Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations 65543 

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

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

2The risk-management standards promulgated by 

the Board under section 805(a)(1)(A) apply to 

designated FMUs for which the Board is the 

Supervisory Agency. The term ‘‘Supervisory 

Agency’’ is defined in Title VIII as the ‘‘Federal 

agency that has primary jurisdiction over a 

designated financial market utility under Federal 

banking, securities, or commodity futures laws’’ (12 

U.S.C. 5462(8)). Currently, the Board is the 

Supervisory Agency for two FMUs that have been 

designated by the Council—The Clearing House 

Payments Company, L.L.C., on the basis of its role 

as operator of the Clearing House Interbank 

Payments System, and CLS Bank International. 

These standards also apply to any designated FMU 

for which another Federal banking agency is the 

appropriate Title VIII Supervisory Agency. At this 

time, there are no designated FMUs in this category. 

3 12 CFR part 234. 

4At the time of the rulemaking, the Board 

acknowledged that designated FMUs that operate as 

central securities depositories or CCPs generally 

would be subject to the risk-management standards 

promulgated by the U.S. Commodity Futures 

Trading Commission (CFTC) or U.S. Securities and 

Exchange Commission (SEC). The Board, however, 

adopted standards for designated FMUs that operate 

as central securities depositories, CCPs, or both, to 

address the event that a designated FMU operates 

as one of the two types of FMUs and is not required 

to register as a derivatives clearing organization or 

a clearing agency with the CFTC or SEC, 

respectively. 

5 12 CFR 234.1. 

6The relevant international standards were the 

2001 CPSS report on the Core Principles for 

Systemically Important Payment Systems, the 2001 

CPSS–IOSCO report on the Recommendations for 

Securities Settlement Systems, and the 2004 CPSS– 

IOSCO report on the Recommendations for Central 

Counterparties. The Board previously incorporated 

these international standards into its PSR policy. 

7The PFMI also establishes minimum 

requirements for trade repositories, which have 

emerged internationally as an important category of 

financial market infrastructure. The term ‘‘financial 

market utility,’’ as defined in Title VIII of the Act, 

excludes trade repositories. 

8Concurrent with the NPRM, the Board issued in 

a separate Federal Register notice proposed 

revisions to part I of the PSR policy based on the 

PFMI. These revisions incorporated the headline 

standards from the 24 principles with no 

modification as the relevant risk-management 

standards for all central securities depositories, 

securities settlement systems, CCPs, and trade 

repositories, as well as certain payment systems. (79 

FR 2838, January 16, 2014.) 

FEDERAL RESERVE SYSTEM 

12 CFR Part 234 

[Regulation HH; Docket No. R–1477] 

RIN No. 7100–AE09 

Financial Market Utilities 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Final rule. 

SUMMARY: The Board of Governors of the 

Federal Reserve System (Board) is 

publishing a final rule revising the riskmanagement standards in its Regulation 

HH, Designated Financial Market 

Utilities. The Board is replacing the 

existing two sets of risk-management 

standards for payment systems and for 

central securities depositories and 

central counterparties with a common 

set of risk-management standards for all 

types of designated financial market 

utilities (FMUs) and making conforming 

changes to the definitions. The new 

common set of risk-management 

standards and the definitions are based 

on the Principles for Financial Market 

Infrastructures (PFMI), which were 

developed by the Committee on 

Payment and Settlement Systems 

(CPSS) and the Technical Committee of 

the International Organization of 

Securities Commissions (IOSCO) and 

published in April 2012. 

DATES: This final rule is effective 

December 31, 2014. Designated FMUs 

must be in compliance with the rule by 

the effective date, with the exception of 

establishing plans for recovery and 

orderly wind-down, set forth in 

§ 234.3(a)(3)(iii); addressing uncovered 

credit losses, set forth in 

§ 234.3(a)(4)(vi); addressing liquidity 

shortfalls, set forth in § 234.3(a)(7)(viii); 

maintaining sufficient liquid net assets 

funded by equity and a viable capital 

plan, set forth in § 234.3(a)(15)(i) and 

(ii); managing risks arising in tiered 

participation arrangements, set forth in 

§ 234.3(a)(19); and providing 

comprehensive public disclosure, set 

forth in § 234.3(a)(23)(iv), which have a 

compliance date of December 31, 2015. 

FOR FURTHER INFORMATION CONTACT: 

Jennifer A. Lucier, Deputy Associate 

Director (202) 872–7581, Paul Wong, 

Manager (202) 452–2895, or Emily A. 

Caron, Senior Financial Services 

Analyst (202) 452–5261, Division of 

Reserve Bank Operations and Payment 

Systems; Christopher W. Clubb, Special 

Counsel (202) 452–3904, Legal Division; 

for users of Telecommunications Device 

for the Deaf (TDD) only, contact (202) 

263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Title VIII of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (Dodd-Frank Act or Act), titled the 

‘‘Payment, Clearing, and Settlement 

Supervision Act of 2010,’’ was enacted 

to mitigate systemic risk in the financial 

system and to promote financial 

stability, in part, through an enhanced 

supervisory framework for FMUs that 

have been designated systemically 

important (designated FMUs) by the 

Financial Stability Oversight Council 

(Council).1 Section 803(6) of the Act 

defines an FMU as a 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. Pursuant to 

section 805(a)(1)(A) of the Act, the 

Board is required to prescribe riskmanagement standards governing the 

operations related to the payment, 

clearing, and settlement activities of 

certain designated FMUs.2

In July 2012, the Board adopted 

Regulation HH, Designated Financial 

Market Utilities, to implement, among 

other things, the statutory provisions 

under section 805(a)(1)(A) of the Act.3

Regulation HH established two sets of 

risk-management standards for certain 

designated FMUs: One set of riskmanagement standards for designated 

FMUs that operate a payment system 

(§ 234.3(a)) and another set for 

designated FMUs that operate a central 

securities depository or a central 

counterparty (CCP) (§ 234.4(a)).4 The 

Regulation HH risk-management 

standards do not apply to designated 

FMUs for which the U.S. Commodity 

Futures Trading Commission (CFTC) or 

the U.S. Securities and Exchange 

Commission (SEC) is the Supervisory 

Agency under Title VIII of the DoddFrank Act.5

In adopting Regulation HH, the Board 

considered relevant international 

standards that were in effect at the time 

the rule was proposed in March 2011 as 

well as the Board’s Federal Reserve 

Policy on Payment System Risk (PSR 

policy).6 In April 2012, CPSS and 

IOSCO published the PFMI, which 

updated, harmonized, strengthened, and 

replaced the previous international riskmanagement standards for payment 

systems that are systemically important, 

central securities depositories, securities 

settlement systems, and CCPs.7 The 

PFMI is now widely recognized as the 

most relevant set of international riskmanagement standards for payment, 

clearing, and settlement systems. 

In January 2014, the Board published 

for comment a notice of proposed 

rulemaking (NPRM) to revise the riskmanagement standards in Regulation 

HH based on the PFMI.8 The revisions 

were proposed to replace the riskmanagement standards in §§ 234.3 and 

234.4 with a common set of riskmanagement standards applicable to all 

types of designated FMUs in proposed 

§ 234.3. The Board also made 

conforming changes to the definitions in 

proposed § 234.2. The public comment 

period for the proposed revisions closed 

on March 31, 2014. 


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9The Board is also making several technical edits, 

which are not specifically addressed in the 

discussion below. 

10The Board proposed deletion of the term 

‘‘payment system’’ because it was not used in the 

proposed single set of standards for all designated 

FMUs. If, in the future, the Board revises Regulation 

HH to provide risk-management standards specific 

to payment systems, it anticipates, at that time, 

reinserting a definition of the term ‘‘payment 

system,’’ if necessary. 

II. Summary of Public Comments and 

Analysis 

The Board received four public 

comment letters that were responsive to 

the NPRM, all from entities that operate 

designated FMUs. The Board considered 

each of these comments as well as 

subsequent staff analysis in developing 

its final rule as discussed below. Except 

as noted herein, the Board is adopting 

the rule text as proposed.9

A. Overall Approach 

The Board proposed to amend 

Regulation HH by replacing the existing 

risk-management standards with a set of 

standards based on the PFMI and 

making conforming changes to the 

definitions. Commenters were generally 

supportive of the Board’s overall 

approach. One commenter, however, 

raised two general concerns with 

respect to the Board’s overall approach. 

The commenter expressed concern that 

one uniform set of standards that 

applies to all designated FMUs and all 

designs of the same type of designated 

FMU does not sufficiently take into 

account material differences that can be 

found among the same types of system. 

The commenter also expressed concern 

that differences in language between the 

risk-management standards in 

Regulation HH and in part I of the PSR 

policy may result in two different sets 

of risk-management standards for FMUs. 

With respect to differences among 

types of systems, the Board believes that 

a uniform set of standards for all types 

of designated FMU is appropriate 

because all designated FMUs potentially 

face and must manage many of the same 

types of risk. Although the design of 

systems may vary, the flexibility in the 

standards allows individual designated 

FMUs to implement, and supervisors to 

enforce, the standards appropriately 

based on the design of and risks that 

arise in a particular designated FMU. 

The Board also believes that a uniform 

set of standards promotes financial 

stability because it facilitates effective 

and consistent risk management across 

different types of FMUs and markets. 

Furthermore, the Board has noted in the 

rule when a particular requirement 

applies only to certain types of 

designated FMU because of its specific 

design or function (for example, only 

designated FMUs that operate a CCP are 

required to have a risk-based margin 

system to cover credit risk). For these 

reasons, the Board continues to believe 

the overall approach is appropriate. 

With respect to the differences in the 

language between Regulation HH and 

part I of the PSR policy, the Board 

continues to believe that such 

differences are appropriate. Regulation 

HH is an enforceable rule applicable to 

designated FMUs other than those 

supervised by the CFTC or SEC, so 

additional details from the key 

considerations and explanatory notes of 

the PFMI were incorporated in the rule 

text to provide greater clarity on the 

Board’s expectations. The PSR policy, 

on the other hand, is a policy statement 

that provides guidance with respect to 

the Board’s exercise of its other 

supervisory or regulatory authority over 

other financial market infrastructures 

(including those operated by the Federal 

Reserve Banks) or their participants, its 

participation in cooperative oversight 

arrangements for financial market 

infrastructures, or the provision of 

intraday credit to eligible Federal 

Reserve account holders. Incorporating 

the headline standards from the PFMI is 

consistent with the purpose of the 

document and the Board’s long-standing 

principles-based approach to its PSR 

policy. Further, the Board has stated 

that it will be guided by the key 

considerations and the explanatory text 

of the PFMI in its application of the PSR 

policy. The Board does not intend for 

differences in language in the two 

documents to lead to inconsistent policy 

results. 

B. Proposed § 234.2—Definitions 

The Board proposed amendments to 

the definitions in § 234.2 by revising 

three definitions, adding six definitions, 

and deleting one definition.10 The 

revisions were proposed for clarity and 

consistency with the revised riskmanagement standards. The Board 

received one comment letter that 

addressed several of the proposed 

changes to the definitions in § 234.2. 

The Board has revised the definitions of 

‘‘recovery’’ and ‘‘wind-down’’ in 

response to these comments. In 

addition, the Board has decided to make 

clarifying edits to the proposed 

definition of ‘‘link’’ and to add a 

definition for ‘‘trade repository.’’ 

Recovery. The Board proposed to add 

a definition for the term ‘‘recovery’’ as 

used in proposed § 234.3(a)(3) and 

§ 234.3(a)(15). The proposal defined 

‘‘recovery’’ for the purposes of 

§ 234.3(a)(3) and § 234.3(a)(15) as ‘‘the 

actions of a designated financial market 

utility consistent with its rules, 

procedures, and other ex-ante 

contractual arrangements, to address 

any uncovered credit loss, liquidity 

shortfall, capital inadequacy, or 

business, operational or other structural 

weakness, including the replenishment 

of any depleted prefunded financial 

resources and liquidity arrangements, as 

necessary to maintain the designated 

financial market utility’s viability as a 

going concern.’’ The term ‘‘recover’’ was 

also used, with a different meaning, in 

proposed § 234.3(a)(17) on operational 

risk in the context of business 

continuity management. 

The commenter requested 

clarification between ‘‘recovery’’ as used 

in proposed § 234.3(a)(3) and proposed 

§ 234.3(a)(15) and ‘‘recover’’ as used in 

proposed § 234.3(a)(17). The commenter 

suggested that the concept of recovery is 

financial in nature and that the 

reference to operational weakness in the 

proposed definition concerns the 

financial impact of an operational issue. 

The Board agrees with the commenter’s 

understanding of ‘‘recovery’’ as used in 

proposed § 234.3(a)(3) and proposed 

§ 234.3(a)(15). The reference in the 

definition to the designated FMU’s 

‘‘viability as a going concern’’ is 

intended to indicate that the objective of 

the recovery plan is a return to financial 

health. Therefore, a designated FMU 

should consider in its recovery plan 

scenarios in which an operational event 

could cause the designated FMU to 

become insolvent. The use of ‘‘recover’’ 

in proposed § 234.3(a)(17), however, 

refers to a designated FMU’s ability to 

recover and resume its critical 

operations and services in a timely 

manner after an operational disruption. 

This use of the term is operational in 

nature, not financial. The Board is 

making technical edits to the definition 

for clarity. 

Wind-down. The Board proposed to 

add a definition for the term ‘‘winddown,’’ which is used in proposed 

§ 234.3(a)(3) and proposed 

§ 234.3(a)(15). The proposal defined 

‘‘wind-down’’ as ‘‘the actions of a 

designated financial market utility to 

effect the permanent cessation, sale, or 

transfer of one or more of its critical 

operations or services.’’ The commenter 

requested additional guidance on 

whether a wind-down plan should 

consider appropriate notice to 

participants and the market, or whether 

the plan should focus only on the 

amount of time required to wind down 

the corporate entity. 

Although the commenter referred to 

the definition of ‘‘wind-down’’ in its 


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comment, the Board understands that 

the commenter is referring to the 

requirement in proposed § 234.3(a)(3) to 

develop and maintain a plan for an 

orderly wind-down. As stated in the 

proposed rule, the Board requires the 

designated FMU to plan for an orderly 

wind-down, which would include 

providing appropriate notice to the 

market to allow participants to 

transition to alternative arrangements in 

an orderly manner. This would likely 

require the designated FMU to assume 

a longer period for wind-down than if 

the requirement were only to wind 

down the corporate entity as quickly as 

possible. Given that the term ‘‘winddown’’ is only used in the context of an 

‘‘orderly wind-down’’ in the proposed 

rule, the Board has replaced the 

definition of ‘‘wind-down’’ with a 

definition for ‘‘orderly wind-down.’’ 

The new definition is intended to clarify 

that if a designated FMU were to wind 

down, it would be expected to do so in 

a manner that would not increase the 

risk of significant liquidity or credit 

problems spreading among financial 

institutions or markets and thereby 

threaten the stability of the U.S. 

financial system. 

Link. The Board proposed to add a 

definition for ‘‘link,’’ which is used in 

proposed § 234.3(a)(20). The proposal 

defined ‘‘link’’ as ‘‘for purposes of 

§ 234.3(a)(20), a set of contractual and 

operational arrangements between two 

or more central counterparties, central 

securities depositories, or securities 

settlement systems that connect them 

directly or indirectly, such as for the 

purposes of participating in settlement, 

cross margining, or expanding their 

services to additional instruments and 

participants.’’ 

Because of the difference in the 

definition of financial market 

infrastructure in the PFMI, which 

includes trade repositories, and 

financial market utility in the DoddFrank Act, which does not, this 

definition inadvertently excluded links 

to trade repositories. Upon further 

consideration, the Board has added 

these links to the definition for 

consistency with the PFMI, defined 

trade repository in § 234.2 as ‘‘an entity 

that maintains a centralized electronic 

record of transaction data, such as a 

swap data repository or a security-based 

swap data repository,’’ and made 

conforming changes to § 234.3(a)(20). 

C. Governance 

Proposed § 234.3(a)(2) outlined the 

requirements for a designated FMU’s 

governance arrangements. The 

comments the Board received on the 

proposed rule are discussed below. 

Support for public interest 

considerations. Proposed 

§ 234.3(a)(2)(iii) required the designated 

FMU to have governance arrangements 

that support the stability of the broader 

financial system, other relevant public 

interest considerations, and the 

legitimate interests of relevant 

stakeholders. One commenter noted that 

public interest considerations is a vague 

concept, and that private-sector systems 

should not be required to consider 

public interest considerations and 

should focus exclusively on the needs of 

participants. The Board believes that, in 

addition to supporting the stability of 

the broader financial system, a 

designated FMU should support public 

interest considerations that are 

consistent with the other objectives of 

Title VIII of the Act to promote robust 

risk management, promote the safety 

and soundness of the designated FMU, 

and reduce systemic risks. For example, 

in the NPRM, the Board listed 

supporting fair and efficient markets as 

a possible relevant public interest 

consideration because a designated 

FMU that creates inefficiencies in the 

market may drive market participants 

toward less-safe alternatives that could 

increase systemic risks. Market 

transparency is another public interest 

consideration that may be relevant. For 

example, a designated FMU that 

provides information to relevant 

authorities and the public about 

payment flows may help to identify and 

reduce sources of systemic risk. For 

certain designated FMUs, however, 

stability of the broader financial system 

may be the predominant or only 

relevant public interest consideration. 

Further, in the NPRM, the Board 

asked whether proposed 

§ 234.3(a)(2)(iii) should specify ‘‘other 

relevant public interest considerations’’ 

for a specific type of or a particular 

designated FMU. One commenter 

responded that the examples given in 

the NPRM—fostering fair and efficient 

markets, market transparency, and 

investor protection—in combination 

with the Board’s guidance through the 

supervisory process would be sufficient 

to assist a designated FMU in 

identifying relevant public interests. 

The Board is adopting the text of the 

rule as proposed. 

Representation on the board of 

directors. Proposed § 234.3(a)(2)(iv)(D) 

required that the designated FMU’s 

board of directors include a majority of 

individuals who are not executives, 

officers, or employees of the designated 

FMU or an affiliate. In the NPRM, the 

Board asked whether it should set a 

specific minimum percentage of these 

individuals on the board of directors 

and whether it should set any 

requirements for the participation of 

outside directors (that is, directors who 

are not participants in or executives, 

officers, or employees of the designated 

FMU or an affiliate). Commenters 

generally indicated that the final rule 

should retain flexibility on board 

representation and did not advocate for 

a change to the proposed text. The 

Board is adopting the text of the rule as 

proposed to provide some flexibility in 

the composition of the board of 

directors. The Board, however, believes 

that outside directors should exercise 

predominate influence over the board of 

directors to ensure robust governance 

and oversight of the designated FMU. 

In the NPRM, the Board also asked 

whether there should be a requirement 

that the chair of the board of directors 

be (a) an individual who is not an 

executive, officer, or employee of the 

designated FMU or an affiliate of the 

designated FMU or (b) a different 

individual than the designated FMU’s 

chief executive officer. One commenter 

responded that the chair of the board of 

directors should be an independent 

director. Although it believes 

designating an independent director as 

board chair generally results in more 

robust governance, the Board recognizes 

that other board structures, such as the 

appointment of a lead independent 

director, may achieve a similar outcome 

as having an independent director as 

board chair. Therefore, the Board is 

adopting the text of the rule as proposed 

to provide flexibility in the structure of 

the board of directors. If the Board has 

governance concerns regarding the 

FMU, however, it may ask, as part of the 

supervisory process, a designated FMU 

that has a single person serving as the 

chief executive officer and the board 

chair to consider splitting these roles or 

adding a lead independent director. 

Performance reviews of the board of 

directors. Proposed § 234.3(a)(2)(iv)(E) 

required the board of directors to 

establish policies and procedures to 

review its own performance. In the 

NPRM, the Board asked whether there 

should be a requirement for these 

regular reviews to include periodic 

independent assessments of the board of 

directors. One commenter responded 

that an independent party should 

perform such reviews but that the 

precise frequency, scope, and specifics 

of the review should be determined by 

the designated FMU. An independent 

review of board performance is a good 

practice that can help strengthen the 

governance of the designated FMU. A 

designated FMU might consider 

conducting such reviews on a periodic 

basis. The Board has decided, however, 


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11As noted above, the compliance date for 

preparing plans for recovery and orderly winddown is December 31, 2015. Designated FMUs are 

encouraged to share with supervisors drafts of these 

plans, as well as other required plans, procedures, 

or documents, in advance of the compliance date 

so that final versions are in place by December 31, 

2015. 

to retain flexibility with respect to the 

manner in which a designated FMU 

reviews performance of its board of 

directors. The Board is adopting the text 

of the rule as proposed. If the Board has 

governance concerns regarding the 

FMU, however, it may direct, through 

the supervisory process, a designated 

FMU to obtain an independent 

performance review of the board of 

directors. 

Structure and composition of the 

committees of the board of directors. 

Proposed § 234.3(a)(2)(iv)(H)–(I) 

required that the risk-management and 

internal audit functions be overseen by 

a committee of the board of directors. In 

the NPRM, the Board asked whether the 

designated FMU’s board of directors 

should be required to have a committee 

of the board of directors that has only 

audit responsibilities to which the audit 

function reports and a risk committee of 

the board of directors that has only riskmanagement responsibilities to which 

the risk-management function reports. 

The Board also asked whether, 

alternatively, the designated FMU’s 

audit and risk-management functions 

should be required to report directly to 

the entire board of directors. One 

commenter stated that a designated 

FMU’s board of directors should have 

an audit committee and a riskmanagement committee and that 

independent directors should chair 

board committees where possible. 

Another commenter stated that the 

structure of the audit and riskmanagement committees should be left 

to the designated FMU’s discretion and 

that the audit and risk-management 

committees can be composed of 

professionals who are not members of 

the board of directors so long as there 

is reporting to the board of directors. 

After further consideration, the Board 

agrees that the requirement should not 

be overly prescriptive with respect to 

the structure of board committees. The 

specific decisions regarding how the 

board of directors will structure its 

committees to oversee the audit and 

risk-management functions should be 

left to the designated FMU’s discretion. 

The Board is adopting the text of the 

rule as proposed. 

Reporting lines for the internal audit 

and risk-management functions. 

Proposed § 234.3(a)(2)(iv)(H)–(I) 

required that the risk-management and 

internal audit functions have sufficient 

authority, resources, and independence 

and that each have a direct reporting 

line to and be overseen by a committee 

of the board of directors. A commenter 

stated that a designated FMU’s riskmanagement function should have a 

primary functional reporting line to the 

executive management of the designated 

FMU, whereas in the case of audit, the 

reporting line should be independent of 

executive management. 

Although a reporting line from the 

risk-management function to executive 

management is certainly reasonable and 

useful, the Board believes that the riskmanagement function should have a 

reporting line to a committee of the 

board of directors to ensure that the 

risk-management function has sufficient 

independence from executive 

management. The proposed rule 

required the risk-management function 

to have a direct reporting line to a 

committee of the board of directors, but 

it does not preclude a reporting line to 

executive management as well. The 

Board is adopting the text of the rule as 

proposed. 

D. Framework for the Comprehensive 

Management of Risks 

Proposed § 234.3(a)(3) required a 

designated FMU to have a sound riskmanagement framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

custody, investment, and other risks 

that arise in or are borne by the 

designated FMU. One commenter raised 

several issues with the requirements in 

proposed § 234.3(a)(3), and they are 

discussed below. 

Frequency of review of the riskmanagement framework. Proposed 

§ 234.3(a)(3) required, among other 

things, that the framework for the 

comprehensive management of risks be 

subject to periodic review. In the NPRM, 

the Board asked whether it should 

establish an annual or longer minimum 

frequency of review for the overall 

framework. The commenter responded 

that the Board should not be overly 

prescriptive with respect to the review 

frequency, noting that different 

standards have different review 

frequencies and that establishing a 

general review frequency for the 

comprehensive risk-management 

framework could be duplicative or 

contradict the review frequencies in 

other proposed standards. The Board 

agrees that a specific frequency for 

review is not necessary, and is adopting 

the proposed text in § 234.3(a)(3) 

regarding periodic review for the overall 

framework. 

Requirement to maintain plans for 

recovery and orderly wind-down. 

Proposed § 234.3(a)(3)(iii) required that 

a designated FMU’s risk-management 

framework include plans for the 

designated FMU’s recovery or orderly 

wind-down that contain the elements 

listed at proposed § 234.3(a)(3)(iii)(A) to 

(F). The commenter stated that a 

designated FMU’s regulator should have 

the discretion to determine if the 

designated FMU would be required to 

produce both a recovery plan and an 

orderly wind-down plan. 

The Board understands that there may 

have been some ambiguity regarding 

whether proposed § 234.3(a)(3)(iii) 

required both a recovery plan and an 

orderly wind-down plan or just one of 

the two. The Board expects a designated 

FMU to prepare plans for both recovery 

and orderly wind-down. Recovery plans 

should not be based on assumptions of 

government intervention or support. In 

addition, the Board believes that the 

recovery and orderly wind-down plans 

should be integrated because there may 

be circumstances in which a designated 

FMU attempts to recover but the 

recovery effort eventually fails. In such 

circumstances, the designated FMU 

should have a plan as well as sufficient 

capital to transition to and execute an 

orderly wind-down. The Board is 

therefore clarifying in § 234.3(a)(3)(iii) 

that a designated FMU must prepare 

integrated plans for recovery and 

orderly wind-down.11 The Board is also 

making conforming edits in 

§ 234.3(a)(3)(iii)(C) through (F) and, for 

greater clarity, has revised the 

requirement in § 234.3(a)(15)(i)(A) with 

respect to the cost to implement the 

plans to refer back to the requirements 

in § 234.3(a)(3)(iii). 

Scenarios addressed by recovery and 

orderly wind-down plans. Proposed 

§ 234.3(a)(3)(iii)(B) required that a 

designated FMU’s plans identify 

scenarios that may potentially prevent 

the FMU from being able to provide its 

critical operations and services as a 

going concern, including uncovered 

credit losses, uncovered liquidity 

shortfalls, and general business losses. 

The commenter noted that such 

scenarios should contemplate severe 

and extreme scenarios and that each 

scenario should be distinct so that the 

analysis of the scenarios would not be 

duplicative. The Board agrees that the 

scenarios addressed by recovery and 

orderly wind-down plans should 

include severe and systemic stress 

events beyond those contemplated by 

business continuity planning, normal 

crisis-management, or failuremanagement tools. In particular, as 

indicated by the reference to the 

designated FMU’s inability to continue 


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as a going concern, these scenarios 

involve shocks that could potentially 

cause the designated FMU to become 

insolvent and cease operations. The 

Board also agrees that such scenarios 

should be sufficiently distinct so the 

analysis related to a particular scenario 

is not duplicative. The Board believes, 

however, that the text of the rule is 

sufficiently clear on these points. The 

Board is adopting the text of the rule as 

proposed. 

Triggers for implementation of 

recovery and orderly wind-down plans. 

Proposed § 234.3(a)(3)(iii)(C) required 

that a designated FMU’s plans identify 

criteria that could trigger the 

implementation of the recovery or 

orderly wind-down plans. The 

commenter stated that the designated 

FMU should have discretion to decide 

whether it will continue its services that 

are deemed noncritical, provided that 

the financial consequences are not 

material to its ability to operate the 

critical services. The commenter also 

noted that that triggers should be 

flexible and that management, working 

with its regulators and other 

stakeholders, should make the decision 

whether to trigger the plan based on the 

relevant facts and circumstances of the 

given situation. Finally, the commenter 

noted that triggers should not be 

required to be defined solely in 

quantifiable or monetary terms. 

The Board agrees with the comments 

provided on the triggers for the 

implementation of the recovery and 

orderly wind-down plans. The 

designated FMU would have discretion 

to decide whether it will continue its 

noncritical services, as long as the 

decision would not impair its ability to 

recover its critical operations and 

services or to wind them down in an 

orderly manner. Also, the decision to 

trigger a recovery or orderly wind-down 

plan will depend on the relevant facts 

and circumstances at the time and any 

such decision will likely include 

discussions between the designated 

FMU and its supervisor. This is 

consistent with the requirement in 

proposed § 234.3(a)(3)(iii)(F) that the 

recovery and orderly wind-down plans 

include procedures for informing the 

Board if the designated FMU is 

considering initiating one of the plans. 

The Board did not propose inclusion of 

automatic triggers based solely on 

quantifiable or monetary terms and is 

not adopting such terms in the final 

rule. 

Requirement for rules, procedures, 

policies, and tools for recovery and 

orderly wind-down plans. Proposed 

§ 234.3(a)(3)(iii)(D) required that the 

plans include rules, procedures, 

policies, and any other tools the 

designated FMU would use in a 

recovery or orderly wind-down to 

address the scenarios addressed in 

proposed § 234.3(a)(3)(iii)(B). The 

commenter stated that the application of 

certain tools, such as expense reduction 

or refinancing, will depend on the 

circumstances at the time of distress and 

therefore may not fit well into the 

designated FMU’s ‘‘rules, policies, and 

procedures.’’ The Board believes that if 

a designated FMU contemplates using a 

particular type of tool in the event of a 

recovery or orderly wind-down, it 

should develop rules, policies, and 

procedures to provide a basis for using 

the tool as well as transparency to its 

participants regarding how the tool may 

be used. The Board expects the 

designated FMU to provide as much 

detail in the rules, policies, and 

procedures as possible, but recognizes 

that some components may need to be 

general, because the specific 

implementation of the tool may depend 

on the circumstances. The Board is not 

revising the final rule in response to this 

comment. 

Requirements for informing the Board 

of initiation of the recovery or orderly 

wind-down plan. Proposed 

§ 234.3(a)(3)(iii)(F) required that the 

designated FMU have procedures to 

inform the Board, as soon as practicable, 

if it is considering initiating the 

recovery or orderly wind-down plan. 

The commenter stated that certain tools, 

such as loss allocation, could be 

triggered automatically pursuant to ex 

ante agreements. In such circumstances, 

a notification to the Board could be 

contemporaneous with or after use of 

such tools. The Board believes that a 

designated FMU should notify the 

Board that it is considering initiating the 

recovery or orderly wind-down plan 

before initiating the relevant plan if at 

all possible. If there are specific tools or 

elements of a plan that may be activated 

automatically, the requirement 

proposed in § 234.3(a)(3)(iii)(F) that 

notification be ‘‘as soon as practicable’’ 

permits the designated FMU, in such 

circumstances, to provide notification 

contemporaneous with or immediately 

after use of such tools. Accordingly, the 

Board is not revising the final rule in 

response to this comment. 

Frequency of review of recovery and 

orderly wind-down plans. The proposed 

rule did not specify a frequency of 

review for the recovery and orderly 

wind-down plans required under 

proposed § 234.3(a)(3)(iii), but the Board 

stated in the NPRM that these plans 

should be reviewed and tested at least 

annually or following material changes 

to the designated FMU’s operations or 

risk profile. The commenter urged that 

such reviews occur every other year, 

assuming no interim material change in 

the designated FMU’s risk exposure, as 

this frequency would provide sufficient 

time to amend, draft, negotiate, and 

discuss any such changes with 

stakeholders. The commenter also noted 

this frequency would be aligned with 

the requirements for public disclosure 

in proposed § 234.3(a)(23)(v). 

The Board agrees that a designated 

FMU should review its recovery and 

orderly wind-down plans the earlier of 

every two years or following changes to 

the designated FMU or the environment 

in which it operates that would 

significantly affect the viability or 

execution of the plans. After 

considering the comments, the Board 

believes a minimum requirement for 

review of the plans of every two years 

is more appropriate than an annual 

review because an annual review cycle 

may not allow sufficient time to 

analyze, discuss with stakeholders and 

supervisors, and implement any 

required changes. The Board is revising 

the rule text to clarify the requirement 

in § 234.3(a)(3)(iii)(G) that the 

designated FMU review the plans the 

earlier of every two years or following 

changes to its system or the 

environment in which it operates that 

would significantly affect the viability 

or execution of the plans. 

E. Credit Risk 

Proposed § 234.3(a)(4) required a 

designated FMU to measure, monitor, 

and manage effectively its credit 

exposures to its participants and the 

credit exposures arising from its 

payment, clearing, and settlement 

processes. The Board received two 

comments on this proposed provision 

that are addressed below. 

Replenishment of financial resources. 

Proposed § 234.3(a)(4)(vi)(B) required 

that a designated FMU establish rules 

and procedures that explicitly describe 

the designated FMU’s process to 

replenish financial resources employed 

during a stress event. One commenter 

noted that circumstances would dictate 

how a designated FMU manages the 

replenishment of financial resources 

employed in a stress scenario and that 

the Board should revise the proposed 

rule to allow greater flexibility. The 

Board acknowledges that the details of 

the replenishment process may depend 

on the particular circumstances that the 

designated FMU faces in a stress event 

and that it may not be possible to 

predict fully the future. The rules and 

procedures regarding replenishment, 

however, should be explicit and as 

specific as possible in order to provide 


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12The Board has revised § 234.3(a)(4)(ii) to clarify 

that it is the Board that makes the determination 

with respect to a ‘‘cover 2’’ requirement. 

13The Board believes that deliveries of currency 

are payment obligations, rather than physical 

deliveries under § 234.3(a)(10), and expects a 

designated FMU subject to Regulation HH to 

manage effectively the liquidity risk related to these 

payments. 

14The Board recognized that the language on 

qualifying liquid resources under Principle 7 of the 

PFMI is phrased differently. Principle 7 requires 

qualifying liquid resources to be, among other 

things, highly marketable collateral held in custody 

and investments that are readily available and 

convertible into cash with ‘‘prearranged and highly 

reliable’’ funding arrangements. The Board has had 

a longstanding expectation that FMUs under its 

authority maintain cash or committed arrangements 

for converting noncash assets into cash to meet the 

minimum liquidity resource requirement. The 

Board believes that, in order for arrangements to be 

‘‘highly reliable,’’ they must be ‘‘prearranged and 

committed.’’ The legal enforceability of committed 

arrangements helps to ensure obligations will be 

fulfilled even in extreme but plausible market 

conditions. The Board recognizes, however, that 

such commitments do not guarantee performance. 

Supplemental resources beyond amounts needed to 

meet the minimum liquid resource requirement in 

§ 234.3(a)(7) may be obtained on an uncommitted 

basis. 

guidance to the designated FMU’s staff, 

participants, and other stakeholders 

during an actual stress event. Moreover, 

given that a designated FMU cannot 

predict the exact circumstances it may 

face, its rules and procedures for 

replenishment should address a wide 

range of potential circumstances. The 

Board is adopting the text of the rule as 

proposed. 

Triggers for a ‘‘cover 2’’ requirement. 

Proposed § 234.3(a)(4)(ii) provided that 

the Board may direct a designated FMU 

that operates as a CCP to maintain 

additional prefunded financial 

resources that are sufficient to cover its 

credit exposure under a wide range of 

significantly different stress scenarios, 

including the default of the two 

participants and their affiliates that 

would potentially cause the largest 

aggregate credit exposure to the CCP in 

extreme but plausible market conditions 

(a ‘‘cover 2’’ requirement). The proposal 

stated further that the Board may direct 

such a CCP to meet a ‘‘cover 2’’ 

requirement if it either is involved in 

activities with a more-complex risk 

profile, such as clearing financial 

market instruments characterized by 

discrete jump-to-default price changes 

or that are highly correlated with 

potential participant defaults, or has 

been determined by another jurisdiction 

to be systemically important in that 

jurisdiction. 

A commenter stated that, in applying 

this provision, the Board should also 

consider ‘‘the proportion of the CCP’s 

clearing activities involving products 

with complex risk profiles as well as the 

manner in which the CCP manages 

those risks.’’ The commenter asked the 

Board to confirm that the ‘‘cover 2’’ 

requirement would not be triggered if a 

CCP has a small amount of activity with 

a complex risk profile relative to overall 

activity or if the CCP addresses the 

added risk incurred, such as through 

enhanced margin systems. In making its 

determination with respect to a ‘‘cover 

2’’ requirement, the Board would 

consider all relevant facts and 

circumstances, including the CCP’s 

product mix and risk profile. Except for 

minor technical edits, the Board is 

adopting the text of the rule as 

proposed.12

F. Collateral 

Proposed § 234.3(a)(5) required a 

designated FMU that uses collateral to 

manage its or its participants’ credit 

exposure to accept collateral with low 

credit, liquidity, and market risks and to 

set and enforce appropriately 

conservative haircuts and concentration 

limits. One commenter supported 

flexibility in the wording of the 

requirement and urged that it not be 

interpreted to exclude the use of equity 

securities as collateral for equity 

options. The Board believes that the text 

in proposed § 234.3(a)(5) retains the 

necessary flexibility to permit, where 

appropriate, a designated FMU to 

integrate the management of risk from 

participant positions with the risk from 

fluctuations in the value of collateral 

provided by participants. One example 

would be for the designated FMU to 

hold equity securities as collateral for 

options on those same securities. 

Therefore, the Board is adopting the text 

of the rule as proposed. 

G. Liquidity Risk 

Proposed § 234.3(a)(7) required a 

designated FMU to measure, monitor, 

and manage effectively the liquidity risk 

that arises in or is borne by the 

designated FMU. The comments 

received on specific elements of the 

liquidity risk-management requirements 

are discussed below. 

Participants’ affiliates. Under 

proposed § 234.3(a)(7)(ii), a designated 

FMU was required to maintain 

sufficient liquid resources in all relevant 

currencies to effect same-day and, as 

applicable, intraday and multiday 

settlement of payment obligations with 

a high degree of confidence under a 

wide range of significantly different 

potential stress scenarios, including the 

default of the participant and its 

affiliates that would generate the largest 

aggregate liquidity obligation for the 

designated FMU in extreme but 

plausible market conditions.13 One 

commenter stated that the inclusion of 

the liquidity obligations of a defaulting 

participant’s affiliates in calculating the 

largest aggregate liquidity obligation in 

proposed § 234.3(a)(7)(ii) should be 

clarified or removed because ‘‘a 

designated FMU may not have the 

authority to demand detailed 

information on participants’ affiliates, 

particularly for affiliates in peripheral 

lines of business.’’ 

The Board believes this requirement 

is sufficiently clear as written. 

Participants’ affiliates that would 

generate liquidity obligations to the 

designated FMU would be known to the 

designated FMU. Such affiliates may 

include affiliates that are also 

participants in the designated FMU, 

liquidity providers to the designated 

FMU, and custodians of the assets held 

in accounts for the designated FMU. 

Affiliates in peripheral lines of business 

would be unlikely to generate liquidity 

obligations to the designated FMU. 

Therefore, the Board is retaining the text 

of the rule as proposed. 

Qualifying liquid resources. For 

purposes of meeting the liquid resource 

requirement under proposed 

§ 234.3(a)(7)(ii), proposed 

§ 234.3(a)(7)(iii) required the designated 

FMU to maintain these liquid resources 

in cash in each relevant currency at the 

central bank of issue or at creditworthy 

commercial banks, or in assets that are 

readily available and convertible into 

cash through committed arrangements 

without material adverse change 

conditions. These committed 

arrangements included, but were not 

limited to, collateralized lines of credit, 

foreign exchange swaps, and repurchase 

agreements. Proposed § 234.3(a)(7)(iii) 

required these arrangements to be 

committed in order to ensure that the 

resources are highly reliable even in 

extreme but plausible market 

conditions.14

A commenter stated that meeting the 

minimum liquid resource requirement 

in proposed § 234.3(a)(7)(ii) with only 

cash and committed arrangements, as 

required in proposed § 234.3(a)(7)(iii), 

would be challenging for cash market 

CCPs and their participants. 

Furthermore, the commenter stated that 

requiring committed arrangements for 

sovereign debt, such as U.S. Treasury 

securities, is inconsistent with CFTC’s 

final rule for systemically important 

derivatives clearing organizations, the 

SEC’s proposed rules for covered 

clearing agencies, and the rules for 

financial market infrastructures in 

foreign jurisdictions, and that requiring 

committed arrangements could 


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significantly reduce the total amount of 

liquidity available to CCPs. The 

commenter also stated that the proposal 

is inconsistent with the Board’s 

treatment of Treasury securities for 

systemically important financial 

institutions (SIFIs) under the Board’s 

Liquidity Coverage Ratio rule. The 

commenter recommended that 

uncommitted arrangements for 

converting U.S. Treasury securities into 

cash, such as customary repurchase 

agreements or pre-established dealer 

accounts to facilitate same-day market 

sales, be included as qualifying liquid 

resources. 

After consideration of the comments, 

the Board has determined not to include 

uncommitted arrangements for U.S. 

Treasuries as qualifying liquid 

resources. The Board believes that legal 

enforceability of committed 

arrangements helps to ensure that 

obligations are fulfilled even in extreme 

but plausible market conditions. For 

example, the Board believes committed 

arrangements provide an additional 

level of assurance that U.S. Treasury 

securities would be converted into cash 

in large quantities on a same-day basis, 

even in stressed market conditions. 

Furthermore, the Board believes a morerobust requirement is necessary for 

designated FMUs than for SIFIs because 

the timely completion of settlement is 

an essential function of an FMU and an 

explicit expectation of the Board for 

these entities. The failure of an FMU to 

complete settlement as expected can 

create broader liquidity dislocations and 

undermine confidence in the FMU’s 

ability to manage effectively a default by 

absorbing rather than transmitting 

shocks to the financial system. 

After consideration of the comments, 

however, the Board has added a new 

category of liquidity arrangements in 

§ 234.3(a)(7)(iii)(C) of the final rule that 

would allow prearranged uncommitted 

arrangements for converting noncash 

assets into cash to be considered 

qualifying liquid resources if they are 

determined by the Board to be highly 

reliable in extreme but plausible market 

conditions. The Board is adding this 

category in order to allow flexibility for 

future innovation in arrangements for 

converting noncash assets into cash on 

a same-day basis. The Board believes 

that including this category improves 

consistency with the text of the CFTC’s 

final rule and the SEC’s proposed rule. 

The Board is also adopting conforming 

edits to § 234.3(a)(7)(iv) in the final rule. 

Testing. Proposed § 234.3(a)(7) 

contained multiple testing requirements 

for the management of liquidity risk. 

Proposed § 234.3(a)(7)(iv) required a 

designated FMU to evaluate and 

confirm, at least annually, whether each 

provider of its committed liquidity 

arrangements has sufficient information 

to understand and manage that 

provider’s associated liquidity risks and 

whether the provider has the capacity to 

perform as required under the 

commitment. Proposed § 234.3(a)(7)(v) 

required the designated FMU to 

maintain and test its procedures and 

operational capacity for accessing each 

type of its liquid resources at least 

annually. Proposed § 234.3(a)(7)(vi) 

required the designated FMU to 

determine the amount and regularly 

stress-test the sufficiency of the liquid 

resources necessary to meet the 

minimum liquid resource requirement 

(A) daily using standard and 

predetermined stress scenarios, 

parameters, and assumptions and (B) at 

least monthly through a comprehensive 

and thorough analysis of the existing 

stress scenarios, models, and underlying 

parameters and assumptions. Proposed 

§ 234.3(a)(7)(viii) required an annual 

validation of the designated FMU’s 

liquidity risk-management model. 

A commenter stated that the testing of 

the procedures and operational capacity 

for accessing liquid resources required 

by proposed § 234.6(a)(7)(v) should not 

cause disruption to the designated 

FMU’s participants or involve the use of 

large amounts of participant funds. The 

commenter also suggested generalizing 

the requirement in proposed 

§ 234.6(a)(7)(vi)(B) to perform monthly 

stress testing and avoid being overly 

prescriptive because the monthly review 

requirement may not be appropriate for 

all models or all types of designated 

FMUs. 

The Board agrees that none of the 

testing requirements need to be or 

should be met in a manner that would 

cause significant disruption to the 

designated FMU’s participants or the 

market or involve the use of large 

amounts of participant funds. In 

addition, after consideration of the 

comments, the Board continues to 

believe that the requirement in 

§ 234.3(a)(7)(vi) to perform an analysis 

of the existing stress scenarios, models, 

and underlying parameters and 

assumptions at least monthly is 

appropriate. The Board believes that all 

designated FMUs should assess the 

effectiveness of their stress testing at 

least monthly to ensure that the 

designated FMU will not neglect to 

consider any relevant new information 

in its stress-testing methodology and 

that the stress tests continue to be 

appropriate for achieving the designated 

FMU’s identified liquidity needs in light 

of current and evolving market 

conditions. The Board is adopting the 

text of the rule as proposed. 

H. Settlement Finality 

Proposed § 234.3(a)(8) required, in 

part, the designated FMU to provide 

clear and certain final settlement 

intraday or in real time as appropriate, 

and at a minimum, by the end of the 

value date. One commenter requested 

confirmation that the proposed 

provision would not require a 

designated FMU that is a CCP to 

accelerate its novation of certain 

noncompetitive transactions, such as 

backloaded over-the-counter options. 

The proposed requirement in 

§ 234.3(a)(8) applied to a designated 

FMU’s obligations to deliver funds and 

other financial instruments, at a 

minimum, by the end of the value date 

in accordance with the terms of the 

underlying contract, and did not 

address the timing of novation. The 

Board is adopting the text of the rule as 

proposed. 

I. Participant-Default Rules and 

Procedures 

Proposed § 234.3(a)(13) required the 

designated FMU to have effective and 

clearly defined participant-default rules 

and procedures that are designed to 

ensure that the designated FMU can 

take timely action to contain losses and 

liquidity pressures and continue to meet 

its obligations. The proposal also 

required the designated FMU to test and 

review its default procedures, including 

any closeout procedures, at least 

annually or following material changes 

to these rules and procedures. One 

commenter stated that the required 

testing should not be so extensive as to 

cause disruption to the designated 

FMU’s members, participants, or 

broader financial markets, nor require 

the use of participant funds, nor 

unnecessarily stress the designated 

FMU’s critical services. 

The Board agrees that any testing 

pursuant to the requirement in proposed 

§ 234.3(a)(13) should not cause 

disruption to the designated FMU’s 

members, participants, or broader 

financial markets. To the extent such 

testing would require use of participant 

funds, it would likely be limited to 

small or de minimus amounts. The 

Board is adopting the text of the rule as 

proposed. 

J. Segregation and Portability 

Proposed § 234.3(a)(14) required a 

designated FMU that operates as a CCP 

to have rules and procedures that enable 

the segregation and portability of 

positions of a participant’s customers 

and the collateral provided to the 


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65550 Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations 

designated FMU with respect to those 

positions. The Board received two 

comment letters on this proposed rule 

that addressed portability requirements 

and alternative segregation regimes. 

Portability requirement. One 

commenter noted that while porting 

positions is a highly desirable result 

when feasible, there may be scenarios in 

which liquidating positions is preferred. 

The commenter suggested that the rule 

text permit a designated FMU to retain 

broad discretion to liquidate positions 

promptly where it has determined that 

timely transfer would not be feasible. 

The proposed rule requires that the 

designated FMU’s rules and procedures 

enable the segregation and portability of 

positions, and does not exclude the 

possibility that liquidation of positions 

may take place if a timely transfer 

would not be feasible. For these reasons, 

the Board is adopting the text of the rule 

as proposed. 

Alternative segregation regimes. One 

commenter encouraged the Board to 

retain the flexibility to permit different 

segregation regimes as appropriate for 

different markets and different classes of 

market participant. Another commenter 

requested that the final text of the rule 

acknowledge the different legal 

frameworks for cash markets. The Board 

acknowledged in the NPRM that 

effective segregation and portability 

arrangements depend not only on the 

operational capabilities of the 

designated FMU but also on the 

applicable legal framework. The Board 

notes that a CCP serving certain cash 

markets, for example, may operate in a 

legal regime that offers the same degree 

of protection for a participant’s 

customers as the segregation and 

portability approaches under proposed 

§ 234.3(a)(14). Where an alternative 

regime exists, the Board will consider 

the CCP’s assessment of whether the 

applicable legal or regulatory framework 

achieves the same degree of protection 

and efficiency for customers that would 

otherwise be achieved by segregation 

and portability arrangements at the CCP 

level described in the proposed 

requirement. Additionally, the Board 

will review whether the CCP’s own 

rules enable the operation of the 

relevant legal and regulatory framework. 

The Board believes segregation and 

portability arrangements may differ 

depending on the design of and the 

products and markets served by the CCP 

and would work with any applicable 

designated FMU through the 

supervisory process to determine how 

best to meet the requirements in 

§ 234.3(a)(14). 

Where alternative segregation and 

portability arrangements offer the same 

degree of protection, proposed 

§ 234.3(a)(14) would not prohibit the 

use of such arrangements. As noted 

above, the requirement is that the 

designated FMU’s rules and procedures 

enable segregation and portability of 

positions and does not prescribe a single 

means by which this could be achieved. 

The Board is adopting the text of the 

rule as proposed. 

K. General Business Risk 

Proposed § 234.3(a)(15) required a 

designated FMU to identify, monitor, 

and manage its general business risk. To 

this end, proposed § 234.3(a)(15)(i) 

required a designated FMU to maintain 

unencumbered liquid financial assets 

that are sufficient to cover the greater of 

the cost to implement the designated 

FMU’s recovery or orderly wind-down 

plan to address general business losses 

or six months of current operating 

expenses. This provision also required a 

designated FMU to hold equity that is 

greater than or equal to the amount of 

unencumbered liquid financial assets 

held to meet the requirement. Proposed 

§ 234.3(a)(15)(ii) required a designated 

FMU to maintain and update annually 

a plan for raising additional equity 

before the designated FMU’s equity falls 

below the amount required under 

§ 234.3(a)(15)(i). 

The Board received four comment 

letters that addressed this provision. 

The commenters generally supported 

proposed § 234.3(a)(15) but raised 

specific concerns that are discussed 

below. 

Recovery and orderly wind-down 

plans. Proposed § 234.3(a)(15)(i)(A)(1) 

referred to the cost to implement the 

recovery or orderly wind-down plan to 

address general business losses as 

required under proposed 

§ 234.3(a)(3)(iii) as one possible 

determinant of the amount of liquid net 

assets funded by equity the designated 

FMU must hold. One commenter stated 

that recovery and orderly wind-down 

plans should be calibrated to take into 

account the existence of alternative 

systems or arrangements that provide 

similar services to those of the 

designated FMU. The Board expects that 

the designated FMU will take into 

consideration in its recovery and 

orderly wind-down plans any viable 

alternatives to its critical operations and 

services. The commenter did not suggest 

any changes to the proposed rule text on 

this point. For clarity and to streamline 

the rule text, however, the Board is 

revising § 234.3(a)(15)(i)(A)(1) to require 

the designated FMU to cover the cost to 

implement the plans to address general 

business losses as required under 

§ 234.3(a)(3)(iii). 

Required amount of unencumbered 

liquid financial assets. Proposed 

§ 234.3(a)(15)(i)(A) required a 

designated FMU to hold unencumbered 

liquid financial assets equal to the 

greater of the cost to implement its 

recovery or orderly wind-down plan to 

address general business losses or six 

months of current operating expenses or 

as otherwise determined by the Board. 

Two commenters provided comments 

on the type of operating expenses that 

should be included in the calculation of 

six months of current operating 

expenses. Both stated that the 

requirement to hold unencumbered 

liquid financial assets and equity to 

fund current operating expenses would 

overstate the amount actually needed in 

a recovery or orderly wind-down 

scenario because an FMU that suffers 

losses will likely eliminate or reduce 

certain expenses, such as travel and 

marketing expenses. The commenters 

proposed that the amount be calculated 

instead as the current expenses required 

to operate the FMU’s critical operations 

and services in such a scenario. 

After consideration of the comments, 

the Board continues to believe that the 

calculation of six months of current 

operating expenses (or as otherwise 

determined by the Board) should 

include all business-as-usual operating 

expenses. Although certain expenses 

may decrease in a recovery or orderly 

wind-down, the Board believes that 

certain other expenses, such as legal and 

consulting fees, would likely increase in 

a recovery or orderly wind-down 

scenario and that it is difficult to predict 

the net effect on the designated FMU’s 

expenses in such a scenario. Therefore, 

the requirement to hold six months of 

business-as-usual operating expenses (or 

as otherwise determined by the Board) 

is intended to set a floor for the 

designated FMU’s holdings of 

unencumbered liquid assets and equity 

that is independent of the assumptions 

about the specifics of the recovery and 

orderly wind-down scenarios as well as 

easy to calculate and verify because the 

information is included on the 

designated FMU’s income statement. 

The Board, however, does expect that if 

the designated FMU foresees significant 

and lasting increases or decreases in its 

business-as-usual operating expenses 

due to structural or other changes to the 

designated FMU’s operating 

environment, the designated FMU will 

include this information in its 

calculation. For these reasons, the Board 

is adopting § 234.3(a)(15)(i)(A)(2) as 

proposed. 

Type of liquid assets required. 

Proposed § 234.3(a)(15)(i)(A) would 

require the designated FMU to hold 


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15The designated FMU’s current operating 

expenses should include the designated FMU’s 

share of overhead and support costs and any cost 

of shared services that are allocated to the 

designated FMU. 

unencumbered liquid financial assets, 

such as cash or highly liquid securities. 

One commenter stated that a designated 

FMU should be able to include as 

unencumbered liquid financial assets 

revenues that are projected to be 

received by the designated FMU over 

the same six-month period, subject to an 

appropriate haircut, because the 

designated FMU may be able to expect 

to continue to generate fees in a 

recovery or orderly wind-down 

scenario. 

The intent of the proposed standard, 

however, is to ensure that the 

designated FMU has the necessary 

liquid assets and equity on hand at any 

particular time. Projected revenues 

would not meet the requirement 

because projected revenues are not 

assets held on the balance sheet. 

Furthermore, the Board does not 

consider accounts receivable to qualify 

as unencumbered liquid financial assets 

under this provision because the funds 

associated with those receivables have 

not yet been collected and therefore are 

not available for immediate use. In a 

recovery or orderly wind-down 

scenario, the designated FMU may not 

be able to collect its accounts receivable 

in the amounts expected because market 

participants may be unable to pay 

amounts owed to the designated FMU. 

For these reasons, neither projected 

revenues nor accounts receivable should 

be included in types of unencumbered 

liquid financial assets held to meet the 

requirement in proposed 

§ 234.3(a)(15)(i)(A). 

It may be appropriate, however, for a 

designated FMU to consider its 

expected revenues, subject to an 

appropriate haircut, in its calculation of 

the cost to implement its recovery and 

orderly wind-down plans. Depending 

on the structure of the market it serves, 

a designated FMU may expect to earn 

revenues in a recovery or orderly winddown scenario that could partially offset 

the cost of recovering or winding down. 

The size of the haircut applied to the 

expected revenues would likely need to 

reflect this market structure. For 

example, a designated FMU that 

operates in a market with viable 

alternatives to the services of the 

designated FMU should not assume that 

it would receive a large amount of 

revenue during an orderly wind-down. 

Type of equity required. Proposed 

§ 234.3(a)(15)(i)(B) lists common stock, 

disclosed reserves, and other retained 

earnings as examples of equity that 

should be held to meet the requirement. 

Two commenters stated that 

noncumulative perpetual preferred 

stock should be included in the types of 

equity allowed to meet the requirements 

in proposed § 234.3(a)(15)(i)(B) because 

some designated FMUs do not have 

ready access to public capital markets to 

replenish capital. One of these 

commenters also stated that such stock 

should be redeemable at the discretion 

of the designated FMU after five years. 

Proposed § 234.3(a)(15)(i)(B) provided 

a non-exhaustive illustrative list of 

types of equity that would be 

acceptable. There may be other types of 

equity, in addition to common stock, 

disclosed reserves, and other retained 

earnings, that could be held to meet the 

requirement in proposed 

§ 234.3(a)(15)(i)(B). The purpose of the 

requirement is to ensure that the 

designated FMU can absorb general 

business losses on an ongoing basis. 

Equity that has characteristics similar to 

debt will not be counted toward the 

requirement. Designated FMUs should 

work with supervision staff to assess 

whether specific equity holdings meet 

the intent of the requirement. The Board 

is adopting the text of the rule as 

proposed. 

Application of § 234.3(a)(15)(i) to a 

DFMU that is part of a larger legal 

entity. In the NPRM, the Board asked 

whether the proposed rule should 

require a designated FMU that is part of 

a larger legal entity to take into account, 

when calculating the cost to implement 

its recovery and orderly wind-down 

plans, recovery or wind-down scenarios 

in which other business lines in the 

legal entity or the legal entity itself may 

face an adverse business environment. 

One commenter stated that a designated 

FMU should consider ‘‘any adverse 

environment that may be faced by the 

other business lines within the legal 

entity, or by the legal entity itself.’’ 

Another stated that the FMU should 

‘‘treat the service that caused it to be 

designated as systemically important as 

a separate division of the company and 

require liquid assets and capital to be 

earmarked for that service, so that the 

company’s other services are not taken 

into account when calculating these 

requirements.’’ 

In the NPRM, the Board also asked, 

for a designated FMU that is engaged in 

several business lines, but is designated 

as systemically important for purposes 

of Title VIII of the Dodd-Frank Act for 

only one of those business lines, 

whether there are any reasonable 

methodologies for determining which of 

the liquid net assets and equity held at 

the legal entity level belong to a 

particular business line. As a single 

legal entity, the firm’s equity supports 

all the business lines, but it is a 

designated FMU for purposes of Title 

VIII of the Dodd-Frank Act with respect 

to only one of those business lines. One 

commenter stated that ‘‘it is difficult to 

determine the capital specific to a 

designated FMU when the designated 

FMU is part of a larger legal entity’’ and 

that ‘‘in insolvency it may not be 

possible to ring-fence assets within a 

legal entity.’’ Another commenter 

suggested, however, that separate pro 

forma balance sheets and income 

statements could be created for a 

particular business line. 

After consideration of the comments, 

the Board has determined to adopt the 

rule text as proposed. When developing 

its recovery and orderly wind-down 

plans and calculating the cost of 

implementing those plans, a designated 

FMU that also engages in business lines 

for which it has not been designated by 

the Council under Title VIII should 

consider business shocks to other 

business lines if those shocks could 

potentially cause the designated FMU to 

need to recover or wind down the 

critical operations and services of the 

business line for which it has been 

designated. When calculating six 

months of current operating expenses 

(or as otherwise determined by the 

Board), however, the designated FMU 

may include only the current operating 

expenses of the business line for which 

it was designated rather than the current 

operating expenses of the whole legal 

entity.15 Furthermore, when 

determining whether the designated 

FMU has sufficient unencumbered 

liquid financial assets and equity on its 

balance sheet to equal or exceed the 

greater of the cost to implement the 

recovery and orderly wind-down plans 

to address general business losses or six 

months of current operating expenses, 

the designated FMU may use the assets 

and equity held at the legal entity level 

that would be available to meet the 

requirement rather than having to 

attribute assets and equity to a certain 

business line. 

Content of the plan for raising 

additional equity. Proposed 

§ 234.3(a)(15)(ii) required the designated 

FMU to maintain a viable plan for 

raising additional equity before the 

designated FMU’s equity falls below the 

amount required in proposed 

§ 234.3(a)(15)(i). Two commenters stated 

that raising equity may take time, 

especially in stressed market conditions. 

Another commenter suggested that the 

designated FMU have a cushion above 

the required amount as an alternative to 

a plan to raise capital before equity falls 

below the minimum amount. 


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Commenters also suggested methods for 

raising equity, such as a committed 

contingent funding plan or a refinancing 

plan involving a loan until an orderly 

equity recapitalization can be executed. 

A commenter also suggested that the 

designated FMU should consider the 

probability of an event that could cause 

equity to fall below the required amount 

and the period over which the event is 

likely to occur. 

The Board agrees that it may not be 

possible in all cases to have a viable 

plan to raise equity before the 

designated FMU’s equity falls below the 

required amount. Business shocks may 

cause equity levels to fall rapidly and 

unexpectedly and in circumstances 

under which it may be difficult to raise 

capital quickly. The Board does not 

believe, however, that the rule should 

specify the features of the plan or the 

methods for raising capital, because the 

details of the plan will depend on the 

ownership structure of the designated 

FMU and the environment in which it 

operates. Therefore, the Board is 

modifying the text of proposed 

§ 234.3(a)(15)(ii) to require a designated 

FMU to maintain a viable plan for 

raising equity should its equity fall 

below the amount required under 

proposed § 234.3(a)(15)(i). 

Schedule for updating the plan for 

raising additional equity. Proposed 

§ 234.3(a)(15)(ii) required the designated 

FMU to update its plan for raising 

additional equity at least annually. One 

commenter stated that the plan should 

be reviewed every three years instead of 

annually. The commenter also stated 

that the plan could be reviewed more 

frequently when there are material 

changes to the designated FMU’s 

financial position or to the capital 

markets. 

After consideration of the comment, 

the Board agrees that annual review of 

the plan may not be necessary in the 

absence of material changes to the 

designated FMU’s financial position or 

to the capital markets. The Board 

believes, however, that the plan should 

be reviewed at least every other year, 

consistent with the required review 

frequency of the recovery and orderly 

wind-down plans in § 234.3(a)(3)(iii)(G) 

and the public disclosure in 

§ 234.3(a)(23)(vi). For these reasons, the 

Board is modifying proposed 

§ 234.3(a)(15)(ii) to require a designated 

FMU to update its plan the earlier of 

every two years or following changes to 

the designated FMU or the environment 

in which it operates that would 

significantly affect the viability or 

execution of the plan. 

L. Operational Risk 

Proposed § 234.3(a)(17) required a 

designated FMU to manage its 

operational risks by establishing a 

robust operational risk-management 

framework, which includes a business 

continuity plan. Proposed 

§ 234.3(a)(17)(vii)(B) required a 

designated FMU to have a business 

continuity plan that is designed to 

ensure that critical information 

technology systems can recover and 

resume operations no later than two 

hours following disruptive events. One 

commenter stated that ensuring that 

critical information technology systems 

can meet the two-hour recovery 

objective in the case of an extreme 

cyberattack could be very costly and 

require substantial changes to the 

designated FMU’s production 

infrastructure, potentially including 

creating additional replicas of 

production infrastructure and systems. 

The commenter supported the Board’s 

proposal in the NPRM to address 

reasonable approaches to preparing for 

potential extreme cyberattacks through 

the supervisory process. 

The Board believes that it is 

imperative to financial stability that a 

designated FMU be able to recover and 

resume operations quickly after 

disruptive events and to complete 

settlement by the end of the day of the 

disruption. For many types of disruptive 

scenarios, such as a wide-scale physical 

disruption, the technology and methods 

exist to enable a designated FMU to 

recover and resume operations within 

two hours of the disruption. The Board 

understands, however, that certain 

threats to the designated FMU’s 

operations as well as the technology to 

mitigate those threats are continually 

evolving. The Board expects that a 

designated FMU’s business continuity 

planning will be a dynamic process in 

which the designated FMU works on an 

ongoing basis to update its plan to 

recover and resume operations no later 

than two hours following disruptive 

events and to complete settlement by 

the end of the day of the disruption, 

even in extreme circumstances. In areas 

where threats and technology are 

evolving, such as is the case for certain 

extreme cyberattacks, the Board 

recognizes that it may not be possible at 

this time for the designated FMU to 

recover within two hours. In such cases, 

the Board will work with the designated 

FMU through the supervisory process to 

identify reasonable approaches to 

preparing for and recovering from such 

attacks. The Board is revising proposed 

§ 234.3(a)(17)(vii)(B) to indicate this 

intent. 

The Board is also making a technical 

edit to § 234.3(a)(17)(ii) to clarify that a 

designated FMU should identify, 

monitor, and manage the material risks 

its operations may pose to trade 

repositories as well as to other financial 

market utilities. As mentioned above, 

because of the differences in the 

definition for financial market 

infrastructure in the PFMI, which 

includes trade repositories, and the 

definition of financial market utility in 

the Dodd-Frank Act, which does not, 

the Board inadvertently excluded 

consideration of risks posed to trade 

repositories. 

M. Tiered Participation Arrangements 

Proposed § 234.3(a)(19) required a 

designated FMU to identify, monitor, 

and manage the material risks to the 

designated FMU arising from tiered 

participation arrangements. These 

arrangements are those in which firms 

that are not members in the designated 

FMU (indirect participants) rely on the 

services provided by members (direct 

participants) of the designated FMU to 

access the designated FMU’s payment, 

clearing, and settlement facilities. 

Three commenters addressed this 

provision of the proposed rule. Two 

commenters opposed the adoption of 

the provision as drafted. The third 

commenter supported the proposal. 

Applicability of the proposed 

requirements. Two commenters 

addressed the applicability of the 

proposed requirements to them. One 

commenter opposed the proposed rule 

because it does not believe that it or its 

participants bear any significant risk 

from its participants’ relationships with 

their customers. Another commenter 

supported the view that a designated 

FMU needs to understand the risks 

associated with the relationships 

between direct participants and their 

customers in order to be able to 

understand and assess what risks, if 

any, the tiered arrangements may 

present to the designated FMU and its 

other participants. This commenter 

mentioned that it had developed a 

document that identifies risks that arise 

from tiered participation arrangements 

and best practices for mitigating these 

risks. This commenter also monitors 

settlement and funding metrics for 

indirect participants, and encourages 

indirect participants that exceed certain 

thresholds to become direct participants 

in order to reduce systemic risk. 

After consideration of the comments 

and further analysis, the Board 

continues to believe that for certain 

designated FMUs, based on the design 

of their settlement arrangements, 

material risks could arise from tiered 


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participation arrangements that are 

borne by the FMU or by its participants. 

For example, in an FMU in which a 

direct participant processes large 

transaction values on behalf of a large 

customer such as a large correspondent 

bank, the failure of the customer could 

jeopardize the direct participant’s 

ability to meet its obligations to the 

FMU or to the other participants in the 

FMU. The failure to meet these 

obligations could result in liquidity 

dislocations that would pose significant 

liquidity risk to the FMU or to the other 

participants in the FMU. The Board 

acknowledges that certain designated 

FMUs with particular system designs 

may not face material risks arising from 

tiered participation arrangements, but 

these designated FMUs should present 

an analysis to that effect. 

Tiered participation arrangements 

could also pose other risks to the 

designated FMU and its participants, 

including operational risk. For example, 

a designated FMU may want to 

understand how its direct participants 

manage any spikes or peaks in volume 

submitted to the designated FMU on 

behalf of indirect participants. 

Understanding the potential for spikes 

in volume will allow the designated 

FMU to prepare to have the scalable 

operational capacity necessary to 

process those volumes effectively, such 

that it is able to achieve its service-level 

objectives. 

The Board believes that a designated 

FMU should seek to understand the 

risks associated with the relationships 

between direct participants and their 

customers in order to assess whether 

any material risk to the designated FMU 

or its other participants exists. If 

material risks exist, the designated FMU 

should mitigate or manage this risk. 

However, the Board does not expect a 

designated FMU to manage all risks that 

arise between a direct participant and 

its customers, but rather to manage only 

the material risks to the designated FMU 

itself or to its other participants as a 

result of their participation in the 

system. The Board is revising 

§ 234.3(a)(19) to clarify that the 

designated FMU should assess the 

material risks arising from tiered 

participation arrangements that are 

borne by the designated FMU or by its 

other participants as a result of their 

participation in the system. 

Duplicative monitoring. One 

commenter stated that a requirement for 

a designated FMU to monitor the risks 

posed by indirect participants would be 

costly and duplicative of monitoring 

activities of regulators and the direct 

participants in the designated FMU. 

After consideration of the comment, the 

Board continues to believe that 

monitoring by direct participants or by 

their supervisors may not fully and 

effectively address all risks that may 

arise from tiered participation 

arrangements. Direct participants would 

likely monitor risks posed to them by 

their customers but may not consider 

how their actions to mitigate or manage 

those risks could affect the FMU or its 

other participants. In addition, the 

supervisory focus for certain direct 

participants is typically different from 

that for designated FMUs, and their 

supervisory monitoring might not take 

into account the effects of tiered 

participation arrangements on the 

designated FMU or its other 

participants. Direct participants in a 

designated FMU may also be subject to 

varying degrees of supervision. 

Therefore, the onus should be on the 

designated FMU to understand the 

tiered participation arrangements in the 

system and the impact of these 

relationships on the designated FMU 

and its participants. 

Requirements for an FMU with 

respect to tiered participation 

arrangements. One commenter stated 

that the proposed rule was ambiguous 

about what would actually be required 

of a designated FMU to comply with 

§ 234.3(a)(19). The commenter stated 

that the Board should make clear that an 

FMU that does not bear any risk from 

its participants or their customers 

should not need to take any action to 

comply with the proposed rule. Another 

commenter stated that a designated 

FMU should be required to ensure that 

its direct participants have sufficient 

information to assess their relationships 

with their customers. The designated 

FMU should also ensure that its direct 

participants have sufficient information 

to evaluate and manage their risks with 

respect to participation in the 

designated FMU. 

After consideration of the comments, 

the Board continues to believe that 

designated FMUs should manage 

material risks arising from tiered 

participation arrangements. The Board 

is adopting provisions in the final rule 

that clarify what would be expected 

from a designated FMU. The Board is 

including § 234.3(a)(19)(i) to clarify that 

the designated FMU should conduct an 

analysis to determine whether material 

risks arise from tiered participation 

arrangements. Depending on the nature 

of their payment, clearing, or settlement 

activities, designated FMUs’ 

methodologies for conducting the 

analysis may differ. For example, some 

designated FMUs may choose to gather 

information about the volume and value 

of activity processed by direct 

participants on behalf of indirect 

participants in the designated FMU or 

other relevant information. Where such 

information would be useful, a 

designated FMU may want to consider 

defining reasonable thresholds and 

other factors for gathering the 

information in order to minimize 

burden. 

The Board is including 

§ 234.3(a)(19)(ii) to clarify that, where 

material risks from tiered participation 

arrangements are identified, the 

designated FMU must mitigate or 

manage such risks. The appropriate 

actions to mitigate or manage the 

material risks identified will depend on 

the circumstances of the designated 

FMU and the risks identified. For 

example, one commenter noted that it 

provides a set of best practices with 

respect to tiered participation 

arrangements to guide participants’ 

understanding and facilitate the 

assessment of risks related to tiered 

participation. This revision to the rule is 

also intended to clarify that the 

designated FMU is required to take 

additional action only if material risks 

are identified pursuant to 

§ 234.3(a)(19)(i). 

The Board is including 

§ 234.3(a)(19)(iii) to clarify that a 

designated FMU will be required to 

review and update its analysis of risks 

arising from tiered participation 

arrangements at the earlier of every two 

years or following material changes to 

the system design or operations or the 

environment in which the designated 

FMU operates if those changes could 

affect the analysis conducted as 

required in § 234.3(a)(19)(i). If a 

designated FMU’s review of its analysis 

indicates that the designated FMU faces 

no material risks from tiered 

participation arrangements, then no 

further action would be required. This 

provision is intended to clarify, in 

response to concerns raised by one 

commenter, that a designated FMU will 

not be required to monitor constantly 

the risks posed by tiered participation 

arrangements. The review requirement 

is also intended to be responsive to 

another comment that the review 

frequency for the assessment of risks 

arising from tiered participation 

arrangements should be consistent with 

the review standards under proposed 

§ 234.3(a)(3). The Board agrees and is 

also adopting a requirement for biennial 

review of the recovery and orderly 

wind-down plans in § 234.3(a)(3)(iii). 

Definition of ‘indirect participants’. 

Proposed § 234.3(a)(19) refers to firms 

that are not members of the designated 

FMU (indirect participants) that rely on 

the services provided by direct 


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16For example, some firms may submit 

transactions or instructions to an FMU directly 

under the account of a direct participant. In this 

case, the firm may be bound by the FMU’s rules, 

but the direct participant would be accountable for 

the firm’s performance on its obligations. In other 

FMUs, indirect participants are not bound by the 

rules of the FMU and do not have a direct 

connection to the FMU. 

participants to access the designated 

FMU’s payment, clearing, or settlement 

facilities. One commenter stated that the 

Board should limit the application of 

the rule to firms that are known by the 

designated FMU, have an agreement 

binding them to the FMU’s rules, and 

may have a direct connection to the 

FMU. The Board believes that material 

risks can originate from arrangements 

with a range of indirect participants 

having a range of relationships or 

arrangements with the FMU. If such 

arrangements may pose material risks, 

the designated FMU should seek to 

gather information from its direct 

participants on those arrangements and 

assess the risks from those 

arrangements. Therefore, the Board is 

retaining the concept of indirect 

participant as those firms that access the 

services of the designated FMU through 

a direct participant, whether or not they 

are bound by some part of the rules or 

have a direct connection to the 

designated FMU.16 The Board wishes to 

clarify, however, that the designated 

FMU should focus its analysis on the 

direct customers of the direct 

participants and need not extend its 

analysis to other tiers of customers, such 

as the customers of the customers of the 

direct participants. 

Thresholds for identifying indirect 

participants that could pose risk to the 

designated FMU. In the preamble to the 

proposed rule, the Board asked how, if 

at all, the Board should define the 

thresholds for identifying indirect 

participants responsible for a significant 

proportion of transactions processed by 

the designated FMU and for identifying 

indirect participants whose transaction 

volumes or values are large relative to 

the capacity of the direct participant 

through which the indirect participants 

access the designated FMU. One 

commenter stated that the Board should 

not be too prescriptive in defining these 

thresholds, because they may vary 

across individual designated FMUs. The 

Board is not defining specific thresholds 

for identifying indirect participants that 

may pose risk to the designated FMU. 

Conflicts of interest and antitrust 

issues. One commenter stated that the 

proposed rule raises conflict-of-interest 

and antitrust issues. The commenter 

stated that the collection of data on 

indirect participation that the Board 

proposed in the NPRM would give the 

board of directors of the designated 

FMU a complete picture of each 

participant’s relationships with its most 

important customers, which could 

create a conflict of interest if the 

designated FMU’s board of directors is 

made up of representatives of the 

member banks. The commenter also 

stated that the proposed requirement 

appeared to require designated FMUs to 

encourage indirect participants that are 

large relative to their direct participants 

to move to a larger direct participant or 

become direct participants themselves, 

which could create antitrust issues if the 

designated FMU’s actions to comply 

with the requirement appear to third 

parties as an effort by the designated 

FMU to favor its owner banks. 

The Board believes that any conflicts 

of interest or antitrust issues that may 

arise from the requirements in proposed 

§ 234.3(a)(19) can be avoided through 

the careful design of the informationgathering and risk-management 

processes developed by the designated 

FMU. First, the designated FMU’s board 

of directors does not have to see a 

complete picture of each participant’s 

relationships with its customers. The 

designated FMU can put controls in 

place that would minimize potential 

conflicts to ensure that information is 

shared in an appropriate manner that 

would allow the board of directors to 

carry out its responsibility for the 

comprehensive management of risks. 

Second, the rule does not require the 

designated FMU to encourage indirect 

participants that are large relative to 

their direct participants to move to a 

larger direct participant or become 

direct participants themselves. The 

designated FMU may choose other 

methods for mitigating or managing 

risks to the designated FMU from tiered 

participation arrangements. For 

example, if the designated FMU is 

concerned that a direct participant’s 

exposures to its customers could cause 

it to default to the designated FMU, the 

designated FMU may require the direct 

participant to provide additional 

collateral to mitigate the relevant 

financial risks posed by its relationships 

with its customers. Therefore, the Board 

does not believe it is necessary to 

modify the rule to address these 

concerns. 

N. Efficiency and Effectiveness 

Proposed § 234.3(a)(21) required a 

designated FMU to be efficient and 

effective in meeting the requirements of 

its participants and the markets it 

serves. In the NPRM, the Board 

explained that efficiency generally 

encompasses what a designated FMU 

chooses to do, how it does it, and the 

resources required by the designated 

FMU to perform its functions. 

Effectiveness refers to whether the 

designated FMU is meeting its goals and 

objectives, which include the 

requirements of its participants and the 

markets it serves. 

One commenter stated that the Board 

has not given sufficient weight to 

market judgments regarding an FMU’s 

effectiveness and that an FMU that does 

not meet the requirements of its 

participants and the markets it serves or 

that does not meet its objectives 

efficiently will not survive in the 

market. The commenter suggested that 

the Board remove the requirement or 

redefine efficiency and effectiveness in 

terms of market judgments. 

The Board continues to believe that a 

requirement for a designated FMU to be 

efficient and effective should be 

included in § 234.3(a) and that the terms 

efficiency and effectiveness should not 

be defined solely in terms of market 

judgments. The Board agrees with the 

comment that market forces may 

encourage an FMU to be efficient and 

effective, particularly in cases where it 

has a direct competitor. Many markets 

for payment, clearing and settlement 

services, however, are monopolies or 

oligopolies. Furthermore, it may be 

difficult for market participants to 

determine if a particular designated 

FMU is efficient and effective because of 

imperfect information about the 

designated FMU. Therefore, market 

judgments alone may be insufficient to 

encourage the designated FMU to 

operate efficiently and effectively. The 

Board does not believe that changes to 

the proposed requirement are necessary 

and is adopting the text of the rule as 

proposed. 

O. Disclosure of Rules, Procedures and 

Market Data 

Proposed § 234.3(a)(23) required the 

designated FMU to disclose relevant 

information about its operations and 

risk management to its participants and 

to the public. Proposed § 234.3(a)(23)(ii) 

required a designated FMU to disclose 

publicly all rules and key procedures, 

including key aspects of its default rules 

and procedures. Proposed 

§ 234.3(a)(23)(iii) required a designated 

FMU to provide sufficient information 

to enable participants to have an 

accurate understanding of the risks, 

fees, and other material costs they incur 

by participating in the designated FMU. 

The Board also asked a question in the 

NPRM about whether a designated FMU 

should disclose information about fees 

and discount policies to the public. 


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The Board received two comment 

letters that addressed this provision of 

the proposed rule. In response to the 

proposed rule, one commenter stated 

that certain procedures should not be 

publicly disclosed because they would 

help unauthorized persons gain access 

to the system. The Board agrees that 

certain procedures should not be 

disclosed to the public in detail if such 

detail would create vulnerabilities for 

the designated FMU or undermine its 

safety and soundness. Although the 

Board expects disclosures to be robust, 

it does not expect a designated FMU to 

disclose to the public sensitive 

information, such as its detailed 

business continuity plan. In such cases, 

it may be sufficient to disclose to the 

public only the key highlights of the 

plan. 

In response to the Board’s question 

about public disclosure of information 

on fees and discount policies, one 

commenter stated that high-level 

information about pricing principles 

and rationale for the designated FMU’s 

pricing principles should be disclosed, 

while another commenter opposed such 

a requirement. After consideration of 

the comments, the Board has 

determined not to include a requirement 

for a designated FMU to disclose 

information about fees and discount 

policies to the public. Although the 

Board believes that public disclosure of, 

at a minimum, high-level information 

about the designated FMU’s pricing 

principles and rationale for those 

principles is a best practice for 

transparency purposes, the Board 

believes that a requirement to disclose 

specific details about fees and discounts 

to the public is not relevant to the 

objectives of Title VIII to promote robust 

risk management, promote safety and 

soundness, reduce systemic risks, and 

support the stability of the broader 

financial system. For these reasons, the 

Board is not introducing this 

requirement in § 234.3(a)(23). 

P. Compliance Dates 

In the NPRM, the Board proposed that 

the revisions to § 234.3(a) become 

effective 30 days from the date final 

rules are published in the Federal 

Register. The Board proposed that 

designated FMUs be expected to comply 

with the requirements in the final rule 

30 days from the date final rules are 

published in the Federal Register, with 

the exception of establishing plans for 

recovery and orderly wind-down, set 

forth in proposed § 234.3(a)(3)(iii); 

addressing uncovered credit losses, set 

forth in proposed § 234.3(a)(4)(vi); 

addressing liquidity shortfalls, set forth 

in proposed § 234.3(a)(7)(viii); 

maintaining sufficient liquid net assets 

funded by equity and a viable capital 

plan, set forth in proposed 

§ 234.3(a)(15)(i) and (ii); managing risks 

arising in tiered participation 

arrangements, set forth in proposed 

§ 234.3(a)(19); and providing 

comprehensive public disclosure, set 

forth in proposed § 234.3(a)(23)(iv). The 

Board proposed that compliance with 

these requirements be required within 

six months of publication of the final 

rules. 

The Board received three comment 

letters that addressed the extension to 

the compliance date for certain 

requirements. Two commenters agreed 

with the six-month extension for these 

requirements. The third commenter 

stated that a minimum of 18 months 

would be required to comply with 

requirements in the proposed rule, 

especially if the requirements set forth 

in proposed § 234.3(a)(19) were adopted 

as proposed. One of the commenters 

also stated that the compliance date for 

proposed § 234.3(a)(20) on links to other 

FMUs should also be extended for at 

least six months because 

implementation of that rule will require 

extensive cooperation and coordination 

between FMUs. 

The Board has adopted the effective 

date of December 31, 2014 for the final 

rule. Designated FMUs are also expected 

to comply with the requirements in the 

final rule on December 31, 2014, with 

the exception of establishing plans for 

recovery and orderly wind-down, set 

forth in § 234.3(a)(3)(iii); addressing 

uncovered credit losses, set forth in 

§ 234.3(a)(4)(vi); addressing liquidity 

shortfalls, set forth in § 234.3(a)(7)(viii); 

maintaining sufficient liquid net assets 

funded by equity and a viable capital 

plan, set forth in § 234.3(a)(15)(i) and 

(ii); managing risks arising in tiered 

participation arrangements, set forth in 

§ 234.3(a)(19); and providing 

comprehensive public disclosure, set 

forth in § 234.3(a)(23)(iv). Compliance 

with these provisions will be required 

on or before December 31, 2015. 

Designated FMUs, however, are 

encouraged to comply with the 

provisions as soon as possible. 

The Board is making these changes to 

the effective date and the compliance 

dates after consideration of the public 

comments as well as internal analysis. 

The Board decided to extend the 

compliance date for the new and 

heightened requirements in order to 

allow sufficient time to the designated 

FMUs to complete their processes and 

procedures for changes to their 

rulebooks and to minimize burden on 

the designated FMUs and the markets 

they serve. Also, the Board has decided 

not to include § 234.3(a)(20) in the list 

of provisions for which there is an 

extension to the compliance period 

because this provision does not apply to 

the designated FMUs that will be 

subject to the revisions to § 234.3(a) on 

the effective date of the final rule. 

III. Administrative Law Matters 

A. Regulatory Flexibility Act Analysis 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (‘‘RFA’’) generally 

requires an agency to perform an initial 

and a final regulatory flexibility analysis 

on the impact a rule is expected to have 

on small entities. However, under 

section 605(b) of the RFA, the regulatory 

flexibility analysis otherwise required 

under section 604 of the FRA is not 

required if an agency certifies, along 

with a statement providing the factual 

basis for such certification, that the rule 

will not have a significant economic 

impact on a substantial number of small 

entities. Based on current information, 

the Board believes that the payment 

systems that have been designated by 

the Council are not ‘‘small entities’’ for 

purposes of the RFA, and so, the final 

rule likely would not have a significant 

economic impact on a substantial 

number of small entities. However, the 

Board has prepared the following final 

regulatory flexibility analysis pursuant 

to section 604 of the RFA. 

1. Statement of the need for, and 

objectives of, the final rule. In 

accordance with Sections 805(a) of the 

Dodd-Frank Act, the Board is adopting 

the final rule. The final rule amends the 

risk-management standards for 

systemically important FMUs in 

consideration of the new international 

standards. The reasons and justification 

for the final rule are described above in 

the Supplementary Information. 

2. Summary of the significant issues 

raised by public comment on the 

Board’s initial analysis, the Board’s 

assessment of such issues, and a 

statement of any changes made as a 

result of such comments. The Board did 

not receive any public comments 

regarding its initial regulatory flexibility 

analysis. In addition, the Board did not 

receive any comments filed by the Chief 

Counsel for Advocacy of the Small 

Business Administration in response to 

the proposed rule. 

3. Small entities affected by the final 

rule. The final rule would affect FMUs 

that the Council designates as 

systemically important to the U.S. 

financial system for which the Board is 

the Supervisory Agency. Pursuant to 

regulations issued by the Small 

Business Administration (the ‘‘SBA’’) 

(13 CFR 121.201), a ‘‘small entity’’ 


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17See ‘‘The Federal Reserve in the Payments 

System,’’ Fed. Res. Reg. Svc. §§ 9–1550, 9–1558 

(Apr. 2009). 

includes an establishment engaged in (i) 

providing financial transaction 

processing, reserve and liquidity 

services, or clearinghouse services with 

an average annual revenue of $38.5 

million or less (NAICS code 522320); (ii) 

securities and/or commodity exchange 

activities with an average annual 

revenue of $38.5 million or less (NAICS 

code 523210); and (iii) trust, fiduciary, 

and/or custody activities with an 

average annual revenue of $38.5 million 

or less (NAICS code 523991). As noted 

in the NPRM, based on current 

information, the Board does not believe 

that any of the FMUs that have been 

designated by the Council, and in 

particular the two designated FMUs for 

which the Board is the Supervisory 

Agency under Title VIII of the DoddFrank Act, would be ‘‘small entities’’ 

pursuant to the SBA regulation. In 

addition, the Board is not, and is not 

likely to become, the Supervisory 

Agency pursuant to section 803(8) of the 

Dodd-Frank Act for any designated 

FMU that operates as a central securities 

depository or central counterparty. 

4. Recordkeeping, reporting, and 

compliance requirements. The final rule 

imposes certain reporting and 

recordkeeping requirements for a 

designated FMU. (See, for example, 

§ 234.3(a)(3) (requiring policies, 

procedures, and systems that enable the 

designated FMU to identify, measure, 

monitor, and manage the risks that arise 

in or are borne by the designated FMU), 

§ 234.3(a)(13) (requiring effective and 

clearly defined rules and procedures to 

manage a participant default), and 

§ 234.3(a)(23) (requiring a 

comprehensive public disclosure of its 

legal, governance, risk management, and 

operating framework).) The final rule 

also contains a number of compliance 

requirements, including the standards 

that the designated FMU must meet, 

such as (i) having a well-founded, clear, 

transparent and enforceable legal basis 

for each material aspect of its activities 

in all relevant jurisdictions 

(§ 234.3(a)(1)), (ii) effectively measuring, 

monitoring, and managing its credit 

exposures under a wide range of 

significantly different stress scenarios 

(§ 234.3(a)(4)), (iii) effectively 

measuring, monitoring, and managing 

the liquidity risk that arises or is borne 

by the designated FMU (§ 234.3(a)(7)), 

and (iv) managing its operational risks 

by establishing a robust operational riskmanagement framework (§ 234.3(a)(17)). 

Designated FMUs for which the Board is 

the Supervisory Agency are generally 

already expected to meet most of these 

standards, or are at least familiar with 

these or similar standards, so these 

requirements would not likely impose 

material additional costs on those 

designated FMUs. 

The final rule, however, also includes 

a number of new or heightened 

standards that may impose new or 

additional compliance costs on the 

designated FMUs for which the Board is 

the Supervisory Agency. For example, 

as explained above in the 

Supplementary Information, the final 

rule includes requirements for 

integrated plans for the designated 

FMU’s recovery and orderly wind-down 

(§ 234.3(a)(3)(iii)); policies and 

procedures that explicitly address 

uncovered credit losses 

(§ 234.3(a)(4)(vi)); policies and 

procedures that explicitly address 

liquidity shortfalls (§ 234.3(a)(7)(viii)); 

maintaining sufficient liquid net assets 

funded by equity sufficient to ensure a 

recovery or orderly wind-down of 

critical operations and services and a 

viable plan for raising additional equity 

should the designated FMU’s equity fall 

below the amount required for a 

recovery or orderly wind-down 

(§ 234.3(a)(15)(i) and (ii)); managing 

risks arising in tiered participation 

arrangements (§ 234.3(a)(19)); and 

providing comprehensive public 

disclosure (§ 234.3(a)(23)(iv)). 

All of these requirements would 

likely require professional skills in the 

legal, risk management, finance, 

payments operations, and accounting 

areas. 

5. Significant alternatives to the 

revisions. Section 805(a) of the DoddFrank Act requires the Board to 

prescribe risk-management standards 

governing the operations related to 

payment, clearing, and settlement 

activities of designated FMUs, so other 

administrative methods for 

accomplishing the goals of the Act were 

not considered. In prescribing the riskmanagement standards, Section 805(a) 

of the Act also requires the Board to take 

into consideration relevant international 

standards, among other things. The 

PFMI is now widely recognized as the 

most relevant set of international riskmanagement standards for payment, 

clearing, and settlement systems. 

Consistent with the PFMI, the proposed 

rule generally employed a flexible, 

principles-based approach to permit a 

designated FMU to employ a costeffective method for compliance. In 

consultation with the Council and the 

other Supervisory Agencies, the Board 

has included additional detail in 

developing the final rule where 

necessary or appropriate, such as 

specific testing frequencies or other 

requirements to provide the designated 

FMUs with sufficient guidance for 

compliance with the standard. As noted 

above, the Board has revised the level of 

detail provided in the risk-management 

standards in the final rule, as 

appropriate, in response to the public 

comments. In addition, after 

consideration of the public comments as 

well as additional Board analysis, the 

Board has delayed the compliance date 

for several of the new or heightened 

requirements in order to allow 

designated FMUs for which the Board is 

the Supervisory Agency sufficient time 

to revise their rules and associated 

processes and procedures and to 

minimize burden on the designated 

FMUs and the markets they serve. As 

noted above, the Board does not believe 

that the alternative adopted in the final 

rule will have a significant economic 

impact on small entities. 

B. Competitive Impact Analysis 

As a matter of policy, the Board 

subjects all operational and legal 

changes that could have a substantial 

effect on payment system participants to 

a competitive impact analysis, even if 

competitive effects are not apparent on 

the face of the proposal.17 Pursuant to 

this policy, the Board assesses whether 

proposed changes ‘‘would have a direct 

and material adverse effect on the 

ability of other service providers to 

compete effectively with the Federal 

Reserve in providing similar services’’ 

and whether any such adverse effect 

‘‘was due to legal differences or due to 

a dominant market position deriving 

from such legal differences.’’ If, as a 

result of this analysis, the Board 

identifies an adverse effect on the ability 

to compete, the Board then assesses 

whether the associated benefits—such 

as improvements to payment system 

efficiency or integrity—can be achieved 

while minimizing the adverse effect on 

competition. 

This final rule promulgates revised 

Regulation HH risk-management 

standards, which are based on the PFMI, 

for certain designated FMUs as required 

by Title VIII of the Dodd-Frank Act. In 

a separate, related Federal Register 

notice, the Board finalized concurrently 

revisions to part I of its PSR policy, 

which applies to the Federal Reserve 

Bank-operated Fedwire Services, based 

on the PFMI. At least one currently 

designated FMU that is subject to 

Regulation HH (The Clearing House 

Payments Company, L.L.C., with respect 

to its operation of the Clearing House 

Interbank Payments System (CHIPS)) 

competes with the Fedwire Funds 


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18These standards include principle 2 on 

governance, principle 3 on the framework for the 

comprehensive management of risks, principle 4 on 

credit risk, principle 5 on collateral, principle 7 on 

liquidity risk, principle 13 on participant-default 

rules and procedures, principle 15 on general 

business risk, and principle 18 on access and 

participation requirements. 

Service. One commenter expressed 

concern that differences in language 

between the risk-management standards 

in Regulation HH and in part I of the 

PSR policy may result in two different 

sets of risk-management standards for 

FMUs. The commenter also stated that 

the Board should ensure that the 

requirements in § 234.3(a)(15) with 

respect to general business risk for 

designated FMUs should also be 

imposed on the equivalent Reserve Bank 

service. 

The final revisions to the riskmanagement and transparency 

expectations in part I of the PSR policy 

are consistent with those in final 

Regulation HH. As discussed above, a 

different level of detail is required for 

Regulation HH as compared to part I of 

the PSR policy. Regulation HH is an 

enforceable rule applicable to 

designated FMUs other than those 

supervised by the CFTC or SEC, so 

additional details from the key 

considerations and explanatory notes of 

the PFMI were incorporated in the rule 

text to provide greater clarity on the 

Board’s expectations. The PSR policy, 

on the other hand, is a policy statement 

that provides guidance with respect to 

the Board’s exercise of its other 

supervisory or regulatory authority over 

other financial market infrastructures 

(including those operated by the Federal 

Reserve Banks) or their participants, its 

participation in cooperative oversight 

arrangements for financial market 

infrastructures, or the provision of 

intraday credit to eligible Federal 

Reserve account holders. Incorporating 

the headline standards from the PFMI is 

consistent with the purpose of the 

document and the Board’s long-standing 

principles-based approach to its PSR 

policy. The Board has stated that it will 

be guided by the key considerations and 

the explanatory text of the PFMI in its 

application of the PSR policy. The 

Board does not intend for differences in 

language in the two documents to lead 

to inconsistent requirements for Reserve 

Bank-operated FMUs and their private 

sector competitors. 

The Board recognizes the critical role 

that the Fedwire Services play in the 

financial system and is committed to 

applying risk-management standards to 

the Reserve Banks’ Fedwire Funds 

Service that are at least as stringent as 

the applicable Regulation HH standards 

applied to designated FMUs that 

provide similar services. The final 

revisions to part I of the PSR policy 

provide that the treatment of Reserve 

Bank systems will be consistent with 

that of private-sector systems in order to 

avoid any material adverse effect on the 

ability of other service providers to 

compete effectively with the Reserve 

Banks. 

There are, however, several riskmanagement standards for which 

flexibility in implementation will be 

necessary for the Fedwire Services given 

the Federal Reserve’s legal framework 

and structure and its roles as monetary 

authority and liquidity provider.18 The 

Board does not expect that the 

difference in approach to implementing 

these standards for the Fedwire Funds 

Service as compared to the requirements 

for its private-sector competitor would 

create a significant difference in 

operating costs for the two entities, with 

the possible exception of the 

expectation to hold unencumbered 

liquid financial assets and equity under 

§ 234.3(a)(15)(i). In order to foster 

competition with private-sector systems, 

the Board will incorporate the cost of 

this requirement into the pricing of the 

Fedwire Funds Service. Although the 

Fedwire Funds Service does not face the 

risk that a business shock would cause 

the service to wind down in a disorderly 

manner and disrupt the stability of the 

financial system, in order to foster 

competition with private-sector systems, 

the Board will require the Fedwire 

Funds Service to impute the cost of 

maintaining liquid assets and equity to 

cover general business losses, similar to 

the requirement for designated FMUs in 

§ 234.3(a)(15)(i). The Board will also 

monitor the implementation of the final 

regulation and policy for issues of 

consistency and competitive equity 

between private-sector systems and the 

Fedwire Funds Service. Therefore, the 

Board does not believe the final rule 

promulgating risk-management 

standards for designated FMUs under 

Title VIII will have any direct and 

material adverse effect on the ability of 

other service providers to compete with 

the Reserve Banks. 

C. Paperwork Reduction Act Analysis 

In accordance with the Paperwork 

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

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

Board reviewed the final rule under the 

authority delegated to the Board by the 

Office of Management and Budget. As 

noted in the proposal, for purposes of 

calculating burden under the Paperwork 

Reduction Act, a ‘‘collection of 

information’’ involves 10 or more 

respondents. Any collection of 

information addressed to all or a 

substantial majority of an industry is 

presumed to involve 10 or more 

respondents (5 CFR 1320.3(c) 

introductory text and (c)(4)(ii)). The 

Board estimates there are fewer than 10 

respondents, and these respondents do 

not represent all or a substantial 

majority of the participants in payment, 

clearing, and settlement systems. 

Therefore, no collections of information 

pursuant to the Paperwork Reduction 

Act are contained in the final rule. The 

Board did not receive any comments on 

this analysis. 

Text of Final Rule 

List of Subjects in 12 CFR 234 

Banks, Banking, Credit, Electronic 

funds transfers, Financial market 

utilities, Securities. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board amends 12 CFR 

part 234 as set forth below. 

PART 234—DESIGNATED FINANCIAL 

MARKET UTILITIES (REGULATION HH) 

■ 1–2. The authority citation for part 

234 continues to read as follows: 

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

■ 3. Revise § 234.2 to read as follows: 

§ 234.2 Definitions. 

(a) Backtest means the ex post 

comparison of realized outcomes with 

margin model forecasts to analyze and 

monitor model performance and overall 

margin coverage. 

(b) Central counterparty means an 

entity that interposes itself between 

counterparties to contracts traded in one 

or more financial markets, becoming the 

buyer to every seller and the seller to 

every buyer. 

(c) Central securities depository 

means an entity that provides securities 

accounts and central safekeeping 

services. 

(d) Designated financial market utility 

means a financial market utility that is 

currently designated by the Financial 

Stability Oversight Council under 

section 804 of the Dodd-Frank Act (12 

U.S.C. 5463). 

(e) Financial market utility has the 

same meaning as the term is defined in 

section 803(6) of the Dodd-Frank Act 

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

(f) Link means, for purposes of 

§ 234.3(a)(20), a set of contractual and 

operational arrangements between two 

or more central counterparties, central 

securities depositories, or securities 

settlement systems, or between one or 

more of these financial market utilities 


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and one or more trade repositories, that 

connect them directly or indirectly, 

such as for the purposes of participating 

in settlement, cross margining, or 

expanding their services to additional 

instruments and participants. 

(g) Orderly wind-down means the 

actions of a designated financial market 

utility to effect the permanent cessation, 

sale, or transfer of one or more of its 

critical operations or services in a 

manner that would not increase the risk 

of significant liquidity or credit 

problems spreading among financial 

institutions or markets and thereby 

threaten the stability of the U.S. 

financial system. 

(h) Recovery means, for purposes of 

§ 234.3(a)(3) and (15), the actions of a 

designated financial market utility, 

consistent with its rules, procedures, 

and other ex ante contractual 

arrangements, to address any uncovered 

loss, liquidity shortfall, or capital 

inadequacy, whether arising from 

participant default or other causes (such 

as business, operational, or other 

structural weaknesses), including 

actions to replenish any depleted 

prefunded financial resources and 

liquidity arrangements, as necessary to 

maintain the designated financial 

market utility’s viability as a going 

concern and to continue its provision of 

critical services. 

(i) Securities settlement system means 

an entity that enables securities to be 

transferred and settled by book entry 

and allows transfers of securities free of 

or against payment. 

(j) Stress test means the estimation of 

credit or liquidity exposures that would 

result from the realization of potential 

stress scenarios, such as extreme price 

changes, multiple defaults, and changes 

in other valuation inputs and 

assumptions. 

(k) Supervisory Agency has the same 

meaning as the term is defined in 

section 803(8) of the Dodd-Frank Act 

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

(l) Trade repository means an entity 

that maintains a centralized electronic 

record of transaction data, such as a 

swap data repository or a security-based 

swap data repository. 

■ 4. In § 234.3, revise paragraph (a) to 

read as follows: 

§ 234.3 Standards for designated financial 

market utilities. 

(a) A designated financial market 

utility must implement rules, 

procedures, or operations designed to 

ensure that it meets or exceeds the 

following risk-management standards 

with respect to its payment, clearing, 

and settlement activities. 

(1) Legal basis. The designated 

financial market utility has a wellfounded, clear, transparent, and 

enforceable legal basis for each material 

aspect of its activities in all relevant 

jurisdictions. 

(2) Governance. The designated 

financial market utility has governance 

arrangements that— 

(i) Are clear, transparent, and 

documented; 

(ii) Promote the safety and efficiency 

of the designated financial market 

utility; 

(iii) Support the stability of the 

broader financial system, other relevant 

public interest considerations such as 

fostering fair and efficient markets, and 

the legitimate interests of relevant 

stakeholders, including the designated 

financial market utility’s owners, 

participants, and participants’ 

customers; and 

(iv) Are designed to ensure— 

(A) Lines of responsibility and 

accountability are clear and direct; 

(B) The roles and responsibilities of 

the board of directors and senior 

management are clearly specified; 

(C) The board of directors consists of 

suitable individuals having appropriate 

skills to fulfill its multiple roles; 

(D) The board of directors includes a 

majority of individuals who are not 

executives, officers, or employees of the 

designated financial market utility or an 

affiliate of the designated financial 

market utility; 

(E) The board of directors establishes 

policies and procedures to identify, 

address, and manage potential conflicts 

of interest of board members and to 

review its performance and the 

performance of individual board 

members on a regular basis; 

(F) The board of directors establishes 

a clear, documented risk-management 

framework that includes the designated 

financial market utility’s risk-tolerance 

policy, assigns responsibilities and 

accountability for risk decisions, and 

addresses decisionmaking in crises and 

emergencies; 

(G) Senior management has the 

appropriate experience, skills, and 

integrity necessary to discharge 

operational and risk-management 

responsibilities; 

(H) The risk-management function has 

sufficient authority, resources, and 

independence from other operations of 

the designated financial market utility, 

and has a direct reporting line to and is 

overseen by a committee of the board of 

directors; 

(I) The internal audit function has 

sufficient authority, resources, and 

independence from management, and 

has a direct reporting line to and is 

overseen by a committee of the board of 

directors; and 

(J) Major decisions of the board of 

directors are clearly disclosed to 

relevant stakeholders, including the 

designated financial market utility’s 

owners, participants, and participants’ 

customers, and, where there is a broad 

market impact, the public. 

(3) Framework for the comprehensive 

management of risks. The designated 

financial market utility has a sound riskmanagement framework for 

comprehensively managing legal, credit, 

liquidity, operational, general business, 

custody, investment, and other risks 

that arise in or are borne by the 

designated financial market utility. This 

framework is subject to periodic review 

and includes— 

(i) Risk-management policies, 

procedures, and systems that enable the 

designated financial market utility to 

identify, measure, monitor, and manage 

the risks that arise in or are borne by the 

designated financial market utility, 

including those posed by other entities 

as a result of interdependencies; 

(ii) Risk-management policies, 

procedures, and systems that enable the 

designated financial market utility to 

identify, measure, monitor, and manage 

the material risks that it poses to other 

entities, such as other financial market 

utilities, settlement banks, liquidity 

providers, or service providers, as a 

result of interdependencies; and 

(iii) Integrated plans for the 

designated financial market utility’s 

recovery and orderly wind-down that— 

(A) Identify the designated financial 

market utility’s critical operations and 

services related to payment, clearing, 

and settlement; 

(B) Identify scenarios that may 

potentially prevent it from being able to 

provide its critical operations and 

services as a going concern, including 

uncovered credit losses (as described in 

paragraph (a)(4)(vi)(A) of this section), 

uncovered liquidity shortfalls (as 

described in paragraph (a)(7)(viii)(A) of 

this section), and general business 

losses (as described in paragraph (a)(15) 

of this section); 

(C) Identify criteria that could trigger 

the implementation of the recovery or 

orderly wind-down plan; 

(D) Include rules, procedures, 

policies, and any other tools the 

designated financial market utility 

would use in a recovery or orderly 

wind-down to address the scenarios 

identified under paragraph (a)(3)(iii)(B) 

of this section; 

(E) Include procedures to ensure 

timely implementation of the recovery 

and orderly wind-down plans in the 


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scenarios identified under paragraph 

(a)(3)(iii)(B) of this section; 

(F) Include procedures for informing 

the Board, as soon as practicable, if the 

designated financial market utility is 

considering initiating recovery or 

orderly wind-down; and 

(G) Are reviewed the earlier of every 

two years or following changes to the 

system or the environment in which the 

designated financial market utility 

operates that would significantly affect 

the viability or execution of the plans. 

(4) Credit risk. The designated 

financial market utility effectively 

measures, monitors, and manages its 

credit exposures to participants and 

those arising from its payment, clearing, 

and settlement processes. In this regard, 

the designated financial market utility 

maintains sufficient financial resources 

to cover its credit exposure to each 

participant fully with a high degree of 

confidence. In addition, the designated 

financial market utility— 

(i) If it operates as a central 

counterparty, maintains additional 

prefunded financial resources that are 

sufficient to cover its credit exposure 

under a wide range of significantly 

different stress scenarios that includes 

the default of the participant and its 

affiliates that would potentially cause 

the largest aggregate credit exposure to 

the designated financial market utility 

in extreme but plausible market 

conditions; 

(ii) If it operates as a central 

counterparty, may be directed by the 

Board to maintain additional prefunded 

financial resources that are sufficient to 

cover its credit exposure under a wide 

range of significantly different stress 

scenarios that includes the default of the 

two participants and their affiliates that 

would potentially cause the largest 

aggregate credit exposure to the 

designated financial market utility in 

extreme but plausible market 

conditions. The Board may consider 

such a direction if the central 

counterparty— 

(A) Is involved in activities with a 

more-complex risk profile, such as 

clearing financial instruments 

characterized by discrete jump-todefault price changes or that are highly 

correlated with potential participant 

defaults, or 

(B) Has been determined by another 

jurisdiction to be systemically important 

in that jurisdiction; 

(iii) If it operates as a central 

counterparty, determines the amount 

and regularly tests the sufficiency of the 

total financial resources available to 

meet the requirements of this paragraph 

by— 

(A) On a daily basis, conducting a 

stress test of its total financial resources 

using standard and predetermined stress 

scenarios, parameters, and assumptions; 

(B) On at least a monthly basis, and 

more frequently when the products 

cleared or markets served experience 

high volatility or become less liquid, or 

when the size or concentration of 

positions held by the central 

counterparty’s participants increases 

significantly, conducting a 

comprehensive and thorough analysis of 

the existing stress scenarios, models, 

and underlying parameters and 

assumptions such that the designated 

financial market utility meets its 

required level of default protection in 

light of current and evolving market 

conditions; and 

(C) Having clear procedures to report 

the results of its stress tests to 

decisionmakers at the central 

counterparty and using these results to 

evaluate the adequacy of and adjust its 

total financial resources; 

(iv) If it operates as a central 

counterparty, excludes assessments for 

additional default or guaranty fund 

contributions (that is, default or 

guaranty fund contributions that are not 

prefunded) in its calculation of financial 

resources available to meet the total 

financial resource requirement under 

this paragraph; 

(v) At least annually, provides for a 

validation of the designated financial 

market utility’s risk-management 

models used to determine the 

sufficiency of its total financial 

resources that— 

(A) Includes the designated financial 

market utility’s models used to comply 

with the collateral provisions under 

paragraph (a)(5) of this section and 

models used to determine initial margin 

under paragraph (a)(6) of this section; 

and 

(B) Is performed by a qualified person 

who does not perform functions 

associated with the model (except as 

part of the annual model validation), 

does not report to such a person, and 

does not have a financial interest in 

whether the model is determined to be 

valid; and 

(vi) Establishes rules and procedures 

that explicitly— 

(A) Address allocation of credit losses 

the designated financial market utility 

may face if its collateral and other 

financial resources are insufficient to 

cover fully its credit exposures, 

including the repayment of any funds a 

designated financial market utility may 

borrow from liquidity providers; and 

(B) Describe the designated financial 

market utility’s process to replenish any 

financial resources that the designated 

financial market utility may employ 

during a stress event, including a 

participant default. 

(5) Collateral. If it requires collateral 

to manage its or its participants’ credit 

exposure, the designated financial 

market utility accepts collateral with 

low credit, liquidity, and market risks 

and sets and enforces conservative 

haircuts and concentration limits, in 

order to ensure the value of the 

collateral in the event of liquidation and 

that the collateral can be used in a 

timely manner. In this regard, the 

designated financial market utility— 

(i) Establishes prudent valuation 

practices and develops haircuts that are 

tested regularly and take into account 

stressed market conditions; 

(ii) Establishes haircuts that are 

calibrated to include relevant periods of 

stressed market conditions to reduce the 

need for procyclical adjustments; 

(iii) Provides for annual validation of 

its haircut procedures, as part of its riskmanagement model validation under 

paragraph (a)(4)(v) of this section; 

(iv) Avoids concentrated holdings of 

any particular type of asset where the 

concentration could significantly impair 

the ability to liquidate such assets 

quickly without significant adverse 

price effects; 

(v) Uses a collateral management 

system that is well-designed and 

operationally flexible such that it, 

among other things,— 

(A) Accommodates changes in the 

ongoing monitoring and management of 

collateral; and 

(B) Allows for the timely valuation of 

collateral and execution of any 

collateral or margin calls. 

(6) Margin. If it operates as a central 

counterparty, the designated financial 

market utility covers its credit 

exposures to its participants for all 

products by establishing a risk-based 

margin system that— 

(i) Is conceptually and 

methodologically sound for the risks 

and particular attributes of each 

product, portfolio, and markets it serves, 

as demonstrated by documented and 

empirical evidence supporting design 

choices, methods used, variables 

selected, theoretical bases, key 

assumptions, and limitations; 

(ii) Establishes margin levels 

commensurate with the risks and 

particular attributes of each product, 

portfolio, and market it serves; 

(iii) Has a reliable source of timely 

price data; 

(iv) Has procedures and sound 

valuation models for addressing 

circumstances in which pricing data are 

not readily available or reliable; 


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(v) Marks participant positions to 

market and collects variation margin at 

least daily and has the operational 

capacity to make intraday margin calls 

and payments, both scheduled and 

unscheduled, to participants; 

(vi) Generates initial margin 

requirements sufficient to cover 

potential changes in the value of each 

participant’s position during the 

interval between the last margin 

collection and the closeout of positions 

following a participant default by— 

(A) Ensuring that initial margin meets 

an established single-tailed confidence 

level of at least 99 percent with respect 

to the estimated distribution of future 

exposure; and 

(B) Using a conservative estimate of 

the time horizons for the effective 

hedging or closeout of the particular 

types of products cleared, including in 

stressed market conditions; and 

(vii) Is monitored on an ongoing basis 

and regularly reviewed, tested, and 

verified through— 

(A) Daily backtests; 

(B) Monthly sensitivity analyses, 

performed more frequently during 

stressed market conditions or significant 

fluctuations in participant positions, 

with this analysis taking into account a 

wide range of parameters and 

assumptions that reflect possible market 

conditions that captures a variety of 

historical and hypothetical conditions, 

including the most volatile periods that 

have been experienced by the markets 

the designated financial market utility 

serves; and 

(C) Annual model validations of the 

designated financial market utility’s 

margin models and related parameters 

and assumptions, as part of its riskmanagement model validation under 

paragraph (a)(4)(v) of this section. 

(7) Liquidity risk. The designated 

financial market utility effectively 

measures, monitors, and manages the 

liquidity risk that arises in or is borne 

by the designated financial market 

utility. In this regard, the designated 

financial market utility— 

(i) Has effective operational and 

analytical tools to identify, measure, 

and monitor its settlement and funding 

flows on an ongoing and timely basis, 

including its use of intraday liquidity; 

(ii) Maintains sufficient liquid 

resources in all relevant currencies to 

effect same-day and, where applicable, 

intraday and multiday settlement of 

payment obligations with a high degree 

of confidence under a wide range of 

significantly different potential stress 

scenarios that includes the default of the 

participant and its affiliates that would 

generate the largest aggregate liquidity 

obligation for the designated financial 

market utility in extreme but plausible 

market conditions; 

(iii) Holds, for purposes of meeting 

the minimum liquid resource 

requirement under paragraph (a)(7)(ii) of 

this section,— 

(A) cash in each relevant currency at 

the central bank of issue or creditworthy 

commercial banks; 

(B) assets that are readily available 

and convertible into cash, through 

committed arrangements without 

material adverse change conditions, 

such as collateralized lines of credit, 

foreign exchange swaps, and repurchase 

agreements; or 

(C) subject to the determination of the 

Board, highly marketable collateral and 

investments that are readily available 

and convertible into cash with 

prearranged and highly reliable funding 

arrangements, even in extreme but 

plausible market conditions; 

(iv) Evaluates and confirms, at least 

annually, whether each provider of the 

arrangements as described in paragraphs 

(a)(7)(iii)(B) and (C) of this section has 

sufficient information to understand 

and manage that provider’s associated 

liquidity risks, and whether the 

provider has the capacity to perform; 

(v) Maintains and tests its procedures 

and operational capacity for accessing 

each type of liquid resource required 

under this paragraph at least annually; 

(vi) Determines the amount and 

regularly tests the sufficiency of the 

liquid resources necessary to meet the 

minimum liquid resource requirement 

under this paragraph by— 

(A) On a daily basis, conducting a 

stress test of its liquid resources using 

standard and predetermined stress 

scenarios, parameters, and assumptions; 

(B) On at least a monthly basis, and 

more frequently when products cleared 

or markets served experience high 

volatility or become less liquid, or when 

the size or concentration of positions 

held by the designated financial market 

utility’s participants increases 

significantly, conducting a 

comprehensive and thorough analysis of 

the existing stress scenarios, models, 

and underlying parameters and 

assumptions such that the designated 

financial market utility meets its 

identified liquidity needs and resources 

in light of current and evolving market 

conditions; and 

(C) Having clear procedures to report 

the results of its stress tests to 

decisionmakers at the designated 

financial market utility and using these 

results to evaluate the adequacy of and 

make adjustments to its liquidity riskmanagement framework; 

(vii) At least annually, provides for a 

validation of its liquidity riskmanagement model by a qualified 

person who does not perform functions 

associated with the model (except as 

part of the annual model validation), 

does not report to such a person, and 

does not have a financial interest in 

whether the model is determined to be 

valid; and 

(viii) Establishes rules and procedures 

that explicitly— 

(A) Address potential liquidity 

shortfalls that would not be covered by 

the designated financial market utility’s 

liquid resources and avoid unwinding, 

revoking, or delaying the same-day 

settlement of payment obligations; and 

(B) Describe the designated financial 

market utility’s process to replenish any 

liquid resources that it may employ 

during a stress event, including a 

participant default. 

(8) Settlement finality. The designated 

financial market utility provides clear 

and certain final settlement intraday or 

in real time as appropriate, and at a 

minimum, by the end of the value date. 

The designated financial market utility 

clearly defines the point at which 

settlement is final and the point after 

which unsettled payments, transfer 

instructions, or other settlement 

instructions may not be revoked by a 

participant. 

(9) Money settlements. The designated 

financial market utility conducts its 

money settlements in central bank 

money where practical and available. If 

central bank money is not used, the 

designated financial market utility 

minimizes and strictly controls the 

credit and liquidity risks arising from 

conducting its money settlements in 

commercial bank money, including 

settlement on its own books. If it 

conducts its money settlements at a 

commercial bank, the designated 

financial market utility— 

(i) Establishes and monitors 

adherence to criteria based on high 

standards for its settlement banks that 

take account of, among other things, 

their applicable regulatory and 

supervisory frameworks, 

creditworthiness, capitalization, access 

to liquidity, and operational reliability; 

(ii) Monitors and manages the 

concentration of credit and liquidity 

exposures to its commercial settlement 

banks; and 

(iii) Ensures that its legal agreements 

with its settlement banks state clearly— 

(A) When transfers on the books of 

individual settlement banks are 

expected to occur; 

(B) That transfers are final when 

funds are credited to the recipient’s 

account; and 


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(C) That the funds credited to the 

recipient are available immediately for 

retransfer or withdrawal. 

(10) Physical deliveries. A designated 

financial market utility that operates as 

a central counterparty, securities 

settlement system, or central securities 

depository clearly states its obligations 

with respect to the delivery of physical 

instruments or commodities and 

identifies, monitors, and manages the 

risks associated with such physical 

deliveries. 

(11) Central securities depositories. A 

designated financial market utility that 

operates as a central securities 

depository has appropriate rules and 

procedures to help ensure the integrity 

of securities issues and minimizes and 

manages the risks associated with the 

safekeeping and transfer of securities. In 

this regard, the designated financial 

market utility maintains securities in an 

immobilized or dematerialized form for 

their transfer by book entry. 

(12) Exchange-of-value settlement 

systems. If it settles transactions that 

involve the settlement of two linked 

obligations, such as a transfer of 

securities against payment or the 

exchange of one currency for another, 

the designated financial market utility 

eliminates principal risk by 

conditioning the final settlement of one 

obligation upon the final settlement of 

the other. 

(13) Participant-default rules and 

procedures. The designated financial 

market utility has effective and clearly 

defined rules and procedures to manage 

a participant default that are designed to 

ensure that the designated financial 

market utility can take timely action to 

contain losses and liquidity pressures so 

that it can continue to meet its 

obligations. In this regard, the 

designated financial market utility tests 

and reviews its default procedures, 

including any closeout procedures, at 

least annually or following material 

changes to these rules and procedures. 

(14) Segregation and portability. A 

designated financial market utility that 

operates as a central counterparty has 

rules and procedures that enable the 

segregation and portability of positions 

of a participant’s customers and the 

collateral provided to the designated 

financial market utility with respect to 

those positions. 

(15) General business risk. The 

designated financial market utility 

identifies, monitors, and manages its 

general business risk, which is the risk 

of losses that may arise from its 

administration and operation as a 

business enterprise (including losses 

from execution of business strategy, 

negative cash flows, or unexpected and 

excessively large operating expenses) 

that are neither related to participant 

default nor separately covered by 

financial resources maintained for credit 

or liquidity risk. In this regard, in 

addition to holding financial resources 

required to manage credit risk 

(paragraph (a)(4) of this section) and 

liquidity risk (paragraph (a)(7) of this 

section), the designated financial market 

utility— 

(i) Maintains liquid net assets funded 

by equity that are at all times sufficient 

to ensure a recovery or orderly winddown of critical operations and services 

such that it— 

(A) Holds unencumbered liquid 

financial assets, such as cash or highly 

liquid securities, that are sufficient to 

cover the greater of— 

(1) The cost to implement the plans to 

address general business losses as 

required under paragraph (a)(3)(iii) of 

this section and 

(2) Six months of current operating 

expenses or as otherwise determined by 

the Board; and 

(B) Holds equity, such as common 

stock, disclosed reserves, and other 

retained earnings, that is at all times 

greater than or equal to the amount of 

unencumbered liquid financial assets 

that are required to be held under 

paragraph (a)(15)(i)(A) of this section; 

and 

(ii) Maintains a viable plan, approved 

by the board of directors, for raising 

additional equity should the designated 

financial market utility’s equity fall 

below the amount required under 

paragraph (a)(15)(i) of this section, and 

updates the plan the earlier of every two 

years or following changes to the 

designated financial market utility or 

the environment in which it operates 

that would significantly affect the 

viability or execution of the plan. 

(16) Custody and investment risks. 

The designated financial market 

utility— 

(i) Safeguards its own and its 

participants’ assets and minimizes the 

risk of loss on and delay in access to 

these assets by— 

(A) Holding its own and its 

participants’ assets at supervised and 

regulated entities that have accounting 

practices, safekeeping procedures, and 

internal controls that fully protect these 

assets; and 

(B) Evaluating its exposures to its 

custodian banks, taking into account the 

full scope of its relationships with each; 

and 

(ii) Invests its own and its 

participants’ assets— 

(A) In instruments with minimal 

credit, market, and liquidity risks, such 

as investments that are secured by, or 

are claims on, high-quality obligors and 

investments that allow for timely 

liquidation with little, if any, adverse 

price effect; and 

(B) Using an investment strategy that 

is consistent with its overall riskmanagement strategy and fully 

disclosed to its participants. 

(17) Operational risk. The designated 

financial market utility manages its 

operational risks by establishing a 

robust operational risk-management 

framework that is approved by the board 

of directors. In this regard, the 

designated financial market utility— 

(i) Identifies the plausible sources of 

operational risk, both internal and 

external, and mitigates their impact 

through the use of appropriate systems, 

policies, procedures, and controls that 

are reviewed, audited, and tested 

periodically and after major changes; 

(ii) Identifies, monitors, and manages 

the risks its operations might pose to 

other financial market utilities and trade 

repositories, if any; 

(iii) Has policies and systems that are 

designed to achieve clearly defined 

objectives to ensure a high degree of 

security and operational reliability; 

(iv) Has systems that have adequate, 

scalable capacity to handle increasing 

stress volumes and achieve the 

designated financial market utility’s 

service-level objectives; 

(v) Has comprehensive physical, 

information, and cyber security policies, 

procedures, and controls that address 

potential and evolving vulnerabilities 

and threats; 

(vi) Has business continuity 

management that provides for rapid 

recovery and timely resumption of 

critical operations and fulfillment of its 

obligations, including in the event of a 

wide-scale disruption or a major 

disruption; and 

(vii) Has a business continuity plan 

that— 

(A) Incorporates the use of a 

secondary site that is located at a 

sufficient geographical distance from 

the primary site to have a distinct risk 

profile; 

(B) Is designed to enable critical 

systems, including information 

technology systems, to recover and 

resume operations no later than two 

hours following disruptive events; 

(C) Is designed to enable it to 

complete settlement by the end of the 

day of the disruption, even in case of 

extreme circumstances; and 

(D) Is tested at least annually. 

(18) Access and participation 

requirements. The designated financial 

market utility has objective, risk-based, 

and publicly disclosed criteria for 

participation, which permit fair and 


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65562 Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations 

open access. The designated financial 

market utility— 

(i) Monitors compliance with its 

participation requirements on an 

ongoing basis and has the authority to 

impose more-stringent restrictions or 

other risk controls on a participant in 

situations where the designated 

financial market utility determines the 

participant poses heightened risk to the 

designated financial market utility; and 

(ii) Has clearly defined and publicly 

disclosed procedures for facilitating the 

suspension and orderly exit of a 

participant that fails to meet the 

participation requirements. 

(19) Tiered participation 

arrangements. The designated financial 

market utility identifies, monitors, and 

manages the material risks arising from 

arrangements in which firms that are 

not direct participants in the designated 

financial market utility rely on the 

services provided by direct participants 

to access the designated financial 

market utility’s payment, clearing, or 

settlement facilities, whether the risks 

are borne by the designated financial 

market utility or by its participants as a 

result of their participation. The 

designated financial market utility— 

(i) Conducts an analysis to determine 

whether material risks arise from tiered 

participation arrangements; 

(ii) Where material risks are 

identified, mitigates or manages such 

risks; and 

(iii) Reviews and updates the analysis 

conducted under paragraph (a)(19)(i) of 

this section the earlier of every two 

years or following material changes to 

the system design or operations or the 

environment in which the designated 

financial market utility operates if those 

changes could affect the analysis 

conducted under paragraph (a)(19)(i) of 

this section. 

(20) Links. If it operates as a central 

counterparty, securities settlement 

system, or central securities depository 

and establishes a link with one or more 

of these types of financial market 

utilities or trade repositories, the 

designated financial market utility 

identifies, monitors, and manages risks 

related to this link. In this regard, each 

central counterparty in a link 

arrangement with another central 

counterparty covers, at least on a daily 

basis, its current and potential future 

exposures to the linked central 

counterparty and its participants, if any, 

fully with a high degree of confidence 

without reducing the central 

counterparty’s ability to fulfill its 

obligations to its own participants. 

(21) Efficiency and effectiveness. The 

designated financial market utility— 

(i) Is efficient and effective in meeting 

the requirements of its participants and 

the markets it serves, in particular, with 

regard to its— 

(A) Clearing and settlement 

arrangement; 

(B) Risk-management policies, 

procedures, and systems; 

(C) Scope of products cleared and 

settled; and 

(D) Use of technology and 

communication procedures; 

(ii) Has clearly defined goals and 

objectives that are measurable and 

achievable, such as minimum service 

levels, risk-management expectations, 

and business priorities; and 

(iii) Has policies and procedures for 

the regular review of its efficiency and 

effectiveness. 

(22) Communication procedures and 

standards. The designated financial 

market utility uses, or at a minimum 

accommodates, relevant internationally 

accepted communication procedures 

and standards in order to facilitate 

efficient payment, clearing, and 

settlement. 

(23) Disclosure of rules, key 

procedures, and market data. The 

designated financial market utility— 

(i) Has clear and comprehensive rules 

and procedures; 

(ii) Publicly discloses all rules and 

key procedures, including key aspects of 

its default rules and procedures; 

(iii) Provides sufficient information to 

enable participants to have an accurate 

understanding of the risks, fees, and 

other material costs they incur by 

participating in the designated financial 

market utility; 

(iv) Provides a comprehensive public 

disclosure of its legal, governance, risk 

management, and operating framework, 

that includes— 

(A) Executive summary. An executive 

summary of the key points from 

paragraphs (a)(23)(iv)(B) through (D) of 

this section; 

(B) Summary of major changes since 

the last update of the disclosure. A 

summary of the major changes since the 

last update of paragraph (a)(23)(iv)(C), 

(D), or (E) of this section; 

(C) General background on the 

designated financial market utility. A 

description of— 

(1) The designated financial market 

utility’s function and the markets it 

serves, 

(2) Basic data and performance 

statistics on its services and operations, 

such as basic volume and value 

statistics by product type, average 

aggregate intraday exposures to its 

participants, and statistics on the 

designated financial market utility’s 

operational reliability, and 

(3) The designated financial market 

utility’s general organization, legal and 

regulatory framework, and system 

design and operations; 

(D) Standard-by-standard summary 

narrative. A comprehensive narrative 

disclosure for each applicable standard 

set forth in this paragraph (a) with 

sufficient detail and context to enable a 

reader to understand the designated 

financial market utility’s approach to 

controlling the risks and addressing the 

requirements in each standard; and 

(E) List of publicly available 

resources. A list of publicly available 

resources, including those referenced in 

the disclosure, that may help a reader 

understand how the designated 

financial market utility controls its risks 

and addresses the requirements set forth 

in this paragraph (a); and 

(v) Updates the public disclosure 

under paragraph (a)(23)(iv) of this 

section the earlier of every two years or 

following changes to its system or the 

environment in which it operates that 

would significantly change the accuracy 

of the statements provided under 

paragraph (a)(23)(iv) of this section. 

* * * * * 

§ 234.4 [Removed] 

■ 5. Remove § 234.4 

§§ 234.5 through 234.7 [Redesignated as 

§§ 234.4 through 234.6] 

■ 6. Redesignate §§ 234.5 through 234.7 

as §§ 234.4 through 6, respectively. 

§ 234.5 [Amended] 

■ 7. In newly redesignated § 234.5, 

redesignate paragraph (b)(3)(iv) as 

paragraph (b)(3)(iii). 

By order of the Board of Governors of the 

Federal Reserve System, October 28, 2014. 

Robert deV. Frierson, 

Secretary of the Board. 

[FR Doc. 2014–26090 Filed 11–4–14; 8:45 am] 

BILLING CODE 6210–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 25 

[Docket No. FAA–2012–1207; Special 

Conditions No. 25–517–SC] 

Special Conditions: Airbus Model 

A350–900 Series Airplane; FlightEnvelope Protection (Icing and NonIcing Conditions); High-Incidence 

Protection and Alpha-Floor Systems 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final special conditions. 


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