2518 Federal Register / Vol. 72, No. 12 / Friday, January 19, 2007 / Notices 

1 71 FR 36800 (June 28, 2006). 

2The G–10 central banks’ Committee on Payment 

and Settlement Systems (CPSS) published in 2001 

the Core Principles to foster safety and efficiency 

in the design and operation of systemically 

important payments systems. The 

Recommendations for SSS and Recommendations 

for CCP were developed by the CPSS in conjunction 

with the Technical Committee of the International 

Organization of Securities Commissions (IOSCO) in 

2001 and 2004, respectively. The Recommendations 

for SSS set forth minimum standards promoting 

safety and efficiency in securities settlement 

systems, while the minimum standards set forth in 

the Recommendations for CCP focus specifically on 

central counterparty risk management. 

3Final recommendations were issued in 

November 2004. In addition to the Federal Reserve, 

the Securities and Exchange Commission and the 

Commodity Futures Trading Commission also 

participated in the development of the 

Recommendations for CCP. The full report on the 

Recommendations for CCP is available at http:// 

www.bis.org/publ/cpss64.htm. 

FEDERAL RESERVE SYSTEM 

Formations of, Acquisitions by, and 

Mergers of Bank Holding Companies 

The companies listed in this notice 

have applied to the Board for approval, 

pursuant to the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841 et seq.) 

(BHC Act), Regulation Y (12 CFR Part 

225), and all other applicable statutes 

and regulations to become a bank 

holding company and/or to acquire the 

assets or the ownership of, control of, or 

the power to vote shares of a bank or 

bank holding company and all of the 

banks and nonbanking companies 

owned by the bank holding company, 

including the companies listed below. 

The applications listed below, as well 

as other related filings required by the 

Board, are available for immediate 

inspection at the Federal Reserve Bank 

indicated. The application also will be 

available for inspection at the offices of 

the Board of Governors. Interested 

persons may express their views in 

writing on the standards enumerated in 

the BHC Act (12 U.S.C. 1842(c)). If the 

proposal also involves the acquisition of 

a nonbanking company, the review also 

includes whether the acquisition of the 

nonbanking company complies with the 

standards in section 4 of the BHC Act 

(12 U.S.C. 1843). Unless otherwise 

noted, nonbanking activities will be 

conducted throughout the United States. 

Additional information on all bank 

holding companies may be obtained 

from the National Information Center 

website at www.ffiec.gov/nic/. 

Unless otherwise noted, comments 

regarding each of these applications 

must be received at the Reserve Bank 

indicated or the offices of the Board of 

Governors not later than February 12, 

2007. 

A. Federal Reserve Bank of Atlanta 

(Andre Anderson, Vice President) 1000 

Peachtree Street, NE., Atlanta, Georgia 

30303: 

1. ATB Management, LLC, 

Birmingham, Alabama; to become a 

bank holding company by acquiring 

control of ATB Holdings, LLC, 

Birmingham, Alabama, and thereby 

indirectly acquiring Alabama Trust 

Bank, N.A., Sylacauga, Alabama. 

B. Federal Reserve Bank of Kansas 

City (Donna J. Ward, Assistant Vice 

President) 925 Grand Avenue, Kansas 

City, Missouri 64198-0001: 

1. Country Bank Shares, Inc., Milford, 

Nebraska; to acquire 100 percent of the 

voting shares of Mid-Nebraska 

Company, Inc., and thereby indirectly 

acquire Kearney State Bank and Trust 

Company, both in Kearney, Nebraska. 

Board of Governors of the Federal Reserve 

System, January 12, 2007. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

[FR Doc. E7–642 Filed 1–18–07; 8:45 am] 

BILLING CODE 6210–01–S 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1259] 

Policy on Payments System Risk 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Policy Statement. 

SUMMARY: The Board has adopted 

several revisions to Part I of its Policy 

on Payments System Risk (PSR policy) 

addressing risk management in 

payments and settlement systems. 

Specifically, the Board has (1) 

incorporated into the PSR policy the 

Recommendations for Central 

Counterparties (Recommendations for 

CCP) as the Board’s minimum standards 

for central counterparties, (2) clarified 

the purpose of Part I of the policy and 

revised its scope with regard to central 

counterparties, and (3) established an 

expectation that systemically important 

systems subject to the Board’s authority 

disclose publicly self-assessments 

against the Core Principles for 

Systemically Important Payment 

Systems (Core Principles), 

Recommendations for Securities 

Settlement Systems (Recommendations 

for SSS), or Recommendations for CCP, 

as appropriate, demonstrating the extent 

to which these systems meet the 

principles or minimum standards. 

EFFECTIVE DATE: January 19, 2007. The 

Board expects each systemically 

important payments and settlement 

system subject to its authority to 

complete and publish its initial selfassessment by December 31, 2007. 

FOR FURTHER INFORMATION CONTACT: Jeff 

Stehm, Deputy Associate Director (202/ 

452–2217), Division of Reserve Bank 

Operations and Payment Systems, or 

Jennifer Lucier, Financial Services 

Project Leader (202/872–7581), Division 

of Reserve Bank Operations and 

Payment Systems; for the hearing 

impaired only: Telecommunications 

Device for the Deaf, 202/263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

On June 22, 2006, the Board requested 

comment on proposed revisions to Part 

I of the PSR policy, which addresses 

risk management in payments and 

settlement systems.1 The key aspects of 

the proposal included the (1) 

incorporation of the Recommendations 

for CCP as the Board’s minimum 

standards for central counterparties, (2) 

the clarification of the purpose of Part 

I of the policy and revisions to its scope 

with regard to central counterparties, 

and (3) the establishment of an 

expectation that systemically important 

systems subject to the Board’s authority 

disclose publicly self-assessments 

against the Core Principles, the 

Recommendations for SSS, or the 

Recommendations for CCP, as 

appropriate.2 The proposed changes did 

not affect Part II of the PSR policy. 

The Board proposed these revisions to 

update the policy to incorporate new 

international risk management 

standards for central counterparties. As 

discussed in more detail in the 

proposal, at the time the Board last 

revised Part I of the policy, the Federal 

Reserve was working with the CPSS and 

IOSCO to finalize the Recommendations 

for CCP.3 These recommendations 

established minimum standards for 

central counterparty risk management, 

operational reliability, efficiency, 

governance, transparency, and 

regulation and oversight. At the time it 

incorporated the Core Principles and 

Recommendations for SSS into the PSR 

policy, the Board noted it would review 

the Recommendations for CCP at a later 

time and determine whether it would be 

appropriate to incorporate them into its 

PSR policy. The Board has considered 

the comments and is incorporating the 

Recommendations for CCP into the 

policy to highlight the importance of 

central counterparties to the financial 

markets and to demonstrate the Board’s 

desire to encourage the use of the 

Recommendations for CCP globally in 

cooperation with other domestic and 

foreign financial system authorities. In 

light of this change, the Board has 

clarified the purpose of Part I of the 


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4The assessment methodologies accompanying 

the Recommendations for SSS and CCP developed 

by CPSS and IOSCO provide some structure, 

referred to as ‘‘assessment criteria,’’ for rating a 

system against a particular recommendation. The 

Core Principles include implementation guidelines 

intended to assist with the interpretation of the 

principles by providing detailed explanations of 

each principle and practical examples of how they 

have been interpreted and implemented. 

5As stated in the final policy, any review of an 

assessment by the Federal Reserve should not be 

viewed as an approval or guarantee of the accuracy 

of a system’s self-assessment. 

6These materials may be publicly available or 

may need to be requested directly from the system. 

policy and revised its scope in order to 

reflect the important role central 

counterparties play in the stability of 

the financial system. 

The Board believes that the 

implementation of the Core Principles 

and Recommendations for SSS and CCP 

can help foster global financial stability. 

The Board further believes that 

broadening the availability of 

information concerning a system’s risk 

management controls, governance, and 

legal framework, for example, can assist 

users and other interested persons in 

understanding and assessing systems 

against internationally accepted 

principles and minimum standards and 

in evaluating and managing any risk 

exposure to a particular system. The 

policy revisions proposed by the Board 

in June were designed to meet these 

objectives. Therefore, the Board is 

establishing an expectation that 

systemically important systems subject 

to its authority disclose publicly selfassessments against the Core Principles, 

Recommendations for SSS, or 

Recommendations for CCP, as 

appropriate, demonstrating the extent to 

which these systems meet the principles 

or minimum standards. 

II. Summary of Comments and Analysis 

The Board received four comment 

letters on the June proposal—two from 

private-sector payments system 

operators, one from a credit union, and 

one from a foreign central bank. 

Comments generally supported the three 

key policy revisions proposed by the 

Board, but varied in response to some of 

the Board’s specific questions 

concerning the proposed guidelines for 

completing self-assessments, namely the 

content, scope of disclosure, and 

frequency of review. One commenter 

requested further clarity on the scope of 

Part I of the existing policy. The final 

policy retains all substantive elements 

of the proposed revisions, except that it 

will adopt a two-year review period for 

self-assessments rather than the annual 

review proposed. In addition, the final 

policy includes one minor change to 

clarify that self-assessments may need to 

be considered in the context of the 

system’s rules, procedures, and other 

relevant materials, in order for the 

reader to gain a full appreciation of any 

risks associated with a particular 

system. 

Content of Self-Assessments 

The Board requested comment on 

whether the implementation guidelines 

in the Core Principles and the 

assessment methodologies 

accompanying the Recommendations 

for SSS and CCP provide sufficiently 

clear and useful frameworks to complete 

comprehensive and objective selfassessments.4 The Board also requested 

comment on whether self-ratings should 

be included in self-assessments. These 

self-ratings would indicate the extent to 

which a system meets a particular 

principle or minimum standard, and 

system operators would be expected to 

use one of the following assessment 

categories: observed, broadly observed, 

partly observed, or non-observed. 

None of the comments addressed the 

sufficiency of the guidance, but three of 

the four commenters discussed the 

inclusion of self-ratings. One 

commenter explicitly supported 

including ratings. Another stated that 

systemically important systems should 

perform periodic self-assessments to 

ensure they are in compliance with the 

applicable principles or minimum 

standards. The third commenter did not 

explicitly disagree with the inclusion of 

ratings; however, it did state that in 

order for self-assessments to be useful it 

is important that they be comparable 

across different systems, and noted that 

the risk of systems assigning subjective 

ratings ‘‘make[s] comparison across 

systems difficult.’’ Two commenters did 

state that the risk that ratings would be 

overly subjective could be limited by 

the Federal Reserve’s review of selfassessments. 

The Board supports the inclusion of 

ratings in self-assessments. Where the 

content of self-assessments is 

sufficiently detailed to support the 

rating assigned, we believe the inclusion 

of ratings can add value to the selfassessment by providing the reader with 

an overall indication on how well the 

system meets particular principles or 

minimum standards and additional 

information on how the system views its 

risk management controls. As stated in 

the final policy, as part of its ongoing 

oversight of systemically important 

payments and settlement systems, the 

Federal Reserve will review selfassessments published by systems 

subject to the Board’s authority. The 

purpose of this review is to ensure the 

Board’s policy objectives and 

expectations are being met, including 

the expectation that self-assessments are 

both comprehensive and objective.5

The final policy establishes an 

expectation that a system’s senior 

management and board of directors 

review and approve the self-assessment 

upon completion. The Board believes 

that the accountability of the system’s 

senior management and board of 

directors for the accuracy and 

completeness of the assessment will 

encourage them to publish robust selfassessments with fully supported 

ratings. The Board also believes that the 

implementation guidelines for the Core 

Principles and the assessment 

methodologies for the 

Recommendations for SSS and CCP may 

facilitate greater consistency in the 

content of self assessments. 

The Board is adopting the final policy 

with language to clarify that selfassessments may need to be considered 

in the context of supplementary 

information, such as the system’s rules, 

procedures, organizational documents, 

or other relevant information, in order 

for the reader to gain a full appreciation 

of any risk exposure associated with a 

particular system.6 Self-assessments, 

including the ratings, are only one 

resource for financial system 

participants and other interested 

persons to consider when evaluating 

and addressing any risks associated 

with a particular system. 

Scope of Disclosure of Self-Assessments 

The Board proposed that a 

systemically important system make its 

self-assessment readily available to the 

public, such as by posting it on the 

system’s public Web site. All four 

comment letters expressed support for 

some degree of disclosure. Three 

commenters support public disclosure. 

One commenter stated that in order for 

the reader to gain a comprehensive 

understanding of the system to support 

an evaluation of the system against the 

applicable standards the self-assessment 

would have to be read or interpreted 

against the system’s rules and 

organizational documents. Therefore, 

this commenter stated that disclosure 

would be limited to those who have 

access to this supplementary 

documentation. 

The Board agrees with the proponents 

of broad disclosure. Public disclosure of 

self-assessments will enable the Board 

to meet its objective of improved 

information availability. If a system has 

chosen to limit the disclosure of its 

rules or other documentation to 

members only, then the onus will be on 


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2520 Federal Register / Vol. 72, No. 12 / Friday, January 19, 2007 / Notices 

7These procedures are described in the Board’s 

policy statement ‘‘The Federal Reserve in the 

Payments System,’’ as revised in March 1990 (55 FR 

11648, March 29, 1990). 

the system operator to explain pertinent 

rules or procedures with enough detail 

to support the reader’s independent 

analysis and understanding of how the 

system meets a particular principle or 

minimum standard. 

Frequency of Review of SelfAssessments 

The proposed revisions included an 

expectation that, in order for selfassessments to reflect correctly the 

system’s current rules, procedures, and 

operations, a systemically important 

system should update the relevant parts 

of its self-assessment following material 

changes to the system or its 

environment and, at a minimum, review 

its self-assessment annually to ensure 

continued accuracy. One commenter 

recommended that the review period be 

extended to every three years. 

The Board has reconsidered the time 

period for reviewing self-assessments 

and is adopting a two-year review 

period rather than the annual review 

proposed. This longer review period 

reduces the burden associated with an 

annual review while ensuring 

sufficiently frequent reviews to help 

ensure assessments remain accurate. A 

three-year review period may allow an 

unacceptable accumulation of 

individual ‘‘non-material’’ changes that 

could affect the accuracy and usefulness 

of the assessment. The Board believes 

that a biennial review addresses the 

commenter’s concern while still 

achieving the objectives of the policy. 

The final policy retains the requirement 

that a system update the relevant parts 

of its self-assessment if there is a 

material change to the system or its 

environment. 

Scope of Part I of the Policy 

One commenter sought clarification 

with respect to which systems would be 

required, and which would be 

encouraged, to comply with the changes 

to the policy. The Board believes the 

existing policy describes sufficiently 

what types of systems are expected to 

comply with the Board’s general policy 

expectations. Moreover, the Board 

communicates directly with systems 

that it has determined to be systemically 

important. 

With regard to the scope, one 

commenter stated that it ‘‘shares the 

view of the Board that central 

counterparties should be within the 

scope of central bank oversight.’’ While 

the Board is interested in central 

counterparties as part of its oversight 

function, the policy acknowledges that 

the Board does not have exclusive 

authority over all payments and 

settlement systems. Systems organized 

as central counterparties are often 

supervised by other federal agencies 

pursuant to the existing legal 

framework. In such circumstances, the 

policy states the Board will work with 

the other domestic and foreign financial 

system authorities to promote effective 

risk management in those systems, as 

appropriate. 

III. Regulatory Flexibility Act Analysis 

The Board has determined that the 

final policy statement would not have a 

significant economic impact on a 

substantial number of small entities. 

The policy would require payments and 

securities settlement systems to address 

material risks in their systems. The 

policy does not apply to smaller systems 

that do not raise material risks. 

IV. Competitive Impact Analysis 

The Board has established procedures 

for assessing the competitive impact of 

rule or policy changes that have a 

substantial impact on payments system 

participants.7 Under these procedures, 

the Board will assess whether a change 

would have a direct and material 

adverse effect on the ability of other 

service providers to compete effectively 

with the Federal Reserve in providing 

similar services due to differing legal 

powers or constraints, or due to a 

dominant market position of the Federal 

Reserve deriving from such differences. 

If no reasonable modifications would 

mitigate the adverse competitive effects, 

the Board will determine whether the 

anticipated benefits are significant 

enough to proceed with the change 

despite the adverse effects. The final 

policy provides that Reserve Bank 

systems will be treated similarly to 

private-sector systems and thus will 

have no material adverse effect on the 

ability of other service providers to 

compete effectively with the Federal 

Reserve Banks in providing payments 

and securities settlement services. 

V. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. Ch. 

3506; 5 CFR Part 1320 Appendix A.1), 

the Board reviewed the policy statement 

under the authority delegated to the 

Board by the Office of Management and 

Budget. The Federal Reserve may not 

conduct or sponsor, and an organization 

is not required to respond to, this 

information collection unless it displays 

a currently valid OMB control number. 

An OMB control number will be 

assigned upon approval of the new 

information collection. 

The collection of information that will 

be implemented by this notice is found 

in Part I of the Board’s PSR policy. This 

information is required to evidence 

compliance with the requirements of the 

PSR policy. The respondents are 

systemically important systems, as 

defined in the PSR policy. 

The Board expects that systemically 

important systems, subject to the 

Board’s authority, to complete initial 

comprehensive self-assessments and 

thereafter, review and update selfassessments biennially or as otherwise 

provided in the PSR policy. The Board 

also expects that these self-assessments 

be reviewed and approved by the 

system’s senior management and board 

of directors. Upon approval and in order 

to achieve broad disclosure, the systems 

should publish self-assessments on their 

public Web sites. In order to help 

minimize the burden the Board is 

implementing guidelines to assist 

system operators in developing selfassessments consistent with the Board’s 

expectations. 

None of the commenters discussed 

the burden estimates for the initial 

reporting and disclosure requirements 

associated with this policy statement. 

The Board continues to believe that the 

estimated burden for the one-time initial 

assessment to be 310 hours per system 

(ranging from 200 to 400 hours). The 

Board estimates that currently about 

three private-sector systems are 

systemically important and subject to 

the Board’s authority; therefore, the total 

burden to complete the one-time initial 

self-assessments for systems under the 

Board’s authority is estimated to be 930 

hours. 

Following the initial assessment, the 

Board estimates that the burden will 

decrease for a system to conduct a 

biennial review and report and disclose 

updates to its self-assessment. The 

Board continues to believe the estimated 

burden for the biennial reviews and 

updates associated with this policy to be 

70 hours per system (ranging from 50 to 

100 hours). The total burden for the 

approximately three private-sector 

systems under the Board’s authority 

would be an estimated 210 hours (an 

average of 105 hours per system, per 

year). The total annual burden for this 

information collection is estimated to be 

1,140 hours. 

The Federal Reserve has a continuing 

interest in the public’s opinions of our 

collections of information. At any time, 

comments regarding the burden 

estimate, or any other aspect of this 

collection of information, including 

suggestions for reducing the burden, 


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Federal Register / Vol. 72, No. 12 / Friday, January 19, 2007 / Notices 2521 

1 1 For the Board’s long-standing objectives in the 

payments system, see ‘‘The Federal Reserve in the 

Payments System,’’ September 2001, FRRS 9–1550, 

available at http://www.federalreserve.gov/ 

paymentsystems/pricing/frpaysys.htm. 

2To assist depository institutions in 

implementing this part of the Board’s payments 

system risk policy, the Federal Reserve has 

prepared two documents, the ‘‘Overview of the 

Federal Reserve’s Payments System Risk Policy’’

and the ‘‘Guide to the Federal Reserve’s Payments 

System Risk Policy,’’ which are available on line at 

www.federalreserve.gov/paymentsystems/PSR or 

from any Reserve Bank. The ‘‘Overview of the 

Federal Reserve’s Payments System Risk Policy’’

summarizes the Board’s policy on the provision of 

daylight credit, including net debit caps and 

daylight overdraft fees. The overview is intended 

for use by institutions that incur only small and 

infrequent daylight overdrafts. The ‘‘Guide to the 

Federal Reserve’s Payments System Risk Policy’’

explains in detail how these policies apply to 

different institutions and includes procedures for 

completing a self-assessment and filing a cap 

resolution, as well as information on other aspects 

of the policy. 

3The term ‘‘depository institution,’’ as used in 

this policy, refers not only to institutions defined 

as ‘‘depository institutions’’ in 12 U.S.C. 

461(b)(1)(A), but also to U.S. branches and agencies 

of foreign banking organizations, Edge and 

agreement corporations, trust companies, and 

bankers’ banks, unless the context indicates a 

different reading. 

4These definitions of credit risk, liquidity risk, 

and legal risk are based upon those presented in the 

Core Principles for Systemically Important Payment 

Systems (Core Principles) and the 

Recommendations for Securities Settlement 

Systems (Recommendations for SSS). The 

definition of operational risk is based on the Basel 

Committee on Banking Supervision’s ‘‘Sound 

Practices for the Management and Supervision of 

Operational Risk,’’ available at http://www.bis.org/ 

publ/bcbs96.htm. Each of these definitions is 

largely consistent with those included in the 

Recommendations for Central Counterparties 

(Recommendations for CCP). 

may be sent to: Secretary, Board of 

Governors of the Federal Reserve 

System, 20th and C Streets, NW., 

Washington, DC 20551; and to the 

Office of Management and Budget, 

Paperwork Reduction Project, 

Washington, DC 20503. 

VI. Federal Reserve Policy on Payments 

System Risk 

Introduction 

Risks In Payments and Settlement Sytems 

I. Risk Management In Payments and 

Settlement Systems 

A. Scope 

B. General Policy Expectations 

C. Systemically Important Systems 

1. Principles for Systemically Important 

Payments Systems 

2. Minimum Standards for Systemically 

Important Securities Settlement Systems 

and Central Counterparties 

3. Self-Assessments by Systemically 

Important Systems 

II. Federal Reserve Daylight Credit Policies 

[No Change] 

A. Daylight Overdraft Definition and 

Measurement 

B. Pricing 

C. Net Debit Caps 

D. Collateral 

E. Special Situations 

F. Monitoring 

G. Transfer-Size Limit on Book-Entry 

Securities 

Introduction 

Payments and settlement systems are 

critical components of the nation’s 

financial system. The smooth 

functioning of these systems is vital to 

the financial stability of the U.S. 

economy. Given the importance of these 

systems, the Board has developed this 

policy to address the risks that 

payments and settlement activity 

present to the financial system and to 

the Federal Reserve Banks (Reserve 

Banks). 

In adopting this policy, the Board’s 

objectives are to foster the safety and 

efficiency of payments and settlement 

systems. These policy objectives are 

consistent with (1) the Board’s longstanding objectives to promote the 

integrity, efficiency, and accessibility of 

the payments mechanism; (2) industry 

and supervisory methods for risk 

management; and (3) internationally 

accepted risk management principles 

and minimum standards for 

systemically important payments and 

settlement systems.1

Part I of this policy sets out the 

Board’s views, and related principles 

and minimum standards, regarding the 

management of risks in payments and 

settlement systems, including those 

operated by the Reserve Banks. In 

setting out its views, the Board seeks to 

encourage payments and settlement 

systems, and their primary regulators, to 

take the principles and minimum 

standards in this policy into 

consideration in the design, operation, 

monitoring, and assessing of these 

systems. The Board also will be guided 

by this part, in conjunction with 

relevant laws and other Federal Reserve 

policies, when exercising its authority 

over certain systems or their 

participants, when providing payment 

and settlement services to systems, or 

when providing intraday credit to 

Federal Reserve account holders. 

Part II of this policy governs the 

provision of intraday or ‘‘daylight’’

overdrafts in accounts at the Reserve 

Banks and sets out the general methods 

used by the Reserve Banks to control 

their intraday credit exposures.2 Under 

this part, the Board expects depository 

institutions to manage their Federal 

Reserve accounts effectively and 

minimize their use of Federal Reserve 

daylight credit.3 Although some 

intraday credit may be necessary, the 

Board expects that, as a result of this 

policy, relatively few institutions will 

consistently rely on intraday credit 

supplied by the Federal Reserve to 

conduct their business. 

Through this policy, the Board 

expects financial system participants, 

including the Reserve Banks, to reduce 

and control settlement and systemic 

risks arising in payments and settlement 

systems, consistent with the smooth 

operation of the financial system. This 

policy is designed to fulfill that aim by 

(1) making financial system participants 

and system operators aware of the types 

of basic risks that arise in the settlement 

process and the Board’s expectations 

with regard to risk management, (2) 

setting explicit risk management 

expectations for systemically important 

systems, and (3) establishing the policy 

conditions governing the provision of 

Federal Reserve intraday credit to 

account holders. The Board’s adoption 

of this policy in no way diminishes the 

primary responsibilities of financial 

system participants generally and 

settlement system operators, 

participants, and Federal Reserve 

account holders more specifically, to 

address the risks that may arise through 

their operation of, or participation in, 

payments and settlement systems. 

Risks in Payments and Settlement 

Systems 

The basic risks in payments and 

settlement systems are credit risk, 

liquidity risk, operational risk, and legal 

risk. In the context of this policy, these 

risks are defined as follows.4

Credit Risk. The risk that a 

counterparty will not settle an 

obligation for full value either when 

due, or anytime thereafter. 

Liquidity Risk. The risk that a 

counterparty will not settle an 

obligation for full value when due. 

Operational Risk. The risk of loss 

resulting from inadequate or failed 

internal processes, people, and systems, 

or from external events. This type of risk 

includes various physical and 

information security risks. 

Legal Risk. The risk of loss because of 

the unexpected application of a law or 

regulation or because a contract cannot 

be enforced. 

These risks arise between financial 

institutions as they settle payments and 

other financial transactions and must be 

managed by institutions, both 


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5The term ‘‘financial institution,’’ as used in this 

policy, includes a broad array of types of 

organizations that engage in financial activity, 

including depository institutions and securities 

dealers. 

6Several existing regulatory and bank supervision 

guidelines and policies also are directed at 

institutions’ management of the risks posed by 

interbank payments and settlement activity. For 

example, Federal Reserve Regulation F (12 CFR 

206) directs insured depository institutions to 

establish policies and procedures to avoid excessive 

exposures to any other depository institutions, 

including exposures that may be generated through 

the clearing and settlement of payments. 7 12 U.S.C. 1861 et seq. 

8Payments and settlement systems within the 

scope of this policy may be subject to oversight or 

supervision by multiple public authorities, as a 

result of the legal framework or the system’s 

operating structure (e.g., multi-currency or crossborder systems). As such, the Federal Reserve, other 

central banks, securities regulators, or other 

financial system authorities may need to find 

practical ways to cooperate in order to discharge 

fully their own responsibilities. In some cases, 

multiple authorities may have responsibility for a 

multi-currency, cross-border, or other arrangement. 

In these situations, financial authorities need to be 

sensitive to the potential for duplicative or 

conflicting requirements, oversight gaps, or 

unnecessary costs and burdens imposed on the 

system. The ‘‘Principles for Cooperative Central 

Bank Oversight and Multi-currency Netting and 

Settlement Schemes,’’ published in 1990, are set out 

in the ‘‘Report of the Committee on Interbank 

Netting Schemes of the Central Banks of the Group 

of Ten Countries’’ (Lamfalussy Minimum 

Standards). The CPSS report, ‘‘Central Bank 

Oversight of Payment and Settlement Systems’’

(Oversight Report), Part B, ‘‘Principles for 

international cooperative oversight,’’ published in 

2005, provides further information on the practical 

application of the Lamfalussy Cooperative 

Oversight Principles. The Lamfalussy Minimum 

Standards and the Oversight Report are available at 

http://www.bis.org/cpss/cpsspubl.htm. 

9The $5 billion threshold was designed to apply 

to cash markets and may not be a useful benchmark 

for settlement systems, such as central 

counterparties, operating in derivatives markets. 

The appropriate financial system authorities in 

derivatives markets may therefore have different 

benchmarks and standards relevant to such 

systems. 

10The ‘next’ twelve-month period is determined 

by reference to the date a determination is being 

made as to whether the policy applies to a 

particular system. Aggregate gross value of U.S 

dollar-denominated transactions refers to the total 

dollar value of individual U.S. dollar transactions 

settled in the system, which also represents the sum 

of total U.S. dollar debits (or credits) to all 

participants prior to or in absence of any netting of 

transactions. 

individually and collectively.5 6

Multilateral payments and settlement 

systems, in particular, may increase, 

shift, concentrate, or otherwise 

transform risks in unanticipated ways. 

These systems also may pose systemic 

risk to the financial system where the 

inability of a system participant to meet 

its obligations when due may cause 

other participants to be unable to meet 

their obligations when due. The failure 

of one or more participants to settle 

their payments or other financial 

transactions, in turn, could create credit 

or liquidity problems for other 

participants, the system operator, or 

depository institutions. Systemic risk 

might lead ultimately to a disruption in 

the financial system more broadly or 

undermine public confidence in the 

nation’s financial infrastructure. 

These risks stem, in part, from the 

multilateral and time-sensitive credit 

and liquidity interdependencies among 

financial institutions. These 

interdependencies often create complex 

transaction flows that, in combination 

with a system’s design, can lead to 

significant demands for intraday credit, 

either on a regular or extraordinary 

basis. Some level of intraday credit is 

appropriate to ensure the smooth 

functioning of payments and settlement 

systems. To the extent that financial 

institutions or the Reserve Banks are the 

direct or indirect source of such 

intraday credit, they may face a direct 

risk of loss if daylight credit is not 

extinguished as planned. In addition, 

measures taken by Reserve Banks to 

limit their intraday credit exposures 

may shift some or all of the associated 

risks to private-sector systems. 

The smooth functioning of payments 

and settlement systems is also critical to 

certain public policy objectives in the 

areas of monetary policy and banking 

supervision. The effective 

implementation of monetary policy, for 

example, depends on both the orderly 

settlement of open market operations 

and the efficient distribution of reserve 

balances throughout the banking system 

via the money market and payments 

system. Likewise, supervisory objectives 

regarding the safety and soundness of 

depository institutions must take into 

account the risks payments and 

settlement systems pose to depository 

institutions that participate directly or 

indirectly in, or provide settlement, 

custody, or credit services to, such 

systems. 

Part I: Risk Management In Payments 

and Settlement Systems 

This part sets out the Board’s views 

regarding the management of risk in 

payments and settlement systems, 

including those operated by the Reserve 

Banks. The Board will be guided by this 

part, 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,7 (2) 

setting or reviewing the terms and 

conditions for the use of Federal 

Reserve payments and settlement 

services by system operators and 

participants, (3) developing and 

applying policies for the provision of 

intraday liquidity to Reserve Bank 

account holders, and (4) interacting 

with other domestic and foreign 

financial system authorities on 

payments and settlement risk 

management issues. The Board’s 

adoption of this policy is not intended 

to exert or create new supervisory or 

regulatory authority over any particular 

class of institutions or arrangements 

where the Board does not currently have 

such authority. 

Where the Board does not have 

exclusive authority over systems 

covered by this policy, it will work with 

other domestic and foreign financial 

system authorities to promote effective 

risk management in payments and 

settlement systems, as appropriate. The 

Board encourages other relevant 

authorities to consider the principles 

and minimum standards embodied in 

this policy when evaluating the risks 

posed by and to payments and 

settlement systems and individual 

system participants that they oversee, 

supervise, or regulate. In working with 

other financial system authorities, the 

Board will be guided, as appropriate, by 

Responsibility D of the Core Principles, 

Recommendation 18 of the 

Recommendations for SSS, 

Recommendation 15 of the 

Recommendations for CCP, the 

‘‘Principles for Cooperative Central 

Bank Oversight of Cross-border and 

Multi-currency Netting and Settlement 

Schemes,’’ and the Principles for 

International Cooperative Oversight 

(Part B) of the Committee on Payment 

and Settlement Systems (CPSS) report, 

‘‘Central Bank Oversight of Payment and 

Settlement Systems.’’ 8 The Board 

believes these international principles 

provide an appropriate framework for 

cooperating and coordinating with other 

authorities to address risks in domestic, 

cross-border, multi-currency, and, 

where appropriate, offshore payments 

and settlement systems. 

A. Scope 

This policy applies to public- and 

private-sector payments and settlement 

systems that expect to settle a daily 

aggregate gross value of U.S. dollardenominated transactions exceeding $5 

billion on any day during the next 12 

months.9 10 For purposes of this policy, 

a payments or settlement system is 

considered to be a multilateral 

arrangement (three or more participants) 

among financial institutions for the 

purposes of clearing, netting, and/or 


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11A system includes all of the governance, 

management, legal, and operational arrangements 

used to effect settlement as well as the relevant 

parties to such arrangements, such as the system 

operator, system participants, and system owners. 

12The types of systems that may fall within the 

scope of this policy include, but are not limited to, 

large-value funds transfer systems, automated 

clearinghouse (ACH) systems, check 

clearinghouses, and credit and debit card settlement 

systems, as well as central counterparties, clearing 

corporations, and central securities depositories. 

For purposes of this policy, the system operator 

manages or directs the operations of the system. 

13For the purposes of this policy, a ‘‘settlement 

system’’ includes a payment-versus-payment 

settlement system for foreign exchange transactions, 

a securities settlement system, and a system 

operating as a central counterparty. The CPSS 

defines ‘‘payment-versus-payment’’ as ‘‘* * *a 

foreign exchange settlement system which ensures 

that a final transfer of one currency occurs if and 

only if a final transfer of the other currency or 

currencies takes place.’’ The CPSS and the 

Technical Committee of the International 

Organization of Securities Commissions (IOSCO) 

define a ‘‘securities settlement system’’ as the full 

set of institutional arrangements for confirmation, 

clearance, and settlement of securities trades and 

safekeeping of securities and a ‘‘central 

counterparty’’ as an entity that interposes itself 

between counterparties to contracts traded in one 

or more financial markets, becoming the buyer to 

every seller and the seller to every buyer. 

14The daily gross value threshold will be 

calculated on a U.S. dollar equivalent basis. 

15Where systems have inter-relationships with or 

dependencies on other systems (e.g., crossguarantees, cross-collateralization, cross-margining, 

common operating platforms), system operators 

should also analyze whether and to what extent any 

cross-system risks exist and who bears them. 

settling payments, securities, or other 

financial transactions among themselves 

or between each of them and a central 

party, such as a system operator or 

central counterparty.11 12 13 A system 

generally embodies one or more of the 

following characteristics: (1) A set of 

rules and procedures, common to all 

participants, that govern the clearing 

(comparison and/or netting) and 

settlement of payments, securities, or 

other financial transactions, (2) a 

common technical infrastructure for 

conducting the clearing or settlement 

process, and (3) a risk management or 

capital structure where any credit losses 

are ultimately borne by system 

participants rather than the system 

operator, a central counterparty or 

guarantor, or the system’s shareholders. 

These systems may be organized, 

located, or operated within the United 

States (domestic systems), outside the 

United States (offshore systems), or both 

(cross-border systems) and may involve 

other currencies in addition to the U.S. 

dollar (multi-currency systems). The 

policy also applies to any system based 

or operated in the United States that 

engages in the settlement of non-U.S. 

dollar transactions if that system would 

be otherwise subject to the policy.14

This policy does not apply to bilateral 

relationships between financial 

institutions and their customers, such as 

traditional correspondent banking, 

including traditional government 

securities clearing services. The Board 

believes that these relationships do not 

constitute ‘‘a system’’ for purposes of 

this policy and that relevant safety and 

soundness issues associated with these 

relationships are more appropriately 

addressed through the bank supervisory 

process. 

B. General Policy Expectations 

The Board encourages payments and 

settlement systems within the scope of 

this policy and expects systems subject 

to its authority to implement a risk 

management framework appropriate for 

the risks the system poses to the system 

operator, system participants, and other 

relevant parties as well as the financial 

system more broadly. A risk 

management framework is the set of 

objectives, policies, arrangements, 

procedures, and resources that a system 

employs to limit and manage risk. While 

there are a number of ways to structure 

a sound risk management framework, all 

frameworks should 

• Clearly identify risks and set sound 

risk management objectives; 

• Establish sound governance 

arrangements; 

• Establish clear and appropriate 

rules and procedures; and, 

• Employ the resources necessary to 

achieve the system’s risk management 

objectives and implement effectively its 

rules and procedures. 

In addition to establishing a risk 

management framework that includes 

these key elements, the Board expects 

systems subject to its authority that it 

determines are systemically important 

to meet the policy expectations set out 

in Section C (Core Principles, 

Recommendations for SSS, or 

Recommendations for CCP, as 

applicable). 

Identify Risks and Set Sound Risk 

Management Objectives. The first 

element of a sound risk management 

framework is the clear identification of 

all risks that have the potential to arise 

in or result from the system’s settlement 

process and the development of clear 

and transparent objectives regarding the 

system’s tolerance for and management 

of such risks. 

System operators should identify the 

forms of risk present in their system’s 

settlement process as well as the parties 

posing and bearing each risk. In 

particular, system operators should 

identify the risks posed to and borne by 

themselves, the system participants, and 

other key parties such as a system’s 

settlement banks, custody banks, and 

third-party service providers. System 

operators should also analyze whether 

risks might be imposed on other 

external parties and the financial system 

more broadly. 

In addition, system operators should 

analyze how risk is transformed or 

concentrated by the settlement process. 

System operators should also consider 

the possibility that attempts to limit one 

type of risk could lead to an increase in 

another type of risk. Moreover, system 

operators should be aware of risks that 

might be unique to certain instruments, 

participants, or market practices. 

System operators should also analyze 

how risks are correlated among 

instruments or participants.15

Based upon its clear identification of 

risks, a system should establish its risk 

tolerance, including the levels of risk 

exposure that are acceptable to the 

system operator, system participants, 

and other relevant parties. The system 

operator should then set risk 

management objectives that clearly 

allocate acceptable risks among the 

relevant parties and set out strategies to 

manage this risk. Risk management 

objectives should be consistent with the 

objectives of this policy, the system’s 

business purposes, and the type of 

instruments and markets for which the 

system clears and settles. Risk 

management objectives should also be 

communicated to and understood by 

both the system operator’s staff and 

system participants. 

System operators should reevaluate 

their risks in conjunction with any 

major changes in the settlement process 

or operations, the instruments or 

transactions settled, a system’s rules or 

procedures, or the relevant legal and 

market environments. Systems should 

revisit their risk management objectives 

regularly to ensure that they are 

appropriate for the risks posed by the 

system, continue to be aligned with the 

system’s purposes, remain consistent 

with this policy, and are being 

effectively adhered to by the system 

operator and participants. 

Sound Governance Arrangements. 

Systems should have sound governance 

arrangements to implement and oversee 

their risk management frameworks. The 

responsibility for sound governance 

rests with a system operator’s board of 

directors or similar body and with the 

system operator’s senior management. 

Governance structures and processes 

should be transparent; enable the 

establishment of clear risk management 

objectives; set and enforce clear lines of 

responsibility and accountability for 

achieving these objectives; ensure that 

there is appropriate oversight of the risk 


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16The risk management and internal audit 

functions should also be independent of those 

responsible for day-to-day functions. 

17Examples of key features that might be 

specified in a system’s rules and procedures are 

controls to limit participant-based risks, such as 

membership criteria based on participants’ financial 

and operational health, limits on settlement 

exposures, and the procedures and resources to 

hedge, margin, or collateralize settlement 

exposures. Other examples of key features might be 

business continuity requirements and loss 

allocation procedures. 

18To facilitate analysis of settlement disruptions, 

systems may need to develop the capability to 

simulate credit and liquidity effects on participants 

and on the system resulting from one or more 

participant defaults, or other possible sources of 

settlement disruption. Such simulations may need 

to include, if appropriate, the effects of changes in 

market prices, volatilities, or other factors. 

19The Core Principles were developed by the 

CPSS; references to ‘‘principles’’ in this policy are 

to the Core Principles. The Core Principles draw 

extensively on the previous work of the CPSS, most 

importantly the Lamfalussy Minimum Standards. 

The Core Principles extend the Lamfalussy 

Minimum Standards by adding several principles 

and broadening the coverage to include 

systemically important payments systems of all 

types, including gross settlement systems, net 

settlement systems, and hybrid systems, operated 

by either the public or private sector. The Core 

Principles also address the responsibilities of 

central banks in applying the Core Principles. 

20The CPSS and IOSCO developed the CPSS–

IOSCO Recommendations as minimum standards 

and are referred to as such in this policy. The full 

reports on the Core Principles and the CPSS–IOSCO 

Recommendations are available at http:// 

www.bis.org/publ/cpss43.htm, http://www.bis.org/ 

publ/cpss46.htm, and http://www.bis.org/publ/ 

cpss64.htm. 

21Systemically important payments systems are 

expected to meet the principles listed in Section 

C.1. Securities settlement systems of systemic 

management process; and enable the 

effective use of information reported by 

the system operator’s management, 

internal auditors, and external auditors 

to monitor the performance of the risk 

management process.16 Individuals 

responsible for governance should be 

qualified for their positions, understand 

their responsibilities, and understand 

their system’s risk management 

framework. Governance arrangements 

should also ensure that risk 

management information is shared in 

forms, and at times, that allow 

individuals responsible for governance 

to fulfill their duties effectively. 

Clear and Appropriate Rules and 

Procedures. Systems should implement 

rules and procedures that are 

appropriate and sufficient to carry out 

the system’s risk management objectives 

and that have a well-founded legal 

basis. Such rules and procedures should 

specify the respective responsibilities of 

the system operator, system 

participants, and other relevant parties. 

Rules and procedures should establish 

the key features of a system’s settlement 

and risk management design and specify 

clear and transparent crisis management 

procedures and settlement failure 

procedures, if applicable.17

Employ Necessary Resources. Systems 

should ensure that the appropriate 

resources and processes are in place to 

allow them to achieve their risk 

management objectives and effectively 

implement their rules and procedures. 

In particular, the system operator’s staff 

should have the appropriate skills, 

information, and tools to apply the 

system’s rules and procedures and 

achieve the system’s risk management 

objectives. System operators should also 

ensure that their facilities and 

contingency arrangements, including 

any information system resources, are 

sufficient to meet their risk management 

objectives. 

The Board recognizes that payments 

and settlement systems differ widely in 

terms of form, function, scale, and scope 

of activities and that these 

characteristics result in differing 

combinations and levels of risks. Thus, 

the exact features of a system’s risk 

management framework should be 

tailored to the risks of that system. The 

Board also recognizes that the specific 

features of a risk management 

framework may entail trade-offs 

between efficiency and risk reduction 

and that payments and settlement 

systems will need to consider these 

trade-offs when designing appropriate 

rules and procedures. In considering 

such trade-offs, however, it is critically 

important that systems take into account 

the costs and risks that may be imposed 

on all relevant parties, including parties 

with no direct role in the system. 

Furthermore, in light of rapidly evolving 

technologies and risk management 

practices, the Board encourages all 

systems to consider periodically making 

cost-effective risk-management 

improvements. 

To determine whether a system’s 

current or proposed risk management 

framework is consistent with this 

policy, the Board will seek to 

understand how a system achieves the 

four elements of a sound risk 

management framework set out above. 

In this context, it may be necessary for 

the Board to obtain information from 

system operators regarding their risk 

management framework, risk 

management objectives, rules and 

procedures, significant legal analyses, 

general risk analyses, analyses of the 

credit and liquidity effects of settlement 

disruptions, business continuity plans, 

crisis management procedures, and 

other relevant documentation.18 It may 

also be necessary for the Board to obtain 

data or statistics on system activity on 

an ad-hoc or ongoing basis. All 

information provided to the Federal 

Reserve for the purposes of this policy 

will be handled in accordance with all 

applicable Federal Reserve policies on 

information security, confidentiality, 

and conflicts of interest. 

C. Systemically Important Systems 

Financial stability depends, in part, 

on a robust and well-managed financial 

infrastructure. If risks are not effectively 

managed by systemically important 

systems, these systems have the 

potential to be a major channel for the 

transmission of financial shocks across 

systems and markets. Financial system 

authorities, including central banks, 

have promoted sound risk management 

practices by developing internationally 

accepted guidelines to encourage the 

safe design and operation of payments 

and settlement systems, especially those 

considered systemically important. 

In particular, the Core Principles, 

Recommendations for SSS, and 

Recommendations for CCP (the latter 

two collectively referred to as the CPSS–

IOSCO Recommendations) set forth risk 

management practices for payments 

systems, securities settlement systems, 

and central counterparties, 

respectively.19 20 The Federal Reserve 

collaborated with participating financial 

system authorities in developing these 

principles and minimum standards. In 

addition, the Securities and Exchange 

Commission and Commodity Futures 

Trading Commission participated in the 

development of the CPSS–IOSCO 

Recommendations. The principles and 

minimum standards reflect broad input 

and provide a balanced view of 

acceptable risk management practices. 

The Core Principles and 

Recommendations for SSS are also part 

of the Financial Stability Forum’s 

Compendium of Standards that have 

been widely recognized, supported, and 

endorsed by U.S. authorities as integral 

to strengthening the stability of the 

financial system. The Board believes 

that the implementation of the 

individual principles and minimum 

standards by systemically important 

systems can help promote safety and 

efficiency in the financial system and 

foster greater financial stability in 

domestic and global economies. 

Systemically important systems that 

are subject to the Board’s authority are 

expected to meet the specific risk 

management principles and minimum 

standards in this section, as appropriate, 

and the general expectations of Section 

B because of their potential to cause 

major disruptions in the financial 

system.21 To determine whether a 


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importance are expected to meet the minimum 

standards listed in Section C.2.a., and systemically 

important central counterparties are expected to 

meet the minimum standards listed in C.2.b. For a 

system not subject to its authority, the Board 

encourages the system and its appropriate financial 

system authority to consider these principles and 

minimum standards when designing, operating, 

monitoring, and assessing the system, as 

appropriate and applicable. 

22The Board will inform a system subject to its 

authority if it considers it systemically important 

and therefore expected to meet the principles or 

minimum standards in this policy. The Board will 

also inform such systems if they are expected to 

exceed any of the principles or minimum standards. 

The appropriate financial system authorities 

responsible for supervising or regulating central 

counterparties are encouraged to inform the central 

counterparties as to whether they are expected to 

meet the Recommendations for CCP. 

23 Important financial markets include, but are 

not limited to, critical markets as defined in the 

‘‘Interagency Paper on Sound Practices to 

Strengthen the Resilience of the U.S. Financial 

System’’ as the markets for federal funds, foreign 

exchange, and commercial paper; U.S. Government 

and agency securities; and corporate debt and 

equity securities. 68 FR 17809 (April 11, 2003). 

system is systemically important for 

purposes of this policy, the Board may 

consider, but will not be limited to, one 

or more of the following factors: 22

• Whether the system has the 

potential to create significant liquidity 

disruptions or dislocations should it fail 

to perform or settle as expected; 

• Whether the system has the 

potential to create large credit or 

liquidity exposures relative to 

participants’ financial capacity; 

• Whether the system settles a high 

proportion of large-value or interbank 

transactions; 

• Whether the system settles 

transactions for important financial 

markets; 23

• Whether the system provides 

settlement for other systems; and, 

• Whether the system is the only 

system or one of a very few systems for 

settlement of a given financial 

instrument. 

Some systemically important systems, 

however, may present an especially 

high degree of systemic risk, by virtue 

of their high volume of large-value 

transactions or central role in the 

financial markets. Because all systems 

are expected to employ a risk 

management framework that is 

appropriate for their risks, the Board 

may expect these systems to exceed the 

principles and minimum standards set 

out below. Finally, the Board expects 

systemically important systems to 

demonstrate the extent to which they 

meet the applicable principles or 

minimum standards by completing selfassessments and disclosing publicly the 

results of their analyses in a manner 

consistent with the guidelines set forth 

in Section C.3. 

1. Principles for Systemically Important 

Payments Systems 

1. The system should have a wellfounded legal basis under all relevant 

jurisdictions. 

2. The system’s rules and procedures 

should enable participants to have a 

clear understanding of the system’s 

impact on each of the financial risks 

they incur through participation in it. 

3. The system should have clearly 

defined procedures for the management 

of credit risks and liquidity risks, which 

specify the respective responsibilities of 

the system operator and the participants 

and which provide appropriate 

incentives to manage and contain those 

risks. 

4. The 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 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 system should ensure a high 

degree of security and operational 

reliability and should have contingency 

arrangements for timely completion of 

daily processing. 

8. The system should provide a means 

of making payments which is practical 

for its users and efficient for the 

economy. 

9. The system should have objective 

and publicly disclosed criteria for 

participation, which permit fair and 

open access. 

10. The system’s governance 

arrangements should be effective, 

accountable and transparent. 

2. Minimum Standards for Systemically 

Important Securities Settlement Systems 

and Central Counterparties 

The CPSS–IOSCO Recommendations 

apply to the full set of institutional 

arrangements for confirmation, 

clearance, and settlement of securities 

transactions, including those related to 

market convention and pre-settlement 

activities. As such, not all of these 

standards apply to all systems. 

Moreover, the standards applicable to a 

particular system also will vary based 

on the structure of the market and the 

system’s design. 

While the Board endorses the CPSS–

IOSCO Recommendations in their 

entirety, its primary interest for 

purposes of this policy is in those 

recommendations related to the 

settlement aspects of financial 

transactions, including the delivery of 

securities or other financial instruments 

against payment, and related risks. The 

Board expects that systems engaged in 

the management or conduct of clearing 

and settling financial transactions to 

meet the expectations set forth in the 

applicable set of CPSS–IOSCO 

Recommendations. 

a. Recommendations for Securities 

Settlement Systems 

1. Securities settlement systems 

should have a well-founded, clear, and 

transparent legal basis in the relevant 

jurisdictions. 

2. Confirmation of trades between 

direct market participants should occur 

as soon as possible after the trade 

execution, but no later than the trade 

date (T+0). Where confirmation of 

trades by indirect market participants 

(such as institutional investors) is 

required, it should occur as soon as 

possible after the trade execution, 

preferably on T+0, but no later than 

T+1. 

3. Rolling settlement should be 

adopted in all securities markets. Final 

settlement should occur no later than 

T+3. The benefits and costs of a 

settlement cycle shorter than T+3 

should be evaluated. 

4. The benefits and costs of a central 

counterparty should be evaluated. 

Where such a mechanism is introduced, 

the central counterparty should 

rigorously control the risks it assumes. 

5. Securities lending and borrowing 

(or repurchase agreements and other 

economically equivalent transactions) 

should be encouraged as a method for 

expediting the settlement of securities 

transactions. Barriers that inhibit the 

practice of lending securities for this 

purpose should be removed. 

6. Securities should be immobilized 

or dematerialized and transferred by 

book entry in central securities 

depository to the greatest extent 

possible. 

7. Central securities depositories 

should eliminate principal risk linking 

securities transfers to funds transfers in 

a way that achieves delivery versus 

payment. 

8. Final settlement should occur no 

later than the end of the settlement day. 

Intraday or real time finality should be 

provided where necessary to reduce 

risks. 

9. Central securities depositories that 

extend intraday credit to participants, 

including central securities depositories 

that operate net settlement systems, 

should institute risk controls that, at a 


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minimum, ensure timely settlement in 

the event that the participant with the 

largest payment obligation is unable to 

settle. The most reliable set of controls 

is a combination of collateral 

requirements and limits. 

10. Assets used to settle the ultimate 

payment obligations arising from 

securities transaction should carry little 

or no credit or liquidity risk. If central 

bank money is not used, steps must be 

taken to protect central securities 

depository members from potential 

losses and liquidity pressures arising 

from the failure of the cash settlement 

agent whose assets are used for that 

purpose. 

11. Sources of operational risk arising 

in the clearing and settlement process 

should be identified and minimized 

through the development of appropriate 

systems, controls and procedures. 

Systems should be reliable and secure, 

and have adequate, scalable capacity. 

Contingency plans and backup facilities 

should be established to allow for the 

timely recovery of operations and 

completion of the settlement process. 

12. Entities holding securities in 

custody should employ accounting 

practices and safekeeping procedures 

that fully protect customers’ securities. 

It is essential that customers’ securities 

be protected against the claims of a 

custodian’s creditors. 

13. Governance arrangements for 

central securities depositories and 

central counterparties should be 

designed to fulfill public interest 

requirement and to promote the 

objectives of owners and users. 

14. Central securities depositories and 

central counterparties should have 

objective and publicly disclosed criteria 

for participation that permit fair and 

open access. 

15. While maintaining safe and secure 

operations, securities settlement 

systems should be cost-effective in 

meeting the requirements of users. 

16. Securities settlement systems 

should use or accommodate the relevant 

international communication 

procedures and standards in order to 

facilitate efficient settlement of crossborder transactions. 

17. Central securities depositories and 

central counterparties should provide 

market participants with sufficient 

information for them to identify and 

evaluate accurately the risks and costs 

associated with using the central 

securities depository or central 

counterparty services. 

18. Securities settlement systems 

should be subject to transparent and 

effective regulation and oversight. 

Central banks and securities regulators 

should cooperate with each other and 

with other relevant authorities. 

19. Central securities depositories that 

establish links to settle cross-border 

trades should design and operate such 

links to reduce effectively the risks 

associated with cross-border settlement. 

b. Recommendations for Central 

Counterparties 

1. A central counterparty should have 

a well founded, transparent, and 

enforceable legal framework for each 

aspect of its activities in all relevant 

jurisdictions. 

2. A central counterparty should 

require participants to have sufficient 

financial resources and robust 

operational capacity to meet obligations 

arising from participation in the central 

counterparty. A central counterparty 

should have procedures in place to 

monitor that participation requirements 

are met on an ongoing basis. A central 

counterparty’s participation 

requirements should be objective, 

publicly disclosed, and permit fair and 

open access. 

3. A central counterparty should 

measure its credit exposures to its 

participants at least once a day. Through 

margin requirements, other risk control 

mechanisms, or a combination of both, 

a central counterparty should 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. 

4. If a central counterparty relies on 

margin requirements to limit its credit 

exposures to participants, those 

requirements should be sufficient to 

cover potential exposures in normal 

market conditions. The models and 

parameters used in setting margin 

requirements should be risk-based and 

reviewed regularly. 

5. A 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. 

6. A central counterparty’s default 

procedures should be clearly stated, and 

they should ensure that the central 

counterparty can take timely action to 

contain losses and liquidity pressures 

and to continue meeting its obligations. 

Key aspects of the default procedures 

should be publicly available. 

7. A 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 

counterparty should be held in 

instruments with minimal credit, 

market, and liquidity risks. 

8. A central counterparty should 

identify sources of operational risk and 

minimize them through the 

development of appropriate systems, 

controls, and procedures. Systems 

should be reliable and secure, and have 

adequate, scalable capacity. Business 

continuity plans should allow for timely 

recovery of operations and fulfillment of 

a central counterparty’s obligations. 

9. A 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. Funds transfers to a central 

counterparty should be final when 

effected. 

10. A central counterparty should 

clearly state its obligations with respect 

to physical deliveries. The risks from 

these obligations should be identified 

and managed. 

11. Central counterparties that 

establish links either cross-border or 

domestically to clear trades should 

evaluate the potential sources of risks 

that can arise, and ensure that the risks 

are managed prudently on an ongoing 

basis. There should be a framework for 

cooperation and coordination between 

the relevant regulators and overseers. 

12. While maintaining safe and secure 

operations, central counterparties 

should be cost-effective in meeting the 

requirements of participants. 

13. Governance arrangements for a 

central counterparty should be clear and 

transparent to fulfill public interest 

requirements and to support the 

objectives of owners and participants. In 

particular, they should promote the 

effectiveness of a central counterparty’s 

risk management procedures. 

14. A 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. 

15. A central counterparty should be 

subject to transparent and effective 

regulation and oversight. In both a 

domestic and an international context, 

central banks and securities regulators 

should cooperate with each other and 

with other relevant authorities. 

3. Self-Assessments by Systemically 

Important Systems 

Users and others outside the user 

community (such as prospective users 

or other public authorities) commonly 

are interested in understanding how 

systemically important payments and 

settlement systems function in order to 


sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 72, No. 12 / Friday, January 19, 2007 / Notices 2527 

24The Board considers self-assessments as only 

one resource for users and other persons to consider 

when evaluating any risks associated with a 

particular system. In order to effectively identify 

and manage risks, a user or other interested person 

may need to consider other relevant documentation 

such as the system’s rules, operating procedures, or 

organizational documents. These materials may be 

publicly available or may need to be requested from 

the system directly. 

25While the Board expects self-assessments to be 

robust, it does not expect payments and settlement 

systems to disclose publicly sensitive information 

that would expose system vulnerabilities or 

otherwise put the system at risk (e.g., specific 

business continuity plans). 

26The Core Principles include implementation 

guidelines and an implementation summary for 

each principle. The guidelines provide both 

detailed explanations of each principle and general 

examples of ways to interpret and implement them. 

27 In November 2002, CPSS–IOSCO published an 

Assessment Methodology for the Recommendations 

for SSS, which is available at http://www.bis.org/ 

publ/cpss51.htm. In November 2004, CPSS–IOSCO 

published the CCP Recommendations and an 

Assessment Methodology, which are available at 

http://www.bis.org/publ/cpss64.htm. These 

assessment methodologies for the CPSS–IOSCO 

Recommendations include key questions to assist 

an assessor in determining to what extent a system 

meets a particular minimum standard. 

28Any review of an assessment by the Federal 

Reserve should not be viewed as an approval or 

guarantee of the accuracy of a system’s selfassessment. Furthermore, the contents of a review 

of a self-assessment would be subject to the Board’s 

rules regarding disclosure of confidential 

supervisory information. Therefore, without the 

express approval of the Board, a system would not 

be allowed to state publicly that its self-assessment 

has been reviewed, endorsed, approved, or 

otherwise not objected to by the Federal Reserve. 

29 If the Federal Reserve materially disagrees with 

the content of a system’s self-assessment, it will 

communicate its concerns to the system’s senior 

management and possibly to its board of directors, 

as appropriate. The Federal Reserve may also 

discuss its concerns with other relevant financial 

system authorities, as appropriate. 

manage their risks. At this time, 

different disclosure practices and 

requirements for payments and 

settlement systems have resulted in 

varying levels of information being 

disseminated to users and others. Users 

and other persons may find it difficult 

to obtain access to sufficient 

information to understand and assess a 

particular system’s approach to risk 

management against internationally 

accepted principles and minimum 

standards. Broadening the availability of 

information concerning a system’s risk 

management controls, governance, and 

legal framework, for example, can 

facilitate this understanding and 

analysis and also assist those interested 

in a system in evaluating and managing 

any risk exposure.24

The Board believes that the 

implementation of the applicable 

principles and minimum standards by 

systemically important systems can 

foster greater financial stability in 

payments and settlement systems. The 

Board further believes that operators of 

systemically important systems are well 

positioned to assess and demonstrate 

the extent to which they have 

implemented the principles or 

minimum standards in this policy. 

Therefore, in furtherance of its policy 

objectives, the Board expects 

systemically important systems subject 

to its authority to complete 

comprehensive, objective selfassessments against the applicable 

principles or minimum standards in this 

policy and disclose publicly the results 

of these efforts. Adopting this selfassessment framework, however, does 

not preclude the Federal Reserve from 

independently assessing compliance of 

systemically important systems with 

relevant rules, regulations, and Federal 

Reserve policies. 

The Board expects systemically 

important systems subject to its 

authority to complete self-assessments 

based on the following guidelines. First, 

systemically important systems are 

expected to document the basis for their 

self-assessment and support any 

conclusions regarding the extent to 

which they meet a particular principle 

or minimum standard.25 System 

operators should use one of the 

following assessment categories to 

describe the extent to which the system 

meets a particular principle or 

minimum standard: Observed, broadly 

observed, partly observed, or nonobserved. The CPSS and CPSS–IOSCO 

have developed implementation 

guidelines and assessment 

methodologies that can assist system 

operators in structuring their selfassessments and assigning an 

assessment category. Accordingly, 

payment system operators are 

encouraged to consult Section 7 of the 

Core Principles for guidance when 

developing their self-assessments and in 

measuring the extent to which the 

system meets each principle.26 Likewise 

system operators for securities 

settlement systems and central 

counterparties are encouraged to consult 

the assessment methodology for the 

relevant minimum standards for further 

guidance on each minimum standard 

and are encouraged to respond to the 

key questions included therein.27 A 

system may consult the Board for 

assistance with respect to the principles 

and minimum standards and the 

completion of its assessment. Second, to 

further ensure system accountability for 

accuracy and completeness, the Board 

expects the system’s senior management 

and board of directors to review and 

approve self-assessments upon 

completion. Third, to achieve broad 

disclosure, the system is expected to 

make its self-assessments readily 

available to the public, such as by 

posting the self-assessment on the 

system’s public Web site. Finally, in 

order for self-assessments to reflect 

correctly the system’s current rules, 

procedures, and operations, the Board 

expects a systemically important system 

to update the relevant parts of its selfassessment following material changes 

to the system or its environment. At a 

minimum, a systemically important 

system would be expected to review its 

self-assessment every two years to 

ensure continued accuracy. 

As part of its ongoing oversight of 

systemically important payments and 

settlement systems, the Federal Reserve 

will review published self-assessments 

by systems subject to the Board’s 

authority to ensure the Board’s policy 

objectives and expectations are being 

met.28 Where necessary, the Federal 

Reserve will provide feedback to these 

systems regarding the content of their 

self-assessments and their effectiveness 

in achieving the policy objectives 

discussed above.29 The Board 

acknowledges that payments and 

settlement systems vary in terms of the 

scope of instruments they settle and 

markets they serve. It also recognizes 

that systems may operate under 

different legal and regulatory constraints 

and within particular market 

infrastructures or institutional 

frameworks. The Board will consider 

these factors when reviewing selfassessments and in evaluating how a 

systemically important system 

addresses a particular principle or 

minimum standard and complies with 

the policy generally. Where the Board 

does not have exclusive authority over 

a systemically important system, it will 

encourage appropriate domestic or 

foreign financial system authorities to 

promote self-assessments by 

systemically important systems as a 

means to achieve greater safety and 

efficiency in the financial system. 

By order of the Board of Governors of the 

Federal Reserve System, January 11, 2007. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

[FR Doc. E7–589 Filed 1–18–07; 8:45 am] 

BILLING CODE 6210–01–P 

FEDERAL RETIREMENT THRIFT 

INVESTMENT BOARD 

Sunshine Act; Notice of Meeting 

TIME AND DATE: 8:30 a.m. (EST), January 

22, 2007. 


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