Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 44763 

1 12 U.S.C. 5461 et seq. 

2See 12 U.S.C. 5462(6). Section 5462(6)(B) 

specifically excludes a number of entities, such as 

designated contract markets and national securities 

exchanges meeting certain criteria, from the 

definition of an FMU. 

3See 12 U.S.C. 5322(a)(2)(J). 

4Section 804(a)(1) of the DFA states that the 

Council, ‘‘on a nondelegable basis and by a vote of 

not fewer than 2⁄3 of the members then serving, 

including an affirmative vote by the Chairperson of 

the Council, shall designate those financial market 

utilities or payment, clearing, or settlement 

activities that the Council determines are, or are 

likely to become, systemically important.’’ 12 

U.S.C. 5463(a)(1). See also DFA section 803(9) 

(defining systemic importance). 12 U.S.C. 5462(9). 

5See 12 U.S.C. 5464(a). 

6See 12 U.S.C. 5464(b). 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1758, 1759, 1761a, 1761b, 1766, 

1767,1782, 1784, 1786, 1787, and 1789. 

Section 701.6 is also authorized by 15 U.S.C. 

3717. Section 701.31 is also authorized by 15 

U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601– 

3619. Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

§ 701.30 [Amended] 

■ 2. Amend § 701.30 as follows: 

■ a. Add to paragraph (a) the phrase 

‘‘and remittance transfers, as defined in 

section 919 of the Electronic Fund 

Transfer Act’’ after the words 

‘‘electronic fund transfers.’’ 

■ b. Remove the phrase ‘‘and receiving 

international and domestic electronic 

fund transfers’’ after the words ‘‘money 

orders’’ from paragraph (b). 

[FR Doc. 2011–18930 Filed 7–26–11; 8:45 am] 

BILLING CODE 7535–01–P 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL 

12 CFR Chapter XIII and Part 1320 

RIN 4030–AA01 

Authority To Designate Financial 

Market Utilities as Systemically 

Important 

AGENCY: Financial Stability Oversight 

Council. 

ACTION: Final rule. 

SUMMARY: Section 804 of the DoddFrank Wall Street Reform and Consumer 

Protection Act (the ‘‘DFA’’) provides the 

Financial Stability Oversight Council 

(the ‘‘Council’’) the authority to 

designate a financial market utility 

(‘‘FMU’’) that the Council determines is 

or is likely to become systemically 

important because the failure of or a 

disruption to the functioning of the 

FMU could create, or increase, the risk 

of significant liquidity or credit 

problems spreading among financial 

institutions or markets and thereby 

threaten the stability of the United 

States financial system. This final rule 

describes the criteria that will inform 

and the processes and procedures 

established under the DFA for the 

Council’s designation of FMUs as 

systemically important under the DFA. 

The Council published an advance 

notice of proposed rulemaking regarding 

the designation criteria in section 804 

on December 21, 2010, followed by a 

notice of proposed rulemaking 

(‘‘NPRM’’) on March 28, 2011. The 

Council notes that this final rule only 

addresses the designation of FMUs. The 

Council expects to address the 

designation of payment, clearing, or 

settlement activities as systemically 

important in a separate rulemaking. 

DATES: Effective date: August 26, 2011. 

FOR FURTHER INFORMATION CONTACT: 

Lance Auer, Deputy Assistant Secretary 

(Financial Institutions), Treasury, at 

(202) 622–1262, Patrick Pinschmidt, 

Senior Policy Advisor, Treasury, at 

(202) 622–2495, Jordan Bleicher, 

Financial Analyst, Treasury, at (202) 

622–6491 or Steven D. Laughton, Senior 

Counsel, Office of the General Counsel, 

Treasury, at (202) 622–8413. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act 

Title VIII of the DFA is entitled the 

‘‘Payment, Clearing, and Settlement 

Supervision Act of 2010.’’ 1 FMUs form 

a critical part of the nation’s financial 

infrastructure. They exist in many 

markets to support and facilitate the 

transfer, clearing or settlement of 

financial transactions, and their smooth 

operation is integral to the soundness of 

the financial system and the overall 

economy. However, their function and 

interconnectedness also concentrate a 

considerable amount of risk in the 

financial system due, in large part, to 

the interdependencies, either directly 

through operational, contractual or 

affiliation linkages, or indirectly 

through payment, clearing, and 

settlement processes. In other words, 

problems at one FMU could trigger 

significant liquidity and credit 

disruptions at other FMUs or financial 

institutions. 

Section 804(a)(1) of the DFA states 

that the Council, ‘‘on a nondelegable 

basis and by a vote of not fewer than 2⁄3

of the members then serving, including 

an affirmative vote by the Chairperson 

of the Council, shall designate those 

financial market utilities or payment, 

clearing, or settlement activities that the 

Council determines are, or are likely to 

become, systemically important.’’ 

Subject to certain exclusions, the DFA 

defines an FMU as ‘‘any person that 

manages or operates a multilateral 

system for the purposes of transferring, 

clearing, or settling payments, 

securities, or other financial 

transactions among financial 

institutions or between financial 

institutions and the person.’’ 2

Section 111 of the DFA establishes the 

Council. Among the duties of the 

Council under section 112(a)(2) is to 

‘‘identify systemically important 

FMUs,’’ as defined in the statute.3

Section 804 of the DFA requires the 

Council, after consultation with the 

Board of Governors of the Federal 

Reserve System (the ‘‘Board of 

Governors’’) and the relevant federal 

agency that has primary jurisdiction 

over an FMU under federal banking, 

securities, or commodity futures laws 

(‘‘Supervisory Agency’’), to identify and 

designate an FMU that is, or is likely to 

become, systemically important if the 

Council determines that a failure of or 

disruption to an FMU could create, or 

increase, the risk of significant liquidity 

or credit problems spreading across 

financial institutions and markets and 

thereby threaten the stability of the U.S. 

financial system.4

The designation of an FMU as 

systemically important by the Council 

subjects the designated FMU to the 

requirements of Title VIII of the DFA 

(‘‘Title VIII’’). For example, section 

805(a) authorizes the Board of 

Governors, the Commodity Futures 

Trading Commission (‘‘CFTC’’), and the 

Securities and Exchange Commission 

(‘‘SEC’’), in consultation with the 

Council and one or more Supervisory 

Agencies and taking into consideration 

relevant international standards and 

existing prudential requirements, to 

prescribe risk management standards 

governing the operations related to the 

payment, clearing, and settlement 

activities of systemically important 

FMUs.5 The objectives and principles 

for the risk management standards are to 

promote robust risk management and 

safety and soundness, reduce systemic 

risk, and support the stability of the 

broader financial system.6 These 

standards may address areas, as 

outlined in section 805(c), such as risk 

management policies and procedures, 

margin and collateral requirements, 

participant or counterparty default 

policies and procedures, the ability to 

complete timely clearing and settlement 

of financial transactions, capital and 

financial resource requirements for 

designated FMUs, as well as other areas 

that are necessary to achieve these 

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44764 Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 

7See 12 U.S.C. 5464(c). 

8See 12 U.S.C. 5465(a). 

9Authority To Designate Financial Market 

Utilities as Systemically Important, 76 FR 17047 

(March 28, 2011). 

10 12 U.S.C. 5463(a)(2). 

11Authority To Designate Financial Market 

Utilities as Systemically Important, 76 FR at 17055. 

12 Id. 

13 Id. 

14 Id. 

15Comments were received from: Americans for 

Financial Reform, the American Bankers 

Association, American Express, Better Markets, 

Robert Brasell, the Committee on Capital Markets 

Regulation, the Council of Institutional Investors, 

LCH.Clearnet Group Limited, MasterCard 

Worldwide, the National Automated Clearing 

House Association, Sun Hong Rie, The Clearing 

House Association L.L.C. and The Clearing House 

Payments Company L.L.C., The Depository Trust & 

Clearing Corporation, The Financial Services 

Roundtable, and The Options Clearing Corporation. 

objectives and principles.7 Designation 

also subjects the FMU to additional 

examinations and reporting 

requirements, as well as potential 

enforcement actions. In addition, as set 

forth in section 806(a), the Board of 

Governors may authorize a Federal 

Reserve Bank to establish and maintain 

an account for a designated FMU and 

provide the services listed in section 

11A(b) of the Federal Reserve Act to the 

designated FMU.8

Designation of Financial Market 

Utilities: Overview of the Proposed Rule 

In March 2011, the Council issued, 

and requested public comment on, an 

NPRM that included the analytical 

framework that the Council would use 

to determine whether an FMU should be 

designated as systemically important in 

accordance with Title VIII.9 As noted in 

the NPRM, section 804(a)(2) of the DFA 

provides that, in determining whether 

an FMU should be designated as 

systemically important, the Council 

must consider: 

A. The aggregate monetary value of 

transactions processed by the FMU; 

B. The aggregate exposure of the FMU 

to its counterparties; 

C. The relationship, 

interdependencies, or other interactions 

of the FMU with other FMUs or 

payment, clearing or settlement 

activities; 

D. The effect that the failure of or a 

disruption to the FMU would have on 

critical markets, financial institutions, 

or the broader financial system; and 

E. Any other factors that the Council 

deems appropriate.10

Under the approach described in the 

NPRM, the Council would evaluate 

FMUs under each of the four specific 

statutory considerations, as well as any 

other factors the Council deems 

relevant, using quantitative metrics 

where possible and appropriate. 

Informed by data collected with respect 

to each statutory consideration, the 

Council would use its judgment to 

determine whether an FMU should be 

designated as systemically important 

and thus subject to the relevant 

heightened risk management standards 

prescribed by the Board of Governors, 

the SEC, or the CFTC. Any 

determinations of the Council would 

ultimately be based on an evaluation of 

whether the failure or disruption of the 

FMU could pose a threat to the financial 

stability of the U.S. financial system as 

described in DFA section 803(9).11

The NPRM indicated that the Council 

expected to use the statutory 

considerations discussed above as the 

base line criteria for assessing an FMU’s 

systemic importance, regardless of the 

type of payment, clearing or settlement 

activities that the FMU is engaged in. 

However, the NPRM also stated that the 

application of the statutory 

considerations would be adapted for the 

risks presented by a particular type of 

FMU and business model. For example, 

the metrics that are best suited for 

assessing the systemic importance of a 

central counterparty will likely differ 

from the metrics used to assess the 

importance of an interbank payment 

system. In light of such differences, the 

Council will apply metrics in a manner 

that is appropriate to a specific FMU or 

market segment.12

In addition, the NPRM sets out a twostage process for evaluating the systemic 

importance of an FMU prior to a vote of 

proposed designation by the Council. 

The first stage would consist of a largely 

data-driven process for the Council, 

working with its committees, to identify 

a preliminary set of FMUs, whose 

failure or disruption could potentially 

threaten the stability of the U.S. 

financial system.13 In the second stage, 

the FMUs identified through the first 

stage would be subject to a more indepth review, with a greater focus on 

qualitative factors, in addition to 

institutional and market specific 

considerations. If an FMU reached the 

second stage of the evaluation process, 

the Council would notify the FMU 

under consideration and provide the 

FMU with an opportunity to submit 

written materials to the Council in 

support of or in opposition to 

designation as outlined in proposed rule 

section 1320.11. In the case of a 

proposed designation of systemic 

importance, an FMU would be notified 

and given the opportunity to request a 

written or oral hearing before the 

Council to demonstrate that the 

proposed determination is not 

supported by substantial evidence as 

outlined in proposed rule section 

1320.12. Following this hearing, the 

Council would complete its 

considerations and carry out its final 

vote and notification to the FMU.14

Overview of the Public Comments 

The Council received 15 comments in 

response to the NPRM—including 

submissions from industry groups, 

clearinghouses, retail payment systems 

and other financial institutions 15— 

addressing a wide variety of issues. 

Commenters submitted suggestions 

regarding the substantive criteria for 

designation, including the relevance of 

certain considerations to various types 

of FMUs operating across different 

markets, quantitative designation 

thresholds and other matters related to 

the description of potential metrics to be 

used by the Council, as outlined in the 

NPRM. With respect to the designation 

process, commenters made 

recommendations regarding the ability 

of an FMU to apply for designation or 

rescission, the periodic reevaluation of 

designated and non-designated FMUs, 

Council communication to FMUs, the 

collection of information from FMUs, 

deadlines for FMUs to request hearings 

and submit information, Council voting 

procedures, and the confidentiality of 

proceedings, notifications and 

information gathered by the Council. 

Several commenters addressed potential 

designations of FMUs operating ‘‘retail 

payment systems,’’ with some arguing 

that the final rule should categorically 

exclude, or contain a presumption 

against, the designation of retail 

payment systems, and others 

recommending designation of at least 

some retail payment systems. 

Commenters also suggested that, given 

the global nature of payment, clearing 

and settlement flows, the designation 

framework should account for 

international regulatory oversight and 

standards. Specific comments are 

discussed in more detail in the relevant 

portions of the section-by-section 

analysis. 

II. Final Rule 

Overview 

After considering the comments, the 

Council has adopted a final rule to 

implement section 804 of the DFA. The 

final rule is substantially similar to the 

proposed rule, maintaining the twostage designation process and the key 

considerations and the subcategories for 

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Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 44765 

16 In the NPRM, the Council laid out its analytical 

framework for stage one in which it proposed to 

begin considering each of the subcategories with 

corresponding illustrative metrics. Upon further 

evaluation, the Council has decided to begin 

applying certain subcategories and metrics in stage 

two rather than stage one to further enhance the 

transparency of the stage one process by relying 

upon readily available data that is generally easy to 

quantify. 

Specifically, the Council will begin applying the 

following four subcategories in section 

1320.10(d)(3)–(6) at stage two: concentration of 

participants, concentration by product type, the 

degree of tiering, and potential impact or spillover 

in the event of a failure or disruption. 

The Council also decided to clarify several of the 

illustrative metrics or to begin considering such 

metrics at stage two. For example, certain metrics 

in stage one will be calculated on ‘‘average’’ values, 

a more generic term, rather than the more specific 

‘‘mean’’ or ‘‘median’’ terms for value, as indicated 

in the NPRM. The Council also moved the 

consideration of ‘‘the mean and peak aggregate 

value of an FMU’s financial resources held to 

address the credit risks arising from a potential 

participant default (i.e., participant, clearing or 

margin fund)’’ from stage one to stage two. 

17 In considering ‘‘average’’ data, the Council will 

use mean or median values, depending on which 

is appropriate in a particular case. 

18 In the context of derivatives clearing, the term 

‘‘credit exposures’’ refers to potential future 

exposures. 

designation. However, the application of 

certain subcategories and illustrative 

metrics have been moved from stage one 

to stage two and the Council has added 

procedural provisions affording FMUs 

the right to an after-the-fact hearing 

following the Council’s waiver or 

modification of a notice, hearing, or 

other requirement.16 A summary of the 

key provisions of the rule, highlighting 

certain portions of the designation 

process and analytical criteria, is 

provided below. This summary is 

followed by a section-by-section 

analysis of key sections of the regulatory 

text, relevant comment letters, and 

changes to the proposed rule. 

The Council expects to use a twostage process for evaluating FMUs prior 

to a vote of proposed designation. The 

first stage will consist of a largely datadriven process for the Council to 

identify a preliminary set of FMUs, 

whose failure or disruption could 

potentially threaten the stability of the 

U.S. financial system. In the second 

stage, the FMUs identified through the 

first stage of review will be subject to a 

more in-depth review, with a greater 

focus on qualitative factors, in addition 

to other institution and market specific 

considerations. 

The Council’s analytical framework, 

which was summarized in the NPRM, is 

outlined below. As discussed in more 

detail in the section-by-section analysis, 

metrics referenced herein are offered for 

purposes of illustration and their 

application will vary by specific market 

or institution. If information for a 

specific metric described below is not 

available or is not relevant to an FMU 

under consideration, the Council may 

consider an alternate or substitute 

metric for which information is 

available or which the Council 

considers more relevant. In appropriate 

cases, the Council may exclude a metric 

from consideration for a particular 

FMU. The Council may revise the 

metrics as new data become available 

and as the process for evaluating FMUs 

for designation evolves. 

Analytical Framework: Stage One 

The Council is establishing 

subcategories to further address the 

specific statutory considerations that are 

set forth in section 804(a)(2) of the DFA. 

These subcategories are substantively 

similar to those contained in the 

proposed rule. Certain subcategories 

and associated metrics are described 

below to illustrate how the 

considerations will be taken into 

account in assessing systemic 

importance. 

Consideration (A): Aggregate Monetary 

Value of Transactions Processed by an 

FMU 

• Subcategory (A)(1): Number of 

transactions processed, cleared or 

settled by the FMU 

Within subcategory (A)(1), examples 

of the types of metrics that the Council 

may consider include daily average 17

and historical peak gross volumes 

processed, cleared or settled. 

• Subcategory (A)(2): Value of 

transactions processed, cleared or 

settled, by the FMU 

Within subcategory (A)(2), examples 

of the types of metrics that the Council 

may consider include daily average and 

historical peak gross values processed, 

cleared or settled. 

• Subcategory (A)(3): Value of other 

financial flows that may flow through 

an FMU 

Within subcategory (A)(3), the 

Council may consider the daily average 

and historical peak value of variation 

margin, as well as the change in average 

daily and peak daily initial margin. 

Consideration (B): Aggregate Exposure 

of an FMU to Its Counterparties 

• Subcategory (B)(1): Credit 

exposures 18 to counterparties 

Within subcategory (B)(1), the Council 

may consider the use of metrics that 

measure the average aggregate daily 

value and peak aggregate dollar value of 

collateral (before or after haircut) posted 

to the FMU; average daily and peak 

aggregate intraday credit provided by an 

FMU to participants; and the mean and 

peak daily value of initial margin held 

by an FMU. 

• Subcategory (B)(2): Liquidity 

exposures to counterparties 

Within subcategory (B)(2), the Council 

may consider measures of the estimated 

peak liquidity need in the case of the 

default of the largest single counterparty 

to the FMU and the average and peak 

daily aggregate dollar value of pay outs 

by an FMU to its counterparties. 

Consideration (C): Relationship, 

Interdependencies, or Other 

Interactions of an FMU With Other 

FMUs or Payment, Clearing or 

Settlement Activities 

Within consideration (C), the Council 

may consider metrics that measure the 

relationships and interdependencies of 

an FMU, including those that measure 

interactions of an FMU with different 

participants, such as systemically 

important financial and/or nonfinancial 

companies, central banks, or other 

payment, clearing or settlement systems, 

with trading platforms (such as 

exchanges and alternative trading 

systems), and with the market 

environment more generally, including 

contractual relationships, that support 

the operations of an FMU. 

Consideration (D): Effect That the 

Failure of or Disruption to an FMU 

Would Have on Critical Markets, 

Financial Institutions or the Broader 

Financial System 

• Subcategory (D)(1): Role of an FMU in 

the market served 

Within subcategory (D)(1), the 

Council may consider market share 

metrics such as an FMU’s volume as a 

percentage of total market volume or 

value as a percentage of total market 

value. 

• Subcategory (D)(2): Availability of 

substitutes 

Within subcategory (D)(2), the 

Council may consider whether there 

exist, and if so, the number of other 

FMUs that may provide the same 

function or product, or provide an 

alternative payment mechanism, and 

how readily available a potential 

substitute would be for participants, 

considering such additional factors as 

operational capability and timing. 

Consideration (E): Any Other Factors 

That the Council Deems Appropriate 

Under this statutory consideration, 

the Council retains its ability to 

consider additional subcategories, 

metrics and qualitative factors as may be 

relevant and appropriate. Such 

additional factors may be based on the 

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44766 Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 

19See 12 U.S.C. 5463(a)(1). 

20See 12 U.S.C. 5462(9). 21See 12 U.S.C. 5461. 

22 12 U.S.C. 5301 and 5462. 

23See comment letter from The Depository Trust 

& Clearing Corporation (May 27, 2011) (hereinafter 

‘‘DTCC letter’’), p. 5. 

particular characteristics of an FMU 

being reviewed, such as the nature of 

the FMU’s operations, the FMU’s 

corporate structure or the FMU’s 

business model. 

Analytical Framework: Stage Two 

The second stage will provide the 

Council with the opportunity to perform 

a more in-depth review and analysis of 

specific FMUs from both a quantitative 

and qualitative perspective. In this 

stage, the Council will place a greater 

focus on any elements that may be 

particular to a specific FMU or a market. 

The Council will conduct a tailored 

analysis of each FMU under 

consideration to determine whether it is 

or is likely to become systemically 

important. 

Relationship Between Considerations 

(A)–(E) and the Statutory Basis for 

Designation 

Ultimately, the Council will use its 

assessment of Considerations (A) 

through (E), as described above, to reach 

a conclusion regarding whether an FMU 

meets the statutory basis for designation 

under section 804(a)(1) of the DFA, 

which directs the Council to designate 

FMUs that the Council determines are, 

or are likely to become, systemically 

important.19 ‘‘Systemically important’’ 

is defined in section 803(9) of the DFA, 

and in section 1320.2 of the final rule, 

as a ‘‘situation where the failure of or 

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.’’20

Thus, the two critical determinations for 

an FMU designation are: 

(1) Whether the failure of or a 

disruption to the functioning of the 

FMU now or in the future could create, 

or increase, the risk of significant 

liquidity or credit problems spreading 

among financial institutions or markets 

(the ‘‘First Determination’’); and 

(2) Whether the spread of such 

liquidity or credit problems among 

financial institutions or markets could 

threaten the stability of the financial 

system of the United States (the 

‘‘Second Determination’’). 

Considerations (A) and (C) primarily 

relate to the First Determination. 

Whether the failure of or a disruption to 

the functioning of the FMU could create 

or increase the risk of significant 

liquidity or credit problems is a 

function of, among other things, the 

value of the transactions the FMU 

processes (Consideration (A)). The risk 

of significant liquidity or credit 

problems also depends on the 

interactions between the FMU and other 

FMUs or payment, clearing, or 

settlement (‘‘PCS’’) activities 

(Consideration (C)). For example, the 

risk of liquidity or credit problems is 

greater if the failure of an FMU would 

cause other FMUs to fail, but mitigated 

if other FMUs could, in a timely 

manner, act as substitutes for the failed 

FMU. 

Consideration (B) relates to both the 

First and the Second Determinations. 

The aggregate exposure of an FMU to its 

counterparties (Consideration (B)) is 

positively correlated with the 

probability that any failure or disruption 

of the FMU could potentially destabilize 

counterparties or the financial system. 

Consideration (D) primarily relates to 

the Second Determination. 

In light of the language and purpose 

of Title VIII, the Council notes that the 

judgment involved in the Second 

Determination is substantially informed 

by the First Determination. Title VIII 

enhances the supervision of 

systemically important FMUs and 

payment, clearing, and settlement 

activities so that the economy can enjoy 

the advantages of efficiency and risk 

reduction that these institutions provide 

to the financial system.21 A failure or 

disruption of an FMU that could create 

the risk of ‘‘significant liquidity or 

credit problems spreading among 

financial institutions or markets’’ will, 

absent extraordinary circumstances, 

weaken the financial system’s ability to 

serve the economy and dramatically 

increase the risk of financial instability 

and economic downturn. The Second 

Determination, therefore, largely 

assesses whether possible disruptions 

are potentially severe, not necessarily in 

the sense that they themselves might 

trigger damage to the U.S. economy, but 

because such disruptions might reduce 

the ability of financial institutions or 

markets to perform their normal 

intermediation functions. 

Section-by-Section Analysis 

Section 1320.1 Authority and Purpose 

Proposed section 1320.1(a) states that 

sections 111, 112, 804, 809, and 810 of 

the DFA provide the statutory authority 

for the Council to designate FMUs. 

Proposed section 1320.1(b) explains that 

the purpose of part 1320 is to set forth 

standards and procedures governing the 

Council’s designation of FMUs that the 

Council determines are, or are likely to 

become, systemically important. 

The Council did not receive any 

comments that requested changes to this 

section. The Council made one 

technical, non-substantive change. 

Section 1320.2 Definitions 

In the proposed rule, the Council 

defined terms that are necessary to 

implement the final rule. The 

definitions (including ‘‘financial market 

utility,’’ ‘‘Supervisory Agency,’’ and 

‘‘systemically important and systemic 

importance’’) use the statutory 

definitions in sections 2 and 803 of the 

DFA.22 The definitions in the final rule 

are unchanged, except that the Council 

has made a technical addition to the 

definition of the term ‘‘Supervisory 

Agency’’ and added a definition of the 

term ‘‘hearing date.’’ 

Financial Market Utility. One 

commenter suggested that, in evaluating 

systemic importance, the Council 

should identify the FMU functions 

within an organization, and separately 

apply the standards for systemic 

importance set forth in section 1320.10 

of the proposed rule to individual 

subsidiaries performing such 

functions.23 The commenter stated that 

the Council should not apply the 

standards for systemic importance to 

non-FMU operating subsidiaries or at 

the parent-company level. The Council 

generally agrees with the comment; 

specifically, where there is a parent 

holding company that has, for example, 

separately incorporated FMU 

subsidiaries whose operations and 

activities are not significantly 

interconnected, the Council expects to 

separately apply the standards for 

systemic importance set forth in section 

1320.10 to each FMU subsidiary that 

potentially meets the standards of 

systemic importance. The Council 

generally does not expect to apply the 

standards for systemic importance to a 

parent holding company or subsidiaries 

that are not themselves FMUs. However, 

there may be instances of overlap 

between affiliates in the operation or 

management of FMU or PCS activities 

making it appropriate for the Council to 

evaluate whether more than one affiliate 

meets the standards for systemic 

importance, for example, if the parent 

holding company is actively managing 

the operations of a subsidiary that 

performs the function in question. 

Hearing date. The final rule includes 

a new definition of the term ‘‘hearing 

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Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 44767 

24See comment letter from LCH.Clearnet Group 

Limited (May 27, 2011) (hereinafter ‘‘LCH letter’’), 

p. 4. 

25See 12 U.S.C. 5462(7)(C)(iv). 

26See comment letter from The Options Clearing 

Corporation (May 26, 2011) (hereinafter ‘‘OCC 

letter’’), p. 2. 

27See comment letter from The Financial 

Services Roundtable (May 27, 2011) (hereinafter 

‘‘Financial Services Roundtable letter’’), p. 3. 

28See comment letter from Americans for 

Financial Reform (May 27, 2011) (hereinafter 

‘‘Americans for Financial Reform letter’’), pp. 3–4; 

and see comment letter from Better Markets (May 

27, 2011) (hereinafter ‘‘Better Markets letter’’), 

p. 2. 

date’’ to be used to establish the date by 

which the Council must provide an 

FMU written notification of the final 

determination of the Council after a 

hearing under section 1320.14 or section 

1320.15 of the final rule. The definition 

of the term ‘‘hearing date’’ distinguishes 

between hearings conducted through 

the submission of written materials and 

hearings conducted through oral 

argument and oral testimony. The 

Council expects to develop and 

implement more detailed procedures 

governing the conduct of hearings under 

this part at a later date. 

Payment, clearing, or settlement 

activity. One commenter suggested 

expanding the types of activities that 

fall within the definition of ‘‘payment, 

clearing, or settlement activity’’ to 

include key risk management controls 

exercised by clearinghouses.24 The 

Council considered this comment and 

determined that the concept of risk 

management controls are already 

included in the proposed definition of 

payment, clearing, or settlement 

activity, which encompasses ‘‘the 

management of risks and activities 

associated with continuing financial 

transactions.’’ 25 As such, expanding the 

definition of payment, clearing, or 

settlement activities to include risk 

management controls exercised by 

clearinghouses, but not other FMUs, is 

unnecessary. 

Supervisory Agency. One commenter 

noted that while the definition of the 

term ‘‘Supervisory Agency’’ in the 

proposed rule would extend only to 

designated FMUs, the context of other 

sections of the proposed rule requires 

that it also apply to undesignated FMUs 

that are being considered for 

designation.26 Consistent with this 

comment, the commenter suggested a 

technical revision to apply the 

definition to both designated and 

undesignated FMUs. The final rule 

incorporates the suggested technical 

revision so that the definition of the 

term ‘‘Supervisory Agency’’ will apply 

to both designated and undesignated 

FMUs. 

Systemically important and systemic 

importance. One commenter suggested 

that a term contained within the 

definitions of ‘‘systemically important’’ 

and ‘‘systemic importance’’— 

specifically, ‘‘significant liquidity or 

credit problems’’—should also be 

defined.27 Specifically, the commenter 

suggested that the Council should take 

into consideration definitions under 

deliberation by other G–20 countries, 

and coordinate the Council’s efforts 

with those of the Committee on 

Payment and Settlement Systems 

(CPSS) and the International 

Organization of Securities Commissions 

(IOSCO) when crafting these and other 

relevant definitions. The Council 

considered this comment and 

determined that it is appropriate to 

leave unchanged the statutory 

definitions of systemically important 

and systemic importance. Doing so does 

not preclude the Council from taking 

into account definitions under 

consideration by, or from coordinating 

its efforts with, international 

organizations, including CPSS and 

IOSCO. Moreover, the Council believes 

that the term ‘‘significant liquidity or 

credit problems’’ does not lend itself to 

a specific definition in the context of 

this final rule because the nature of 

liquidity and credit problems will 

depend on particular facts and 

circumstances, and the Council will 

take those facts and circumstances into 

consideration in making designation 

determinations. 

Section 1320.10 Factors for 

Consideration in Designation 

In the proposed rule, the Council 

listed five considerations that section 

804(a)(2) of the DFA requires the 

Council to consider in making such 

determinations. Of these considerations, 

four were specific: (1) Aggregate 

monetary value of transactions; (2) 

aggregate counterparty exposure; (3) 

relationships, interdependencies, or 

other interactions with market 

participants; and (4) the effect that a 

failure or disruption of an FMU would 

have on critical markets, financial 

institutions, or the broader financial 

system. The fifth consideration—any 

other factors that the Council deems 

appropriate—is open-ended. For each of 

the four specific considerations—the 

proposed rule contained non-exclusive 

subcategories to provide greater 

transparency as to how the Council will 

apply each of the specific 

considerations. The proposed rule did 

not provide for any categorical 

exclusions or exemptions. 

These considerations and 

subcategories, as well as the metrics 

discussed earlier, prompted a broad 

range of responses from commenters 

addressing how these considerations are 

formulated and the nature of proposed 

subcategories, including additional 

considerations for inclusion, and 

qualitative and quantitative assessments 

on the appropriateness of certain criteria 

or metrics. 

While several comments requested 

more detailed criteria, the Council 

believes that the establishment and 

application of rigid ‘‘bright-line’’ 

standards or thresholds would unduly 

constrain the designation process. The 

Council believes that the diverse nature 

of businesses operated by FMUs— 

spanning a broad range of asset classes, 

counterparties and market structures— 

does not lend itself to a fixed formula 

drawn consistently from an array of predetermined considerations. In this 

context, the Council believes that a 

reasonable degree of flexibility is 

appropriate to permit refinement of its 

approach to designations as market 

structure, technology and competition 

evolve across key markets. 

Two commenters observed that the 

standards for determining whether an 

FMU is, or is likely to become, 

systemically important are influenced 

by the financial market and economic 

conditions that might exist at the time 

of failure or disruption.28 In testing for 

systemic importance, both of these 

commenters recommended that the 

Council assume that the failure or 

disruption of an FMU occurs at a time 

of ‘‘extreme but plausible market 

conditions.’’ They warned against 

relying on purely historical data in 

identifying such conditions on the 

grounds that damage caused by a buildup of systemic risk is most likely to 

occur as a result of unprecedented 

events. The Council considered these 

comments and agrees that, in 

determining whether the failure or 

disruption of an FMU could create, or 

increase, the risk of significant liquidity 

or credit problems, it should generally 

consider a range of circumstances, 

including ‘‘extreme but plausible’’ 

events. In considering such 

circumstances, the Council does not 

anticipate limiting itself to historical 

data. 

With respect to the aggregate 

monetary value of transactions 

processed by an FMU, one commenter 

urged the Council to adopt a 

methodology for valuing derivatives 

transactions that does not distort 

comparisons made with securities or 

commodity transactions and suggested 

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44768 Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 

29LCH letter, supra, at 5. 

30See 12 U.S.C. 5461(a)(4). 

31See comment letters from the National 

Automated Clearing House Association (May 26, 

2011) (hereinafter ‘‘NACHA letter’’), p. 2 and 

MasterCard letter, supra, at 2. 

32See DTCC letter, supra, p.2; and see comment 

letter from The Clearing House Association, L.L.C. 

and The Clearing House Payments Company L.L.C. 

(May 20, 2011) (hereinafter ‘‘The Clearing House 

letter’’), p. 3. 

33Americans for Financial Reform letter, supra, 

at 4. 

34 In utilizing a more flexible approach, one 

commenter urged the Council to consider the 

potential for creating inconsistent standards that 

may lead to unintended competitive advantages. 

See DTCC letter, supra, p. 4. 

35See comment letter from the American Bankers 

Association (May 27, 2011) (hereinafter ‘‘ABA 

letter’’), p. 4. 

36See e.g., MasterCard letter, supra, at 2 and 

AMEX letter, supra, at 2. 

37MasterCard letter, supra, at 2, and NACHA 

letter, supra, at 3. 

38AMEX letter, supra, at 2–5, and NACHA letter, 

supra, at 3 

39See e.g., NACHA letter, supra, at 4. 

that the Council analyze evaluation 

criteria in light of the currencies in 

which an FMU’s obligations are 

denominated.29 This commenter also 

recommended that, in the case of an 

FMU that is a clearinghouse, any 

assessment of the FMU’s potential 

liquidity exposures should consider 

liquidity strains from: (i) The failure of 

a bank or dealer which is a market 

counterparty of the clearinghouse for 

the purposes of investment of margin or 

other collateral; (ii) a delay in, or 

disruption to, collateral liquidation in 

the event of a participant’s default; (iii) 

and the failure of a settlement bank. 

Finally, this commenter asserted that 

the Council should, in assessing the 

potential systemic importance of a 

clearinghouse, take into account its 

linkages to other clearinghouses and the 

regulatory oversight of an FMU’s 

participants or members. As a general 

matter, the Council agrees with these 

comments and expects to apply the 

considerations set forth in section 

1320.10 in a manner that is consistent 

with these recommendations, as 

appropriate to the circumstances of each 

FMU. However, as noted below, the 

Council does not believe that the extent 

of regulatory oversight of an FMU is a 

dispositive consideration because 

Congress recognized that most FMUs are 

already subject to regulatory oversight, 

but nevertheless found that 

enhancements to the existing regulation 

of systemically important FMUs are 

necessary to mitigate systemic risk and 

promote financial stability.30

Quantifiable benchmarks. Two 

commenters recommended that the final 

rule contain quantifiable benchmarks to 

better equip an FMU to assess the 

likelihood of being designated.31

Conversely, two other commenters 

recognized the difficulty of establishing 

quantifiable benchmarks that would 

function as a bright-line standard for 

determining whether an FMU is 

systemically important.32 The latter two 

commenters noted that bright-line 

designation criteria could overly restrict 

the Council’s ability to designate 

systemically important FMUs that might 

not otherwise meet certain size or risk 

thresholds, with one commenter 

specifically noting that it will be 

difficult to discern bright-line criteria in 

advance, as there is not always a 

correlation between size and risk. 

Another commenter noted that the 

Council should have flexibility to 

respond to the evolving market 

landscape, maintaining the ability to 

respond to unforeseen risks that may be 

difficult to define today.33

While clear, identifiable ‘‘triggers’’ 

could provide predictable outcomes, the 

application of bright-line standards is 

not likely to achieve the stated purposes 

of Title VIII given the breadth of FMUs 

operating across diverse and rapidly 

evolving marketplaces. The Council 

believes that any degree of certainty 

provided by quantifiable benchmarks is 

outweighed by the risk that such 

benchmarks could prevent the Council 

from designating systemically important 

FMUs in as effective a manner as 

necessary to achieve the objectives of 

Title VIII. 

Therefore, the Council does not 

believe that it can effectively fulfill its 

mandate to mitigate risk and promote 

financial stability if it were to establish 

in advance bright-line triggers for 

determining systemic importance. This 

conclusion is underscored by the lack of 

consensus among commenters on the 

relative merits of certain subcategories, 

metrics, or other considerations to 

inform the designation process. Given 

the breadth of affected markets, not all 

metrics can be applied consistently 

across firms or asset classes. The 

Council serves its statutory mandate in 

preserving the flexibility to seek out and 

utilize substitute subcategories and 

metrics when appropriate to better 

inform the Council’s assessment of 

systemic importance. 

At this stage, while the Council 

believes that it would be premature to 

pre-judge or otherwise narrow the 

identification and collection of 

pertinent data, the Council does not 

anticipate that it will employ all of the 

identified metrics in every 

determination, and expects to refine its 

approach, as appropriate, as its work 

progresses and markets evolve.34 The 

Council intends to rely on quantitative 

measures as inputs to the process, 

particularly for making its initial 

assessments at stage one of the 

designation process. As outlined in the 

NPRM, these metrics do not represent 

quantifiable thresholds, but rather 

provide an illustrative list of the types 

of metrics that will inform the Council’s 

work. The Council believes that, in most 

cases, much of this data is available to 

regulators, although the relevance of 

particular metrics will vary by 

institution or market segment. If data are 

not available or otherwise applicable, 

the Council will endeavor to identify 

appropriate substitutes. In addition, the 

Council will, to the extent practicable, 

seek to avoid unnecessary and 

unintended anti-competitive effects 

from its selection of appropriate metrics. 

Retail payment systems. Several 

commenters made suggestions regarding 

the Council’s consideration of FMUs 

operating retail payment systems, which 

one commenter defined as including 

check, Automated Clearing House 

(‘‘ACH’’), and debit and credit card 

networks.35 Specifically, a number of 

these commenters stated that retail 

payment systems are not systemically 

important and should not be designated 

as such for a variety of reasons, 

including the fact that they process low 

aggregate value transactions with broad 

availability of substitutes. These 

commenters urged the Council to 

reconsider its position against including 

a categorical exclusion of retail payment 

systems from consideration.36 Two 

commenters acknowledged the 

Council’s proposed rationale for not 

categorically excluding retail payment 

systems, but suggested that the final rule 

contain a rebuttable presumption that 

retail payment systems are not 

systemically important.37 Some 

commenters suggested that in the 

absence of a categorical exclusion, the 

Council consider the extent of existing 

regulatory oversight over retail payment 

systems, the different structures of retail 

payment systems, and finality in 

settlement.38 One of these commenters 

suggested that the Council broadly 

interpret the ‘‘availability of substitutes’’ 

subcategory contained in section 

1320.10(d)(2) of the proposed rule to 

include any payment method that 

satisfies the same payment need.39

Conversely, one commenter urged the 

Council to, at a minimum, designate 

large credit card systems, on the basis 

that not doing so would put the Council 

in a position where it would not be 

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Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 44769 

40Americans for Financial Reform letter, supra, at 

3. 

41See 12 U.S.C. 5463(c)(2)(C), which provides 

that an FMU may request a hearing before the 

Council to demonstrate that the Council’s proposed 

determination is not supported by substantial 

evidence. 

42See 12 U.S.C. 5461. 

43LCH letter, supra, at 5. 

44See comment letter from the Council of 

Institutional Investors (May 13, 2011) (hereinafter 

‘‘Council letter’’), p. 1. 

45Section 804 of the DFA requires a vote of no 

fewer than two-thirds of the members of the 

Council then serving, including the affirmative vote 

of the Chairperson of the Council, before the 

Council may either designate an FMU or rescind the 

designation of an FMU. 12 U.S.C. 5463. The stage 

1 and stage 2 processes, including the section 

1320.11 consultation process, precede any Council 

proposed or final determination to designate an 

FMU. 

46See e.g., AMEX letter, supra, at 5–6. 

47Financial Services Roundtable letter, supra, at 

2. 

fulfilling its responsibilities under the 

DFA.40

The Council recognizes that the 

definition of an FMU covers a large 

number of systems and a larger number 

of system operators. Within payment 

systems, the Council expects to focus on 

FMUs that operate large-value systems 

and not on FMUs that operate low-value 

systems for which there appear to be 

readily available and timely alternative 

payment mechanisms. However, the 

Council has decided against including 

in the final rule any categorical 

exclusion for FMUs operating retail 

payment or other systems, both because 

there are not clear distinctions between 

various types of systems, and because 

such an exclusion would impair the 

Council’s ability to respond 

appropriately to new information, 

changed circumstances, and future 

developments. The Council has also 

decided against including in the final 

rule a rebuttable presumption that retail 

payment systems are not systemically 

important. The Council believes that 

such a presumption is unnecessary 

because the initial task of determining 

whether any FMU is systemically 

important already rests with the 

Council.41

The Council also decided not to add 

considerations more narrowly tailored 

to the characteristics of retail payment 

systems, because the Council does not 

believe additional considerations are 

necessary or appropriate at this time. 

For example, as discussed above, the 

Council does not believe that the extent 

of regulatory oversight is an appropriate 

consideration.42 Lastly, under section 

1320.10(d)(2), the Council will consider 

with respect to retail payment systems, 

the availability of substitute 

mechanisms to make low-value 

payments. 

Subcategories. In the NPRM, the 

Council requested comment on whether 

the subcategories in the proposed rule 

for each specific consideration were 

clear, sufficiently detailed, and 

appropriate. To the extent applicable, 

the Council also sought feedback on the 

merits of potential additional 

subcategories, as well as the elimination 

or modification of the subcategories. 

The Council received several 

comments on the proposed 

subcategories. One commenter 

suggested that the Council consider a 

common methodology for determining 

the value of derivatives transactions 

across various asset classes and 

currencies; an FMU’s potential liquidity 

exposure in the event of a participant 

default; counterparty credit exposure to 

the FMU; and the nature of regulatory 

oversight and intermarket linkages of a 

particular FMU.43 Another commenter 

asserted that corporate governance 

arrangements and risk management 

oversight practices should be 

considered by the Council.44

The Council has considered these 

recommendations for designation 

determinations and has adopted the 

proposed subcategories in the final rule, 

with one technical change in 

section1320.10(c) regarding interactions 

with participants to make clear that the 

Council should consider interactions 

between participants of the same type of 

FMU or PCS activity. Importantly, these 

subcategories are neither exclusive nor 

rigid, and are provided as illustrative 

examples of potential criteria to 

improve transparency to market 

participants regarding factors that may 

be considered in the Council’s 

determinations. Nonetheless, the 

comments offered on the subcategories 

will inform the Council’s analysis. 

Furthermore, the Council may consider 

additional subcategories or find certain 

subcategories inapplicable to specific 

cases. 

Section 1320.11 Stage Two 

Consultation With Financial Market 

Utility 

In general. In the NPRM, the Council 

outlined the two-stage process that the 

Council, working with its committees, 

will use to designate FMUs. The NPRM 

described the stage one assessment 

process and explained that those FMUs 

that are determined to warrant further 

assessment will advance to stage two 

(such advancement does not require a 

two-thirds vote of Council members 

then serving).45 The NPRM explained 

that FMUs that advance to stage two 

will receive written notification from 

the Council that they are under 

consideration for designation, and that 

each such FMU may voluntarily submit 

written materials to the Council in 

support of, or in opposition to, 

designation by the Council within such 

time as the Council determines 

appropriate. The Council stated that the 

stage two consultation process would 

help the Council make better informed 

decisions in determining whether to 

propose or not propose the designation 

of an FMU. The Council also noted that 

the stage two consultation process 

would benefit an FMU by, for example, 

enabling it to demonstrate that it is not 

systemically important. 

Section 1320.11(a) Content of 

consultation notices. Two commenters 

suggested that the Council’s notices 

should specify why the Council is 

considering the FMU for potential 

designation so that the FMU can prepare 

an appropriate response.46 One 

commenter suggested that the Council 

provide the FMU with all applicable 

information the Council relied on in 

making the determination to advance an 

FMU to stage two.47 The Council agrees 

that some degree of specificity is 

appropriate in all circumstances, and 

additional clarification may be 

appropriate under certain 

circumstances, such as when the 

Council believes it will help an FMU 

tailor its response. Accordingly, under 

section 1320.12(a) of the final rule, the 

Council’s notice of proposed 

determination to designate an FMU as 

systemically important will contain 

proposed findings of fact supporting the 

Council’s proposed determination. 

Further, the Council expects that 

additional clarity, for example, may be 

appropriate where an FMU operates 

more than one system and the Council 

is focusing on only one particular 

system for designation. Under those 

circumstances, the Council expects that 

its notice will identify the system the 

Council is reviewing when considering 

the FMU for designation. 

The Council has decided not to 

include in the rule a standard or 

requirement to provide FMUs with the 

stage one information that informed its 

decision to advance an FMU to stage 

two. The Council anticipates relying 

upon publicly available information and 

data from the appropriate Supervisory 

Agencies during stage one. Accordingly, 

information obtained from one or more 

federal agencies with jurisdiction over 

an FMU could in some instances 

contain confidential supervisory 

information not appropriate for 

disclosure. Because an FMU under 

consideration will have an opportunity 

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44770 Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 

48AMEX letter, supra, at 5. 

49 DTCC letter, supra, at 6. 

50Council information requests to FMUs are 

covered by section 1320.20 of the proposed rule, 

which provides that the Council’s notice must 

describe the basis for the Council’s belief that the 

FMU is, or is likely to become, systemic important. 

51 5 U.S.C. 552. See 12 U.S.C. 5468(g). At the 

same time, the Council recognizes that the FMU 

itself (as opposed to the Council or a Supervisory 

Agency) may be required to disclose notices or 

information requests to the extent required by 

applicable law, particularly if the FMU is a public 

company required to comply with federal securities 

laws. 

52 12 U.S.C. 5322(a)(2)(N)(iv). 

53Financial Services Roundtable letter, supra, at 

2. 

54AMEX letter, supra, at 5. 

55Financial Services Roundtable letter, supra, at 

2. 

56For example, changes to § 1320.12 clarify that 

before the Council makes a final determination to 

rescind a designated FMU’s designation of systemic 

importance, the Council must provide the 

designated FMU with advance notice of the 

proposed rescission, including the right to request 

a written or oral hearing to challenge the proposed 

rescission. 

57See 12 U.S.C. 5463(a)(1). 58See LCH letter, supra, at 7. 59See DTCC letter, supra, at 4. 

to understand the information 

considered by the Council to be most 

relevant if the Council proposes to 

designate the FMU, the Council believes 

its decision not to include in the rule a 

standard or requirement regarding 

providing stage one information to an 

FMU to be appropriate. 

Confidentiality of notices. One 

commenter suggested that the final rule 

should clarify that the Council will keep 

confidential a notice or information 

request to an FMU regarding its 

potential designation.48 Another 

commenter suggested that the Council 

implement procedures that provide 

market participants the opportunity to 

offer input on the possible designation 

of an FMU.49 The Council considered 

these two comments and determined 

that it will not publicize the notices or 

information requests 50 submitted to 

FMUs. The Council understands that 

maintaining the confidentiality of the 

notices and information requests is 

important to prevent potentially 

destabilizing market speculation that 

could occur if the Council were to make 

such notices public. This approach also 

is consistent with the DFA, which 

provides that any materials prepared by 

the Council regarding its assessment of 

the systemic importance of FMUs shall 

be exempt from disclosure pursuant to 

the Freedom of Information Act.51

Finally, the Council will in its annual 

report to Congress disclose publicly its 

final designation determinations and the 

basis for those determinations as 

required by Section 112 of the DFA.52

Section 1320.11(b) Timeframe to 

respond to notices. In the NPRM, the 

Council requested comment on the 

merits of establishing a set time period 

for FMUs to submit written materials to 

the Council or whether flexibility in the 

time permitted for FMUs to submit 

information is appropriate. One 

commenter stated that FMUs should 

have at least 60 days to provide 

information to the Council after 

receiving a consultative notice and that 

the final rule should contain a 

mechanism by which an FMU can 

request an extension.53 Another 

commenter suggested that, in the 

absence of an emergency, FMUs should 

be given 90 days to respond to Council 

notices or requests.54 The Council 

considered these comments and 

determined that a set 60-day or 90-day 

response time is too inflexible and, in 

most cases, too long, particularly in 

light of the fact that any FMU that the 

Council may later propose to designate 

will have a second opportunity to 

submit written materials to the Council 

under section 1320.12 of the final rule. 

However, the Council believes that there 

may be exceptional circumstances 

where a 60-day, 90-day, or even longer 

response time may be appropriate. As a 

result, the Council believes that it is 

appropriate to preserve administrative 

flexibility to tailor a response time to 

the particular facts and circumstances 

for each FMU, so as to avoid pro forma 

delay in inappropriate circumstances. 

Therefore, the final rule is 

substantively similar to the proposed 

rule, except that the Council revised 

section 1320.11(b)(3) to require the 

Council to consider only those written 

materials that are ‘‘timely’’ submitted by 

the FMU. 

Section 1320.12 Advance Notice of 

Proposed Determination 

The proposed rule outlined the 

process by which the Council will 

provide an FMU with advance notice 

and an opportunity for a hearing to 

contest the Council’s proposed 

designation of an FMU as systemically 

important or a proposed rescission of a 

prior designation. One commenter noted 

that a two-thirds vote of the Council is 

necessary for a proposed designation 

and suggested that section 1320.12 

directly state the two-thirds Council 

vote standard.55 The Council agrees 

with the suggestion, and has revised 

section 1320.12(a) of the final rule to 

state that a proposed determination of 

designation or rescission shall be made 

by a vote of the Council under section 

1320.13(c). 

The Council has also made several 

non-substantive changes to section 

1320.12 to provide greater clarity.56

Section 1320.13 Council 

Determination Regarding Systemic 

Importance 

The proposed rule set out the 

requirement for the Council to designate 

an FMU and rescind the designation of 

an FMU depending on whether the 

FMU is, or is likely to become, 

systemically important. The proposed 

rule provided that any proposed or final 

determination by the Council is nondelegable and requires at least a twothirds vote of the voting members then 

serving, including the affirmative vote 

of the Chairperson of the Council. These 

requirements track the language in 

section 804(a)(1) of the DFA.57

In the NPRM, the Council proposed to 

reassess designated FMUs at least 

annually, as well as conduct stage one 

reviews of FMUs that appear to be, or 

that appear likely to become, 

systemically important. One commenter 

recommended adding a provision 

allowing an FMU to apply to be 

designated as systemically important as 

well as to apply to have such 

designation rescinded.58 Another 

commenter suggested that the final rule 

provide for periodic reexamination and 

reevaluation of FMU designations.59

The Council agrees that a periodic 

review of each designated FMU should 

help to maintain the integrity of the 

designation process and minimize the 

risk of unnecessary regulatory burdens 

on a designated FMU, particularly in 

light of the fact that an FMU’s role in 

the financial system will not be static. 

Similarly, the Council believes that a 

periodic review of any FMUs that are 

potentially systemically important, but 

that have not been designated as such, 

is important to evaluate any new 

developments in the roles these FMUs 

have in the financial system. As a result, 

the Council anticipates conducting 

reviews of both designated FMUs and 

potentially systemically important 

FMUs on a periodic basis. 

However, the Council believes that it 

is important to retain flexibility in the 

timing for periodic reviews in order to 

take into account evolving market 

conditions. Accordingly, the Council is 

not including a provision regarding 

periodic reviews in the final rule. In 

addition, taking into consideration the 

anticipated periodic reviews, the 

Council does not believe that it is 

necessary or appropriate to include 

provisions in the final rule for an 

‘‘application process’’ that an FMU 

could use to apply for designation or to 

seek rescission of a designation. 

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60LCH letter, supra, at 7. 

61Financial Services Roundtable letter, supra, at 

2. 

62 12 U.S.C. 5463(a)(1) (emphasis added). 

63LCH letter, supra, at 8. 

64LCH letter, supra, at 8. 

65See 12 U.S.C. 5463(d)(2). 

66LCH letter, supra, at 8. 

67See 12 U.S.C. 5363(e). 

Section 1320.13(a) Likely to become 

systemically important. One commenter 

suggested that when a designation is 

based on an assessment that an FMU is 

likely to become systemically important, 

as opposed to an FMU already being 

systemically important, the Council 

should make this differentiation clear.60

The Council considered this comment 

and expects that it will state in both its 

proposed determination letter, under 

section 1320.12, and its final 

determination letter, under section 

1320.15, whether the proposed and final 

determinations are based on whether 

the FMU is systemically important or is 

likely to become systemically important. 

The Council also recognizes that for 

newly formed or start-up FMUs, 

complete information regarding each of 

the four specific considerations may not 

be available or cover a sufficient 

historical period. In such cases, the 

Council will need to consider whether 

such an FMU ‘‘is likely to become 

systematically important.’’ In doing so, 

the Council will take into consideration 

available information regarding the four 

specific considerations, including 

estimates and projections of volume and 

value of cleared or settled transactions. 

In addition, the Council will consider 

the importance to the financial system 

and financial institutions of the 

market(s) and products to be supported 

by the FMU, the availability of 

substitutes for the FMU, the type and 

nature of expected participants and 

risks to be borne by the FMU. In 

designating a newly formed FMU that is 

likely to become systemically important, 

the Council also recognizes that the 

FMU may not in fact ultimately achieve 

over time a level and scope of activity 

that would pose systemic risk to the 

U.S. financial system. As a general 

matter, the Council expects to evaluate 

annually whether any previous 

designations should be rescinded. 

Where a newly formed FMU does not 

achieve a level and scope of activity that 

would pose systemic risk to the U.S. 

financial system, the Council would 

then consider rescinding the FMU 

designation under section 1320.13(b). 

Section 1320.13(c) Council 

membership at time of designation 

determinations. One commenter 

suggested that the Council make no 

proposed or final determinations 

regarding designations of FMUs until all 

voting and non-voting members of the 

Council are in place.61 The Council 

determined that this suggestion conflicts 

with language in the DFA specifying 

that designations are to be made ‘‘by a 

vote of not fewer than 2⁄3 of members 

then serving. * * * ’’ 62 As a result, the 

Council decided to retain the language 

of the proposed rule. The Council has 

also made several non-substantive 

changes to provide greater clarity with 

regard to proposed and final 

determinations. 

Section 1320.14 Emergency Exception 

The proposed rule authorized the 

Council to waive or modify any or all 

of the notice, hearing, and other 

requirements of sections 1320.11 and 

1320.12 with respect to an FMU if (1) 

the Council determined that the waiver 

or modification is necessary to prevent 

or mitigate an immediate threat to the 

financial system posed by the FMU and 

(2) the Council provides notice of the 

waiver or modification to the applicable 

FMU, as soon as practicable, but not 

later than 24 hours after the waiver or 

modification. Invoking the emergency 

exception would require the affirmative 

vote of at least two-thirds of the Council 

members then serving, including the 

affirmative vote of the Chairperson of 

the Council. The Council requested 

comment on whether it should provide 

a designated FMU an opportunity for a 

hearing to contest the Council’s 

determination to waive the notification 

and hearing requirements and the extent 

to which the opportunity for a hearing 

should mirror section 113(f)(4) and (5) 

of the DFA. 

One commenter suggested that, when 

the Council invokes the emergency 

exception, the Council should disclose 

the basis for its decision and give the 

FMU the option of an after-the-fact 

hearing to contest such decision.63 The 

Council agrees with the comment and 

has revised section 1320.14 accordingly. 

The procedures governing the conduct 

of an after-the-fact hearing are 

substantively similar to those contained 

in section 1320.12 of the final rule, 

except that any waiver or modification 

under the emergency exception will 

take effect immediately. 

Section 1320.15 Notification of Final 

Determination Regarding Systemic 

Importance 

The proposed rule set the deadline for 

the Council to notify an FMU of the 

Council’s final determination after 

providing the FMU notice of the 

proposed determination and an 

opportunity for a hearing. The proposed 

rule substantially mirrored the 

requirements contained in the DFA. The 

Council requested comment on whether 

it should provide findings of fact in its 

final determination notification to an 

FMU that did not timely request a 

hearing. One commenter suggested that 

the Council’s final determination 

notification to an FMU that did not 

timely request a hearing should include 

the Council’s factual findings.64 The 

Council has decided not to include 

findings of fact in the ‘‘notification of 

final determination if no hearing’’ 

because the section substantively 

mirrors the DFA.65 The Council revised 

section 1320.15 of the final rule to 

clarify the date by which the Council 

must provide to an FMU written 

notification of the final determination of 

the Council after a hearing. Specifically, 

the Council must provide written 

notification within 60 calendar days of 

the ‘‘hearing date.’’ The definition of the 

term ‘‘hearing date’’ distinguishes 

between hearings conducted through 

the submission of written materials and 

hearings conducted through oral 

argument and oral testimony. 

Section 1320.16 Extension of Time 

Period 

The proposed rule authorized the 

Council to extend the time periods by 

which an FMU may request a hearing 

and submit written materials to contest 

the Council’s proposed determination, 

the 24 hour time period for the Council 

to notify an FMU of an emergency 

designation, and the time period for the 

Council to notify an FMU of its final 

determination. One commenter 

suggested that FMUs should have no 

longer than 90 days to request a hearing 

and submit written materials to contest 

a proposed determination; that the 

Council should not extend the 24-hour 

time period for the Council to notify an 

FMU of an emergency designation; and 

that the Council should notify an FMU 

of its final determination within 90 

days.66 The Council considered the 

suggestions and decided to adopt 

section 1320.16 substantially as 

proposed, because it substantively 

mirrors the DFA and provides the 

Council with flexibility to grant itself 

and FMUs extensions of time as 

necessary or appropriate.67 The final 

rule contains one change in that it 

clarifies that the Council may extend 

‘‘any’’ time period established in 

sections 1320.12, 1320.14, or 1320.15. 

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68Financial Services Roundtable letter, supra, at 

4. 

69LCH letter, supra, at 9. 

70OCC letter, supra, at 2. 

71ABA letter, supra, at 4. 72ABA letter, supra, at 3. 

Section 1320.20 Council Information 

Collection and Coordination 

The proposed rule authorized the 

Council to require an FMU to submit 

information that the Council may 

require for the sole purpose of assessing 

whether the FMU is systemically 

important. However, before the Council 

may impose an information collection 

burden on an FMU, the Council must 

have reasonable cause to believe that the 

FMU meets the standards for systemic 

importance. The Council must also 

coordinate with the FMU’s Supervisory 

Agency to determine if the requested 

information is available from or may be 

obtained by the Supervisory Agency. If 

the Supervisory Agency is unable to 

provide the Council with the requested 

information in less than 15 calendar 

days after the date the material is 

requested, the Council may then request 

the information directly from the FMU. 

In requesting information from an FMU, 

the Council must provide a written 

explanation of the basis for the 

Council’s reasonable cause 

determination. The Council requested 

comment on the utility of providing an 

FMU with a written explanation of the 

basis for its belief that the FMU is 

systemically important. 

Several commenters generally 

supported the proposed approach. For 

example, one commenter agreed that, 

before requiring an FMU to provide 

information for purposes of assessing 

systemic significance, the Council 

should determine that it has reasonable 

cause to believe that the FMU meets the 

standards for systemic importance and 

that such information cannot be timely 

obtained from the FMU’s Supervisory 

Agency.68 Another commenter agreed 

that the Council should provide an FMU 

with a written explanation of the basis 

for the Council’s belief that the FMU is 

systemically important before requiring 

an FMU to provide information to the 

Council.69

Several commenters, on the other 

hand, suggested revisions. For example, 

one commenter stated that FMUs should 

be able to bypass information 

submission requirements by consenting 

to designation.70 Another commenter 

suggested that the Council redraft the 

regulatory text to make clear that the 

Council will not collect information 

directly from FMUs during stage one.71

This commenter also suggested that the 

Council take into account the expense of 

the FMU data collection process when 

it makes requests for information from 

retail FMUs.72

The Council considered these 

comments and has determined to adopt 

section 1320.20 substantially as 

proposed. The Council will not allow an 

FMU to bypass information submission 

requirements by consenting to 

designation. The Council has a 

responsibility to determine whether an 

FMU meets the standards for systemic 

importance. With respect to the 

suggestion that the Council restrict itself 

from collecting information directly 

from FMUs during stage one and that 

the Council take into account the 

expenses involved in data collection, 

the Council expects, as a general matter, 

not to collect any information from 

FMUs during stage one; rather, the 

Council expects that, in most instances, 

it will obtain the required information 

during stage one from publicly available 

sources and an FMU’s Supervisory 

Agency. Nevertheless, the final rule 

limits the Council’s ability to require 

FMUs to submit information by 

providing that the Council can request 

information only if it has reasonable 

cause to believe the FMU is, or is likely 

to become, systemically important and 

after coordinating with the FMU’s 

Supervisory Agency. Accordingly, the 

Council has not adopted additional 

restrictions on the methods or timing of 

collecting information from FMUs in the 

final rule because the Council believes 

that these restrictions appropriately 

balance the needs of the Council to 

timely obtain sufficient information 

about FMUs with the costs associated 

with collecting such information. Once 

the Council has completed at least one 

full cycle of designations and 

reevaluations of designated FMUs, the 

Council will reexamine whether any 

changes to its analytical framework are 

warranted, including whether any 

changes to the information-collection 

provisions of the rule may be 

appropriate. 

Moreover, the final rule makes 

clarifying changes to one of the 

prerequisites for the Council to collect 

information from an FMU. The 

proposed rule required the Council to 

determine that it has reasonable cause to 

believe that an FMU meets the 

standards for systemic importance. The 

final rule provides that the Council 

must determine that it has reasonable 

cause to believe that the FMU is, or is 

likely to become, systemically 

important. The Council made this 

change to conform this information 

collection prerequisite to the standard 

in section 1320.10 by which the Council 

will determine whether to make a 

proposed or final determination. 

III. Administrative Law Matters 

Regulatory Flexibility Act 

The Council certifies that this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities. The final rule 

would apply only to FMUs whose 

failure could pose a threat to the 

stability of the U.S. financial system. 

Size is an important factor, although not 

the exclusive factor, in assessing 

whether an FMU’s failure could pose a 

threat to the stability of the U.S. 

financial system. However, the Council 

does not expect the rule to directly 

affect a substantial number of small 

entities. Accordingly, a final regulatory 

flexibility analysis under the Regulatory 

Flexibility Act (5 U.S.C. 601, et seq.) is 

not required. 

Paperwork Reduction Act 

The collection of information 

contained in this final rule has been 

reviewed and approved by the Office of 

Management and Budget (OMB) in 

accordance with the requirements of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)) under control number 

1505–. An agency may not conduct or 

sponsor, and an organization is not 

required to respond to, a collection of 

information unless it displays a valid 

control number assigned by OMB. 

The collection of information that is 

contained in this final rulemaking is 

found in sections section 1320.11, 

section 1320.12, section 1320.14, and 

section 1320.20. The collection of 

information in section 1320.11 affords 

financial market utilities that are under 

consideration for designation, or 

rescission of designation, an 

opportunity to submit written materials 

to the Council in support of, or in 

opposition to, designation or rescission 

of designation. The collection of 

information in section 1320.12 is 

required by section 804(c)(2)(C) of the 

DFA and affords financial market 

utilities an opportunity to contest a 

proposed determination of the Council 

by requesting a hearing and submitting 

written materials (or, at the sole 

discretion of the Council, oral testimony 

and oral argument). The collection of 

information in section 1320.14 affords 

financial market utilities an opportunity 

to contest the Council’s waiver or 

modification of the notice, hearing, or 

other requirements contained in section 

1320.11 and section 1320.12 by 

requesting a hearing and submitting 

written materials (or, at the sole 

discretion of the Council, oral testimony 

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Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 44773 

and oral argument). The collection of 

information in section 1320.20 is 

authorized by section 809 of the DFA 

and will be used by the Council to 

determine whether to designate or 

rescind the designation of an FMU. The 

collection of information under section 

1320.20 is mandatory. The likely 

respondents are businesses or other forprofit and not-for-profit organizations. 

The estimated total annual reporting 

burden associated with the collection of 

information in this final rule is 500 

hours. 

Executive Order 12866 

Executive Orders 13563 and 12866 

direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. This rule 

has been designated a ‘‘significant 

regulatory action’’ although not 

economically significant, under section 

3(f) of Executive Order 12866. 

Accordingly, the rule has been reviewed 

by the Office of Management and 

Budget. 

IV. Text of Final Rule 

List of Subjects in 12 CFR Part 1320 

Administrative practice and 

procedure, Banks, Banking, Commodity 

futures, Electronic funds transfers, 

Financial market utilities, Securities. 

For the reasons set forth in the 

preamble, the Financial Stability 

Oversight Council establishes 12 CFR 

chapter XIII, consisting of part 1320, to 

read as follows: 

CHAPTER XIII—FINANCIAL STABILITY 

OVERSIGHT COUNCIL 

PART 1320—DESIGNATION OF 

FINANCIAL MARKET UTILITIES 

Sec. 

Subpart A—General 

1320.1 Authority and purpose. 

1320.2 Definitions. 

Subpart B—Consultations, Determinations 

and Hearings 

1320.10 Factors for consideration in 

designations. 

1320.11 Consultation with financial market 

utility. 

1320.12 Advance notice of proposed 

determination 

1320.13 Council determination regarding 

systemic importance. 

1320.14 Emergency exception. 

1320.15 Notification of final determination 

regarding systemic importance. 

1320.16 Extension of time periods. 

Subpart C—Information Collection 

1320.20 Council information collection and 

coordination. 

Authority: 12 U.S.C. 5321; 12 U.S.C. 5322; 

12 U.S.C. 5463; 12 U.S.C. 5468; 12 U.S.C. 

5469 

Subpart A—General 

§ 1320.1 Authority and purpose. 

(a) Authority. This part is issued by 

the Financial Stability Oversight 

Council under sections 111, 112, 804, 

809, and 810 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’) (12 U.S.C. 

5321, 5322, 5463, 5468, and 5469). 

(b) Purpose. The purpose of this part 

is to set forth the standards and 

procedures governing the Council’s 

designation of a financial market utility 

that the Council determines is, or is 

likely to become, systemically 

important. 

§ 1320.2 Definitions. 

The terms used in this part have the 

following meanings: 

Appropriate Federal banking agency. 

The term ‘‘appropriate Federal banking 

agency’’ has the same meaning as in 

section 3(q) of the Federal Deposit 

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

amended. 

Board of Governors. The term ‘‘Board 

of Governors’’ means the Board of 

Governors of the Federal Reserve 

System. 

Council. The term ‘‘Council’’ means 

the Financial Stability Oversight 

Council. 

Designated clearing entity. The term 

‘‘designated clearing entity’’ means a 

designated financial market utility that 

is a derivatives clearing organization 

registered under section 5b of the 

Commodity Exchange Act (7 U.S.C. 

7a–1) or a clearing agency registered 

with the Securities and Exchange 

Commission under section 17A of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78q–1). 

Designated financial market utility. 

The term ‘‘designated financial market 

utility’’ means a financial market utility 

that the Council has designated as 

systemically important under § 1320.13. 

Financial institution. The term 

‘‘financial institution’’— 

(1) Means— 

(i) A depository institution as defined 

in section 3 of the Federal Deposit 

Insurance Act (12 U.S.C. 1813); 

(ii) A branch or agency of a foreign 

bank, as defined in section 1(b) of the 

International Banking Act of 1978 (12 

U.S.C. 3101); 

(iii) An organization operating under 

section 25 or 25A of the Federal Reserve 

Act (12 U.S.C. 601–604a and 611 

through 631); 

(iv) A credit union, as defined in 

section 101 of the Federal Credit Union 

Act (12 U.S.C. 1752); 

(v) A broker or dealer, as defined in 

section 3 of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c); 

(vi) An investment company, as 

defined in section 3 of the Investment 

Company Act of 1940 (15 U.S.C. 80a–3); 

(vii) An insurance company, as 

defined in section 2 of the Investment 

Company Act of 1940 (15 U.S.C. 80a–2); 

(viii) An investment adviser, as 

defined in section 202 of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b–2); 

(ix) A futures commission merchant, 

commodity trading advisor, or 

commodity pool operator, as defined in 

section 1a of the Commodity Exchange 

Act (7 U.S.C. 1a); and 

(x) Any company engaged in activities 

that are financial in nature or incidental 

to a financial activity, as described in 

section 4 of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1843(k)). 

(2) Does not include designated 

contract markets, registered futures 

associations, swap data repositories, and 

swap execution facilities registered 

under the Commodity Exchange Act (7 

U.S.C. 1 et seq.), or national securities 

exchanges, national securities 

associations, alternative trading 

systems, securities information 

processors solely with respect to the 

activities of the entity as a securities 

information processor, security-based 

swap data repositories, and swap 

execution facilities registered under the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), or designated 

clearing entities, provided that the 

exclusions in this paragraph apply only 

with respect to the activities that require 

the entity to be so registered. 

Financial market utility. The term 

‘‘financial market utility’’— 

(1) Means any person that manages or 

operates a multilateral system for the 

purpose of transferring, clearing, or 

settling payments, securities, or other 

financial transactions among financial 

institutions or between financial 

institutions and the person; and 

(2) Does not include— 

(i) Designated contract markets, 

registered futures associations, swap 

data repositories, and swap execution 

facilities registered under the 

Commodity Exchange Act (7 U.S.C. 1 et 

seq.), or national securities exchanges, 

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national securities associations, 

alternative trading systems, securitybased swap data repositories, and swap 

data execution facilities registered 

under the Securities Exchange Act of 

1934 (15 U.S.C. 78a et seq.), solely by 

reason of their providing facilities for 

comparison of data respecting the terms 

of settlement of securities or futures 

transactions effected on such exchange 

or by means of any electronic system 

operated or controlled by such entities, 

provided that the exclusions in this 

clause apply only with respect to the 

activities that require the entity to be so 

registered; and 

(ii) Any broker, dealer, transfer agent, 

or investment company, or any futures 

commission merchant, introducing 

broker, commodity trading advisor, or 

commodity pool operator, solely by 

reason of functions performed by such 

institution as part of brokerage, dealing, 

transfer agency, or investment company 

activities, or solely by reason of acting 

on behalf of a financial market utility or 

a participant therein in connection with 

the furnishing by the financial market 

utility of services to its participants or 

the use of services of the financial 

market utility by its participants, 

provided that services performed by 

such institution do not constitute 

critical risk management or processing 

functions of the financial market utility. 

Hearing date. The term ‘‘hearing 

date’’ means the later of— 

(1) The date on which the Council 

receives all of the written materials 

timely submitted by the financial 

market utility for a hearing that is 

conducted without oral testimony; or 

(2) The final date on which the 

Council convenes for the financial 

market utility to present oral testimony. 

Payment, clearing, or settlement 

activity. 

(1) The term ‘‘payment, clearing, or 

settlement activity’’ means an activity 

carried out by 1 or more financial 

institutions to facilitate the completion 

of financial transactions, but shall not 

include any offer or sale of a security 

under the Securities Act of 1933 (15 

U.S.C. 77a et seq.), or any quotation, 

order entry, negotiation, or other pretrade activity or execution activity. 

(2) For purposes of paragraph (1) of 

this definition, the term ‘‘financial 

transaction’’ includes— 

(i) Funds transfers; 

(ii) Securities contracts; 

(iii) Contracts of sale of a commodity 

for future delivery; 

(iv) Forward contracts; 

(v) Repurchase agreements; 

(vi) Swaps; 

(vii) Security-based swaps; 

(viii) Swap agreements; 

(ix) Security-based swap agreements; 

(x) Foreign exchange contracts; 

(xi) Financial derivatives contracts; 

and 

(xii) Any similar transaction that the 

Council determines to be a financial 

transaction for purposes of this part. 

(3) When conducted with respect to a 

financial transaction, payment, clearing, 

and settlement activities may include— 

(i) The calculation and 

communication of unsettled financial 

transactions between counterparties; 

(ii) The netting of transactions; 

(iii) Provision and maintenance of 

trade, contract, or instrument 

information; 

(iv) The management of risks and 

activities associated with continuing 

financial transactions; 

(v) Transmittal and storage of 

payment instructions; 

(vi) The movement of funds; 

(vii) The final settlement of financial 

transactions; and 

(viii) Other similar functions that the 

Council may determine. 

(4) Payment, clearing, and settlement 

activities shall not include public 

reporting of swap transactions under 

section 727 or 763(i) of the Dodd-Frank 

Act. 

Supervisory Agency. (1) The term 

‘‘Supervisory Agency’’ means the 

Federal agency that— 

(i) Has primary jurisdiction over a 

designated financial market utility 

under Federal banking, securities, or 

commodity futures laws as follows— 

(A) The Securities and Exchange 

Commission, with respect to a 

designated financial market utility that 

is a clearing agency registered with the 

Securities and Exchange Commission; 

(B) The Commodity Futures Trading 

Commission, with respect to a 

designated financial market utility that 

is a derivatives clearing organization 

registered with the Commodity Futures 

Trading Commission; 

(C) The appropriate Federal banking 

agency, with respect to a designated 

financial market utility that is an 

institution described in section 3(q) of 

the Federal Deposit Insurance Act; 

(D) The Board of Governors, with 

respect to a designated financial market 

utility that is otherwise not subject to 

the jurisdiction of any agency listed in 

paragraphs (1)(i), (ii), and (iii) of this 

definition; or 

(ii) Would have primary jurisdiction 

over a financial market utility if the 

financial market utility were a 

designated financial market utility 

under paragraph (1) of this definition. 

(2) If a financial market utility is 

subject to the jurisdictional supervision 

of more than one agency listed in 

paragraph (1) of this definition, then 

such agencies should agree on one 

agency to act as the Supervisory 

Agency, and if such agencies cannot 

agree on which agency has primary 

jurisdiction, the Council shall decide 

which is the Supervisory Agency for 

purposes of this part. 

Systemically important and systemic 

importance. The terms ‘‘systemically 

important’’ and ‘‘systemic importance’’ 

mean a situation where the failure of 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. 

Subpart B—Consultations, 

Determinations and Hearings 

§ 1320.10 Factors for consideration in 

designations. 

In making any proposed or final 

determination with respect to whether a 

financial market utility is, or is likely to 

become, systemically important under 

this part, the Council shall take into 

consideration: 

(a) The aggregate monetary value of 

transactions processed by the financial 

market utility, including without 

limitation— 

(1) The number of transactions 

processed, cleared or settled; 

(2) The value of transactions 

processed, cleared or settled; and 

(3) The value of other financial flows. 

(b) The aggregate exposure of the 

financial market utility to its 

counterparties, including without 

limitation— 

(1) Credit exposures, which includes 

but is not limited to potential future 

exposures; and 

(2) Liquidity exposures. 

(c) The relationship, 

interdependencies, or other interactions 

of the financial market utility with other 

financial market utilities or payment, 

clearing, or settlement activities, 

including without limitation 

interactions with different types of 

participants in those utilities or 

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, including without 

limitation— 

(1) Role of the financial market utility 

in the market served; 

(2) Availability of substitutes; 

(3) Concentration of participants; 

(4) Concentration by product type; 

(5) Degree of tiering; and 

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(6) Potential impact or spillover in the 

event of a failure or disruption. 

(e) Any other factors that the Council 

deems appropriate. 

§ 1320.11 Consultation with financial 

market utility. 

Before providing a financial market 

utility notice of a proposed 

determination under § 1320.12, the 

Council shall provide the financial 

market utility with— 

(a) Written notice that the Council is 

considering whether to make a proposed 

determination with respect to the 

financial market utility under § 1320.13; 

and 

(b) An opportunity to submit written 

materials to the Council, within such 

time as the Council determines to be 

appropriate, concerning— 

(1) Whether the financial market 

utility is systemically important taking 

into consideration the factors set out in 

§ 1320.10; and 

(2) Proposed changes by the financial 

market utility that could— 

(i) Reduce or increase the inherent 

systemic risk the financial market utility 

poses and the need for designation 

under § 1320.13; or 

(ii) Reduce or increase the 

appropriateness of rescission under 

§ 1320.13. 

(3) The Council shall consider any 

written materials timely submitted by 

the financial market utility under this 

section before making a proposed 

determination under section 1320.13. 

§ 1320.12 Advance notice of proposed 

determination. 

(a) Notice of proposed determination 

and opportunity for hearing. Before 

making any final determination on 

designation or rescission under 

§ 1320.13, the Council shall propose a 

determination and provide the financial 

market utility with advance notice of 

the proposed determination, and 

proposed findings of fact supporting 

that determination. A proposed 

determination shall be made by a vote 

of the Council in the manner described 

in § 1320.13(c). 

(b) Request for hearing. Within 30 

calendar days from the date of any 

provision of notice of the proposed 

determination of the Council, the 

financial market utility may request, in 

writing, an opportunity for a written or 

oral hearing before the Council to 

demonstrate that the proposed 

designation or rescission of designation 

is not supported by substantial 

evidence. 

(c) Written submissions. Upon receipt 

of a timely request, the Council shall fix 

a time, not more than 30 calendar days 

after receipt of the request, unless 

extended by the Council at the request 

of the financial market utility, and place 

at which the financial market utility 

may appear, personally or through 

counsel, to submit written materials, or, 

at the sole discretion of the Council, oral 

testimony and oral argument. 

§ 1320.13 Council determination regarding 

systemic importance. 

(a) Designation determination. The 

Council shall designate a financial 

market utility if the Council determines 

that the financial market utility is, or is 

likely to become, systemically 

important. 

(b) Rescission determination. The 

Council shall rescind a designation of 

systemic importance for a designated 

financial market utility if the Council 

determines that the financial market 

utility no longer meets the standards for 

systemic importance. 

(c) Vote required. Any determination 

under paragraph (a) or (b) of this section 

and any proposed determination under 

§ 1320.12 shall— 

(1) Be made by the Council and must 

not be delegated by the Council; and 

(2) Require the vote of not fewer than 

two-thirds of the members of the 

Council then serving, including the 

affirmative vote of the Chairperson of 

the Council. 

(d) Consultations. Before making any 

determination under paragraph (a) or (b) 

of this section or any proposed 

determination under § 1320.12, the 

Council shall consult with the relevant 

Supervisory Agency and the Board of 

Governors. 

§ 1320.14 Emergency exception. 

(a) Emergency exception. 

Notwithstanding §§ 1320.11 and 

1320.12, the Council may waive or 

modify any or all of the notice, hearing, 

and other requirements of §§ 1320.11 

and 1320.12 with respect to a financial 

market utility if— 

(1) The Council determines that the 

waiver or modification is necessary to 

prevent or mitigate an immediate threat 

to the financial system posed by the 

financial market utility; and 

(2) The Council provides notice of the 

waiver or modification, and an 

explanation of the basis for the waiver 

or modification, to the financial market 

utility concerned, as soon as practicable, 

but not later than 24 hours after the 

waiver or modification. 

(b) Vote required. Any determination 

by the Council under paragraph (a) to 

waive or modify any of the requirements 

of §§ 1320.11 and 1320.12 shall— 

(1) Be made by the Council; and 

(2) Require the affirmative vote of not 

fewer than two-thirds of members then 

serving, including the affirmative vote 

of the Chairperson of Council. 

(c) Request for hearing. Within 10 

calendar days from the date of any 

provision of notice of waiver or 

modification of the Council, the 

financial market utility may request, in 

writing, an opportunity for a written or 

oral hearing before the Council to 

demonstrate that the basis for the waiver 

or modification is not supported by 

substantial evidence. 

(d) Written submissions. Upon receipt 

of a timely request, the Council shall fix 

a time, not more than 30 calendar days 

after receipt of the request, and place at 

which the financial market utility may 

appear, personally or through counsel, 

to submit written materials, or, at the 

sole discretion of the Counsel, oral 

testimony and oral argument. 

(e) Notification of hearing 

determination. If a financial market 

utility makes a timely request for a 

hearing under paragraph (c) of this 

section, the Council shall, not later than 

30 calendar days after the hearing date, 

notify the financial market utility of the 

determination of the Council, which 

shall include a statement of the basis for 

the determination of the Council. 

§ 1320.15 Notification of final 

determination regarding systemic 

importance. 

(a) Notification of final determination 

after a hearing. Within 60 calendar days 

of the hearing date, the Council shall 

provide to the financial market utility 

written notification of the final 

determination of the Council under 

§ 1320.13, which shall include findings 

of fact upon which the determination of 

the Council is based. 

(b) Notification of final determination 

if no hearing. If the Council does not 

receive a timely request for a hearing 

under § 1320.12, the Council shall 

provide the financial market utility 

written notification of the final 

determination of the Council under 

§ 1320.13 not later than 30 calendar 

days after the expiration of the date by 

which a financial market utility could 

have requested a hearing. 

§ 1320.16 Extension of time periods. 

The Council may extend any time 

period established in §§ 1320.12, 

1320.14, or 1320.15 as the Council 

determines to be necessary or 

appropriate. 

Subpart C—Information Collection 

§ 1320.20 Council information collection 

and coordination. 

(a) Information collection to assess 

systemic importance. The Council may 

require any financial market utility to 

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44776 Federal Register / Vol. 76, No. 144 / Wednesday, July 27, 2011 / Rules and Regulations 

1 17 CFR part 40 Provisions Common to 

Registered Entities, 75 FR 67282 (Nov. 2, 2010). 

2Sections 728 and 733 of the Dodd-Frank Act 

created two new categories of registered entities, 

SEFs and SDRs. Provisions related to the regulation 

of these entities will be promulgated in other 

Commission rulemakings. 

submit such information to the Council 

as the Council may require for the sole 

purpose of assessing whether the 

financial market utility is systemically 

important. 

(b) Prerequisites to information 

collection. Before requiring any 

financial market utility to submit 

information to the Council under 

paragraph (a) of this section, the Council 

shall— 

(1) Determine that it has reasonable 

cause to believe that the financial 

market utility is, or is likely to become, 

systemically important, considering the 

standards set out in § 1320.10; or 

(2) Determine that it has reasonable 

cause to believe that the designated 

financial market utility is no longer, or 

is no longer likely to become, 

systemically important, considering the 

standards set out in § 1320.10; and 

(3) Coordinate with the Supervisory 

Agency for the financial market utility 

to determine if the information is 

available from, or may be obtained by, 

the Supervisory Agency in the form, 

format, or detail required by the 

Council. 

(c) Timing of response from the 

appropriate Supervisory Agency. If the 

information, reports, records, or data 

requested by the Council under 

paragraph (b)(3) of this section are not 

provided in full by the Supervisory 

Agency in less than 15 calendar days 

after the date on which the material is 

requested, the Council may request the 

information directly from the financial 

market utility with notice to the 

Supervisory Agency. 

(d) Notice to financial market utility 

of information collection requirement. 

In requiring a financial market utility to 

submit information to the Council, the 

Council shall provide to the financial 

market utility the following— 

(1) Written notice that the Council is 

considering whether to make a proposed 

determination under § 1320.12; and 

(2) A description of the basis for the 

Council’s belief under paragraphs (b)(1) 

or (b)(2) of this section. 

Dated: July 20, 2011. 

Alastair Fitzpayne, 

Deputy Chief of Staff and Executive Secretary, 

Department of the Treasury. 

[FR Doc. 2011–18948 Filed 7–26–11; 8:45 am] 

BILLING CODE 4810–25–P–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 40 

RIN 3038–AD07 

Provisions Common to Registered 

Entities 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final Rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’) is 

adopting regulations to implement 

certain statutory provisions of the DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). The 

Commission also is amending its 

existing regulations governing the 

submission of new products, rules, and 

rule amendments. The final regulations 

establish the Commission’s procedural 

framework for the submission of new 

products, rules, and rule amendments 

by designated contract markets 

(‘‘DCMs’’), derivatives clearing 

organizations (‘‘DCOs’’), swap execution 

facilities (‘‘SEFs’’), and swap data 

repositories (‘‘SDRs’’). In addition, the 

final regulations prohibit event 

contracts involving certain excluded 

commodities, establish special 

submission procedures for certain rules 

proposed by systemically important 

derivatives clearing organizations 

(‘‘SIDCOs’’), and stay the certifications 

and the approval review periods of 

novel derivative products pending 

jurisdictional determinations. 

DATES: Effective date: September 26, 

2011. 

FOR FURTHER INFORMATION CONTACT: 

Bella Rozenberg, Assistant Deputy 

Director, Division of Market Oversight 

(‘‘DMO’’), at 202–418–5119 or 

brozenberg@cftc.gov, Riva Spear 

Adriance, Associate Director, DMO at 

202–418–5494 or radriance@cftc.gov, 

Phyllis Dietz, Associate Director, 

Division of Clearing and Intermediary 

Oversight at 202–418–5449 or 

pdietz@cftc.gov, and Joseph R. Cisewski, 

Attorney Advisor, DMO at 202–418– 

5718 or jcisewski@cftc.gov, in each case, 

at the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

II. Amendments to Part 40 of the 

Commission’s Regulations 

a. Definitions (§ 40.1) 

b. Listing Products for Trading by 

Certification (§ 40.2) 

c. Voluntary Submission of New Products 

for Commission Review and Approval 

(§ 40.3) 

d. Amendments to Terms or Conditions of 

Enumerated Agricultural Contracts 

(§ 40.4) 

e. Voluntary Submission of Rules for 

Commission Review and Approval 

(§ 40.5) 

f. Self-Certification of Rules (§ 40.6) 

g. Delegations (§ 40.7) 

h. Availability of Public Information 

(§ 40.8) 

i. Special Certification Procedures for 

Submission of Rules by Systemically 

Important Derivatives Clearing 

Organizations (§ 40.10) 

j. Review of Event Contracts Based Upon 

Certain Excluded Commodities (§ 40.11) 

k. Staying of Certification and Tolling of 

Review Period Pending Jurisdictional 

Determination (§ 40.12) 

III. Cost Benefit Considerations 

IV. Related Matters 

a. Regulatory Flexibility Act 

b. Paperwork Reduction Act 

I. Background 

On November 2, 2010, the 

Commission published proposed 

regulations to implement certain 

statutory provisions of the Dodd-Frank 

Act and to amend existing regulations 

governing the submission of new 

products, rules, and rule amendments.1

The Commission is hereby adopting 

final regulations 40.1 through 40.8, as 

amended below, and new regulations 

40.10 through 40.12 to implement 

certain provisions of the Dodd-Frank 

Act, to clarify submission-related 

regulatory obligations of registered 

entities, and to enhance the 

Commission’s administration of the 

Commodity Exchange Act (‘‘Act’’). 

The Commission’s final regulations 

implement, among other provisions, 

Section 745 of the Dodd-Frank Act, 

which, effective July 16, 2011, amended 

Section 5c of the Act to provide new 

procedures for the submission of rules 

and rule amendments by DCMs, SEFs, 

DCOs, and SDRs.2 The final regulations 

also amend existing requirements for 

the submission of new products and 

prohibit the listing and clearing of 

products based upon certain excluded 

commodities, if such products involve 

statutorily-specified activities or similar 

activities determined, by rule or 

regulation, to be contrary to the public 

interest. In addition, the Commission is 

adopting special submission procedures 

for certain risk-related rules proposed 

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