[Federal Register Volume 75, Number 244 (Tuesday, December 21, 2010)]
[Proposed Rules]
[Pages 79982-79984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32005]
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Proposed Rules
Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 /
Proposed Rules
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FINANCIAL STABILITY OVERSIGHT COUNCIL
12 CFR Chapter XIII
Authority To Designate Financial Market Utilities as Systemically
Important
AGENCY: Financial Stability Oversight Council.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the ``DFA'') gives the Financial Stability Oversight Council (the
``Council'') the authority to identify and designate as systemically
important a financial market utility if the Council determines that the
failure, or a disruption to the functioning, of a financial market
utility could create or increase the risk of significant liquidity or
credit problems spreading among financial institutions or markets and
thereby threaten the stability of the financial system of the United
States. The DFA generally defines a ``financial market utility'' 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 that person.\1\ The utility-like
arrangements used to settle financial transactions, whether involving
payments, securities, derivatives, or other similar financial
instruments, are critical parts of the financial infrastructure for the
economy and are integral to the soundness of the financial system and
overall economic performance. The importance of these arrangements has
been highlighted by the recent period of market stress. This advance
notice of proposed rulemaking (ANPR) invites public comment on the
criteria and analytical framework that should be applied by the Council
in designating financial market utilities under the DFA.
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\1\ Section 803(6)(B) of the DFA excludes certain entities from
the definition of a financial market utility, including designated
contract markets and national securities exchanges.
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DATES: Comments must be received by January 20, 2011.
ADDRESSES: Interested persons are invited to submit comments regarding
this advance notice of proposed rulemaking according to the
instructions for ``Electronic Submission of Comments'' below. All
submissions must refer to the document title. The FSOC encourages the
early submission of comments.
Electronic Submission of Comments. Interested persons must submit
comments electronically through the Federal eRulemaking Portal at
http://www.regulations.gov. Electronic submission of comments allows
the commenter maximum time to prepare and submit a comment, ensures
timely receipt, and enables the FSOC to make them available to the
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and
interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through the method specified above.
Public Inspection of Public Comments. All properly submitted
comments will be available for inspection and downloading at http://www.regulations.gov.
Additional Instructions. Please note the number of the question to
which you are responding at the top of each response. Though the
responses will be screened for obscenities and appropriateness, in
general comments received, including attachments and other supporting
materials, are part of the public record and are immediately available
to the public. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
FOR FURTHER INFORMATION CONTACT: Office of Domestic Finance, Treasury,
at (202) 622-1703.
SUPPLEMENTARY INFORMATION: Sections 112(a)(2)(J) and 804(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the ``DFA'')
give the Financial Stability Oversight Council (the ``Council'') the
authority to identify and designate as systemically important a
financial market utility if the Council determines that the failure, or
a disruption to the functioning, of a financial market utility could
create or increase the risk of significant liquidity or credit problems
spreading among financial institutions or markets and thereby threaten
the stability of the financial system of the United States.
I. Background
The Council, which was established by section 111 of the DFA, has
ten voting members and 5 nonvoting members.\2\ It has several duties,
including monitoring the financial services marketplace to identify
potential threats to the financial stability of the United States and
identifying those financial market utilities that should be designated
by the Council as systemically important and subject to enhanced
examination, supervision, enforcement and reporting standards and
requirements.
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\2\ The voting members consist of the Secretary of the Treasury
who also is the Chairperson of the Council, the Chairman of the
Board of Governors of the Federal Reserve System, the Comptroller of
the Currency, the Director of the Bureau of Consumer Financial
Protection, the Chairman of the Securities and Exchange Commission,
the Chairperson of the Federal Deposit Insurance Corporation, the
Chairperson of the Commodity Futures Trading Commission, the
Director of the Federal Housing Finance Agency, the Chairman of the
National Credit Union Administration Board, and an independent
member having insurance expertise appointed by the President with
the advice and consent of the Senate. The nonvoting members are the
Director of the Office of Financial Research; the Director of the
Federal Insurance Office; and a State insurance commissioner, a
State banking supervisor, and a State securities commissioner (or an
officer performing like functions), each designated by a selection
process determined by their respective state supervisors or
commissioners.
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Financial market utilities exist in a number of markets and provide
many benefits, but also concentrate risk. The payment and settlement
processes of such systems are also highly interdependent, either
directly through operational, contractual or affiliation linkages, or
indirectly through liquidity flows or common participants. Problems in
the completion of settlement at one system could spill over to other
systems or financial institutions in the form of liquidity and credit
disruptions.
Through this ANPR the Council is seeking to gather information as
it begins to develop the specific criteria and analytical framework by
which it
[[Page 79983]]
will designate financial market utilities \3\ as systemically important
\4\ under Title VIII of the DFA. This ANPR does not address the
designation criteria and analytical framework for payment, clearing, or
settlement activities carried out by financial institutions \5\, which
the Council is considering separately.
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\3\ As defined in Section 803(6) of the DFA.
\4\ As defined in Section 803(9) of the DFA.
\5\ As defined in Section 803(7) of the DFA.
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a. Considerations in Making a Determination
Under section 804(a)(2) of the DFA, in making a determination on
whether the financial market utility should be designated as
systemically important, the Council must consider:
(A) The aggregate monetary value of transactions processed by the
financial market utility;
(B) The aggregate exposure of the financial market utility to its
counterparties;
(C) The relationship, interdependencies, or other interactions of
the financial market utility with other financial market utilities or
payment, clearing or settlement activities;
(D) The effect that the failure of or a disruption to the financial
market utility would have on critical markets, financial institutions,
or the broader financial system; and
(E) Any other factors that the Council deems appropriate.
b. Process for Making a Determination
Under the provisions of the DFA, the Council generally must provide
a financial market utility with advance notice that it proposes to make
a determination, and the financial market utility has up to 30 days to
request a hearing.\6\ The Council must schedule the hearing within 30
days of receipt of the request. After holding a hearing, the Council
has up to 60 days to make a final determination. If a financial market
utility does not make a timely request for a hearing, the Council must
notify the firm of its final determination within 30 days of the
expiration of the 30-day period in which a hearing could have been
requested. In making a determination, the Council must consult with the
relevant supervisory agency for the financial market utility \7\ and
the Board of Governors of the Federal Reserve System. Once designated,
the Council can rescind a designation. The Council is not requesting
comment on these procedural requirements in this ANPR.
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\6\ The Council may waive or modify the advance notice and
hearing requirements if the Council determines it is necessary to
prevent or mitigate an immediate threat to the financial system
posed by the FMU. DFA Sec. 804(c)(3).
\7\ As defined in Section 803(8) of the DFA.
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II. Criteria for Designation
1. What quantitative and qualitative information should the Council
use to measure the factors it is required to consider in Section
804(a)(2) when making determinations under Section 804 of the DFA? How
should quantitative and qualitative considerations be incorporated into
the determination process?
2. Can the considerations listed in section 804(a)(2) be broken
down into easily measured factors that the Council should use to
determine whether financial market utilities are systemically
important? Are there certain levels of quantitative measures (e.g., for
value and exposure) or qualitative characteristics (e.g., registered
clearing agencies versus exempt clearing agencies) that should trigger
a review for systemic importance by the Council?
3. Which of the considerations listed in section 804(a)(2) are most
important for the Council to consider? Should the application of the
considerations differ depending on the type of FMU, and if so how?
4. How should the Council measure and assess the aggregate monetary
value of transactions processed by financial market utilities?
a. For each type of financial market utility (e.g., central
counterparty, funds transfer system), what is the best approach for
measuring value (e.g., notional values, margin flows, net versus gross
values)?
b. What time horizon/statistics should be used when assessing value
(e.g., daily, monthly or annual averages; daily, monthly, or annual
peaks?). Should the Council consider historical values, projected
future values, or both?
c. Should different measures be applied to different types of
financial market utilities based on their activities, products, or
markets?
d. What is the best approach for measuring potential aggregate
monetary values for start-up financial market utilities?
e. Should certain payment systems that transfer relatively low
aggregate values be considered by the Council for designation as
systemically important given that the system's failure or disruption
could still cause widespread disruption, especially if there is no
ready alternative means of making payments? For example, the failure or
disruption of a system used extensively to make payments could leave a
significant portion of the general public with unexpected overdrafts
and/or lack of liquid funds. If so, what factors should the Council
consider in making a determination of systemic importance for such
systems?
5. How should the Council measure and assess the aggregate exposure
of financial market utilities engaged in payment, clearing, or
settlement activities to its counterparties?
a. How should the Council identify the extent to which financial
market utilities bear and create risk exposures for themselves and
their participants?
b. What measures of exposure should be considered (e.g., liquidity
exposures, current and potential future counterparty credit exposures,
operational risk, the degree of concentration of exposures across
participants)?
c. For each type of financial market utility (e.g., central
counterparty, funds transfer system), what is the best approach for
measuring current credit exposure or, where relevant, potential future
exposures? For liquidity (funding), how might the Council assess the
potential liquidity risks that a financial market utility may bear or
liquidity risks it may impose on the broader financial system should it
fail to settle as expected?
6. How should the Council identify, measure, and assess the effects
of relationships, interdependencies, and other interactions of
financial market utilities listed as considerations in section
804(a)(2)?
a. What role should models of interdependencies (e.g.,
correlations; stress tests) play in the Council's determinations?
b. What role should the nature of participants or counterparties
play in the Council's determinations (e.g., common participants across
utilities, systemic importance of participants)?
c. Should the Council consider the legal, corporate, or contractual
relationships of financial market utilities in assessing relationships,
interdependencies, and other interactions (e.g., common holding
company, joint ventures, cross-margining agreements, service provider
relationships)?
d. Should the Council consider whether there are readily available
substitutes for the payment, clearing, and settlement services of
financial market utilities?
7. How should the Council assess whether failures or disruptions to
a financial market utility could potentially threaten the financial
system of the United States?
a. What measures, information and thresholds should be used in
assessing the effect of a financial market utility
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failure or disruption on critical markets and financial institutions?
For example, how might the Council assess potential credit and
liquidity effects and spillovers from a financial market utility
disruption?
b. What factors should the Council consider when determining
whether markets served by financial market utilities are critical? What
qualitative or quantitative characteristics might lead the Council to
scope in or out particular markets?
8. Title VIII of the DFA contains distinct provisions with respect
to financial market utilities and financial institutions engaged in
payment, clearing and settlement activities. What factors should the
Council consider in distinguishing between a systemically important
financial market utility and a financial institution that is very
substantially engaged in a systemically important payment, clearing, or
settlement activity?
9. What other types of information would be effective in helping
the Council determine systemic importance? What additional factors does
your organization consider when assessing exposure to, or the
interconnectedness of, financial market utilities?
10. What role should international considerations play in
designating financial market utilities?
Dated: December 14, 2010.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the
Treasury.
Statement of CFTC Chairman Gary Gensler
I support the advanced notice of proposed rulemaking on the
Authority to Designate Financial Market Utilities as Systematically
Important. It is an important step in fulfilling the requirements of
the Dodd-Frank Act to ensure that there is robust oversight and risk
management of financial market utilities including clearinghouses.
Clearinghouses in the futures markets have been around since the
late-19th Century and have functioned both in clear skies and during
stormy times--through the Great Depression, numerous bank failures, two
world wars and the 2008 financial crisis--to lower risk to the American
public. By standing between two counterparties, by valuing transactions
daily, requiring collateral, and rigorous risk management standards,
clearinghouses help ensure that the failure of one entity does not harm
its counterparties and reverberate throughout the financial system.
Comprehensive and robust regulatory oversight of clearinghouses,
however, is essential to our country's financial stability. This is
particularly important since, under the Dodd-Frank Wall Street Reform
and Consumer Protection Act, standardized swaps between financial
entities must be brought to clearinghouses.
The Commodity Futures Trading Commission (CFTC) has overseen
clearinghouses for decades. Currently, it oversees 14 clearinghouses
and that number is expected to increase to approximately 20. The Dodd-
Frank Act provides for enhanced oversight of these clearinghouses. In
close consultation with the Securities and Exchange Commission, the
Federal Reserve Board, other financial regulatory agencies, and
international regulators, the CFTC is currently working to implement a
series of rulemakings on risk management for clearinghouses. These
rulemakings will take account of relevant international standards,
particular those developed by the Committee on Payment and Settlement
Systems and the International Organization of Securities Commissions
(CPSS-IOSCO). In some instances, these rules also outline specific
additional requirements for systemically important clearinghouses.
The Dodd-Frank Act gives the Financial Stability Oversight Council
and the Federal Reserve Board important roles in clearinghouse
oversight by authorizing the Council to designate certain
clearinghouses as systemically important and by permitting the Federal
Reserve to recommend heightened prudential standards in certain
circumstances.
The advanced notice of proposed rulemaking being considered by this
Council today complements the CFTC's rulemaking efforts. It seeks the
public's input on how the Council should apply statutory criteria to
determine which clearinghouses qualify for designation as systemically
important.
At the CFTC, we plan on completing the rulemaking with regard to
clearinghouses by the statutory deadline of July 15, 2011. Although the
effective dates of these rules will generally be later in 2011, it is
my recommendation that we as a Council be in position to identify
systemically important clearinghouses by the summer of next year. This
will provide clarity to clearinghouses and market participants as to
the standards that they will have to uphold when the mandatory clearing
of standardized swaps becomes effective.
[FR Doc. 2010-32005 Filed 12-20-10; 8:45 am]
BILLING CODE 4810-25-P