Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 18445 

Conditioning Engineers, Inc., 1791 

Tullie Circle, NE., Atlanta, GA 30329, 

(404) 636–8400, ashrae@ashrae.org, or 

http://www.ashrae.org. 

(1) American National Standards 

Institute/American Society of Heating, 

Refrigeration, and Air-Conditioning 

Engineers Standard 29–2009, (‘‘ASHRAE 

Standard 29–2009’’), ‘‘Method of Testing 

Automatic Ice Makers,’’ IBR approved 

for § 431.134. 

(2) [Reserved]. 

4. Section 431.134 is revised to read 

as follows: 

§ 431.134 Uniform test methods for the 

measurement of energy and water 

consumption of automatic commercial ice 

makers. 

(a) Scope. This section provides the 

test procedures for measuring, pursuant 

to EPCA, the energy use in kilowatt 

hours per 100 pounds of ice (kWh/100 

lb ice) and the condenser water use in 

gallons per 100 pounds of ice (gal/100 

lb ice) of automatic commercial ice 

makers with capacities between 50 and 

4,000 pounds of ice per 24 hours. 

(b) Testing and Calculations. Measure 

the energy use and the condenser water 

use of each covered product by 

conducting the test procedures set forth 

in AHRI Standard 810–2007, section 3, 

‘‘Definitions,’’ section 4, ‘‘Test 

Requirements,’’ and section 5, ‘‘Rating 

Requirements’’ (incorporated by 

reference, see § 431.133). Where AHRI 

Standard 810–2007 references 

‘‘ASHRAE Standard 29,’’ ASHRAE 

Standard 29–2009 shall be used 

(incorporated by reference, see 

§ 431.133). 

(1) For batch type automatic 

commercial ice-making heads, remote 

condensing (but not remote compressor) 

automatic commercial ice makers, and 

remote condensing and remote 

compressor automatic commercial ice 

makers; the energy use and condenser 

water use will be reported as measured 

in this paragraph (b), including the 

energy and water consumption, as 

applicable, of the ice-making 

mechanism, the compressor, and the 

condenser or condensing unit. 

(2)(i) For continuous type automatic 

commercial ice makers, determine the 

energy use and condenser water use by 

multiplying the energy consumption or 

condenser water use as measured in this 

paragraph (b) by the ice quality 

adjustment factor, determined using the 

following equation: 

(ii) Determine the calorimeter 

constant as specified in the ‘‘Procedure 

for Determining Ice Quality’’ in section 

A.3 of normative annex A of ASHRAE 

Standard 29–2009 (incorporated by 

reference, see § 431.133). 

(3) For batch and continuous type 

automatic ice makers with multiple 

capacity settings, determine the energy 

use and condenser water use by 

performing the test procedures in this 

section at the highest capacity setting. 

The energy consumption and condenser 

water use may optionally be determined 

by testing the multiple capacity 

automatic commercial ice makers at 

both the highest and the lowest capacity 

settings and averaging the two results. 

[FR Doc. 2011–7728 Filed 4–1–11; 8:45 am] 

BILLING CODE 6450–01–P 

FEDERAL RESERVE SYSTEM 

12 CFR Part 234 

[Regulation HH; Docket No. R–1412] 

RIN 7100–AD71 

Financial Market Utilities 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: Under section 805(a)(1)(A) of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the ‘‘DoddFrank Act’’), the Board of Governors of 

the Federal Reserve System (the 

‘‘Board’’) is required to promulgate riskmanagement standards governing the 

operations related to the payment, 

clearing, and settlement activities of 

certain financial market utilities 

(‘‘FMUs’’) that are designated as 

systemically important by the Financial 

Stability Oversight Council (the 

‘‘Council’’). In addition, under section 

806(e) of the Dodd-Frank Act, the Board 

is required to prescribe regulations 

setting forth the standards for 

determining when advance notice is 

required to be provided by a designated 

FMU for which the Board is the 

Supervisory Agency when the 

designated FMU proposes to change its 

rules, procedures, or operations that 

could materially affect the nature or 

level of risks presented by the 

designated FMU. The Board is 

proposing new Part 234 to Title 12 of 

the Code of Federal Regulations to 

implement these provisions of the 

Dodd-Frank Act. 

DATES: Comments on this notice of 

proposed rulemaking must be received 

by May 19, 2011. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1412 and 

RIN No. AD–7100–AD71, by any of the 

following methods: 

• Agency Web site: http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Facsimile: (202) 452–3819 or (202) 

452–3102. 

• Mail: Jennifer J. Johnson, 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, Manager (202) 872– 

7581, Division of Reserve Bank 

Operations and Payment Systems; 

Christopher W. Clubb, Senior Counsel 

(202) 452–3904, or Kara L. Handzlik, 

Senior Attorney (202) 452–3852, Legal 

Division; for users of 

Telecommunications Device for the Deaf 

(TDD) only, contact (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 


mstockstill on DSKH9S0YB1PROD with PROPOSALSEP04AP11.005</GPH>
18446 Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 

1The Dodd-Frank Act, Public Law 111–203, 124 

Stat. 1376, was signed into law on July 21, 2010. 

2For these purposes, section 803(9) of the DoddFrank Act defines ‘‘systemically important’’ as a 

situation in which the failure of or a disruption to 

the functioning of an FMU could create, or increase, 

the risk of significant liquidity or credit problems 

spreading among financial institutions or markets 

and thereby threaten the stability of the financial 

system of the United States. 12 U.S.C. 5462(9). The 

Council issued an advance notice of proposed 

rulemaking on the criteria for FMU designations on 

November 23, 2010 (see 75 FR 79982 (Dec. 21, 

2010)). 

3 Dodd-Frank Act section 805(a)(2) 12 U.S.C. 

5464(a)(2). 

4Section 805(a)(2) similarly requires the CFTC 

and SEC to take into consideration relevant 

international standards and existing prudential 

requirements when prescribing regulations 

containing risk-management standards for 

designated clearing entities. 

5A Supervisory Agency includes the SEC and 

CFTC with respect to their respective designated 

clearing entities (as defined above), the appropriate 

federal banking agencies with respect to FMUs that 

are institutions described in section 3(q) of the 

Federal Deposit Insurance Act (12 U.S.C. 1813(q)), 

and the Board with respect to a designated FMU 

this is otherwise not subject to the jurisdiction of 

any of the agencies listed above. 

I. Background 

A. Financial Market Utilities 

FMUs, such as payment systems, 

central securities depositories, and 

central counterparties, are critical 

components of the nation’s financial 

system. FMUs are multilateral 

organizations that provide the essential 

infrastructure to clear and settle 

payments and other financial 

transactions, upon which the financial 

markets and the broader economy rely 

to function effectively. Financial 

institutions, such as banks, participate 

in FMUs pursuant to a common set of 

rules and procedures, a technical 

infrastructure, and a risk-management 

framework. The basic risks that FMUs 

must manage include credit risk, 

liquidity risk, settlement risk, 

operational risk, and legal risk. These 

risks arise between financial institutions 

and FMUs as they settle payments and 

other financial transactions. The FMUs 

and their participating institutions are 

responsible for managing these risks on 

an individual and a collective basis. 

Financial stability requires that the 

financial infrastructure, including 

FMUs, be robust and well managed. If 

a systemically important FMU fails to 

perform as expected or fails to measure, 

monitor, and manage its risks 

effectively, it could pose significant risk 

to its participants and the financial 

system more broadly. For example, the 

inability of an FMU to complete 

settlement on time could create credit or 

liquidity problems for its participants or 

other FMUs. An FMU, therefore, should 

have an appropriate and robust riskmanagement framework, including 

sound governance arrangements, and 

appropriate policies and procedures to 

measure, monitor, and manage its risks. 

B. Dodd-Frank Wall Street Reform and 

Consumer Protection Act 

Title VIII of the Dodd-Frank Act, 

titled the ‘‘Payment, Clearing, and 

Settlement Supervision Act of 2010,’’ 

was enacted to mitigate systemic risk in 

the financial system and to promote 

financial stability, in part, through 

enhanced supervision of designated 

FMUs.1 Under section 803, an FMU is 

defined as a 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. Pursuant to 

section 804 of the Dodd-Frank Act, the 

Council is required to designate those 

FMUs that the Council determines are, 

or are likely to become, systemically 

important.2 Designation by the Council 

makes an FMU subject to the 

supervisory framework set out in Title 

VIII. 

Section 805(a)(1)(A) of the DoddFrank Act requires the Board to 

prescribe, by rule or order, riskmanagement standards governing the 

operations related to the payment, 

clearing, and settlement activities of 

certain designated FMUs. With respect 

to a designated FMU that is a 

derivatives clearing organization 

registered under section 5b of the 

Commodity Exchange Act or a clearing 

agency registered under section 17A of 

the Securities Exchange Act of 1934 

(collectively, ‘‘designated clearing 

entities’’), the Commodity Futures 

Trading Commission (‘‘CFTC’’) or the 

Securities and Exchange Commission 

(‘‘SEC’’), respectively, may each 

prescribe regulations, in consultation 

with the Council and the Board, 

containing applicable risk-management 

standards.3

In prescribing the standards, section 

805(a)(1) requires the Board to take into 

consideration relevant international 

standards and existing prudential 

requirements.4 In addition, as set out in 

section 805(b) of the Dodd-Frank Act, 

the objectives and principles for the 

risk-management standards are to (1) 

promote robust risk management, (2) 

promote safety and soundness, (3) 

reduce systemic risks, and (4) support 

the stability of the broader financial 

system. Section 805(c) of the DoddFrank Act also states that riskmanagement standards may address 

areas such as (1) risk-management 

policies and procedures, (2) margin and 

collateral requirements, (3) participant 

or counterparty default policies and 

procedures, (4) the ability to complete 

timely clearing and settlement of 

financial transactions, (5) capital and 

financial resource requirements for 

designated FMUs, and (6) other areas 

that are necessary to achieve the 

objectives and principles for riskmanagement standards in section 

805(b). Designated FMUs are required to 

conduct their operations in compliance 

with the applicable risk-management 

standards. 

In addition to compliance with the 

applicable risk-management standards, 

section 806(e)(1)(B) of the Dodd-Frank 

Act requires a designated FMU to 

provide at least 60 days’ advance notice 

to its Supervisory Agency (as defined 

below) of any proposed change to its 

rules, procedures, or operations that 

could, as defined in rules of each 

Supervisory Agency, materially affect 

the nature or level of risks presented by 

the designated FMU. Each Supervisory 

Agency must prescribe regulations that 

define and describe the standards for 

determining when such advance notice 

is required. Under section 803(8) of the 

Dodd-Frank Act, a ‘‘Supervisory 

Agency’’ means the federal agency that 

has primary jurisdiction over a 

designated FMU under federal banking, 

securities, or commodity futures laws.5

II. Explanation of Proposed Rules 

A. Authority, Purpose, and Scope 

Proposed § 234.1(a) clarifies that 

sections 805, 806, and 810 of the DoddFrank Act provide the statutory 

authority for the Board to promulgate 

the proposed part. Proposed § 234.1(b) 

explains that the proposed rules include 

risk-management standards for 

designated FMUs and that this part does 

not apply to designated clearing entities 

governed by the risk-management 

standards promulgated by the CFTC or 

the SEC, as appropriate. Proposed 

§ 234.1(b) also clarifies that the 

requirements and procedures in this 

part for a designated FMU that proposes 

to make a change to its rules, 

procedures, or operations that could 

materially affect the nature or level of 

risks presented by the designated FMU 

apply only to designated FMUs for 

which the Board is the Supervisory 

Agency. 

B. Definitions 

The proposed rule includes 

definitions that are necessary to 

implement the rules. Several definitions 

(including ‘‘designated financial market 

mstockstill on DSKH9S0YB1PROD with PROPOSALS

Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 18447 

6See full reports for the Core Principles for 

Systemically Important Payment Systems (Core 

Principles) (http://www.bis.org/publ/cpss43.htm) 

and the CPSS–IOSCO Recommendations for 

Securities Settlement Systems (Recommendations 

for Securities Settlement Systems) (http:// 

www.bis.org/publ/cpss46.htm) and Central 

Counterparties (http://www.bis.org/publ/ 

cpss64.htm) (Recommendations for Central 

Counterparties). 

7See the full PSR policy at http:// 

www.federalreserve.gov/paymentsystems/ 

psr_policy.htm. The Board requested comment on 

these standards prior to adopting them as part of its 

PSR policy. See 71 FR 36800 (June 28, 2006) and 

72 FR 2518 (Jan. 19, 2007). 

8See, for example, proposed standards in 

§§ 234.3(a)(5) and 234.4(a)(18). 

utility,’’ ‘‘financial market utility,’’ and 

‘‘Supervisory Agency’’) reference the 

statutory language in section 803 of the 

Dodd-Frank Act. Other proposed 

definitions (including ‘‘central 

counterparty,’’ ‘‘central securities 

depository,’’ and ‘‘payment system’’) are 

based on similar terms used in the riskmanagement standards issued by the 

Committee on Payment and Settlement 

Systems (the ‘‘CPSS’’) and the Technical 

Committee of the International 

Organization of Securities Commissions 

(‘‘IOSCO’’), which are discussed in detail 

below. The Board is requesting 

comment on all aspects of the proposed 

definitions except those defined in the 

Dodd-Frank Act. In particular, the Board 

requests comment on whether the 

definitions are clear and sufficiently 

detailed and whether additional 

definitions are needed to implement the 

proposed rules. 

C. Risk-Management Standards for 

Designated FMUs 

As noted above, in prescribing riskmanagement standards for designated 

FMUs, section 805(a) of the Dodd-Frank 

Act directs the Board to take into 

consideration relevant international 

standards and existing prudential 

requirements. The current international 

standards most relevant to risk 

management of FMUs are the standards 

developed by the CPSS and IOSCO.6 In 

2001, the CPSS published a set of 

principles for the design and operation 

of systemically important payment 

systems (the ‘‘Core Principles’’). That 

same year the CPSS and IOSCO jointly 

issued a set of minimum standards for 

securities settlement systems (the 

‘‘Recommendations for Securities 

Settlement Systems’’). In 2004, the CPSS 

and IOSCO jointly published 

recommendations for the risk 

management of central counterparties 

(the ‘‘Recommendations for Central 

Counterparties,’’ and collectively with 

the Recommendations for Securities 

Settlement Systems, the ‘‘CPSS–IOSCO 

Recommendations’’). The Board has 

adopted the three sets of standards in its 

Policy on Payment System Risk (‘‘PSR 

policy’’). Furthermore, the Board has 

been guided by this policy, in 

conjunction with relevant laws and 

other Federal Reserve policies, when 

exercising its authority in (1) 

supervising state member banks, Edge 

and agreement corporations, bank 

holding companies, and clearinghouse 

arrangements, including the exercise of 

authority under the Bank Service 

Company Act, where applicable; (2) 

setting or reviewing the terms and 

conditions for use of Federal Reserve 

payment and settlement services by 

system operators and participants; (3) 

developing and applying policies for the 

provision of intraday credit to Reserve 

Bank account holders; and (4) 

interacting with other domestic and 

foreign financial system authorities on 

payments and settlement risk issues.7

Thus, the Board has had several years 

experience with interpreting and 

applying the three sets of standards to 

payment, clearing, and settlement 

systems. 

The Board believes that the Core 

Principles and the CPSS–IOSCO 

Recommendations further the objectives 

and principles for designated FMU 

standards set out in section 805(b) of the 

Dodd-Frank Act. These international 

standards were formulated by central 

banks and securities regulators to 

promote sound risk-management 

practices, encourage the safe design and 

operation of relevant FMUs, reduce 

systemic risk, and, in certain instances, 

improve selected market practices or 

actions by regulators. The Federal 

Reserve collaborated with participating 

financial system authorities in 

developing the three sets of standards. 

In addition, the SEC and CFTC 

participated in the development of the 

CPSS–IOSCO Recommendations. The 

Core Principles and Recommendations 

for Securities Settlement Systems are 

also part of the Financial Stability 

Board’s Compendium of Standards, 

which has been widely recognized, 

supported, and endorsed by U.S. 

authorities as integral to strengthening 

the stability of the financial system. 

Furthermore, while the 

Recommendations for Central 

Counterparties have not been 

recognized formally by the Financial 

Stability Board, they are widely 

accepted and applied by central banks 

and market regulators around the world. 

The Board, therefore, believes that the 

Core Principles and CPSS–IOSCO 

Recommendations are an appropriate 

basis for risk-management standards for 

designated FMUs, and the Board is 

proposing to adopt by regulation a set of 

standards based on the Core Principles 

and CPSS–IOSCO Recommendations to 

implement section 805(a) of the DoddFrank Act. 

The Board believes, however, that it 

should adopt a modified version of the 

standards for the purpose of section 

805(a). In particular, the Board is 

proposing to adopt by regulation only 

those Core Principles and CPSS–IOSCO 

Recommendations, or portions thereof, 

that directly apply to an FMU’s riskmanagement or operational framework, 

rather than those standards that apply 

more generally to financial markets (for 

example, market convention, presettlement activities) or regulators (for 

example, regulation and oversight). The 

Board acknowledges that the scope of 

the standards is broad. For example, the 

Core Principles and the CPSS–IOSCO 

Recommendations contain a standard 

requiring a clear and well founded legal 

framework, which includes legislation 

and administrative rulemaking. While 

the Board acknowledges that an FMU 

cannot control or dictate legislation or 

regulatory rulemaking, it expects that a 

designated FMU will manage its legal 

risk within the context of current 

applicable statutes and regulations, in 

ways such as ensuring that its rules, 

procedures, and contractual provisions 

are clear and accessible to participants 

and such rules, procedures, and 

contractual provisions will be 

enforceable with a high degree of 

certainty. In order to facilitate 

compliance, designated FMUs may refer 

to the CPSS and CPSS–IOSCO 

documents for background. 

The Board expects to interpret and 

apply the proposed standards consistent 

with its interpretation and application 

of those standards under its existing 

PSR policy. For instance, when 

considering the adequacy of risk 

controls or the sufficiency of financial 

resources that a payment system, central 

securities depository, or central 

counterparty would require to complete 

timely settlement in the event the 

participant with the largest settlement 

obligation is unable to complete 

settlement, the Board usually has 

interpreted the term ‘‘participant’’ to 

mean the largest family of affiliated 

participants where there is more than 

one affiliated participant.8 Furthermore, 

the Board would continue to expect a 

central securities depository that 

extends intraday credit to its 

participants to institute risk controls 

that cover fully its credit risk exposure 

to all participants, not only the 

participant with the largest payment 

mstockstill on DSKH9S0YB1PROD with PROPOSALS

18448 Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 

9See proposed standard in § 234.4(a)(15). 10The interagency paper is available at http:// 

www.federalreserve.gov/boarddocs/SRLETTERS/ 

2003/SR0309a1.pdf. 11This interpretation is consistent with the 

Board’s supervision of banking organizations that 

are core clearing and settlement organizations or act 

as large-value payment system operators. See 

Supervision and Regulation letter 03–9 (May 28, 

2003) at http://www.federalreserve.gov/boarddocs/ 

srletters/2003/sr0309.htm. 

12See consultative report for Principles for 

Financial Market Infrastructures at http:// 

www.bis.org/publ/cpss94.htm. 

13 12 U.S.C. 5464(a)(1). 

14The Board is not proposing to include the 

following CPSS–IOSCO Recommendations as riskmanagement standards for designated FMUs: 

Recommendations 2 (trade confirmation), 3 

(settlement cycles), 4 (central counterparties), 5 

(securities lending), 12 (protection of customers’ 

securities), and 18 (regulation and oversight) of the 

Recommendations for Securities Settlement 

Systems and recommendation 15 (regulation and 

oversight) in the Recommendations for Central 

Counterparties. In addition, the Board is not 

proposing to prescribe a rule to adopt 

Recommendation 16 in the Recommendations for 

Securities Settlement Systems (communication 

procedures and standards) because the Board 

believes that at this time the purpose of this 

recommendation is sufficiently captured in the 

proposed risk-management standard regarding the 

efficient operation of a central securities depository. 

obligation.9 In addition, the Board 

would expect a designated FMU to meet 

the sound practices set forth in the 

‘‘Interagency Paper on Sound Practices 

to Strengthen the Resilience of the U.S. 

Financial System’’ as one element of 

complying with the risk-management 

standards in proposed §§ 234.3(a)(7) and 

234.4(a)(4).10 Specifically, a designated 

FMU should develop the capacity to 

recover and resume its payment, 

clearing, and settlement activities 

within the business day on which the 

disruption occurs with the overall goal 

of achieving recovery and resumption 

within two hours after an event.11 The 

Board requests comment on whether 

these provisions need further definition 

in the text of the proposed standards. 

The Board believes that the adoption 

of risk-management standards under 

Title VIII that are based on the current 

international standards will have 

several important benefits, including 

easing the potential burden for 

designated FMUs to comply with the 

standards; reducing potential conflicts 

among regulators regarding prudential 

requirements; providing a common 

framework among relevant regulators for 

overseeing and assessing the risks and 

risk management of FMUs with crossmarket, cross-border, or cross-currency 

operations; aiding international efforts 

to strengthen the risk management of 

critical FMUs; and reducing systemic 

risk. 

The Board requests comment on the 

set of standards set out in the proposed 

rule and the use of CPSS and CPSS– 

IOSCO documents as further 

information. In particular, given the 

familiarity of most FMUs with the 

existing relevant international 

standards, the Board requests comment 

on whether the proposed standards 

provide sufficient guidance for 

designated FMUs to comply with the 

standards pursuant to Title VIII of the 

Dodd-Frank Act. 

The CPSS and IOSCO are currently 

reviewing the three sets of international 

standards. This review is intended to 

strengthen and clarify the standards 

based on experience with the Core 

Principles and CPSS–IOSCO 

Recommendations since their 

publication and to incorporate lessons 

learned during the recent financial 

crisis. The CPSS and IOSCO published 

a consultative report on March 10, 2011; 

final international standards are 

expected in early 2012.12 At that time, 

the Board anticipates that it will review 

the new standards, consult with other 

appropriate agencies and the Council, 

and likely seek public comment on the 

adoption of revised standards for 

designated FMUs under section 805(a) 

of the Dodd-Frank Act based on the new 

international standards. 

Payment systems. Proposed § 234.3(a) 

sets out risk-management standards for 

designated FMUs that operate as 

payment systems, in accordance with 

section 805(a) of the Dodd-Frank Act. 

The Board is proposing a set of 

standards based on the Core Principles 

for such designated FMUs. The Core 

Principles are widely accepted by the 

international regulatory community, 

and numerous payment systems around 

the world already follow them. These 

standards address the types of areas of 

supervisory concern for designated 

FMUs set out in section 805(c) of the 

Dodd-Frank Act. For example, the 

standards address risk-management 

policies and procedures, participant 

default policies and procedures, and the 

ability to complete timely settlement of 

payments. 

Proposed § 234.3(b) clarifies that the 

Board will apply the standards set out 

in proposed § 234.3(a) in its supervision 

of designated FMUs that operate as 

payment systems and for which the 

Board is the Supervisory Agency. All 

designated FMUs are expected to 

employ a risk-management framework 

that is appropriate for their risks, so the 

Board may require a particular 

designated FMU to exceed the standards 

set out in the proposed rules in this 

notice. To that end, § 234.3(b) states that 

the Board may, by order, apply 

heightened risk-management standards 

to a particular FMU in response to the 

risks presented by that FMU. 

The Board requests comment on all 

aspects of the appropriateness of the 

proposed standards for designated 

FMUs that are payment systems, 

including whether there are any areas of 

supervisory concern regarding a 

payment system’s operations that are 

not sufficiently addressed by the 

proposed rules. The Board also requests 

comment on whether the proposed 

standards achieve the statutory 

objectives outlined above to (1) promote 

robust risk management, (2) promote 

safety and soundness, (3) reduce 

systemic risks, and (4) support the 

stability of the broader financial system. 

Central securities depositories and 

central counterparties. Proposed 

§ 234.4(a) of the proposed rule sets out 

risk-management standards for 

designated FMUs that operate as central 

securities depositories or central 

counterparties, in accordance with 

section 805(a) of the Dodd-Frank Act. 

Each proposed standard states whether 

it is applicable to a central securities 

depository, a central counterparty, or 

both. 

Most designated FMUs that operate as 

central securities depositories or central 

counterparties will be designated 

clearing entities subject to the riskmanagement standards promulgated by 

the CFTC or SEC. The Board is 

proposing standards for designated 

FMUs that operate as central securities 

depositories, central counterparties, or 

both, to address the unlikely event that 

a designated FMU operates as a central 

securities depository or central 

counterparty and is not required to be 

registered as a clearing agency or 

derivatives clearing organization with 

the SEC or CFTC, respectively. Pursuant 

to section 805(a)(1) of the Dodd-Frank 

Act, the Board’s risk-management 

standards apply to any designated FMU 

that is otherwise not subject to the 

jurisdiction of the SEC or the CFTC.13

The Board is proposing a set of 

standards for such designated FMUs 

that is based on the majority of the 

CPSS–IOSCO Recommendations 

presented in a modified format. 

Specifically, the Board is proposing to 

prescribe only those portions of the 

CPSS–IOSCO Recommendations that 

apply directly to FMUs, rather than 

those portions that apply to market 

convention, pre-settlement activities, 

and regulation and oversight, which are 

outside the control of the individual 

FMUs and are more appropriately 

addressed by other entities.14 While the 

Board endorses the CPSS–IOSCO 

mstockstill on DSKH9S0YB1PROD with PROPOSALS

Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 18449 

15Proposed § 234.4(a)(17)(i)—(ii) are generally 

consistent with Recommendations 4 and 5 in the 

Recommendations for Central Counterparties. 

Proposed rule 234.4.(17)(i) is based on 

Recommendation 5 (financial resources), paragraph 

4.5.4, that recommends that a central counterparty 

conduct comprehensive stress tests involving a full 

validation of model parameters and assumptions at 

least annually. Proposed § 234.4(17)(ii) is based on 

Recommendation 4 (margin requirements), 

paragraph 4.4.2, that states that margin models and 

parameters should be reviewed and backtested 

regularly (at least quarterly) to assess the reliability 

of the methodology in achieving the desired 

coverage. 

Recommendations in their entirety as a 

policy matter, its primary interest for 

purposes of this rulemaking is in those 

recommendations related to the clearing 

and settlement aspects of financial 

transactions, including the delivery of 

securities or other financial instruments 

against payment, and related risks. In 

addition, the standards in the 

Recommendations for Securities 

Settlement Systems and the 

Recommendations for Central 

Counterparties that overlap significantly 

have been consolidated to avoid 

repetition. 

Finally, the Board has modified the 

margin-related standards set forth in the 

Recommendations for Central 

Counterparties by adding two 

components on testing set forth in 

proposed § 234.4(a)(17). The 

components added by the Board are 

consistent with the frequencies 

recommended in the explanatory text of 

the Recommendations for Central 

Counterparties; however, proposed 

§ 234.4(a)(17)(i) would introduce more 

specific parameters on who may 

conduct model validations for central 

counterparties.15 In conducting 

supervision of central counterparties, 

the Board typically has required systems 

to employ a qualified, independent 

party to conduct validations of proposed 

and existing models to evaluate the 

performance of the model, along with 

parameters and assumptions, in a range 

of scenarios. The Board believes that in 

order for the validator to offer 

independent, unbiased conclusions and 

recommendations, the model validation 

should be performed by a person who 

is not responsible for developing the 

margin model and does not report to a 

person who performs these functions. A 

central counterparty’s margin model is a 

critical component in its riskmanagement framework and should be 

tested rigorously and validated at least 

annually to ensure it is performing 

reliably and achieving the desired 

coverage. The Board requests comment 

on whether the proposed rule for model 

validation is sufficiently clear. The 

Board also requests comment on all 

aspects of the proposed rule, including 

the proposed frequency and whether a 

model validation should be triggered as 

a result of any material change to a 

central counterparty, such as revisions 

to the margin model, introduction of 

new products, or formation of new 

margining arrangements (for example, 

portfolio or cross-margining). 

The Board believes that the standards 

in proposed § 234.4(a) appropriately 

address the types of areas of supervisory 

concern set out in section 805(c) of the 

Dodd-Frank Act. For example, the 

standards address collateral 

requirements and the ability to complete 

timely clearing and settlement of 

financial transactions for central 

securities depositories, and margin 

requirements and counterparty default 

policies and procedures for central 

counterparties. 

Proposed § 234.4(b) clarifies that the 

Board will apply the standards in 

proposed § 234.4(a) in its supervision of 

designated FMUs that operate as a 

central securities depository or a central 

counterparty and for which the Board is 

the Supervisory Agency. A designated 

FMU should comply with the standards 

that are applicable to it as determined 

by its function as a central securities 

depository, a central counterparty, or 

both. In addition, proposed § 234.4(b) 

states that the Board may, by order, 

apply heightened risk-management 

standards to a particular FMU in 

response to the risks presented by that 

FMU, for the same reasons as discussed 

above regarding heightened standards 

for designated FMUs operating as 

payment systems. 

The Board requests comment on all 

aspects of the proposed standards for 

designated FMUs that act as central 

securities depositories or central 

counterparties, including whether there 

are any areas of supervisory concern 

regarding the operations of a central 

securities depository or a central 

counterparty that are not sufficiently 

addressed by the proposed rules. The 

Board also requests comment on 

whether these standards achieve the 

statutory objectives outlined above to (1) 

promote robust risk management, (2) 

promote safety and soundness, (3) 

reduce systemic risks, and (4) support 

the stability of the broader financial 

system. 

The Board also requests comment on 

all aspects of proposed rules in §§ 234.3 

and 234.4, but, in particular, the Board 

requests comment on the following 

specific issues: 

• Under §§ 234.3(a)(5), 234.4(a)(2), 

234.4(a)(15), and 234.4(a)(18), should 

the Board require designated FMUs to 

maintain sufficient financial resources 

to withstand the default by the 

participant with the largest exposure or 

obligation in extreme but plausible 

market conditions, where participant 

means the family of affiliated 

participants where there is more than 

one affiliated participant (‘‘cover one’’); 

or should the Board require sufficient 

financial resources to withstand defaults 

by the two participants, plus any 

affiliated participants, with the largest 

exposures or obligations in extreme but 

plausible market conditions (‘‘cover 

two’’)? Should the Board require that 

financial resource requirements be 

different for certain types of designated 

FMUs in the same category, such as 

central counterparties, depending on the 

risk and other characteristics of the 

particular products that it clears or 

settles? What competitive impacts, if 

any, should the Board consider? 

• How would a cover two 

requirement compare with the current 

practices of payment, clearing, and 

settlement systems? What would be the 

expected incremental financial resource 

costs, separately including incremental 

liquidity costs on the system, and its 

participants, in connection with 

potentially increasing the current cover 

one requirement to a cover two 

requirement? 

D. Material Changes to Rules, 

Procedures, or Operations Requiring 

Advanced Notice 

As noted above, section 806(e)(1) of 

the Dodd-Frank Act requires a 

designated FMU to provide 60 days’ 

advance notice to its Supervisory 

Agency of any changes to its rules, 

procedures, or operations that 

‘‘materially affect the nature or level of 

risks presented.’’ Section 806(e) further 

requires each Supervisory Agency to 

describe in a rule what changes are 

considered material and thus would 

require advance notice by the 

designated FMU. The Board is currently 

evaluating the manner in which these 

types of advance notice should be 

submitted. The Board will provide 

guidance at a future date regarding the 

advance notice submission procedures. 

Proposed § 234.5(a) requires 

designated FMUs for which the Board is 

the Supervisory Agency to provide the 

Board with 60 days’ advance notice of 

any proposed change to its rules, 

procedures, or operations that could 

materially affect the nature or level of 

risks presented by the designated FMU. 

The proposed rule includes procedural 

requirements regarding such notices, 

such as the required contents of the 

notices and the procedures and timing 

for the methods for approving such 

changes. These provisions of the 

proposed rules essentially reiterate 

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18450 Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 

similar provisions in section 806(e) of 

the Dodd-Frank Act. 

As required by section 806(e), the 

Board is proposing to define under 

§ 234.5(c) changes that ‘‘materially affect 

the nature or level of risks presented’’ as 

those that could be reasonably expected 

to affect the performance of payment, 

clearing, or settlement functions or the 

overall nature or level of risk (including 

credit, liquidity, settlement, legal, or 

operational risks) presented by the 

designated FMU. Under this proposed 

definition, material changes would 

generally include changes that may 

affect the designated FMU’s ability or 

approach to measure or manage the 

risks posed by or to itself. Material 

changes also include changes to the 

designated FMU’s design that not only 

affect the FMU and its direct 

participants, but, even when properly 

implemented, could also affect the 

financial system more broadly. For 

example, given the operational and risk 

interdependencies of a designated FMU, 

it is possible that attempts to reduce or 

limit one type of risk could lead to the 

concentration or creation of different 

risks. Material changes, therefore, are 

not limited to those changes that would 

adversely affect or increase the risks of 

the FMU, and include those that may 

transfer or transform risks. 

To assist designated FMUs in 

determining whether a proposed change 

is material, the Board’s proposed rule 

sets out a non-exclusive list of changes 

that would be considered material and 

require advance notice to the Board. 

Under the proposed rule, material 

changes would include, but not be 

limited to, changes that affect 

participant eligibility or access criteria; 

product eligibility; risk management; 

settlement failure or default procedures; 

financial resources; business continuity 

and disaster recovery plans; daily or 

intraday settlement procedures; the 

scope of services, including the addition 

of a new service or discontinuation of 

an existing service; technical design or 

operating platform, which result in 

nonroutine changes to the underlying 

technological framework for payment, 

clearing, or settlement functions; or 

governance. 

The proposed rule also includes a 

non-exclusive list of routine changes to 

a designated FMU’s rules, procedures, 

or operations that will not be deemed to 

materially affect an FMU’s nature or 

level of risks or impact or cause 

disruption to the financial system more 

broadly. The Board believes the relevant 

safety and soundness issues associated 

with these routine changes are more 

appropriately addressed through 

ongoing communications with the 

designated FMU rather than through the 

formal advance notice process under 

section 806(e) of the Dodd-Frank Act. 

For the purposes of the advance notice 

provision, changes that would not be 

deemed to materially affect the FMU’s 

risks include, but are not limited to, 

changes to an existing rule, procedure, 

or operation that do not modify the 

contractual rights or obligations of the 

designated FMU or persons using its 

payment, clearing, or settlement 

services; changes to an existing 

procedure, control, or service that do 

not adversely affect the safeguarding of 

securities, collateral, or funds in the 

custody or control of the designated 

FMU or for which it is responsible; 

routine technology systems upgrades; 

changes related solely to the 

administration of the designated FMU 

or related to the routine, daily 

administration, direction, and control of 

employees; or clerical changes and other 

nonsubstantive revisions to rules, 

procedures, or other documentation. 

The material and nonmaterial lists are 

not exhaustive regarding the types of 

changes that the Board may deem 

material under section 806(e). There 

would be many proposed changes to a 

designated FMU’s rules, procedures, or 

operations that are not included in 

either list. If a designated FMU had any 

question regarding whether a particular 

change to a rule, procedure, or 

operation, which was not covered by 

either list, met the general materiality 

standard, the Board anticipates that the 

FMU would contact Board staff. 

The Board requests comment on all 

aspects of the proposed rule regarding 

changes to rule, procedures, or 

operations of a designated FMU. The 

Board requests comment on whether the 

proposed rule’s provisions regarding the 

requirements, content, and timing of 

advance notices of proposed changes are 

clear. In addition, the Board requests 

comment on whether the proposed nonexclusive illustrative lists for material 

and nonmaterial changes to an FMU’s 

rules, procedures, or operations would 

be helpful to designated FMUs in 

determining whether advance notice of 

such changes is required. The Board 

also requests comment on whether there 

are any areas or items on either list that 

should be deleted as inappropriate. 

Finally, the Board requests comment on 

whether there are other areas or items 

that appropriately should be added to 

either list as material or not material to 

an FMU’s risks. In responding to these 

questions, commenters are requested to 

explain why they believe an item or area 

on either list should be deleted or 

added. 

III. Administrative Law Matters 

A. Regulatory Flexibility Act Analysis 

Congress enacted the Regulatory 

Flexibility Act (the ‘‘RFA’’) (5 U.S.C. 601 

et seq.) to address concerns related to 

the effects of agency rules on small 

entities, and the Board is sensitive to the 

impact its rules may impose on small 

entities. The RFA requires agencies 

either to provide an initial regulatory 

flexibility analysis with a proposed rule 

or to certify that the proposed rule will 

not have a significant economic impact 

on a substantial number of small 

entities. In accordance with section 3(a) 

of the RFA, the Board has reviewed the 

proposed regulation. In this case, the 

proposed rule would apply to FMUs 

that are identified and designated by the 

Council as systemically important to the 

U.S. financial system. Based on current 

information, the Board believes that the 

payment system FMUs that would likely 

be designated by the Council would not 

be ‘‘small entities’’ for purposes of the 

RFA, and so, the proposed rule likely 

would not have a significant economic 

impact on a substantial number of small 

entities (5 U.S.C. 605(b)). The authority 

to designate systemically important 

FMUs, however, resides with the 

Council, rather than the Board, and the 

Board cannot therefore be assured of the 

identity of the FMUs that the Council 

may designate in the future. 

Accordingly, an Initial Regulatory 

Flexibility Analysis has been prepared 

in accordance with 5 U.S.C. 603, based 

on current information. The Board will, 

if necessary, conduct a final regulatory 

flexibility analysis after consideration of 

comments received during the public 

comment period. 

1. Statement of the need for, 

objectives of, and legal basis for, the 

proposed rule. The Board is proposing 

a regulation to implement certain 

provisions of Title VIII of the DoddFrank Act. Section 805(a)(1)(A) of the 

Dodd-Frank Act requires the Board to 

promulgate risk-management standards 

governing the operations related to the 

payment, clearing, and settlement 

activities of designated FMUs. The 

proposed rule clarifies that the Board 

would apply the standards set out in the 

proposed rule to designated FMUs for 

which the Board is the Supervisory 

Agency. In addition, under section 

806(e) of the Dodd-Frank Act, the Board 

is required to prescribe regulations 

setting forth the standards for 

determining when advance notice is 

required to be provided by a designated 

FMU for which the Board is the 

Supervisory Agency that proposes to 

change its rules, procedures, or 

operations that could materially affect 

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16See 12 U.S.C. 5461(b)(1)(A). 

the nature or level of risks presented by 

the designated FMU. The Board believes 

that the proposed regulation 

implements Congress’s requirement that 

the Board prescribe regulations that 

carry out the purposes of Title VIII of 

the Dodd-Frank Act. 

2. Small entities affected by the 

proposed rule. The proposed rule would 

affect FMUs that the Council designates 

as systemically important to the U.S. 

financial system. The Board estimates 

that fewer than five large-value payment 

systems would meet these conditions 

and be affected by this proposed rule. 

Pursuant to regulations issued by the 

Small Business Administration (the 

‘‘SBA’’) (13 CFR 121.201), a ‘‘small 

entity’’ includes an establishment 

engaged in providing financial 

transaction processing, reserve and 

liquidity services, or clearinghouse 

services with an average revenue of $7 

million or less (NAICS code 522320). 

Based on current information, the Board 

does not believe that any of the payment 

systems that would likely be designated 

by the Council would be ‘‘small entities’’ 

pursuant to the SBA regulation. The 

Board does not at this time believe that, 

pursuant to section 803(8) of the DoddFrank Act, it would be the Supervisory 

Agency for any FMU that operates as a 

central securities depository or a central 

counterparty and that would likely be 

designated by the Council. The Board 

seeks information and comment on the 

number of small entities to which the 

proposed rule would apply. 

3. Projected reporting, recordkeeping, 

and other compliance requirements. 

The proposed rule imposes certain 

reporting and recordkeeping 

requirements for a designated FMU. 

(See, for example, § 234.3(a)(3) of the 

proposed rule (requiring clearly defined 

procedures for the management of credit 

risks and liquidity risks), §§ 234.5(a)(1) 

and (2) of the proposed rule (requiring 

advance notice of changes that could 

materially affect the nature or level of 

risks presented by the designated FMU), 

and §§ 234.5(a)(2) and (3) of the 

proposed rule (requiring notice of an 

emergency change implemented by a 

designated FMU).) The proposed rule 

also contains a number of compliance 

requirements, including the standards 

that the designated FMU must meet, 

such as having a well-founded legal 

basis under all relevant jurisdictions 

and having rules and procedures that 

enable participants to understand 

clearly the FMU’s impact on each of the 

financial risks they incur by 

participation in it. Payment systems 

under the Board’s jurisdiction 

(including certain payment systems the 

Board believes could be designated as 

systemically important) generally 

already have implemented these 

standards, so the proposed rule would 

not likely impose additional costs on 

those payment systems. The Board seeks 

information and comment on any costs, 

compliance requirements, or changes in 

operating procedures that would arise 

from the application of the proposed 

rule. 

4. Identification of duplicative, 

overlapping, or conflicting Federal 

rules. The Board does not believe that 

any Federal rules conflict with the 

proposed rule. There is an overlap 

between the risk-management standards 

for FMUs in the proposed rule and the 

Board’s PSR policy; however, the 

proposed standards are consistent with 

the PSR policy. The Board seeks 

comment regarding any statutes or 

regulations that would duplicate, 

overlap, or conflict with the proposed 

rule. 

5. Significant alternatives to the 

proposed rule. The Board is unaware of 

any significant alternatives to the 

proposed rule that accomplish the 

stated objectives of the Dodd-Frank Act 

and that minimize any significant 

economic impact of the proposed rule 

on small entities. FMUs that are 

designated as systemically important by 

the Council and present similar risk 

profiles should be held to consistent 

standards. Promoting uniform standards 

for designated FMUs is one of the stated 

purposes of Title VIII of the Dodd-Frank 

Act.16 The standards in the proposed 

rule are being proposed for adoption in 

part because the payment systems that 

would likely be designated by the 

Council are already familiar with the 

international standards and could 

implement them with relatively less 

burden than if the Board adopted a 

wholly new and unfamiliar set of 

standards at this time. Similarly, the 

standards in the proposed rule for 

central securities depositories and 

central counterparties are a consolidated 

and streamlined compilation. They are 

based on the CPSS–IOSCO 

Recommendations, and most central 

securities depositories and central 

counterparties are already familiar with 

them. The Board requests comment on 

whether there are additional ways to 

reduce regulatory burden on small 

entities associated with this proposed 

rule. 

B. Paperwork Reduction Act Analysis 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3506; 

5 CFR 1320, Appendix A.1), the Board 

reviewed the proposed rule 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 the 

participants in payment, clearing, and 

settlement systems. Therefore, no 

collections of information pursuant to 

the Paperwork Reduction Act are 

contained in the proposed rule. 

IV. Statutory Authority 

Pursuant to the authority in Title VIII 

of the Dodd-Frank Act, particularly 

sections 805(a) and 806(e) (12 U.S.C. 

5464(a) and 5465(e)), the Board 

proposes to adopt part 234 to govern 

designated financial market utilities 

(Regulation HH). 

V. Text of Proposed Rules 

List of Subjects in 12 CFR Part 234 

Banks, Banking, Credit, Electronic 

funds transfers, Financial market 

utilities, Securities. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board proposes to amend 

12 CFR, Chapter II by adding part 234 

as set forth below. 

PART 234—DESIGNATED FINANCIAL 

MARKET UTILITIES (REGULATION HH) 

Sec. 

234.1 Authority, purpose, and scope 

234.2 Definitions 

234.3 Standards for payment systems 

234.4 Standards for central securities 

depositories and central counterparties 

234.5 Changes to rules, procedures, or 

operations 

Authority: 12 U.S.C. 5461 et seq. 

§ 234.1 Authority, purpose, and scope. 

(a) Authority. This part is issued 

under the authority of sections 805, 806, 

and 810 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act) (Pub. L. 111–203, 124 

Stat. 1376; 12 U.S.C. 5464, 5465, and 

5469). 

(b) Purpose and scope. This part 

establishes risk-management standards 

governing the operations related to the 

payment, clearing, and settlement 

activities of designated financial market 

utilities. The risk-management 

standards do not apply, however, to a 

designated financial market utility that 

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is a derivatives clearing organization 

registered under section 5b of the 

Commodity Exchange Act (7 U.S.C. 7a– 

1) or a clearing agency registered with 

the Securities and Exchange 

Commission under section 17A of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78q–1), which are governed by 

the risk-management standards 

promulgated by the Commodity Futures 

Trading Commission or the Securities 

and Exchange Commission, 

respectively, for which each is the 

Supervisory Agency (as defined in 

§ 234.2). In addition, this part sets out 

requirements and procedures for a 

designated financial market utility that 

proposes to make a change to its rules, 

procedures, or operations that could 

materially affect the nature or level of 

risks presented by the designated 

financial market utility and for which 

the Board is the Supervisory Agency. 

§ 234.2 Definitions. 

(a) Central counterparty means a 

designated financial market utility that 

interposes itself between the 

counterparties to trades, acting as the 

buyer to every seller and the seller to 

every buyer. 

(b) Central securities depository 

means a designated financial market 

utility that holds securities in custody to 

enable securities transactions to be 

processed by means of book entries or 

a designated financial market utility that 

enables securities to be transferred and 

settled by book entry either free of or 

against payment. 

(c) Designated financial market utility 

means a financial market utility (as 

defined in paragraph (d) of this section) 

that the Financial Stability Oversight 

Council has designated as systemically 

important under section 804 of the 

Dodd-Frank Act (12 U.S.C. 5463). 

(d) Financial market utility has the 

same meaning as the term is defined in 

section 803(6) of the Dodd-Frank Act 

(12 U.S.C. 5462(6)). 

(e) Payment system means a 

designated financial market utility that 

consists of a set of payment instructions, 

procedures, and rules for the transfer of 

funds among system participants. 

(f) Supervisory Agency has the same 

meaning as the term is defined in 

section 803(8) of the Dodd-Frank Act 

(12 U.S.C. 5462(8)). 

§ 234.3 Standards for payment systems. 

(a) A designated financial market 

utility that operates as a payment 

system should meet or exceed the 

following risk-management standards 

with respect to its payment, clearing, 

and settlement activities: 

(1) The payment system should have 

a well-founded legal basis under all 

relevant jurisdictions. 

(2) The payment system’s rules and 

procedures should enable participants 

to have a clear understanding of the 

payment system’s impact on each of the 

financial risks they incur through 

participation in it. 

(3) The payment system should have 

clearly defined procedures for the 

management of credit risks and liquidity 

risks, which specify the respective 

responsibilities of the payment system 

operator and the participants and which 

provide appropriate incentives to 

manage and contain those risks. 

(4) The payment system should 

provide prompt final settlement on the 

day of value, preferably during the day 

and at a minimum at the end of the day. 

(5) A payment system in which 

multilateral netting takes place should, 

at a minimum, be capable of ensuring 

the timely completion of daily 

settlements in the event of an inability 

to settle by the participant with the 

largest single settlement obligation. 

(6) Assets used for settlement should 

preferably be a claim on the central 

bank; where other assets are used, they 

should carry little or no credit risk and 

little or no liquidity risk. 

(7) The payment system should 

ensure a high degree of security and 

operational reliability and should have 

contingency arrangements for timely 

completion of daily processing. 

(8) The payment system should 

provide a means of making payments 

that is practical for its users and 

efficient for the economy. 

(9) The payment system should have 

objective and publicly disclosed criteria 

for participation, which permit fair and 

open access. 

(10) The payment system’s 

governance arrangements should be 

effective, accountable, and transparent. 

(b) Designated financial market 

utilities that operate as payment systems 

and for which the Board is the 

Supervisory Agency must meet or 

exceed the risk-management standards 

in § 234.3(a). The Board, by order, may 

apply heightened risk-management 

standards to an individual designated 

financial market utility in accordance 

with the risks presented by the 

designated financial market utility. 

§ 234.4 Standards for central securities 

depositories and central counterparties. 

(a) A designated financial market 

utility that operates as a central 

securities depository or a central 

counterparty should meet or exceed the 

following risk-management standards 

with respect to its payment, clearing, 

and settlement activities: 

(1) The central securities depository 

or central counterparty should have a 

well-founded, transparent, and 

enforceable legal framework for each 

aspect of its activities in all relevant 

jurisdictions. 

(2) The central securities depository 

or central counterparty should require 

participants to have sufficient financial 

resources and robust operational 

capacity to meet obligations arising from 

participation in the central securities 

depository or central counterparty. The 

central securities depository or central 

counterparty should have procedures in 

place to monitor that participation 

requirements are met on an ongoing 

basis. The central securities depository’s 

or central counterparty’s participation 

requirements should be objective and 

publicly disclosed, and permit fair and 

open access. 

(3) The central securities depository 

or central counterparty should hold 

assets in a manner whereby risk of loss 

or of delay in its access to them is 

minimized. Assets invested by a central 

securities depository or central 

counterparty should be held in 

instruments with minimal credit, 

market, and liquidity risks. 

(4) The central securities depository 

or central counterparty should identify 

sources of operational risk and 

minimize them through the 

development of appropriate systems, 

controls, and procedures; have systems 

that are reliable and secure, and have 

adequate, scalable capacity; and have 

business continuity plans that allow for 

timely recovery of operations and 

fulfillment of the central securities 

depository’s or central counterparty’s 

obligations. 

(5) The central securities depository 

or central counterparty should employ 

money settlement arrangements that 

eliminate or strictly limit its settlement 

bank risks, that is, its credit and 

liquidity risks from the use of banks to 

effect money settlements with its 

participants and should require funds 

transfers to the central securities 

depository or central counterparty be 

final when effected. 

(6) The central securities depository 

or central counterparty should be costeffective in meeting the requirements of 

participants while maintaining safe and 

secure operations. 

(7) The central securities depository 

or central counterparty should evaluate 

the potential sources of risks that can 

arise when the central securities 

depository or central counterparty 

establishes links either cross-border or 

domestically to settle transactions or 

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clear trades, and ensure that the risks 

are managed prudently on an ongoing 

basis. 

(8) The central securities depository 

or central counterparty should have 

governance arrangements that are clear 

and transparent to fulfill public interest 

requirements and to support the 

objectives of owners and participants 

and should promote the effectiveness of 

a central securities depository’s or 

central counterparty’s risk-management 

procedures. 

(9) The central securities depository 

or central counterparty should provide 

market participants with sufficient 

information for them to identify and 

evaluate accurately the risks and costs 

associated with using its services. 

(10) The central securities depository 

or central counterparty should establish 

default procedures that ensure that the 

central securities depository or central 

counterparty can take timely action to 

contain losses and liquidity pressures 

and to continue meeting its obligations 

and should provide for key aspects of 

the default procedures to be publicly 

available. 

(11) The central securities depository 

or central counterparty should ensure 

that final settlement occurs no later than 

the end of the settlement day and 

should require that intraday or real-time 

finality be provided where necessary to 

reduce risks. 

(12) The central securities depository 

or central counterparty should eliminate 

principal risk by linking securities 

transfers to funds transfers in a way that 

achieves delivery versus payment. 

(13) The central securities depository 

or central counterparty should state its 

obligations with respect to physical 

deliveries, and the risks from these 

obligations should be identified and 

managed. 

(14) The central securities depository 

should immobilize or dematerialize 

securities certificates and transfer them 

by book entry to the greatest extent 

possible. 

(15) The central securities depository 

should institute risk controls that 

include collateral requirements and 

limits, and ensure timely settlement in 

the event that the participant with the 

largest payment obligation is unable to 

settle when the central securities 

depository extends intraday credit. 

(16) The central counterparty should 

measure its credit exposures to its 

participants at least once a day and limit 

its exposures to potential losses from 

defaults by its participants in normal 

market conditions so that the operations 

of the central counterparty would not be 

disrupted and non-defaulting 

participants would not be exposed to 

losses that they cannot anticipate or 

control. 

(17) The central counterparty should 

use margin requirements to limit its 

credit exposures to participants in 

normal market conditions and use riskbased models and parameters to set 

margin requirements and review them 

regularly. Specifically, the central 

counterparty should— 

(i) Provide for annual model 

validation consisting of evaluating the 

performance of the clearing agency’s 

margin models and the related 

parameters and assumptions associated 

with such models by a qualified person 

who does not perform functions 

associated with the clearing agency’s 

margin models (except as part of the 

annual model validation) and does not 

report to such a person. 

(ii) Review and backtest margin 

models and parameters at least 

quarterly. 

(18) The central counterparty should 

maintain sufficient financial resources 

to withstand, at a minimum, a default 

by the participant to which it has the 

largest exposure in extreme but 

plausible market conditions. 

(b) Designated financial market 

utilities that operate as central securities 

depositories or central counterparties 

and for which the Board is the 

Supervisory Agency must meet or 

exceed the risk-management standards 

in § 234.4(a). The Board, by order, may 

apply heightened risk-management 

standards to individual designated 

financial market utilities in accordance 

with the risks presented by the 

designated financial market utility. 

§ 234.5 Changes to rules, procedures, or 

operations. 

(a) Advance notice. 

(1) A designated financial market 

utility shall provide at least 60-days 

advance notice to the Board of any 

proposed change to its rules, 

procedures, or operations that could 

materially affect the nature or level of 

risks presented by the designated 

financial market utility. 

(2) The notice of the proposed change 

shall describe— 

(i) The nature of the change and 

expected effects on risks to the 

designated financial market utility, its 

participants, or the market; and 

(ii) How the designated financial 

market utility plans to manage any 

identified risks. 

(3) The Board may require the 

designated financial market utility to 

provide additional information 

necessary to assess the effect the 

proposed change would have on the 

nature or level of risks associated with 

the utility’s payment, clearing, or 

settlement activities and the sufficiency 

of any proposed risk-management 

techniques. 

(4) A designated financial market 

utility shall not implement a change to 

which the Board has an objection. 

(5) The Board will notify the 

designated financial market utility of 

any objection within 60 days from the 

later of— 

(i) The date the Board receives the 

notice of proposed change; or 

(ii) The date the Board receives any 

further information it requests for 

consideration of the notice. 

(6) A designated financial market 

utility may implement a change if it has 

not received an objection to the 

proposed change within 60 days of the 

later of— 

(i) The date the Board receives the 

notice of proposed change; or 

(ii) The date the Board receives any 

further information it requests for 

consideration of the notice. 

(7) With respect to proposed changes 

that raise novel or complex issues, the 

Board may, by written notice during the 

60-day review period, extend the review 

period for an additional 60 days. Any 

extension under this paragraph will 

extend the time periods under 

paragraphs (a)(5) and (a)(6) to 120 days. 

(8) A designated financial market 

utility may implement a proposed 

change before the expiration of the 

applicable review period if the Board 

notifies the designated financial market 

utility in writing that the Board does not 

object to the proposed change and 

authorizes the designated financial 

market utility to implement the change 

on an earlier date, subject to any 

conditions imposed by the Board. 

(b) Emergency changes. 

(1) A designated financial market 

utility may implement a change that 

would otherwise require advance notice 

under this section if it determines that— 

(i) An emergency exists; and 

(ii) Immediate implementation of the 

change is necessary for the designated 

financial market utility to continue to 

provide its services in a safe and sound 

manner. 

(2) The designated financial market 

utility shall provide notice of any such 

emergency change to the Board as soon 

as practicable and no later than 24 hours 

after implementation of the change. 

(3) In addition to the information 

required for changes requiring advance 

notice in paragraph (a)(2) of this section, 

the notice of an emergency change shall 

describe: 

(i) The nature of the emergency; and 

(ii) The reason the change was 

necessary for the designated financial 

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18454 Federal Register / Vol. 76, No. 64 / Monday, April 4, 2011 / Proposed Rules 

market utility to continue to provide its 

services in a safe and sound manner. 

(4) The Board may require 

modification or rescission of the change 

if it finds that the change is not 

consistent with the purposes of the 

Dodd-Frank Act or any applicable rules, 

order or standards prescribed under 

section 805(a) of the Dodd-Frank Act. 

(c) Materiality. 

(1) The term ‘‘materially affect the 

nature or level of risks presented’’ in 

paragraph (a)(1) of this section means 

matters as to which there is a reasonable 

possibility that the change could 

materially affect the performance of 

clearing, settlement, or payment 

functions or the overall nature or level 

of risk presented by the designated 

financial market utility. 

(2) A change to rules, procedures, or 

operations that would materially affect 

the nature or level of risks presented 

includes, but is not limited to, changes 

that affect the following: 

(i) Participant eligibility or access 

criteria; 

(ii) Product eligibility; 

(iii) Risk management; 

(iv) Settlement failure or default 

procedures; 

(v) Financial resources; 

(vi) Business continuity and disaster 

recovery plans; 

(vii) Daily or intraday settlement 

procedures; 

(viii) The scope of services, including 

the addition of a new service or 

discontinuation of an existing service; 

(ix) Technical design or operating 

platform, which results in non-routine 

changes to the underlying technological 

framework for payment, clearing, or 

settlement functions; or 

(x) Governance. 

(3) A change to rules, procedures, or 

operations that does not meet the 

conditions of paragraph (c)(2) of this 

section and would not materially affect 

the nature or level of risks presented 

includes, but is not limited to the 

following: 

(i) A change that does not modify the 

contractual rights or obligations of the 

designated financial market utility or 

persons using its payment, clearing, or 

settlement services; 

(ii) A change to an existing procedure, 

control, or service that does not 

adversely affect the safeguarding of 

securities, collateral, or funds in the 

custody or control of the designated 

financial market utility or for which it 

is responsible; 

(iii) A routine technology systems 

upgrade; 

(iv) A change related solely to the 

administration of the designated 

financial market utility or related to the 

routine, daily administration, direction, 

and control of employees; or 

(v) A clerical change and other nonsubstantive revisions to rules, 

procedures, or other documentation. 

By order of the Board of Governors of the 

Federal Reserve System, March 29, 2011. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2011–7812 Filed 4–1–11; 8:45 am] 

BILLING CODE 6210–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2011–0318; Directorate 

Identifier 2010–CE–033–AD] 

RIN 2120–AA64 

Airworthiness Directives; Burl A. 

Rogers (Type Certificate Previously 

Held by William Brad Mitchell and 

Aeronca, Inc.) Models 15AC and 

S15AC Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: We propose to adopt a new 

airworthiness directive (AD) for the 

products listed above. This proposed 

AD would require repetitive inspections 

of the upper and lower main wing spar 

cap angles for cracks and/or corrosion 

and installing inspection access panels. 

This AD would also require replacing 

the wing spar cap angles if moderate or 

severe corrosion is found and applying 

corrosion inhibitor. This proposed AD 

was prompted by reports of 

intergranular exfoliation and corrosion 

of the upper and/or lower wing main 

spar cap angles found on the affected 

airplanes. We are proposing this AD to 

detect and correct cracks, intergranular 

exfoliation and corrosion in the wing 

main spar cap angles, which could 

result in reduced strength of the wing 

spar and the load carrying capacity of 

the wing. This could lead to wing 

failure and consequent loss of control. 

DATES: We must receive comments on 

this proposed AD by May 19, 2011. 

ADDRESSES: You may send comments by 

any of the following methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590. 

• Hand Delivery: Deliver to Mail 

address above between 9 a.m. and 

5 p.m., Monday through Friday, except 

Federal holidays. 

For service information identified in 

this proposed AD, contact Burl’s 

Aircraft, LLC, P.O. Box 671487, 

Chugiak, Alaska 99567–1487; phone: 

(907) 688–3715; fax (907) 688–5031; 

e-mail burl@biginalaska.com; Internet: 

http://www.burlac.com. You may 

review copies of the referenced service 

information at the FAA, Small Airplane 

Directorate, 901 Locust, Room 301, 

Kansas City, MO 64106. For information 

on the availability of this material at the 

FAA, call (816) 329–4148. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http:// 

www.regulations.gov; or in person at the 

Docket Management Facility between 

9 a.m. and 5 p.m., Monday through 

Friday, except Federal holidays. The AD 

docket contains this proposed AD, the 

regulatory evaluation, any comments 

received, and other information. The 

street address for the Docket Office 

(phone: 800–647–5527) is in the 

ADDRESSES section. Comments will be 

available in the AD docket shortly after 

receipt. 

FOR FURTHER INFORMATION CONTACT: Eric 

Wright, Aerospace Engineer, FAA, 

Anchorage Aircraft Certification Office, 

222 W. 7th Ave., #14, Anchorage, 

Alaska 99513; telephone: (907) 271– 

2648; fax: (907) 271–6365; e-mail: 

eric.wright@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Comments Invited 

We invite you to send any written 

relevant data, views, or arguments about 

this proposal. Send your comments to 

an address listed under the ADDRESSES

section. 

Include ‘‘Docket No. FAA–2011–0318; 

Directorate Identifier 2010–CE–033–AD’’ 

at the beginning of your comments. We 

specifically invite comments on the 

overall regulatory, economic, 

environmental, and energy aspects of 

this proposed AD. We will consider all 

comments received by the closing date 

and may amend this proposed AD 

because of those comments. 

We will post all comments we 

receive, without change, to http:// 

www.regulations.gov, including any 

personal information you provide. We 

will also post a report summarizing each 

substantive verbal contact we receive 

about this proposed AD. 

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