[Federal Register Volume 75, Number 244 (Tuesday, December 21, 2010)]
[Proposed Rules]
[Pages 79982-79984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32005]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 75, No. 244 / Tuesday, December 21, 2010 / 
Proposed Rules

[[Page 79982]]



FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Chapter XIII


Authority To Designate Financial Market Utilities as Systemically 
Important

AGENCY: Financial Stability Oversight Council.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(the ``DFA'') gives the Financial Stability Oversight Council (the 
``Council'') the authority to identify and designate as systemically 
important a financial market utility if the Council determines that the 
failure, or a disruption to the functioning, of a financial market 
utility could create or increase the risk of significant liquidity or 
credit problems spreading among financial institutions or markets and 
thereby threaten the stability of the financial system of the United 
States. The DFA generally defines a ``financial market utility'' as any 
person that manages or operates a multilateral system for the purpose 
of transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and that person.\1\ The utility-like 
arrangements used to settle financial transactions, whether involving 
payments, securities, derivatives, or other similar financial 
instruments, are critical parts of the financial infrastructure for the 
economy and are integral to the soundness of the financial system and 
overall economic performance. The importance of these arrangements has 
been highlighted by the recent period of market stress. This advance 
notice of proposed rulemaking (ANPR) invites public comment on the 
criteria and analytical framework that should be applied by the Council 
in designating financial market utilities under the DFA.
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    \1\ Section 803(6)(B) of the DFA excludes certain entities from 
the definition of a financial market utility, including designated 
contract markets and national securities exchanges.

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DATES: Comments must be received by January 20, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding 
this advance notice of proposed rulemaking according to the 
instructions for ``Electronic Submission of Comments'' below. All 
submissions must refer to the document title. The FSOC encourages the 
early submission of comments.
    Electronic Submission of Comments. Interested persons must submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. Electronic submission of comments allows 
the commenter maximum time to prepare and submit a comment, ensures 
timely receipt, and enables the FSOC to make them available to the 
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through the method specified above.

    Public Inspection of Public Comments. All properly submitted 
comments will be available for inspection and downloading at http://www.regulations.gov.
    Additional Instructions. Please note the number of the question to 
which you are responding at the top of each response. Though the 
responses will be screened for obscenities and appropriateness, in 
general comments received, including attachments and other supporting 
materials, are part of the public record and are immediately available 
to the public. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.

FOR FURTHER INFORMATION CONTACT: Office of Domestic Finance, Treasury, 
at (202) 622-1703.

SUPPLEMENTARY INFORMATION: Sections 112(a)(2)(J) and 804(a) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (the ``DFA'') 
give the Financial Stability Oversight Council (the ``Council'') the 
authority to identify and designate as systemically important a 
financial market utility if the Council determines that the failure, or 
a disruption to the functioning, of a financial market utility could 
create or increase the risk of significant liquidity or credit problems 
spreading among financial institutions or markets and thereby threaten 
the stability of the financial system of the United States.

I. Background

    The Council, which was established by section 111 of the DFA, has 
ten voting members and 5 nonvoting members.\2\ It has several duties, 
including monitoring the financial services marketplace to identify 
potential threats to the financial stability of the United States and 
identifying those financial market utilities that should be designated 
by the Council as systemically important and subject to enhanced 
examination, supervision, enforcement and reporting standards and 
requirements.
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    \2\ The voting members consist of the Secretary of the Treasury 
who also is the Chairperson of the Council, the Chairman of the 
Board of Governors of the Federal Reserve System, the Comptroller of 
the Currency, the Director of the Bureau of Consumer Financial 
Protection, the Chairman of the Securities and Exchange Commission, 
the Chairperson of the Federal Deposit Insurance Corporation, the 
Chairperson of the Commodity Futures Trading Commission, the 
Director of the Federal Housing Finance Agency, the Chairman of the 
National Credit Union Administration Board, and an independent 
member having insurance expertise appointed by the President with 
the advice and consent of the Senate. The nonvoting members are the 
Director of the Office of Financial Research; the Director of the 
Federal Insurance Office; and a State insurance commissioner, a 
State banking supervisor, and a State securities commissioner (or an 
officer performing like functions), each designated by a selection 
process determined by their respective state supervisors or 
commissioners.
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    Financial market utilities exist in a number of markets and provide 
many benefits, but also concentrate risk. The payment and settlement 
processes of such systems are also highly interdependent, either 
directly through operational, contractual or affiliation linkages, or 
indirectly through liquidity flows or common participants. Problems in 
the completion of settlement at one system could spill over to other 
systems or financial institutions in the form of liquidity and credit 
disruptions.
    Through this ANPR the Council is seeking to gather information as 
it begins to develop the specific criteria and analytical framework by 
which it

[[Page 79983]]

will designate financial market utilities \3\ as systemically important 
\4\ under Title VIII of the DFA. This ANPR does not address the 
designation criteria and analytical framework for payment, clearing, or 
settlement activities carried out by financial institutions \5\, which 
the Council is considering separately.
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    \3\ As defined in Section 803(6) of the DFA.
    \4\ As defined in Section 803(9) of the DFA.
    \5\ As defined in Section 803(7) of the DFA.
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a. Considerations in Making a Determination

    Under section 804(a)(2) of the DFA, in making a determination on 
whether the financial market utility should be designated as 
systemically important, the Council must consider:
    (A) The aggregate monetary value of transactions processed by the 
financial market utility;
    (B) The aggregate exposure of the financial market utility to its 
counterparties;
    (C) The relationship, interdependencies, or other interactions of 
the financial market utility with other financial market utilities or 
payment, clearing or settlement activities;
    (D) The effect that the failure of or a disruption to the financial 
market utility would have on critical markets, financial institutions, 
or the broader financial system; and
    (E) Any other factors that the Council deems appropriate.

b. Process for Making a Determination

    Under the provisions of the DFA, the Council generally must provide 
a financial market utility with advance notice that it proposes to make 
a determination, and the financial market utility has up to 30 days to 
request a hearing.\6\ The Council must schedule the hearing within 30 
days of receipt of the request. After holding a hearing, the Council 
has up to 60 days to make a final determination. If a financial market 
utility does not make a timely request for a hearing, the Council must 
notify the firm of its final determination within 30 days of the 
expiration of the 30-day period in which a hearing could have been 
requested. In making a determination, the Council must consult with the 
relevant supervisory agency for the financial market utility \7\ and 
the Board of Governors of the Federal Reserve System. Once designated, 
the Council can rescind a designation. The Council is not requesting 
comment on these procedural requirements in this ANPR.
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    \6\ The Council may waive or modify the advance notice and 
hearing requirements if the Council determines it is necessary to 
prevent or mitigate an immediate threat to the financial system 
posed by the FMU. DFA Sec.  804(c)(3).
    \7\ As defined in Section 803(8) of the DFA.
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II. Criteria for Designation

    1. What quantitative and qualitative information should the Council 
use to measure the factors it is required to consider in Section 
804(a)(2) when making determinations under Section 804 of the DFA? How 
should quantitative and qualitative considerations be incorporated into 
the determination process?
    2. Can the considerations listed in section 804(a)(2) be broken 
down into easily measured factors that the Council should use to 
determine whether financial market utilities are systemically 
important? Are there certain levels of quantitative measures (e.g., for 
value and exposure) or qualitative characteristics (e.g., registered 
clearing agencies versus exempt clearing agencies) that should trigger 
a review for systemic importance by the Council?
    3. Which of the considerations listed in section 804(a)(2) are most 
important for the Council to consider? Should the application of the 
considerations differ depending on the type of FMU, and if so how?
    4. How should the Council measure and assess the aggregate monetary 
value of transactions processed by financial market utilities?
    a. For each type of financial market utility (e.g., central 
counterparty, funds transfer system), what is the best approach for 
measuring value (e.g., notional values, margin flows, net versus gross 
values)?
    b. What time horizon/statistics should be used when assessing value 
(e.g., daily, monthly or annual averages; daily, monthly, or annual 
peaks?). Should the Council consider historical values, projected 
future values, or both?
    c. Should different measures be applied to different types of 
financial market utilities based on their activities, products, or 
markets?
    d. What is the best approach for measuring potential aggregate 
monetary values for start-up financial market utilities?
    e. Should certain payment systems that transfer relatively low 
aggregate values be considered by the Council for designation as 
systemically important given that the system's failure or disruption 
could still cause widespread disruption, especially if there is no 
ready alternative means of making payments? For example, the failure or 
disruption of a system used extensively to make payments could leave a 
significant portion of the general public with unexpected overdrafts 
and/or lack of liquid funds. If so, what factors should the Council 
consider in making a determination of systemic importance for such 
systems?
    5. How should the Council measure and assess the aggregate exposure 
of financial market utilities engaged in payment, clearing, or 
settlement activities to its counterparties?
    a. How should the Council identify the extent to which financial 
market utilities bear and create risk exposures for themselves and 
their participants?
    b. What measures of exposure should be considered (e.g., liquidity 
exposures, current and potential future counterparty credit exposures, 
operational risk, the degree of concentration of exposures across 
participants)?
    c. For each type of financial market utility (e.g., central 
counterparty, funds transfer system), what is the best approach for 
measuring current credit exposure or, where relevant, potential future 
exposures? For liquidity (funding), how might the Council assess the 
potential liquidity risks that a financial market utility may bear or 
liquidity risks it may impose on the broader financial system should it 
fail to settle as expected?
    6. How should the Council identify, measure, and assess the effects 
of relationships, interdependencies, and other interactions of 
financial market utilities listed as considerations in section 
804(a)(2)?
    a. What role should models of interdependencies (e.g., 
correlations; stress tests) play in the Council's determinations?
    b. What role should the nature of participants or counterparties 
play in the Council's determinations (e.g., common participants across 
utilities, systemic importance of participants)?
    c. Should the Council consider the legal, corporate, or contractual 
relationships of financial market utilities in assessing relationships, 
interdependencies, and other interactions (e.g., common holding 
company, joint ventures, cross-margining agreements, service provider 
relationships)?
    d. Should the Council consider whether there are readily available 
substitutes for the payment, clearing, and settlement services of 
financial market utilities?
    7. How should the Council assess whether failures or disruptions to 
a financial market utility could potentially threaten the financial 
system of the United States?
    a. What measures, information and thresholds should be used in 
assessing the effect of a financial market utility

[[Page 79984]]

failure or disruption on critical markets and financial institutions? 
For example, how might the Council assess potential credit and 
liquidity effects and spillovers from a financial market utility 
disruption?
    b. What factors should the Council consider when determining 
whether markets served by financial market utilities are critical? What 
qualitative or quantitative characteristics might lead the Council to 
scope in or out particular markets?
    8. Title VIII of the DFA contains distinct provisions with respect 
to financial market utilities and financial institutions engaged in 
payment, clearing and settlement activities. What factors should the 
Council consider in distinguishing between a systemically important 
financial market utility and a financial institution that is very 
substantially engaged in a systemically important payment, clearing, or 
settlement activity?
    9. What other types of information would be effective in helping 
the Council determine systemic importance? What additional factors does 
your organization consider when assessing exposure to, or the 
interconnectedness of, financial market utilities?
    10. What role should international considerations play in 
designating financial market utilities?

    Dated: December 14, 2010.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the 
Treasury.

Statement of CFTC Chairman Gary Gensler

    I support the advanced notice of proposed rulemaking on the 
Authority to Designate Financial Market Utilities as Systematically 
Important. It is an important step in fulfilling the requirements of 
the Dodd-Frank Act to ensure that there is robust oversight and risk 
management of financial market utilities including clearinghouses.
    Clearinghouses in the futures markets have been around since the 
late-19th Century and have functioned both in clear skies and during 
stormy times--through the Great Depression, numerous bank failures, two 
world wars and the 2008 financial crisis--to lower risk to the American 
public. By standing between two counterparties, by valuing transactions 
daily, requiring collateral, and rigorous risk management standards, 
clearinghouses help ensure that the failure of one entity does not harm 
its counterparties and reverberate throughout the financial system. 
Comprehensive and robust regulatory oversight of clearinghouses, 
however, is essential to our country's financial stability. This is 
particularly important since, under the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, standardized swaps between financial 
entities must be brought to clearinghouses.
    The Commodity Futures Trading Commission (CFTC) has overseen 
clearinghouses for decades. Currently, it oversees 14 clearinghouses 
and that number is expected to increase to approximately 20. The Dodd-
Frank Act provides for enhanced oversight of these clearinghouses. In 
close consultation with the Securities and Exchange Commission, the 
Federal Reserve Board, other financial regulatory agencies, and 
international regulators, the CFTC is currently working to implement a 
series of rulemakings on risk management for clearinghouses. These 
rulemakings will take account of relevant international standards, 
particular those developed by the Committee on Payment and Settlement 
Systems and the International Organization of Securities Commissions 
(CPSS-IOSCO). In some instances, these rules also outline specific 
additional requirements for systemically important clearinghouses.
    The Dodd-Frank Act gives the Financial Stability Oversight Council 
and the Federal Reserve Board important roles in clearinghouse 
oversight by authorizing the Council to designate certain 
clearinghouses as systemically important and by permitting the Federal 
Reserve to recommend heightened prudential standards in certain 
circumstances.
    The advanced notice of proposed rulemaking being considered by this 
Council today complements the CFTC's rulemaking efforts. It seeks the 
public's input on how the Council should apply statutory criteria to 
determine which clearinghouses qualify for designation as systemically 
important.
    At the CFTC, we plan on completing the rulemaking with regard to 
clearinghouses by the statutory deadline of July 15, 2011. Although the 
effective dates of these rules will generally be later in 2011, it is 
my recommendation that we as a Council be in position to identify 
systemically important clearinghouses by the summer of next year. This 
will provide clarity to clearinghouses and market participants as to 
the standards that they will have to uphold when the mandatory clearing 
of standardized swaps becomes effective.

[FR Doc. 2010-32005 Filed 12-20-10; 8:45 am]
BILLING CODE 4810-25-P