Fed Revises Risk Standards for Financial 'Utilities'

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WASHINGTON - The Federal Reserve Board on Tuesday issued a final rule establishing common risk management standards for all financial market utilities subject to central bank supervision.

The new rule combines the two sets of standards that had formerly applied separately to financial market utilities involved in payment systems and those operating a central securities depository or central counterparty. In a related move, the Fed also announced final changes to its policy statement on payment system risk. Both stem from the issuance of international standards on financial market infrastructure that were published in April 2012.

"The board believes that a uniform set of standards for all types of designated FMU is appropriate because all designated FMUs potentially face and must manage many of the same types of risk," the final rule said.

The Fed was tasked with overseeing financial market utilities as a result of its new supervisory powers over nonbank companies - mandated by the Dodd-Frank Act - that are deemed a risk to the broader financial system. In 2012, eight such companies supporting financial infrastructure were designated as "systemically important" by the Financial Stability Oversight Council.

The Fed had originally crafted a policy - known as Regulation HH - to deal with supervising financial market utilities, but opted to revise its standards after release of the international Principles for Financial Market Infrastructures. The global principles were developed by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions.

Key changes for financial market utilities adopted by the final rule and policy statement - both of which become effective Dec. 31 - include the establishment of standards to deal specifically with credit and liquidity risk, new recovery and wind-down planning obligations, a standard to deal with tiered participation arrangements and tougher requirements related to transparency and disclosure.

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Law and regulation Dodd-Frank