Supervisory Rating System for Financial Market Infrastructures, 70211-70217 [2015-28821]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 80, Number 219 (Friday, November 13, 2015)]
[Notices]
[Pages 70211-70217]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28821]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1521]


Supervisory Rating System for Financial Market Infrastructures

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice and request for comment.

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SUMMARY: Title VIII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') granted the Board of Governors of 
the Federal Reserve System (``Board'') enhanced authority to supervise 
``financial market utilities'' that are designated as systemically 
important by the Financial Stability Oversight Council (financial 
market utilities are defined to comprise a subset of the entities that, 
outside the United States, are generally called ``financial market 
infrastructures'' or ``FMIs''). In addition, the Board may have direct 
supervisory authority over other FMIs subject to its jurisdiction. The 
Board and, under delegated authority, the Federal Reserve Banks 
(collectively, the ``Federal Reserve'') propose to use the ORSOM 
(Organization; Risk Management; Settlement; Operational Risk and 
Information Technology (IT); and Market Support, Access, and 
Transparency) rating system in reviews of FMIs. The Board is seeking 
comment on this system for rating FMIs. The Federal Reserve anticipates 
implementing the ORSOM rating system in 2016.

DATES: Comments must be received by January 22, 2016.

ADDRESSES: When submitting comments, please consider submitting your 
comments by email or fax because paper mail in the Washington, DC area 
and at the Board may be subject to delay. You may submit comments, 
identified by Docket No. OP-1521, 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 docket 
number in the subject line of the message.
     Fax: (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, 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 3515, 1801 K Street NW. (between 18th and 19th Street NW.), 
Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays

FOR FURTHER INFORMATION CONTACT: Stuart Sperry, Deputy Associate 
Director (202) 452-2832 or Kristopher Natoli, Sr. Financial Services 
Analyst (202) 452-3227, Division of Reserve Bank Operations and Payment 
Systems; Evan H. Winerman, Counsel (202) 872-7578, Legal Division; for 
users of

[[Page 70212]]

Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

Background

    FMIs are multilateral systems that transfer, clear, settle, or 
record payments, securities, derivatives, or other financial 
transactions among participants or between participants and the FMI 
operator. FMIs include payment systems, central securities depositories 
(``CSDs''), securities settlement systems (``SSSs''), central 
counterparties (``CCPs''), and trade repositories (``TRs''). FMIs can 
strengthen the markets that they serve and play a critical role in 
fostering financial stability. If not properly managed, however, they 
can pose significant risks to the financial system and be a potential 
source of contagion, particularly in periods of market stress. For 
example, improperly managed FMIs can be sources of financial shocks or 
channels through which shocks are transmitted across domestic and 
international financial markets.
    The Federal Reserve supervises certain FMIs that provide payment, 
clearing, and settlement services for critical U.S. financial markets. 
Specifically, under Title VIII of the Dodd-Frank Act, the Federal 
Reserve is the ``Supervisory Agency'' for certain ``designated 
financial market utilities'' (``DFMUs'').\1\ These DFMUs are subject to 
risk-management standards set out in Regulation HH.\2\ In addition, the 
Federal Reserve may have supervisory authority over FMIs that are 
operated by state member banks, Edge or agreement corporations, or bank 
holding companies. Furthermore, the Board supervises FMIs that are 
operated by the Federal Reserve Banks, such as the Fedwire Funds 
Service.\3\ These latter two categories of FMIs are expected to meet 
the risk-management standards set out in the Board's Payment System 
Risk (``PSR'') policy.\4\ The risk management standards set out in both 
Regulation HH and the PSR policy are based on the Principles for 
Financial Market Infrastructures (``PFMI'').\5\
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    \1\ The term ``financial market utility'' (``FMU'') 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)). FMUs are a subset of FMIs; for 
example, trade repositories are excluded from the definition of a 
FMU. Pursuant to section 804 of the Dodd-Frank Act, the Financial 
Stability Oversight Council (``Council'') is required to designate 
those FMUs that the Council determines are, or are likely to become, 
systemically important. Such a designation by the Council makes an 
FMU subject to the supervisory framework set out in Title VIII of 
the Dodd-Frank Act.
    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 DFMUs: (i) The Clearing House 
Payments Company, L.L.C., on the basis of its role as operator of 
the Clearing House Interbank Payments System (CHIPS), and (ii) CLS 
Bank International (CLS).
    \2\ 12 CFR 234.3 (2014).
    \3\ See Sections 11(a)(1) and 11(j) of the Federal Reserve Act, 
12 U.S.C. 248(a)(1) and 248(j).
    \4\ The Board's PSR policy is available at https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
    \5\ The PFMI, published by the Committee on Payment and 
Settlement Systems (now the Committee on Payments and Market 
Infrastructures) and the Technical Committee of the International 
Organization of Securities Commissions in April 2012, is widely 
recognized as the most relevant set of international risk-management 
standards for payment, clearing, and settlement systems.
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    The ORSOM (Organization; Risk Management; Settlement; Operational 
Risk and IT; and Market Support, Access, and Transparency) rating 
system is a supervisory tool that the Federal Reserve will use to 
provide a consistent internal framework for discussing FMI assessments 
across the Federal Reserve's FMI portfolio. The ORSOM rating system 
will be applied to DFMUs for which the Board is the Supervisory Agency 
pursuant to Title VIII, other DFMUs over which the Board has 
supervisory authority because they are members of the Federal Reserve 
System, and FMIs that are operated by a Federal Reserve Bank.\6\ The 
Federal Reserve will convey the annual rating to a DFMU's management 
and board of directors. The rating system is designed to link 
supervisory assessments and messages to the regulations and guidance 
that form the foundation of the supervisory program, such as Regulation 
HH and the PSR policy.
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    \6\ At present, the first group includes CLS and CHIPS, the 
second group includes the Depository Trust Company, and the third 
group includes Fedwire Funds Service and Fedwire Securities Service.
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    The Federal Reserve is requesting public comment on all aspects of 
the FMI rating system.

Proposed Text of the Supervisory Rating System for FMIs

Introduction

    Under the ORSOM rating system for FMIs, the Federal Reserve 
develops a rating for each of the ORSOM categories and rolls those 
category ratings into an overall composite rating. The rating system is 
designed to (1) be clearly tied to relevant Federal Reserve regulations 
and guidance, (2) facilitate a clear and logical discussion of the 
FMI's condition with the FMI's management and board of directors, (3) 
be easily understood and used by both supervisors and FMIs, (4) be 
flexible, (5) facilitate comprehensive and consistent assessments 
across the Federal Reserve's FMI portfolio, and (6) promote financial 
stability by ensuring that systemically important FMIs understand and 
are held to the Federal Reserve's rigorous risk-management standards. 
Importantly, the rating system is designed to allow for supervisory 
judgment and discretion, and should not be viewed as establishing a 
formula for determining an FMI's rating. Each of the assigned ratings, 
including the composite rating, should reflect supervisory judgment 
about the importance of the individual categories and issues as they 
pertain to the FMI. Relevant provisions of Regulation HH and the PSR 
policy, which are reflected in each rating category, help to organize 
and structure ratings for each category. The criticality of categories 
and issues, however, may differ among FMIs because of factors such as 
their differing services, risk profiles, and operational and 
organizational structures. An FMI's rating should also take into 
account the FMI's responsiveness to supervisory concerns and the 
sustainability of any measures that the FMI has implemented to address 
those concerns, both in terms of long-term viability and demonstrated 
effectiveness.

Categories

    The ORSOM rating system consists of the following five categories, 
which were selected to highlight broadly the risk management issues 
that FMIs face, to guide supervisory examinations, and to provide a 
structure for organizing assessment letters:

 Organization
 Risk Management
 Settlement
 Operational Risk and IT
 Market Support, Access, and Transparency

    Analysis of the issues considered under each category should be 
consistent with Regulation HH, the PSR policy, and relevant guidance, 
such as supervision and regulation (SR) letters and guidance of the 
Federal Financial Institutions Examination Council (FFIEC). The 
categories' order is not a reflection of their relative importance. The 
weight prescribed to either a category or a category's components is a 
matter of supervisory judgment and expertise, and may differ among 
FMIs. In addition, supervisory staff's assessment of an FMI should take 
into account the categories' interrelationships and the FMI's entire

[[Page 70213]]

risk management framework, and should integrate knowledge derived from 
all available sources, including examination work, continuous 
monitoring efforts, and other relevant sources (for example, the 
Regulation HH advance notice process for designated financial market 
utilities (``DFMUs'') and lessons learned from market events). Finally, 
an FMI's category rating should reflect consideration of the 
sustainability of any remediation measures that the FMI has implemented 
to address supervisory concerns, both in terms of the measures' 
demonstrated effectiveness and long-term viability.

Organization

    The foundations of an FMI's risk management framework are its 
management and governance structures, which include the board of 
directors' and management's authority, responsibilities, and reporting. 
The Organization category evaluates the FMI's overarching objectives, 
and the ability of the FMI's board and management to implement them. 
This category also considers the relationships among the FMI's 
stakeholders and their influence on the FMI's business strategy. 
Further, analysis under this category considers the independence and 
effectiveness of the FMI's internal audit function and its ability to 
inform the board and management about the robustness of the FMI's risk 
management and control processes. As a result, the Organization 
category contains two subcomponents, Board and Management Oversight, 
and Internal Audit. The FMI's assessment under these subcomponents is 
reflected in a single category rating.\7\
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    \7\ The Board and Management Oversight and the Internal Audit 
subcomponents are not individually rated; they represent matters 
examiners should consider when assigning the Organization category 
rating. Depending on the issues at the FMI, examiners should use 
their judgment in weighting each of these subcomponents in their 
assessment of the Organization category overall.
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Board and Management Oversight

    The Board and Management Oversight subcomponent addresses the 
organization and conduct of the FMI's board of directors and senior 
management. It assesses the structure and effectiveness of the FMI's 
legal and compliance risk monitoring and management framework. This 
rating evaluates how effectively the board of directors and senior 
management guide and manage the FMI, and ensure that the FMI operates 
in a safe and sound manner; specific considerations in this regard 
include management's responsiveness to supervisory concerns. This 
rating component also evaluates the board's effectiveness at 
establishing the FMI's objectives, strategy, and risk tolerances, and 
management's effectiveness at ensuring that the FMI's activities are 
consistent with them. Specific considerations in this regard include 
the board's effectiveness in setting strategic objectives, developing a 
risk-management framework, creating clear and responsive corporate 
governance structures, and establishing corporate risk tolerances. This 
rating also evaluates the effectiveness of the FMI's governance program 
for risk models and its use of independent validation mechanisms to 
validate the FMI's model methodologies and output.
    Relevant statutes, regulations and guidance include--

 Regulation HH Sec.  234.3(a)(1)-(3) (excluding (a)(2)(iv)(I))
 Regulations implementing the Bank Secrecy Act (BSA) \8\
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    \8\ The BSA is codified at 31 U.S.C. 5311 et seq., 12 U.S.C. 
1829b, and 12 U.S.C. 1951-1959. Federal Reserve supervised 
institutions that are subject to the BSA include state member banks 
(Regulation H, 12 CFR part 208), bank holding companies (Regulation 
Y, 12 CFR part 225), Edge and agreement corporations, and foreign 
banking organizations operating in the United States (Regulation K, 
12 CFR part 211). The U.S. Department of the Treasury's Financial 
Crimes Enforcement Network has published regulations implementing 
the BSA at 31 CFR chapter X.
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 PSR policy: Legal Basis (PFMI 1), Governance (PFMI 2, 
excluding references to internal audit), Framework for Comprehensive 
Management of Risks (PFMI 3, excluding references to internal audit)

Internal Audit

    The Internal Audit subcomponent reflects the ability and 
independence of the FMI's internal audit function to assess risk and to 
inform the board and management. An FMI should have an effective 
internal audit function with sufficient resources and independence from 
management to provide a rigorous and unbiased assessment of the FMI's 
risk appetite and risk exposure, including financial and operational 
risk, as well as the effectiveness of risk management and controls. The 
Internal Audit subcomponent assesses the internal audit function's day-
to-day management, including its annual risk assessment, audit program, 
quality of work papers, quality assurance, planning and reporting, and 
training.\9\
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    \9\ The Internal Audit subcomponent does not assess the board's 
effectiveness at establishing and overseeing an internal audit 
function at the FMI; that is assessed in the Board and Management 
Oversight subcomponent.
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    Relevant regulations and guidance include--

 Regulation HH Sec.  234.3(a)(2)(iv)(I)
 Audit guidance (for example, Institute of Internal Auditors, 
FFIEC, SR Letters, Bank for International Settlements, and ISACA)
 PSR policy: Governance (PFMI 2, as it pertains to internal 
audit), Framework for Comprehensive Management of Risks (PFMI 3, as it 
pertains to internal audit), Operational Risk (PFMI 17, as it pertains 
to internal audit)

Risk Management

    The Risk Management category evaluates the effectiveness of the 
FMI's risk management, including the availability to the FMI of 
acceptable financial resources to contain and manage losses and 
liquidity pressures, and the FMI's ability to meet its obligations in 
the event of a participant's default. Further, the rating assesses the 
FMI's ability to implement a recovery or orderly wind-down of its 
operations and the viability of its capital plan. The rating also 
considers the FMI's ability and practices in safeguarding its own 
assets and those of its participants, and the FMI's ability to ensure 
those assets are accessible at all times with minimum losses. In 
addition, the Risk Management rating assesses the FMI's awareness of, 
and control over, the risk that its participants' customers and other 
FMIs indirectly introduce.
    Relevant regulations and guidance include--

 Regulation HH Sec.  234.3(a)(4)-(7), (14)-(16), (19)-(20)
 PSR policy: Credit risk (PFMI 4), Collateral (PFMI 5), Margin 
(PFMI 6), Liquidity risk (PFMI 7), Segregation and Portability (PFMI 
14), General Business Risk (PFMI 15), Custody and Investment Risks 
(PFMI 16), Tiered Participation Arrangements (PFMI 19), and FMI Links 
(PFMI 20)

Settlement

    Final settlement is the irrevocable and unconditional transfer of 
an asset or financial instrument, or the discharge of an obligation by 
an FMI or its participants in accordance with the underlying contract's 
terms. Settlement risk, which is the risk that settlement will not take 
place as expected, is a key risk that FMIs and their participants face. 
Failure to settle a transaction on time and in full can create 
liquidity and credit problems for an FMI or its participants, with 
potential systemic implications. This is especially true during a 
participant default event. Well-designed, clearly articulated, and 
effectively disclosed default management rules are imperative to 
maintaining market confidence in the event of a participant default.

[[Page 70214]]

    The Settlement category focuses on the risk-management tools that 
an FMI uses to ensure settlement takes place as expected, and the 
default management procedures the FMI follows in the event of a 
participant default. The rating assesses the FMI's ability to ensure 
settlement finality, and its ability to manage the risks related to 
money settlements and the delivery of physical assets. The rating also 
includes CSDs' abilities to safeguard the rights of securities issuers 
and holders, and to ensure the integrity of the securities issues that 
they hold in custody. Finally, this category includes assessing the 
adequacy of the FMI's participant default rules and procedures, and the 
steps that the FMI takes to ensure that it is prepared to execute them.
    Relevant regulations and guidance include--

 Regulation HH Sec.  234.3(a)(8)-(13)
 PSR Policy: Settlement Finality (PFMI 8), Money Settlements 
(PFMI 9), Physical Deliveries (PFMI 10), Central Securities 
Depositories (PFMI 11), Exchange-of-Value Settlement Systems (PFMI 12), 
and Participant Default Rules and Procedures (PFMI 13)

Operational Risk and IT

    FMIs face significant operational and IT risks in their provision 
of post-trade services. Operational risk entails deficiencies in 
information systems, internal processes, and personnel, or disruptions 
from external events that may result in the reduction, deterioration, 
or breakdown of services provided by an FMI. FMIs are expected to 
ensure that, through the development of appropriate systems, controls, 
and procedures, their operations and IT infrastructure are reliable, 
secure, and have adequately scalable capacity. FMIs' information 
security practices and controls are expected to be strong and 
effective. FMIs should protect and secure the systems, media, and 
facilities that process and maintain information vital to their 
operations in the context of a continually changing threat landscape. 
Further, FMIs are expected to have robust business continuity plans 
that allow for the rapid recovery and timely resumption of critical 
operations. FMIs are expected to test and update these plans regularly.
    The Operational Risk and IT category focuses on the FMI's 
operational reliability and its ability to support the safe and 
continuous functioning of the markets that it serves. This category 
considers the FMI's operational risk management framework and IT 
infrastructure, including the adequacy of the FMI's operational risk 
management governance, internal controls, physical and information 
security, data management, capacity management, interdependency 
monitoring programs, and business continuity plan.
    Relevant regulations and guidance include--

 Regulation HH Sec.  234.3(a)(17)
 PSR Policy: Operational Risk (PFMI 17, excluding references to 
internal audit)
 Interagency Paper on Sound Practices to Strengthen Resilience 
of the U.S. Financial System
 FFIEC and relevant industry guidance

Market Support, Access, and Transparency

    FMIs should be designed and operated to meet the needs of their 
participants and the markets that they serve. Access to FMIs' services 
is often necessary for meaningful participation in the markets that 
they serve, and FMIs' efficiency and effectiveness can influence 
financial activity and market structure. Also, access to, and 
understanding of, relevant information about an FMI fosters confidence 
among participants and the public.
    The Market Support, Access, and Transparency category focuses on 
the FMI's efforts to support the markets they serve, to ensure fair and 
open access to, and use of, its services, and to provide participants 
with the information necessary to understand the risks and 
responsibilities attendant with their participation in the FMI. 
Analysis under this category should consider, among other things, an 
FMI's participation requirements; its member monitoring framework; the 
efficiency with which it consumes resources in providing its services; 
and the adequacy of its disclosure of its rules, procedures, and 
relevant information about its operations.
    Relevant regulations and guidance include--

 Regulation HH Sec.  234.3(a)(18), (21)-(23)
 PSR policy: Access and Participation Requirements (PFMI 18), 
Efficiency and Effectiveness (PFMI 21), Communication Procedures and 
Standards (PFMI 22), Disclosure of Rules, Key Procedures, and Market 
Data (PFMI 23), Disclosure of Market Data by Trade Repositories (PFMI 
24)

Category Ratings

    FMIs receive a rating for each ORSOM category based on an 
evaluation of the FMI against that category's key attributes as 
described herein. Regulation HH prescribes risk-management standards 
for DFMUs for which the Board or another federal banking agency is the 
Supervisory Agency under Title VIII of the Dodd-Frank Act. Other FMIs 
subject to Federal Reserve supervision--for example, FMIs that are 
members of the Federal Reserve System--are subject to the Federal 
Reserve Act and the expectations set out in the Federal Reserve's PSR 
policy. An FMI's rating should be consistent with the expectations set 
forth in Regulation HH, the PSR policy, and supervisory guidance, such 
as SR letters and FFIEC guidance.\10\ The rating scale ranges from 1 to 
5, with a rating of 1 indicating the strongest performance and, 
therefore, the level of least supervisory concern. A rating of 5 
indicates the most critically deficient level of performance and, 
therefore, the greatest level of supervisory concern. Importantly, an 
FMI's category rating should reflect supervisory judgment and expertise 
as to the materiality of any issues identified based on the resulting 
effect those issues have on the safety and soundness of the FMI, the 
growth of systemic risks, or the stability of the broader financial 
system.\11\
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    \10\ In any event where Regulation HH's provisions establish 
standards different from those articulated in supervisory guidance, 
designated FMUs subject to the jurisdiction of the Federal Reserve 
under Title VIII of the Dodd-Frank Act should adhere to, and will be 
assessed against, Regulation HH's provisions.
    \11\ See Dodd-Frank Act Section 805, 12 U.S.C. 5464(b).
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    A common set of definitions for each rating level is applied across 
all of the ORSOM categories. These general definitions focus on broad 
supervisory interests, which are--
     The extent to which any issues identified, either 
individually or cumulatively, are issues of concern for the safety and 
soundness of the FMI, the growth of systemic risks, or the stability of 
the broader financial system.
     the immediacy with which the FMI is expected to remedy the 
issues, and the extent to which close supervisory monitoring of the 
FMI's remediation efforts, or supervisory action,\12\ is needed.
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    \12\ FMIs are responsible for remedying supervisory concerns. 
``Supervisory action'' in this context refers to the range of 
supervisory measures that relevant laws authorize the Federal 
Reserve to take. These include issuing a Matter Requiring Attention 
(MRA) or Matter Requiring Immediate Attention (MRIA); entering into 
a Memorandum of Understanding (MOU) with the FMI; or more severe 
enforcement action measures as authorized under Title VIII of the 
Dodd-Frank Act or other relevant laws.
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    Supervisors may identify multiple issues with differing degrees of 
concern. In such cases, supervisors typically

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should assign the category a rating that reflects their judgment of the 
severity of the most serious concerns identified. For example, if a 
payment system meets the majority of supervisory standards for the 
Settlement category, but only partly observes the risk management 
standard pertaining to settlement finality, then, because of that 
issue's criticality to a payment system, the payment system's rating 
for the Settlement category should reflect its weaknesses with regard 
to that key risk management standard.
1: Strong
     Any issues identified, either individually or 
cumulatively, are not issues of concern with respect to the category's 
supervisory guidance. For example, the FMI observes all of the key risk 
management standards in Regulation HH or the PSR policy, as 
applicable.\13\
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    \13\ The applicable standards are based on the Federal Reserve's 
source of authority. DFMUs for which the Federal Reserve acts as the 
Supervisory Agency under Title VIII of the Dodd-Frank Act are 
subject to Regulation HH. Other FMIs subject to Federal Reserve 
supervision, for example, by virtue of being members of the Federal 
Reserve System, are subject to the Federal Reserve Act and the 
expectations set out in the Federal Reserve's PSR policy. The 
applicable standards in both Regulation HH and the PSR policy are 
based on the PFMI. The Board has stated that it does not intend for 
differences in language in the two documents to lead to inconsistent 
policy results.
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     The FMI can correct any issues identified in the normal 
course of business and dedicated supervisory monitoring of the FMI's 
remediation efforts is not needed.
2: Satisfactory
     Any issues identified, either individually or 
cumulatively, are not presently issues of concern with respect to the 
category's supervisory guidance, but may become so if left uncorrected. 
For example, the FMI either observes or broadly observes the key risk 
management standards in Regulation HH or the PSR policy, as applicable.
     The FMI can correct any issues identified in the normal 
course of business, but limited, dedicated supervisory monitoring of 
the FMI's remediation efforts may be needed.
3: Fair
     One or more issues identified, either individually or 
cumulatively, are issues of concern with respect to the category's 
supervisory guidance. For example, the FMI, at a minimum, broadly 
observes most of the key risk management standards in Regulation HH or 
the PSR policy, as applicable, but may partly observe some of them.
     The FMI should correct one or more of the issues 
identified within a defined period, dedicated supervisory monitoring of 
the FMI's remediation efforts is likely needed, and supervisory action 
may be needed.
4: Marginal
     One or more issues identified, either individually or 
cumulatively, are substantial issues of concern with respect to the 
category's supervisory guidance. For example, the FMI only partly 
observes many key risk management standards in Regulation HH or the PSR 
policy, as applicable, and may not observe some of them.
     The FMI should correct one or more of the issues 
identified immediately, dedicated supervisory monitoring of the FMI's 
remediation efforts is needed, and supervisory action is likely.
5: Unsatisfactory
     One or more issues identified, either individually or 
cumulatively, are critical and immediate issues of concern with respect 
to the category's supervisory guidance. For example, the FMI does not 
observe key risk management standards in Regulation HH or the PSR 
policy, as applicable.
     The FMI must correct one or more of the issues identified 
immediately, and immediate supervisory action and monitoring of the 
FMI's remediation efforts are needed.

Composite Ratings

    An FMI's composite rating indicates whether and to what extent the 
issues identified, in the aggregate, give cause for supervisory 
concern. Like the category ratings, an FMI's composite rating ranges 
from 1 to 5. A rating of 1 indicates the strongest performance and, 
therefore, the level of least supervisory concern, and a rating of 5 
indicates a critically deficient level of performance and, therefore, 
the greatest level of supervisory concern. Importantly, an FMI's 
composite rating should not represent a formulaic combination of its 
category ratings, such as an arithmetic average. Rather, the ratings 
definitions provide factors that supervisory staff should consider when 
viewing an FMI's performance against the totality of supervisory 
guidance.
1: Strong
     As reflected in its category ratings, an FMI with a 
composite rating of 1 is substantially sound in every respect and does 
not give cause for supervisory concern.
     Any issues identified do not reflect a pattern of risk 
management or governance failures and, either individually or 
cumulatively, are not issues of concern for the safety and efficiency 
of either the FMI or the markets that it supports.
     The FMI can correct any issues identified in the normal 
course of business and dedicated supervisory monitoring of the FMI's 
remediation efforts is not needed.
2: Satisfactory
     As reflected in its category ratings, an FMI with a 
composite rating of 2 is sound in most respects and does not presently 
give cause for supervisory concern.
     Any issues identified do not reflect a pattern of risk 
management or governance failures and, either individually or 
cumulatively, are not presently issues of concern for the safety and 
efficiency of either the FMI or the markets that it supports, but may 
become so if left uncorrected.
     The FMI can correct any issues identified in the normal 
course of business, but limited, dedicated supervisory monitoring of 
the FMI's remediation efforts may be needed.
3: Fair
     As reflected in its category ratings, an FMI with a 
composite rating of 3 is sound in many respects, but gives cause for 
some supervisory concern, and supervisory action may be necessary.
     Any issues identified, either individually or 
cumulatively, are issues of concern for the safety and efficiency of 
either the FMI or the markets that it supports.
     The FMI should correct one or more of the issues of 
concern identified within a defined period and dedicated monitoring of 
the FMI's remediation efforts is likely needed.
4: Marginal
     As reflected in its category ratings, an FMI with a 
composite rating of 4 may be unsound in one or more respects and gives 
cause for substantial supervisory concern, which will likely lead to 
supervisory action.
     Any issues identified, either individually or 
cumulatively, are substantial issues of concern for the safety and 
efficiency of either the FMI or the markets that it supports.
     The FMI should correct one or more of the issues of 
concern identified immediately and dedicated supervisory monitoring of 
the FMI's remediation efforts is needed.
5: Unsatisfactory
     As reflected in its category ratings, an FMI with a 
composite rating of 5 is considered critically unsound and gives

[[Page 70216]]

cause for substantial and immediate supervisory concern and action.
     Any issues identified, either individually or 
cumulatively, are critical and immediate issues of concern for the 
safety and efficiency of either the FMI or the markets that it 
supports.
     The FMI must correct one or more of the issues of concern 
identified immediately, and immediate supervisory action and monitoring 
of the FMI's remediation efforts are needed.

Administrative Law Matters

Regulatory Flexibility Act Analysis

    Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
et seq.) to address concerns related to the effects of agency rules on 
small entities, and the Board is sensitive to the impact its rules may 
impose on small entities. The RFA requires agencies either to provide 
an initial regulatory flexibility analysis with a proposed rule or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. The Board has 
reviewed the proposed text of the ORSOM rating system. In this case, 
the rating system would apply to FMUs that are designated by the 
Council under Title VIII of the Dodd-Frank Act as systemically 
important, for which the Board is the Supervisory Agency, and which are 
subject to Regulation HH. In addition, the supervisory rating system 
for FMIs will apply to other FMIs over which the Board has supervisory 
authority, including FMIs operated by the Federal Reserve Banks, 
pursuant to the PSR policy. Based on current information, none of the 
designated FMIs are ``small entities'' for purposes of the RFA, and so, 
the proposed rating system likely would not have a significant economic 
impact on a substantial number of small entities (5 U.S.C. 605(b)). The 
following Initial Regulatory Flexibility Analysis, however, has been 
prepared in accordance with 5 U.S.C. 603, based on current information. 
The Board will, if necessary, conduct a final regulatory flexibility 
analysis after consideration of comments received during the public 
comment period. The Board requests public comments on all aspects of 
this analysis.
    1. Statement of the need for, objectives of, and legal basis for, 
the proposed rule. The Board is proposing the ORSOM rating system in 
order to carry out its supervisory responsibilities regarding FMIs 
under Title VIII of the Dodd-Frank Act and other applicable law, as 
discussed above. As noted above, the ORSOM rating system is a 
supervisory tool that the Federal Reserve will use to provide a 
consistent internal framework for discussing FMI assessments across the 
Federal Reserve's FMI portfolio, including DFMUs for which the Board is 
the Supervisory Agency pursuant to Title VIII, other DFMUs that are 
members of the Federal Reserve System, and FMIs that are operated by a 
Federal Reserve Bank. The Federal Reserve will convey the annual ORSOM 
rating to a DFMU's management and board of directors. The rating system 
is designed to link supervisory assessments and messages to the 
regulations and guidance that form the foundation of the supervisory 
program, such as Regulation HH and the PSR policy.
    2. Small entities affected by the proposed rule. Pursuant to 
regulations issued by the Small Business Administration (SBA) (13 CFR 
121.201), a ``small entity'' includes an establishment engaged in (i) 
financial transaction processing, reserve and liquidity services, and/
or clearinghouse services with an average annual revenue of $35.5 
million or less (NAICS code 522320); (ii) securities and/or commodity 
exchange activities with an average annual revenue of $35.5 million or 
less (NAICS code 523210); and (iii) trust, fiduciary, and/or custody 
activities with an average annual revenue of $35.5 million or less 
(NAICS code 523991). Based on current information, the Board does not 
believe that any of the FMIs that would be subject to the ORSOM rating 
system would be ``small entities'' pursuant to the SBA regulation.
    3. Projected reporting, recordkeeping, and other compliance 
requirements. The proposed ORSOM rating system does not impose any 
reporting or recordkeeping requirements on the relevant FMIs. Although 
the rating system reflects risk management standards set out in 
Regulation HH, the PSR policy, and other applicable rules and guidance, 
the ORSOM rating system itself does not impose any compliance 
requirements.
    4. Identification of duplicative, overlapping, or conflicting 
Federal rules. The Board does not believe that any Federal rules 
duplicate, overlap with, or conflict with the proposed rating system.
    5. Significant alternatives. The Board is not aware of any 
significant alternatives to the proposed rating system that accomplish 
the objectives of reflecting the relevant risk management standards in 
the supervisory rating system and that minimize any significant 
economic impact on small entities.

Competitive Impact Analysis

    As a matter of policy, the Board subjects all operational and legal 
changes that could have a substantial effect on payment system 
participants to a competitive impact analysis, even if competitive 
effects are not apparent on the face of the proposal. Pursuant to this 
policy, the Board assesses whether the proposed changes ``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'' and whether any such adverse effect ``was due to 
legal differences or due to a dominant market position deriving from 
such legal differences.'' If, as a result of this analysis, the Board 
identifies an adverse effect on the ability to compete, the Board then 
assesses whether the associated benefits--such as improvements to 
payment system efficiency or integrity--can be achieved while 
minimizing the adverse effect on competition.
    Designated FMUs are subject to the supervisory framework 
established under Title VIII of the Dodd-Frank Act. At least one 
currently designated FMU that is subject to Regulation HH competes with 
a similar service provided by the Reserve Banks. Under the Federal 
Reserve Act, the Board has general supervisory authority over the 
Reserve Banks, including the Reserve Banks' provision of payment and 
settlement services (``Federal Reserve priced services''). This general 
supervisory authority is much more extensive in scope than the 
authority provided under Title VIII over designated FMUs. In practice, 
Board oversight of the Reserve Banks goes well beyond the typical 
supervisory framework for private-sector entities, including the 
framework provided by Title VIII.
    The Board is committed to applying risk-management standards to the 
Reserve Banks' Fedwire Funds Service and Fedwire Securities Service 
that are at least as stringent as the applicable Regulation HH 
standards applied to DFMUs that provide similar services. The risk 
management and transparency expectations in part I of the PSR policy, 
which applies to the Federal Reserve priced services, are consistent 
with those in Regulation HH. The proposed ORSOM rating system will be 
applied equally to both designated FMUs subject to Regulation HH and to 
the other FMIs subject to the Board's authority, including the Federal 
Reserve priced services, subject to the PSR policy. Therefore, the 
Board does not believe the proposed rating system will have

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any direct and material adverse effect on the ability of other service 
providers to compete with the Reserve Banks.

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 may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a valid Office of Management and Budget 
(OMB) control number. The Board has reviewed this rating system 
proposal and determined that it contains no collections of information. 
As the Board considers the public comments received and finalizes the 
proposal, the Board will reevaluate this PRA determination.

    By order of the Board of Governors of the Federal Reserve 
System, November 9, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-28821 Filed 11-12-15; 8:45 am]
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