[Federal Register Volume 79, Number 11 (Thursday, January 16, 2014)]
[Notices]
[Pages 2838-2850]
From the Federal Register Online via the Government Publishing 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: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. 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
http://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 http://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 http://www.bis.org/publ/cpss43.htm and http://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 http://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 http://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 http://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-
[[Page 2841]]
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 http://www.financialstabilityboard.org/cos/key_standards.htm.
\16\ See BCBS, Capital Requirements for Bank Exposures to
Central Counterparties, July 2012, (http://www.bis.org/publ/bcbs227.pdf) and BCBS, Capital Treatment of Bank Exposures to
Central Counterparties, consultative document, June 2013 (http://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 (http://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);
http://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 http://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.
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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 http://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 http://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 http://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.
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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.
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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.
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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 http://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 http://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 http://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); http://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 http://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 http://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