide for effective regulation, 
supervision, and oversight of FMIs.
    \42\ The FSB's Key Standards for Sound Financial Systems are 
available at https://www.financialstabilityboard.org/cos/key_standards.htm. The FSB is an international forum that was 
established to develop and promote the implementation of effective 
regulatory, supervisory and other financial sector policies. The FSB 
includes the U.S. Department of the Treasury, the Board, and the 
SEC.

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[[Page 2847]]

    The Board believes that the implementation of the PFMI by the 
FMIs within the scope of this section will help promote their safety 
and efficiency in the financial system and foster greater financial 
stability in the domestic and global economy. Accordingly, the Board 
has incorporated into the PSR policy principles 1 through 24 from 
the PFMI, as set forth in the appendix. In addition, the Board's 
Regulation HH contains risk-management standards that are based on 
the PFMI for certain designated financial market utilities.\43\ In 
applying part I of this policy, the Board will be guided by the key 
considerations and explanatory notes from the PFMI.\44\
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    \43\ Regulation HH (12 C.F.R. Part 234) is available at https://www.federalreserve.gov/bankinforeg/reglisting.htm#HH.
    \44\ The Board will also look to the CPSS-IOSCO Principles for 
Financial Market Infrastructures: Disclosure Framework and 
Assessment Methodology, which is available at https://www.bis.org/publ/cpss106.htm, and other related documents.
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a. Fedwire Services

    The Board recognizes the critical role the Reserve Banks' 
Fedwire Services play in the financial system and requires them to 
meet or exceed the standards set forth in the appendix to this 
policy, consistent with the guidance on central bank-operated 
systems provided in the PFMI and with the requirements in the 
Monetary Control Act.\45\ \46\
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    \45\ Certain standards may require flexibility in the way they 
are applied to central bank-operated systems because of central 
banks' unique role in the financial markets and their public 
responsibilities. These principles include principle 2 on 
governance, principle 3 on the framework for the comprehensive 
management of risks, principle 4 on credit risk, principle 5 on 
collateral, principle 7 on liquidity risk, principle 13 on 
participant-default rules and procedures, and principle 15 on 
general business risk, and principle 18 on access and participation 
requirements. For instance, the Reserve Banks should refer to part 
II of this policy for managing their credit risk arising from the 
provision of intraday credit to users of the Fedwire Services.
    \46\ The Monetary Control Act requires that fees be set for 
Reserve Bank services according to a set of pricing principles 
established by the Board. In preparing the pricing principles and 
fee schedules, the Board takes into account the objectives of 
fostering competition, improving the efficiency of the payment 
mechanism, and lowering costs of these services to society at large. 
At the same time, the Board is cognizant of, and concerned with, the 
continuing Federal Reserve responsibility and necessity for 
maintaining the integrity and reliability of the payment mechanism 
and providing an adequate level of service nationwide. (12 U.S.C. 
248a(c)(3); https://www.federalreserve.gov/paymentsystems/pfs_principles.htm).
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b. Designated Financial Market Utilities for Which the Board Is the 
Supervisory Agency Under Title VIII of the Dodd-Frank Act

    The Board's Regulation HH imposes risk-management standards 
applicable to a designated financial market utility for which the 
Board is the Supervisory Agency.\47\ \48\ The risk-management 
standards in Regulation HH are based on the PFMI. As required under 
Title VIII of the Dodd-Frank Act, the risk-management standards seek 
to promote robust risk management, promote safety and soundness, 
reduce systemic risks, and support the stability of the broader 
financial system. Designated financial market utilities for which 
the Board is the Supervisory Agency are required to comply with the 
risk-management standards in Regulation HH and are not subject to 
the standards in the appendix.
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    \47\ The term ``Supervisory Agency'' is defined in Title VIII as 
the ``Federal agency that has primary jurisdiction over a designated 
financial market utility under Federal banking, securities, or 
commodity futures laws'' (12 U.S.C. 5462(8)). Under Title VIII, the 
Board must prescribe risk-management standards for designated 
financial market utilities for which the Board or another Federal 
banking agency is the appropriate Supervisory Agency (12 U.S.C. 
5464(a)).
    \48\ The Regulation HH risk-management standards also apply to 
any designated financial market utility for which another Federal 
banking agency is the appropriate Title VIII Supervisory Agency.
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c. Other Financial Market Infrastructures That Are Subject to the 
Board's Supervisory Authority Under the Federal Reserve Act

    The Board expects all other FMIs that are subject to its 
supervisory authority under the Federal Reserve Act, including FMIs 
that are members of the Federal Reserve System, to meet or exceed 
the risk-management standards in the appendix.

d. All Other Central Securities Depositories, Securities Settlement 
Systems, Central Counterparties, and Trade Repositories

    The Board encourages all other central securities depositories, 
securities settlement systems, central counterparties, and trade 
repositories, whether located within or outside the United States, 
to meet or exceed the risk-management standards in the appendix to 
this policy. Where the Board does not have authority over a central 
securities depository, securities settlement system, central 
counterparty, or trade repository, the Board will be guided by this 
policy in its cooperative efforts with other FMI authorities.

e. Other Systemically Important Offshore and Cross-Border Payment 
Systems

    The Board encourages systemically important offshore and cross-
border payment systems that are not included in any of the 
categories above to meet or exceed the risk-management standards in 
the appendix to this policy.\49\ The Board will be guided by this 
policy in its cooperative efforts with other payment system 
authorities.
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    \49\ These systems may be used by U.S. financial institutions, 
clear or settle U.S. dollars, or have the ability to affect 
financial stability, more broadly.
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2. Transparency

    Transparency helps ensure that relevant information is provided 
to an FMI's participants, authorities, and the public to inform 
sound decisionmaking, improve risk management, enable market 
discipline, and foster confidence in markets more broadly. In 
particular, public disclosures play a critical role in allowing 
current and prospective participants, as well as other stakeholders, 
to understand an FMI's operations and the risks associated with 
using its services and to manage more effectively their risks with 
respect to the FMI. The Board believes that FMIs are well-positioned 
to provide the information necessary to support greater market 
transparency and to maintain financial stability.
    The Board expects an FMI that is subject to its supervisory 
authority but not subject to Regulation HH, to disclose to its 
participants information about the risks and costs that they incur 
by participating in the FMI, consistent with the requirements in 
principle 23 in the appendix.\50\ At a minimum, the FMI should 
disclose to its participants overviews of the FMI's system design 
and operations, rules and key procedures, key highlights of business 
continuity arrangements, fees and other material costs, aggregate 
transaction volumes and values, levels of financial resources that 
can be used to cover participant defaults, and other information 
that would facilitate its participants' understanding of the FMI and 
its operations and their evaluation of the risks associated with 
using that FMI.
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    \50\ The Board's Regulation HH imposes an equivalent public 
disclosure requirement.
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    In addition, the Board expects such an FMI to complete the 
disclosure framework set forth in the CPSS-IOSCO Principles for 
Financial Market Infrastructures: Disclosure Framework and 
Assessment Methodology (``disclosure framework'' and ``assessment 
methodology'').\51\ The disclosure framework establishes the 
international baseline set of information that all FMIs are expected 
to disclose publicly and review regularly.\52\ An FMI is encouraged 
to use the guiding questions in the accompanying assessment 
methodology to guide the content and level of detail in their 
disclosures. The Board expects each FMI to make its disclosure 
readily available to the public, such as by posting it on the FMI's 
public Web site to achieve maximum transparency.
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    \51\ See CPSS-IOSCO, Principles for Financial Market 
Infrastructures: Disclosure Framework and Assessment Methodology, 
December 2012, available at https://www.bis.org/publ/cpss106.htm.
    \52\ Although the Board expects disclosures to be robust, it 
does not necessarily expect FMIs to disclose to the public sensitive 
information that could expose system vulnerabilities or otherwise 
put the FMI at risk (for example, specific business continuity 
plans).
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    To ensure each FMI's accountability for the accuracy and 
completeness of its disclosure, the Board expects the FMI's senior 
management and board of directors to review and approve each 
disclosure upon completion. Further, in order for an FMI's 
disclosure to reflect its current rules, procedures, and operations, 
the Board expects the FMI to update the relevant parts of its 
disclosure following changes to the FMI or the environment in which 
it operates, which would significantly change the accuracy of the 
statements in its disclosure. At a minimum, the FMI is expected to 
review and update as warranted its disclosure every two years.
    As part of its ongoing oversight of FMIs, the Board will review 
public disclosures by FMIs subject to its authority to ensure that 
the Board's policy objectives and

[[Page 2848]]

expectations are being met.\53\ Where necessary, the Board will 
provide feedback to the FMIs regarding the content of these 
disclosures and their effectiveness in achieving the policy 
objectives discussed above.\54\ The Board acknowledges that FMIs 
vary in terms of the scope of instruments they settle and markets 
they serve. It also recognizes that FMIs may operate under different 
legal and regulatory constraints, charters, and corporate 
structures. The Board will consider these factors when reviewing the 
disclosures and in evaluating how an FMI addresses a particular 
standard. Where the Board does not have statutory or exclusive 
authority over an FMI, it will be guided by this policy in 
cooperative efforts with other domestic or foreign authorities to 
promote comprehensive disclosures by FMIs as a means to achieve 
greater safety and efficiency in the financial system.
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    \53\ Any review of a disclosure by the Board should not be 
viewed as an approval or guarantee of the accuracy of an FMI's 
disclosure. Without the express approval of the Board, an FMI may 
not state publically that its disclosure has been reviewed, 
endorsed, approved, or otherwise not objected to by the Board.
    \54\ If the Board materially disagrees with the content of an 
FMI's disclosure, it will communicate its concerns to the FMI's 
senior management and possibly to its board of directors, as 
appropriate. The Board may also discuss its concerns with other 
relevant authorities, as appropriate.
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C. General Policy Expectations for Other Payment Systems Within the 
Scope of the Policy

    The Board encourages payment systems within the scope of this 
policy, but that are not included in any of the categories in 
section B above, to implement a general risk-management framework 
appropriate for the risks the payment system poses to the system 
operator, system participants, and other relevant parties as well as 
the financial system more broadly.

1. Establishment of a Risk-Management Framework

    A risk-management framework is the set of objectives, policies, 
arrangements, procedures, and resources that a system employs to 
limit and manage risk. Although there are a number of ways to 
structure a sound risk-management framework, all frameworks should
    a. identify risks clearly and set sound risk-management 
objectives;
    b. establish sound governance arrangements to oversee the risk-
management framework;
    c. establish clear and appropriate rules and procedures to carry 
out the risk-management objectives; and
    d. employ the resources necessary to achieve the system's risk-
management objectives and implement effectively its rules and 
procedures.

a. Identify Risks Clearly and Set Sound Risk-Management Objectives

    The first element of a sound risk-management framework is the 
clear identification of all risks that have the potential to arise 
in or result from the system's settlement process and the 
development of clear and transparent objectives regarding the 
system's tolerance for and management of such risks. System 
operators should identify the forms of risk present in their 
system's settlement process as well as the parties posing and 
bearing each risk. In particular, system operators should identify 
the risks posed to and borne by them, the system participants, and 
other key parties such as a system's settlement banks, custody 
banks, and third-party service providers. System operators should 
also analyze whether risks might be imposed on other external 
parties and the financial system more broadly.
    In addition, system operators should analyze how risk is 
transformed or concentrated by the settlement process. System 
operators should also consider the possibility that attempts to 
limit one type of risk could lead to an increase in another type of 
risk. Moreover, system operators should be aware of risks that might 
be unique to certain instruments, participants, or market practices. 
Where payment systems have inter-relationships with or dependencies 
on other FMIs, system operators should also analyze whether and to 
what extent any cross-system risks exist and who bears them.
    Using their clear identification of risks, system operators 
should establish the risk tolerance of the system, including the 
levels of risk exposure that are acceptable to the system operator, 
system participants, and other relevant parties. System operators 
should then set risk-management objectives that clearly allocate 
acceptable risks among the relevant parties and set out strategies 
to manage this risk. Risk-management objectives should be consistent 
with the objectives of this policy, the system's business purposes, 
and the type of payment instruments and markets for which the system 
clears and settles. Risk-management objectives should also be 
communicated to and understood by both the system operator's staff 
and system participants.
    System operators should reevaluate their risks in conjunction 
with any major changes in the settlement process or operations, the 
transactions settled, a system's rules or procedures, or the 
relevant legal and market environments. System operators should 
review the risk-management objectives regularly to ensure that they 
are appropriate for the risks posed by the system, continue to be 
aligned with the system's purposes, remain consistent with this 
policy, and are being effectively adhered to by the system operator 
and participants.

b. Establish Sound Governance Arrangements To Oversee the Risk-
Management Framework

    Systems should have sound governance arrangements to implement 
and oversee their risk-management frameworks. The responsibility for 
sound governance rests with a system operator's board of directors 
or similar body and with the system operator's senior management. 
Governance structures and processes should be transparent; enable 
the establishment of clear risk-management objectives; set and 
enforce clear lines of responsibility and accountability for 
achieving these objectives; ensure that there is appropriate 
oversight of the risk-management process; and enable the effective 
use of information reported by the system operator's management, 
internal auditors, and external auditors to monitor the performance 
of the risk-management process.\55\ Individuals responsible for 
governance should be qualified for their positions, understand their 
responsibilities, and understand their system's risk-management 
framework. Governance arrangements should also ensure that risk-
management information is shared in forms, and at times, that allow 
individuals responsible for governance to fulfill their duties 
effectively.
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    \55\ The risk-management and internal audit functions should 
also be independent of those responsible for day-to-day functions.
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c. Establish Clear and Appropriate Rules and Procedures to Carry Out 
the Risk-Management Objectives

    Systems should have rules and procedures that are appropriate 
and sufficient to carry out the system's risk-management objectives 
and that are consistent with its legal framework. Such rules and 
procedures should specify the respective responsibilities of the 
system operator, system participants, and other relevant parties. 
Rules and procedures should establish the key features of a system's 
settlement and risk-management design and specify clear and 
transparent crisis management procedures and settlement failure 
procedures, if applicable.\56\
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    \56\ Examples of key features that might be specified in a 
system's rules and procedures are controls to limit participant-
based risks, such as membership criteria based on participants' 
financial and operational health; limits on credit exposures; and 
the procedures and resources to liquidate collateral. Other examples 
of key features might be business continuity requirements and loss-
allocation procedures.
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d. Employ the Resources Necessary To Achieve the System's Risk-
Management Objectives and Implement Effectively Its Rules and 
Procedures

    System operators should ensure that the appropriate resources 
and processes are in place to allow the system to achieve its risk-
management objectives and effectively implement its rules and 
procedures. In particular, the system operator's staff should have 
the appropriate skills, information, and tools to apply the system's 
rules and procedures and achieve the system's risk-management 
objectives. System operators should also ensure that their 
facilities and contingency arrangements, including any information 
system resources, are sufficient to meet their risk-management 
objectives.

2. Other Considerations for a Risk-Management Framework

    Payment systems differ widely in form, function, scale, and 
scope of activities, and these characteristics result in differing 
combinations and levels of risks. Thus, the exact features of a 
system's risk-management framework should be tailored to the risks 
of that system. The specific features of a risk-management framework 
may entail tradeoffs between efficiency and risk reduction, and 
payment systems will need to consider these tradeoffs when designing 
appropriate rules

[[Page 2849]]

and procedures. In considering such tradeoffs, however, it is 
critically important that system operators take into account the 
costs and risks that may be imposed on all relevant parties, 
including parties with no direct role in the system. Furthermore, in 
light of rapidly evolving technologies and risk-management 
practices, the Board encourages all system operators to consider 
making risk-management improvements when cost-effective.
    To determine whether a system's current or proposed risk-
management framework is consistent with this policy, the Board will 
seek to understand how a system achieves the four elements of a 
sound risk-management framework set out above. In this context, the 
Board may seek to obtain information from system operators regarding 
their risk-management framework, risk-management objectives, rules 
and procedures, significant legal analyses, general risk analyses, 
analyses of the credit and liquidity effects of settlement 
disruptions, business continuity plans, crisis management 
procedures, and other relevant documentation.\57\ The Board also may 
seek to obtain data or statistics on system activity on an ad hoc or 
ongoing basis. All information provided to the Federal Reserve for 
the purposes of this policy will be handled in accordance with all 
applicable Federal Reserve policies on information security, 
confidentiality, and conflicts of interest.
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    \57\ To facilitate analysis of settlement disruptions, systems 
may need to develop the capability to simulate credit and liquidity 
effects on participants and on the system resulting from one or more 
participant defaults, or other possible sources of settlement 
disruption. Such simulations may need to include, if appropriate, 
the effects of changes in market prices, volatilities, or other 
factors.
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D. Cooperation With Other Authorities in Regulating, Supervising, 
and Overseeing Financial Market Infrastructures

    When the Board does not have statutory or exclusive authority 
over an FMI covered by this policy, this section will guide the 
Board, as appropriate, in its interactions with other domestic and 
foreign authorities to promote effective risk management in and 
transparency by FMIs. For example, the Federal Reserve may have an 
interest in the safety and efficiency of FMIs outside the United 
States that are subject to regulation, supervision, or oversight by 
another authority but that provide services to financial 
institutions supervised by the Board or conduct activity that 
involves the U.S. dollar.\58\ In its interactions with other 
domestic and foreign authorities, the Board will encourage these 
authorities to adopt and to apply the internationally accepted 
principles set forth in the appendix when evaluating the risks posed 
by and to FMIs and individual system participants that these 
authorities regulate, supervise, or oversee.
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    \58\ An FMI may be subject to supervision or oversight by the 
Board and other authorities, as a result of its legal framework, 
operating structure (for example, multi-currency or cross-border 
systems), or participant base. In such cases, the Board will be 
sensitive to the potential for duplicative or conflicting 
requirements, oversight gaps, or unnecessary costs and burdens 
imposed on the FMI.
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    In working with other authorities, the Board will seek to 
establish arrangements for effective and practical cooperation that 
promote sound risk-management outcomes. The Board believes that 
cooperative arrangements among relevant authorities can be an 
effective mechanism for, among other things, (1) sharing relevant 
information concerning the policies, procedures, and operations of 
an FMI; (2) sharing supervisory views regarding an FMI; (3) 
discussing and promoting the application of robust risk-management 
standards; and (4) serving as a forum for effective communication, 
coordination, and consultation during normal circumstances, as well 
as periods of market stress.
    When establishing such cooperative arrangements, the Board will 
be guided, as appropriate, by international principles on 
cooperative arrangements for the regulation, supervision, and 
oversight of FMIs. In particular, responsibility E in the PFMI 
addresses domestic and international cooperation among central 
banks, market regulators, and other relevant authorities and 
provides guidance to these entities for supporting each other in 
fulfilling their respective mandates with respect to FMIs. The CPSS 
report on Central Bank Oversight of Payment and Settlement Systems 
also provides important guidance on international cooperation among 
central banks.\59\ The Board believes this international guidance 
provides important frameworks for cooperating and coordinating with 
other authorities to address risks in domestic, cross-border, multi-
currency, and, where appropriate, offshore FMIs.
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    \59\ See Central Bank Oversight of Payment and Settlement 
Systems (Oversight Report), part B on ``Principles for international 
cooperative oversight,'' May 2005, available at https://www.bis.org/publ/cpss68.htm.
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PART II. FEDERAL RESERVE INTRADAY CREDIT POLICIES

    [No change to existing part II of the policy.]

APPENDIX--CPSS-IOSCO Principles for Financial Market Infrastructures

Principle 1: Legal Basis

    An FMI should have a well-founded, clear, transparent, and 
enforceable legal basis for each material aspect of its activities 
in all relevant jurisdictions.

Principle 2: Governance

    An FMI should have governance arrangements that are clear and 
transparent, promote the safety and efficiency of the FMI, and 
support the stability of the broader financial system, other 
relevant public interest considerations, and the objectives of 
relevant stakeholders.

Principle 3: Framework for the Comprehensive Management of Risks

    An FMI should have a sound risk-management framework for 
comprehensively managing legal, credit, liquidity, operational, and 
other risks.

Principle 4: Credit Risk

    An FMI should effectively measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes. An FMI should maintain 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence. In addition, a 
central counterparty that is involved in activities with a more-
complex risk profile or that is systemically important in multiple 
jurisdictions should maintain additional financial resources 
sufficient to cover a wide range of potential stress scenarios that 
should include, but not be limited to, the default of the two 
participants and their affiliates that would potentially cause the 
largest aggregate credit exposure to the central counterparty in 
extreme but plausible market conditions. All other central 
counterparties should maintain additional financial resources 
sufficient to cover a wide range of potential stress scenarios that 
should include, but not be limited to, the default of the 
participant and its affiliates that would potentially cause the 
largest aggregate credit exposure to the central counterparty in 
extreme but plausible market conditions.

Principle 5: Collateral

    An FMI that requires collateral to manage its or its 
participants' credit exposure should accept collateral with low 
credit, liquidity, and market risks. An FMI should also set and 
enforce appropriately conservative haircuts and concentration 
limits.

Principle 6: Margin

    A central counterparty should cover its credit exposures to its 
participants for all products through an effective margin system 
that is risk-based and regularly reviewed.

Principle 7: Liquidity Risk

    An FMI should effectively measure, monitor, and manage its 
liquidity risk. An FMI should maintain sufficient liquid resources 
in all relevant currencies to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of potential 
stress scenarios that should include, but not be limited to, the 
default of the participant and its affiliates that would generate 
the largest aggregate liquidity obligation for the FMI in extreme 
but plausible market conditions.

Principle 8: Settlement Finality

    An FMI should provide clear and certain final settlement, at a 
minimum by the end of the value date. Where necessary or preferable, 
an FMI should provide final settlement intraday or in real time.

Principle 9: Money Settlements

    An FMI should conduct its money settlements in central bank 
money where practical and available. If central bank money is not 
used, an FMI should minimise and strictly control the credit and 
liquidity risk arising from the use of commercial bank money.

[[Page 2850]]

Principle 10: Physical Deliveries

    An FMI should clearly state its obligations with respect to the 
delivery of physical instruments or commodities and should identify, 
monitor, and manage the risks associated with such physical 
deliveries.

Principle 11: Central Securities Depositories

    A central securities depository should have appropriate rules 
and procedures to help ensure the integrity of securities issues and 
minimise and manage the risks associated with the safekeeping and 
transfer of securities. A central securities depository should 
maintain securities in an immobilised or dematerialised form for 
their transfer by book entry.

Principle 12: Exchange-of-Value Settlement Systems

    If an FMI settles transactions that involve the settlement of 
two linked obligations (for example, securities or foreign exchange 
transactions), it should eliminate principal risk by conditioning 
the final settlement of one obligation upon the final settlement of 
the other.

Principle 13: Participant-Default Rules and Procedures

    An FMI should have effective and clearly defined rules and 
procedures to manage a participant default. These rules and 
procedures should be designed to ensure that the FMI can take timely 
action to contain losses and liquidity pressures and continue to 
meet its obligations.

Principle 14: Segregation and Portability

    A central counterparty should have rules and procedures that 
enable the segregation and portability of positions of a 
participant's customers and the collateral provided to the central 
counterparty with respect to those positions.

Principle 15: General Business Risk

    An FMI should identify, monitor, and manage its general business 
risk and hold sufficient liquid net assets funded by equity to cover 
potential general business losses so that it can continue operations 
and services as a going concern if those losses materialise. 
Further, liquid net assets should at all times be sufficient to 
ensure a recovery or orderly wind-down of critical operations and 
services.

Principle 16: Custody and Investment Risks

    An FMI should safeguard its own and its participants' assets and 
minimise the risk of loss on and delay in access to these assets. An 
FMI's investments should be in instruments with minimal credit, 
market, and liquidity risks.

Principle 17: Operational Risk

    An FMI should identify the plausible sources of operational 
risk, both internal and external, and mitigate their impact through 
the use of appropriate systems, policies, procedures, and controls. 
Systems should be designed to ensure a high degree of security and 
operational reliability and should have adequate, scalable capacity. 
Business continuity management should aim for timely recovery of 
operations and fulfilment of the FMI's obligations, including in the 
event of a wide-scale or major disruption.

Principle 18: Access and Participation Requirements

    An FMI should have objective, risk-based, and publicly disclosed 
criteria for participation, which permit fair and open access.

Principle 19: Tiered Participation Arrangements

    An FMI should identify, monitor, and manage the material risks 
to the FMI arising from tiered participation arrangements.

Principle 20: FMI Links

    An FMI that establishes a link with one or more FMIs should 
identify, monitor, and manage link-related risks.

Principle 21: Efficiency and Effectiveness

    An FMI should be efficient and effective in meeting the 
requirements of its participants and the markets it serves.

Principle 22: Communication Procedures and Standards

    An FMI should use, or at a minimum accommodate, relevant 
internationally accepted communication procedures and standards in 
order to facilitate efficient payment, clearing, settlement, and 
recording.

Principle 23: Disclosure of Rules, Key Procedures, and Market Data

    An FMI should have clear and comprehensive rules and procedures 
and should provide sufficient information to enable participants to 
have an accurate understanding of the risks, fees, and other 
material costs they incur by participating in the FMI. All relevant 
rules and key procedures should be publicly disclosed.

Principle 24: Disclosure of Market Data by Trade Repositories

    A trade repository should provide timely and accurate data to 
relevant authorities and the public in line with their respective 
needs.

    By order of the Board of Governors of the Federal Reserve 
System, January 10, 2014.
Robert deV. Frierson,
Secretary of the Board.

[FR Doc. 2014-00681 Filed 1-15-14; 8:45 am]
BILLING CODE P