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From Banking and Finance Law Daily, October 28, 2014

Fed harmonizes risk-management standards for all financial utilities

By Richard A. Roth, J.D.

The Federal Reserve Board is amending Reg. HH—Designated Financial Market Utilities (12 CFR Part 234) to create a common set of risk-management standards for all types of designated financial market utilities. Currently, payment systems are subject to standards that are separate from those that apply to central securities depositories and central counterparties. The Fed also is making changes to the more broadly applicable Federal Reserve Policy on Payment System Risk. The amendments to the rule and policy statement are effective Dec. 31, 2014, although the Fed noted there are delayed mandatory compliance deadlines for some provisions.

FMUs. A financial market utility is a company that manages or operates a multilateral system for transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the company. Reg. HH applies to FMUs that have been designated as systemically important by the Financial Stability Oversight Council. The Dodd-Frank Act requires the Fed to set risk-management standards for these designated FMUs.

The Fed says the revised standards are based on revisions to the internationally developed Principles for Financial Market Infrastructures. According to the Fed, the common standards are flexible and principles-based and will allow FMUs to use a cost-effective method of compliance. However, some specific minimum requirements are imposed, such as for testing frequency and the calculation of financial resources.

Amendments. According to the Fed, important amendments to the rule and Part I of the policy statement include:

  • establishing separate standards to address credit risk and liquidity risk;

  • creating new requirements on recovery and orderly wind-down planning;

  • setting a new standard on general business risk;

  • setting a new standard on tiered participation arrangements; and

  • imposing heightened requirements on transparency and disclosure.

Delayed compliance deadlines. While covered institutions are expected to be in compliance with most of the changes by Dec. 31, 2014, full compliance is not required until Dec. 31, 2015, for provisions relating to plans for:

  • recovery and orderly wind-down;

  • liquidity shortfalls;

  • maintaining sufficient liquid net assets funded by equity and a viable capital plan;

  • managing risks arising in tiered participation arrangements; and

  • providing comprehensive public disclosures.

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