67326 Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 

1Part II governs the provision of intraday credit 

in accounts at the Reserve Banks and sets out the 

general methods used by the Reserve Banks to 

control their intraday credit exposures. 

2Prior to this notice, part I of the PSR policy 

incorporated the international standards for 

payment, clearing, and settlement systems set out 

(1) Regular rate. The total AMS 

laboratory service program personnel 

direct pay divided by direct hours, 

which is then multiplied by the next 

year’s percentage of cost of living 

increase, plus the benefits rate, plus the 

operating rate, plus the allowance for 

bad debt rate. If applicable, travel 

expenses may also be added to the cost 

of providing the service. 

(2) Overtime rate. The total AMS 

laboratory service program personnel 

direct pay divided by direct hours, 

which is then multiplied by the next 

year’s percentage of cost of living 

increase and then multiplied by 1.5 plus 

the benefits rate, plus the operating rate, 

plus an allowance for bad debt. If 

applicable, travel expenses may also be 

added to the cost of providing the 

service. 

(3) Holiday rate. The total AMS 

laboratory service program personnel 

direct pay divided by direct hours, 

which is then multiplied by the next 

year’s percentage of cost of living 

increase and then multiplied by 2, plus 

benefits rate, plus the operating rate, 

plus an allowance for bad debt. If 

applicable, travel expenses may also be 

added to the cost of providing the 

service. 

(b)(1) For each calendar year, based 

on previous fiscal year/historical actual 

costs, AMS will calculate the benefits, 

operating, and allowance for bad debt 

components of the regular, overtime and 

holiday rates as follows: 

(i) Benefits rate. The total AMS 

laboratory service program direct 

benefits costs divided by the total hours 

(regular, overtime, and holiday) worked, 

which is then multiplied by the next 

calendar year’s percentage cost of living 

increase. Some examples of direct 

benefits are health insurance, 

retirement, life insurance, and Thrift 

Savings Plan (TSP) retirement basic and 

matching contributions. 

(ii) Operating rate. The total AMS 

laboratory service program operating 

costs divided by total hours (regular, 

overtime, and holiday) worked, which is 

then multiplied by the percentage of 

inflation. 

(iii) Allowance for bad debt rate. Total 

AMS laboratory service program 

allowance for bad debt divided by total 

hours (regular, overtime, and holiday) 

worked. 

(2) The calendar year cost of living 

expenses and percentage of inflation 

factors used in the formulas in this 

section are based on the most recent 

Office of Management and Budget’s 

Presidential Economic Assumptions. 

* * * * * 

■ 46. Amend § 91.38 by revising 

paragraph (a) to read as follows: 

§ 91.38 Additional fees for appeal of 

analysis. 

(a) The applicant for appeal sample 

testing will be charged a fee based on 

the formulas in § 91.37. 

* * * * * 

■ 47. Amend § 91.39 by revising 

paragraph (a) to read as follows: 

§ 91.39 Premium hourly fee rates for 

overtime and legal holiday service. 

(a) When analytical testing in a 

Science and Technology facility 

requires the services of laboratory 

personnel beyond their regularly 

assigned tour of duty on any day or on 

a day outside the established schedule, 

such services are considered as overtime 

work. When analytical testing in a 

Science and Technology facility 

requires the services of laboratory 

personnel on a Federal holiday or a day 

designated in lieu of such a holiday, 

such services are considered holiday 

work. Laboratory analyses initiated at 

the request of the applicant to be 

rendered on Federal holidays, and on an 

overtime basis will be charged fees 

based on the formulas in § 91.37. 

* * * * * 

Dated: November 5, 2014. 

Erin M. Morris, 

Associate Administrator, Agricultural 

Marketing Service. 

[FR Doc. 2014–26655 Filed 11–12–14; 8:45 am] 

BILLING CODE 3410–02–P 

FEDERAL RESERVE SYSTEM 

12 CFR Chapter II 

[Docket No. OP–1478] 

Policy on Payment System Risk 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Policy statement. 

SUMMARY: The Board of Governors of the 

Federal Reserve System (Board) has 

adopted revisions to part I of its Federal 

Reserve Policy on Payment System Risk 

(PSR policy) to reflect the prevailing 

international standards, 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, 

and the supervisory framework for 

designated financial market utilities 

(FMUs) established in Title VIII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 (DoddFrank Act or Act). The Board also made 

conforming and technical changes to 

part I of the PSR policy. 

DATES: The Board will be guided by the 

PSR policy revisions when exercising 

the authorities discussed therein as of 

December 31, 2014, with the exception 

of the following measures, which the 

Board would expect to be met on or 

before December 31, 2015: 

Transparency, set forth in section I.B.2; 

establishing plans for recovery and 

orderly wind-down as necessary to meet 

the expectations of principle 3; 

establishing rules and procedures that 

explicitly address uncovered credit 

losses and liquidity shortfalls as 

necessary to meet the expectations of 

principles 4 and 7, respectively; 

maintaining sufficient liquid net assets 

funded by equity and a viable plan for 

raising additional equity as necessary to 

meet the expectations of principle 15; 

and managing risks arising in tiered 

participation arrangements as necessary 

to meet the expectations of principle 19. 

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 

In adopting the PSR policy, the 

Board’s objectives have been to foster 

the safety and efficiency of payment, 

clearing, and settlement systems. Part I 

of the policy sets forth the Board’s 

views, and related principles and 

minimum standards, regarding the 

management of risks in and 

transparency of payment, clearing, and 

settlement systems, including those 

operated by the Federal Reserve Banks 

(Reserve Banks).1 Part I of the policy 

incorporates relevant international riskmanagement standards developed by 

central banks and market regulators as 

the baseline for its expectations for 

payment, clearing, and settlement 

systems.2 Part I is not intended to exert 


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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 67327 

in the CPSS Core Principles for Systemically 

Important Payment Systems, the CPSS–IOSCO 

Recommendations for Securities Settlement 

Systems, and the CPSS–IOSCO Recommendations 

for Central Counterparties, which are available at 

http://www.bis.org/cpmi/publ/d43.pdf, http://www.

bis.org/cpmi/publ/d46.pdf, and http://www.bis.org/ 

cpmi/publ/d64.pdf, respectively. (Effective 

September 2014, the CPSS changed its name to the 

Committee on Payments and Market 

Infrastructures.) 

3 79 FR 2838 (January 16, 2014). 

4The PFMI is available at http://www.bis.org/

cpmi/publ/d101a.pdf. 

5The CPSS–IOSCO report on the Principles for 

Financial Market Infrastructures: Disclosure 

Framework and Assessment Methodology is 

available at http://www.bis.org/cpmi/publ/d106.pdf. 

6The term ‘‘financial market utility’’ is defined in 

Title VIII as ‘‘any person that manages or operates 

a multilateral system for the purpose of transferring, 

clearing, or settling payments, securities, or other 

financial transactions among financial institutions 

or between financial institutions and the person’’ 

(12 U.S.C. 5462(6)). FMUs are a subset of FMIs; for 

example, trade repositories are excluded from the 

definition of a FMU. Pursuant to section 804 of the 

Dodd-Frank Act, the Financial Stability Oversight 

Council (Council) is required to designate those 

FMUs that the Council determines are, or are likely 

to become, systemically important. Such a 

designation by the Council makes an FMU subject 

to the supervisory framework set out in Title VIII 

of the Dodd-Frank Act. 

7Concurrent with this final policy statement, the 

Board is adopting final revisions to Regulation HH 

that take into consideration the PFMI. 

8The 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 designated FMUs are 

subject to the Regulation HH risk-management 

standards promulgated by the Board under section 

805(a)(1)(A). The Regulation HH 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. 

9Concurrent with the proposal, the Board issued 

in a separate Federal Register notice a proposal 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 (79 FR 3666 (January 22, 2014)). 

All three commenters addressed the proposed 

revisions to both part I of the PSR policy and 

Regulation HH in one letter. Where the commenters 

addressed specific provisions of Regulation HH that 

did not appear in the revisions to the PSR policy, 

the Board addressed those comments only in the 

notice of final rulemaking for Regulation HH. 

10 In addition, the Board is making several 

technical edits to the proposed policy. These edits 

are minor and are not discussed in this notice. 

or create supervisory or regulatory 

authority over any particular class of 

institutions or arrangements where the 

Board does not have such authority. 

In January 2014, the Board requested 

comment on proposed revisions to part 

I of the PSR policy.3 The key aspects of 

the proposal were (1) revising the 

Board’s existing minimum riskmanagement standards in the PSR 

policy to reflect the PFMI, which now 

represents the relevant set of 

international standards; 4 (2) including 

all central securities depositories, 

securities settlement systems, and 

central counterparties (CCPs) in the 

scope of part I of the PSR policy; (3) 

expanding the scope of part I of the PSR 

policy to include trade repositories; (4) 

establishing six mutually exclusive 

categories of financial market 

infrastructures (FMIs) and clarifying the 

Board’s risk-management expectations 

for FMIs in each category; (5) replacing 

the existing self-assessment framework 

with a broader disclosure expectation; 

and (6) recognizing responsibility E 

from the PFMI, in addition to other 

relevant international guidance, as the 

basis for cooperation with other 

authorities in overseeing FMIs. The 

proposed changes did not affect part II 

of the PSR policy. 

The Board proposed revisions to the 

policy to incorporate the new 

international risk-management 

standards for financial market 

infrastructures in the PFMI, including 

the expectation for FMIs to complete the 

disclosure framework set out in the 

December 2012 CPSS–IOSCO report on 

the Principles for Financial Market 

Infrastructures: Disclosure Framework 

and Assessment Methodology 

(‘‘disclosure framework’’ and 

‘‘assessment methodology’’).5 The Board 

also proposed revisions to the policy to 

reflect the enhanced supervisory 

framework for designated FMUs as set 

forth in Title VIII of the Dodd-Frank 

Act.6 In particular, the Board proposed 

certain revisions that were necessary to 

clarify that designated FMUs for which 

the Board is the Supervisory Agency 

under Title VIII of the Act are required 

to comply with Regulation HH and not 

the risk-management or transparency 

expectations set out in the policy.7 8 The 

public comment period for the proposed 

revisions closed on March 31, 2014. 

II. Summary of Comments and Analysis 

The Board received three comment 

letters that were responsive to the 

January proposal, all from entities that 

operate designated FMUs.9 The Board 

considered each of the comments on the 

proposed revisions to the PSR policy in 

developing its final policy as discussed 

in more detail below. Except as noted 

herein, the Board is adopting the policy 

as proposed.10

A. Overall Approach To Incorporating 

the New Standards 

The Board proposed to revise part I of 

the PSR policy by replacing the existing 

risk-management standards with the 24 

headline standards from the PFMI 

verbatim. 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 FMIs and all designs of the 

same type of FMI does not sufficiently 

take into account material differences 

that can be found among the different 

systems. 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 

FMIs. 

With respect to differences among 

types of systems, the Board believes that 

a uniform set of standards is appropriate 

because, in many instances, FMIs face 

and must manage certain common risks. 

Although the design of systems may 

vary, the flexibility in the standards 

allows individual FMIs to implement, 

and supervisors to enforce, the 

standards appropriately based on the 

design of and risks that arise in a 

particular FMI. 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 

FMIs and markets. For specific riskmanagement standards in the PSR 

policy that are applicable only to certain 

types of FMI, however, those standards 

are made expressly applicable only to 

those FMI types (for example, only CCPs 

are expected 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 


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67328 Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 

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 will be 

guided by the key considerations and 

the explanatory text of the PFMI, as well 

as its interpretation of the 

corresponding provisions of Regulation 

HH, in its application of the PSR policy. 

The Board does not intend for the 

differences in language in the two 

documents to lead to inconsistent policy 

results. 

B. Overall Approach To Applying the 

Policy 

The proposed revised policy stated 

that the Board sets out its views 

regarding management of risks in FMIs 

in part I of the PSR policy in order to 

encourage these systems and their 

primary regulators to take the standards 

in the policy into consideration in the 

design, operation, monitoring, and 

assessment of these systems. One 

commenter stated that the Board should 

acknowledge in the final PSR policy 

that if a regulatory agency other than the 

Board is the Supervisory Agency for a 

designated FMU, then the Board would 

consider compliance by the designated 

FMU with the corresponding PFMIbased regulations of such Supervisory 

Agency as sufficient. 

In carrying out its Title VIII 

responsibilities, the Board participates 

in examinations of designated FMUs by 

other Supervisory Agencies and 

provides input to those Agencies with 

respect to the designated FMU’s riskmanagement practices. Although the 

Supervisory Agency would apply its 

own rules in assessing the sufficiency of 

the designated FMU’s compliance, the 

Board’s input will be informed by the 

principles in the PSR policy as well as 

the Agency’s rules and the general 

framework of Title VIII of the DoddFrank Act. Therefore, the Board will 

maintain the overall approach of the 

policy as proposed. 

C. Governance 

Proposed principle 2 stated that an 

FMI should have governance 

arrangements that are clear and 

transparent, promote the safety and 

efficiency of the FMI, and support the 

stability of the broader financial system, 

other relevant public interest 

considerations, and the objectives of 

relevant stakeholders. One commenter 

noted that public interest considerations 

is a vague concept, and that privatesector systems should not be required to 

consider public interest considerations 

and should focus exclusively on the 

needs of participants. 

The Board believes that taking public 

interest considerations into account is 

consistent with the 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, 

public interests may include supporting 

fair and efficient markets because an 

FMI 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 

because, for example, an FMI that 

provides information to relevant 

authorities and the public about 

payment flows may help to identify and 

reduce sources of systemic risk. For 

certain FMIs, stability of the broader 

financial system may be the only 

relevant public interest consideration. 

The final policy retains the text of the 

principle as proposed. 

D. Credit Risk 

Proposed principle 4 stated that an 

FMI should measure, monitor, and 

manage effectively its credit exposures 

to its participants and the credit 

exposures arising from its payment, 

clearing, and settlement processes. The 

principle also stated that an FMI should 

maintain sufficient financial resources 

to cover its credit exposure to each 

participant fully with a high degree of 

confidence. In addition, a CCP that is 

involved in activities with a morecomplex risk profile or that is 

systemically important in multiple 

jurisdictions should maintain additional 

financial resources sufficient to cover a 

wide range of potential stress scenarios 

that should include, but not be limited 

to, the default of the two participants 

and their affiliates that would 

potentially cause the largest credit 

exposure to the CCP in extreme but 

plausible market conditions (a ‘‘cover 2’’ 

expectation). 

One commenter stated that, in setting 

a ‘‘cover 2’’ expectation for a particular 

FMI, 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’’ 

expectation 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. The Board’s 

‘‘cover 2’’ expectation for a particular 

FMI would depend on all relevant facts 

and circumstances, including the mix of 

activities with varying risk profiles. The 

Board believes that the proposed policy 

language provides sufficient flexibility 

and has adopted the text of the principle 

as proposed. 

E. Collateral 

Proposed principle 5 stated that an 

FMI that requires collateral to manage 

its or its participants’ credit exposure 

should accept collateral with low credit, 

liquidity, and market risks and should 

set and enforce appropriately 

conservative haircuts and concentration 

limits. One commenter supported the 

flexibility in the wording of the 

principle and urged that it not be 

interpreted to exclude the use of equity 

securities as collateral for equity 

options. The Board believes that the 

principle would permit, where 

appropriate, an FMI 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 

a CCP to hold equity securities as 

collateral for options on those same 

securities. The final policy retains the 

text of the principle as proposed. 

F. Liquidity Risk 

In the proposed policy, the Board 

defined liquidity risk as ‘‘the risk that a 

counterparty, whether a participant or 

other entity, will be unable to meet fully 

its financial obligations when due, 

although it may be able to do so in the 

future.’’ The definition went on to 

explain that an FMI, through its design 

or operation, may bear or generate 

liquidity risk in one or more currencies 

in its payment or settlement process. In 

this context, liquidity risk may arise 

between or among the system operator 

and the participants in the FMI, the 

system operator and other entities (such 

as settlement banks, nostro agents, or 

liquidity providers), the participants in 

the FMI and other entities, or two or 

more participants in the FMI. 

After further consideration, the Board 

has added a footnote to the definition of 

liquidity risk to clarify that the Board 

believes that deliveries of currency are 

payments, and FMIs that conduct such 

activity should consider these deliveries 

to be payments in the management of 

liquidity risk. The Board added this 

footnote to clarify that it does not 

believe that such deliveries of currency 

should be treated as physical deliveries 

under principle 10 in the revised riskmanagement standards, but rather it 

would expect an FMI subject to its 

authority to manage effectively the 

liquidity risk related to these payments. 


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11As required by the Monetary Control Act of 

1980, the Board has historically required and will 

continue to require that the Fedwire Services be 

operated and priced in a manner that fosters 

competition, improves the efficiency of the 

payment mechanism, and lowers costs of these 

services to society. The Board established a set of 

pricing principles that governs the schedule of fees 

for the Federal Reserve priced services, including 

the Fedwire Services, that is consistent with these 

objectives. (12 U.S.C. 248a(c)(3); http://

www.federalreserve.gov/paymentsystems/pfs_

principles.htm). 

12Consistent with the PFMI, the calculation of 

these current operating expenses would exclude 

depreciation and amortization expenses. 

13Federal Reserve priced services fees are set to 

recover, over the long run, all direct and indirect 

costs and imputed costs, including financing costs, 

taxes, and certain other expenses, as well as the 

return on equity (profit) that would have been 

earned if a private business provided the services. 

The imputed costs and imputed profit are 

collectively referred to as the private-sector 

adjustment factor. The Board’s current method for 

calculating the private-sector adjustment factor 

involves developing an estimated Federal Reserve 

priced services pro forma balance sheet using actual 

Continued 

G. Settlement Finality 

Proposed principle 8 stated that an 

FMI should provide clear and certain 

final settlement, at a minimum by the 

end of the value date. One commenter 

requested confirmation that the 

proposed provision would not require 

an FMI that is a CCP to accelerate its 

novation of certain noncompetitive 

transactions, such as backloaded overthe-counter options. The principle 

applies to an FMI’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 

does not address the timing of novation. 

The Board believes that the proposed 

policy language provides sufficient 

flexibility, and the final policy retains 

the text of the principle as proposed. 

H. Segregation and Portability 

Proposed principle 14 stated that a 

CCP should have rules and procedures 

that enable the segregation and 

portability of positions of a participant’s 

customers and the collateral provided to 

the CCP with respect to those positions. 

The Board received two comment letters 

on this principle that addressed 

portability and alternative segregation 

regimes. 

Portability. One commenter noted 

that, while porting positions is a highly 

desirable result where feasible, there 

may be scenarios where liquidating 

positions is preferred. The commenter 

suggested that the Board allow an FMI 

to retain broad discretion to liquidate 

positions promptly where it has 

determined that timely transfer would 

not be feasible. The Board interprets the 

principle, which states that a central 

counterparty should have rules and 

procedures that enable the segregation 

and portability of positions, not to 

exclude the possibility that liquidation 

of positions may take place if a timely 

transfer would not be feasible. The 

Board believes that the proposed policy 

language provides sufficient flexibility, 

and the final policy retains the text of 

the principle as proposed. 

Alternative segregation regimes. One 

commenter encouraged the Board to 

state in the policy that different 

segregation regimes are appropriate for 

different markets and different classes of 

market participant. Another commenter 

requested that the final text of the policy 

acknowledge the different legal 

frameworks for cash markets. The Board 

acknowledges that effective segregation 

and portability arrangements depend 

not only on the operational capabilities 

of the CCP 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 

addressed in principle 14 of the PFMI. 

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. Additionally, the Board will 

consider whether the CCP’s own rules 

enable the operation of the relevant 

legal and regulatory framework. 

Where alternative segregation and 

portability arrangements offer the same 

degree of protection, proposed principle 

14 would not prohibit the use of such 

arrangements. As noted above, the 

expectation is that an FMI’s rules and 

procedures enable segregation and 

portability of positions, and the policy 

does not prescribe a single means by 

which this could be achieved. The final 

policy retains the text of the principle 

as proposed. 

I. General Business Risk 

Proposed principle 15 stated that an 

FMI should identify, monitor, and 

manage its general business risk and 

hold sufficient liquid net assets funded 

by equity to cover potential general 

business losses so that it can continue 

operations and services as a going 

concern if those losses materialize. 

Further, liquid net assets should at all 

times be sufficient to ensure a recovery 

or orderly wind-down of critical 

operations and services. Commenters 

generally supported the principle, but 

made two specific points that are 

addressed below. 

Treatment of Reserve Bank services 

under the principle. One commenter 

stated that the Board should ensure that 

the requirements with respect to 

principle 15 in Regulation HH for 

designated FMUs are the same as those 

imposed on the equivalent Reserve Bank 

service. The Board expects that the 

Fedwire Services will meet or exceed 

the applicable standards set forth in this 

policy. The Board will be guided by the 

key considerations and explanatory 

notes in the PFMI, including the 

guidance on central bank-operated 

systems, as well as its interpretation of 

the corresponding provisions of 

Regulation HH, in supervising the 

Fedwire Services. This expectation is 

consistent with past practice. 

Consistent with the previous 

international standards, the PFMI 

recognizes that flexibility in 

implementation is warranted for central 

bank-operated systems to meet the 

objectives of the standards because of 

central banks’ roles as monetary 

authorities and liquidity providers. As 

noted in the proposal, the Board will 

allow flexibility in application of 

principle 15 on general business risk for 

the Fedwire Services. A key 

consideration in principle 15 of the 

PFMI requires FMIs to maintain viable 

recovery or orderly wind-down plans 

that consider general business risk and 

to hold sufficient liquidity and capital 

reserves to implement the plans. The 

Fedwire Services do 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. Given the fundamental 

role of the Fedwire Services in the U.S. 

financial system, the Federal Reserve 

would need to consider the impact of 

sudden or disorderly changes and 

would need to pursue policies 

consistent with financial stability and 

established principles of entering and 

exiting priced services. Therefore, the 

Board will not require the Fedwire 

Services to develop recovery or orderly 

wind-down plans under principle 3. 

In order to foster competition with 

private-sector FMIs, however, the Board 

will require the Federal Reserve priced 

services to hold six months of the 

Fedwire Funds Service’s current 

operating expenses as liquid financial 

assets and equity on the pro forma 

balance sheet used in determining 

Reserve Bank fees for priced 

services.11 12 This balance sheet is used 

for imputing costs in the private-sector 

adjustment factor used to establish 

Fedwire Funds Service fees.13 If it is 


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67330 Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 

priced services assets and liabilities. The remaining 

components on the balance sheet, such as equity, 

are imputed as if these services were provided by 

a publicly traded firm. The capital structure of 

imputed equity is derived from the market for 

publicly traded firms, subject to minimum equity 

constraints consistent with those required by the 

Federal Deposit Insurance Corporation for a wellcapitalized institution. 

necessary to impute additional assets or 

equity, the incremental cost will be 

incorporated into the pricing of Fedwire 

Funds Service fees. In applying the PSR 

policy, the Board will monitor the 

implementation of Regulation HH and 

the final policy for issues of consistency 

and competitive equity between privatesector systems and the Fedwire Funds 

Service. 

Expectations for certain FMIs that are 

part of a larger legal entity. An FMI may 

be one of several business lines of a 

larger legal entity. As a single legal 

entity, the firm’s equity supports all of 

the business lines, but the Board’s 

expectations under principle 15 may 

only apply to one of those business 

lines. In the proposal, the Board asked 

whether there are any reasonable 

methodologies for determining which of 

the liquid financial assets and equity 

held at the legal entity level belong to 

a particular business line. One 

commenter suggested that separate pro 

forma balance sheets could be created 

for a particular business line. After 

consideration of the comment, the 

Board believes it may not be useful for 

certain FMIs to attribute assets and 

equity to a business line on separate pro 

forma statements because it may not be 

possible to ring-fence assets within a 

legal entity in insolvency. Therefore, 

consistent with the approach described 

above for the Fedwire Funds Service 

and the approach in the final rule for 

Regulation HH, the Board would allow 

an FMI to use the assets and equity held 

at the legal entity level to meet the 

relevant requirements in principle 15. 

J. Tiered Participation Arrangements 

Proposed principle 19 stated that an 

FMI should identify, monitor, and 

manage the material risks to the FMI 

arising from tiered participation 

arrangements. These arrangements are 

those in which firms that are not 

members in the FMI (indirect 

participants) rely on the services 

provided by members of the FMI (direct 

participants) to access the FMI’s 

payment, clearing, and settlement 

facilities. The Board received two 

comment letters that addressed this 

proposed principle. 

Applicability of the proposed 

principle. A commenter stated that the 

Board did not adequately articulate the 

risk that tiered participation 

arrangements pose and opposed the 

principle because it does not believe 

that it or its participants bear any 

significant risk from its participants’ 

relationships with their customers. After 

consideration of the comment and 

analysis, the Board continues to believe 

that for certain FMIs, based on the 

design of their settlement arrangements, 

material risks could arise from tiered 

participation arrangements that are 

borne by the FMI, including by its 

participants. For example, in an FMI 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 FMI or to the other 

participants in the FMI, potentially 

resulting in liquidity dislocations. 

Tiered participation arrangements 

could also pose other risks to the FMI, 

including operational risk. For example, 

an FMI may need to understand how its 

direct participants manage any spikes in 

volume submitted to the FMI on behalf 

of indirect participants. Understanding 

the potential for spikes in volume will 

allow the FMI to prepare to have the 

scalable operational capacity necessary 

to process those volumes effectively, 

such that it is able to achieve its servicelevel objectives. 

Therefore, the Board believes that 

material risks to an FMI, including to its 

participants, may arise from tiered 

participation arrangements. The Board 

expects FMIs to seek to understand the 

risks associated with the relationships 

between direct participants and their 

customers in order to be able to assess 

whether any material risk to the FMI, 

including to its other participants, 

exists. The Board recognizes, however, 

that certain FMIs, including their 

participants, may not bear any material 

risks from these arrangements due to the 

design of their settlement arrangements 

or due to the characteristics of the 

markets they serve. These FMIs should 

conduct an analysis to support their 

conclusion. 

Expectations for an FMI with respect 

to tiered participation arrangements. 

One commenter stated that it is unclear 

what would actually be expected of an 

FMI under the proposed principle. The 

commenter stated that the Board should 

make clear that it does not expect an 

FMI that does not bear any risk from its 

participants or their customers to take 

any action with respect to principle 19. 

The Board expects that an FMI will 

conduct an analysis to determine 

whether any material risks arise from 

tiered participation arrangements that 

are borne by the FMI, including by its 

participants as a result of their 

participation in the FMI. Depending on 

the nature of their payment, clearing, 

settlement, or recording activities, FMIs’ 

methodologies for conducting the 

analysis may differ. For example, some 

FMIs may choose to gather information 

about the volume and value of activity 

processed by direct participants on 

behalf of indirect participants in the 

FMI or other relevant information. 

Where such information would be 

useful, an FMI may consider defining 

reasonable thresholds and other factors 

for gathering the information in order to 

minimize burden. If the FMI determines 

that no material risks exist to the FMI, 

including to its participants, from tiered 

participation arrangements, the Board 

would not expect the FMI to take any 

further action. If material risks are 

identified, the Board would expect the 

FMI to take steps to mitigate or manage 

these risks. The Board does not expect, 

however, an FMI to manage risks that 

arise between a direct participant and 

its customers, but rather only to manage 

the material risks to the FMI, including 

to its other participants. 

The Board expects that an FMI will 

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 FMI operates 

if those changes could affect its analysis. 

If an FMI’s review of its analysis 

indicates that the FMI faces no material 

risks from tiered participation 

arrangements, then no further action 

would be required. 

Duplicative monitoring. One 

commenter stated that an expectation 

that an FMI will monitor the risks posed 

by indirect participants would be costly 

and duplicative of monitoring activities 

of regulators and the direct participants 

in the FMI. After consideration of the 

comment, the Board continues to 

believe that monitoring by direct 

participants or by their supervisors may 

not fully 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 FMI, including its other 

participants. In addition, the 

supervisory focus for certain direct 

participants is typically different from 

that for FMIs, and supervisory 

monitoring of direct participants also 

might not take into account the effects 

of tiered participation arrangements on 

the FMI, including its other 

participants. Direct participants in an 


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14For example, some firms may submit 

transactions or instructions to an FMI directly 

under the account of a direct participant. In this 

case, the firm may be bound by the FMI’s rules, but 

the direct participant would be accountable for the 

firm’s performance on its obligations. In other FMIs, 

indirect participants are not bound by the rules of 

the FMI and do not have a direct connection to the 

FMI. 

15 In the NPRM for Regulation HH, 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. 

16 Designated FMUs are subject to Regulation HH 

(§ 234.3(a)(23)(iv)) rather than this policy. 

FMI may also be subject to varying 

degrees of supervision. Therefore, the 

onus should be on the FMI to 

understand the tiered participation 

arrangements in the system and the 

impact of these relationships on the 

FMI, including on its participants. 

Scope of the principle. One 

commenter stated that the Board should 

expect FMIs to consider material risks 

arising from tiered participation 

arrangements only where the indirect 

participants are known by the FMI, have 

an agreement binding them to the FMI’s 

rules, or may have a direct connection 

to the FMI. 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 

FMI. If such arrangements may pose 

material risks, the FMI should seek to 

gather information from its direct 

participants on those arrangements and 

assess the risks from those 

arrangements. Therefore, the Board will 

expect an FMI to understand generally 

the arrangements between its direct 

participants and firms that access the 

services of the FMI through the direct 

participants, whether or not these firms 

are bound by some part of the rules or 

have a direct connection to the FMI.14

The FMI, however, 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. 

Conflicts of interest and antitrust 

issues. One commenter stated that 

proposed principle 19 raises conflicts of 

interest and antitrust issues. The 

commenter stated that collecting data on 

indirect participation would give the 

board of directors of the FMI a complete 

picture of each participant’s 

relationships with its most important 

customers, which could create a conflict 

of interest if the FMI’s board of directors 

is made up of representatives of the 

member banks. The commenter also 

stated that the proposed principle 

appeared to require FMIs 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 

FMI’s actions to meet the principle 

appear to third parties as an effort by the 

FMI to favor its owner banks. 

The Board believes that conflicts of 

interest or antitrust issues that may arise 

from expectations with respect to 

principle 19 can be avoided through the 

careful design of the informationgathering and risk-management 

processes developed by the FMI. First, 

the FMI’s board of directors does not 

have to see a complete picture of each 

participant’s relationships with its 

customers. The FMI 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 Board does not necessarily 

expect an FMI 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 FMI 

may choose other methods for 

mitigating or managing risks arising 

from tiered participation arrangements. 

For example, if the FMI is concerned 

that a direct participant’s exposures to 

its indirect participants could cause it to 

default to the FMI, the FMI may require 

the direct participant to provide 

additional collateral to mitigate the 

relevant financial risks posed by its 

relationships with its customers. 

The Board has adopted the text of this 

principle as proposed. 

K. Efficiency and Effectiveness 

Proposed principle 21 stated that an 

FMI should be efficient and effective in 

meeting the requirements of its 

participants and the markets it serves. 

One commenter stated that an FMI that 

does not meet the requirements of its 

participants and the market it serves or 

that does not meet its objectives 

efficiently will not survive in the 

market. The commenter suggested that 

the Board remove the principle or 

redefine efficiency and effectiveness in 

terms of market judgments.15

The Board continues to believe that 

the expectation for an FMI to be 

efficient and effective should be 

included in the policy 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 FMI 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 

FMI is efficient and effective due to 

imperfect information about the FMI. 

Therefore, market judgments alone may 

be insufficient to encourage the FMI to 

operate efficiently and effectively. The 

Board has adopted the text of this 

principle as proposed. 

L. Transparency 

Proposed principle 23 stated that an 

FMI should publicly disclose all 

relevant rules and key procedures. 

Consistent with the principle, section 

I.B.2 of the proposed policy sets forth 

the Board’s expectation that FMIs 

subject to its supervisory authority 

complete the CPSS–IOSCO disclosure 

framework and make their disclosure 

readily available to the public.16 A 

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 publicly 

disclosed in detail if such detail would 

undermine the FMI’s safety and 

soundness. The Board stated in the 

proposed policy that, although 

disclosures should be robust, the Board 

does not expect FMIs to disclose to the 

public sensitive information that could 

expose system vulnerabilities or 

otherwise put the FMI at risk. For 

example, disclosing the detail included 

in the FMI’s business continuity plan 

could expose the vulnerabilities of the 

system, and in this case it would be 

sufficient to disclose publicly only key 

highlights of the plan. The Board has 

adopted the text of the policy as 

proposed. 

M. Compliance Dates 

The Board proposed that the revised 

policy become effective upon 

publication of the final version in the 

Federal Register. The Board also noted 

that several of the expectations in the 

proposed policy were new or 

heightened and may require additional 

time to implement, such as up to six 

months after adoption of the policy. The 

Board noted that these expectations may 

include the revised expectations in 

section I.B.2 on transparency and the 

expectation to manage risks arising in 


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67332 Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 

17See sections I.C.2.a.xix and I.C.2.b.xi of the 

existing policy. 

18These procedures are described in the Board’s 

policy statement ‘‘The Federal Reserve in the 

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

11648 (Mar. 29, 1990)). 

19These 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. 

tiered participation arrangements under 

principle 19. New or heightened 

expectations also included the 

establishment of plans for recovery and 

orderly wind-down as necessary to meet 

the expectations under principle 3; the 

establishment of rules and procedures 

that explicitly address uncovered credit 

losses and liquidity shortfalls as 

necessary to meet the expectations 

under principles 4 and 7, respectively; 

and the maintenance of sufficient liquid 

net assets funded by equity and a viable 

plan for raising additional equity as 

necessary to meet the expectations 

under principle 15. In the proposal, the 

Board asked whether there are any other 

expectations that may require additional 

time to implement and whether six 

months is sufficient to implement the 

changes necessary to meet the 

expectations. 

The Board received three comment 

letters that addressed the compliance 

date for the new or heightened 

expectations proposed in the revised 

policy. One commenter agreed with the 

six-month extension. Two commenters 

stated that a longer extension may be 

necessary, and one of these suggested 

that a minimum of 18 months be 

allowed to meet the expectations in the 

proposed policy, especially if the 

expectations under principle 19 on 

tiered participation arrangements are 

finalized as proposed. 

After consideration of the comments 

and analysis, the Board is adopting an 

overall effective date for the PSR policy 

revisions of December 31, 2014. 

However, the Board will begin to apply 

the new or heightened risk-management 

and transparency expectations as of 

December 31, 2015. The Board believes 

that this additional time may be 

necessary to allow FMIs time to 

complete their processes and 

procedures for changes to their 

rulebooks and to minimize burden on 

FMIs and the markets they serve. FMIs, 

however, are encouraged to meet the 

expectations in the PSR policy as soon 

as possible. 

One commenter also stated that the 

expectations under proposed principle 

20 on links may require additional time 

to implement because implementation 

will require extensive cooperation and 

coordination between FMIs. These 

expectations, however, are included in 

the existing PSR policy and are not new 

or heightened.17 Therefore, the Board 

will retain its expectation that FMIs 

subject to the policy meet principle 20 

on the effective date of the final revised 

PSR policy. 

III. Administrative Law Matters 

A. Competitive Impact Analysis 

The Board has established procedures 

for assessing the competitive impact of 

rule or policy changes that have a 

substantial impact on payment system 

participants.18 Under these procedures, 

the Board will assess whether a change 

would have a direct and material 

adverse effect on the ability of other 

service providers to compete effectively 

with the Federal Reserve in providing 

similar services due to differing legal 

powers or constraints, or due to a 

dominant market position of the Federal 

Reserve deriving from such differences. 

If no reasonable modifications would 

mitigate the adverse competitive effects, 

the Board will determine whether the 

anticipated benefits are significant 

enough to proceed with the change 

despite the adverse effects. 

This final policy sets forth revised 

risk-management standards, which are 

based on the PFMI, for certain FMIs, 

including the Federal Reserve Bankoperated Fedwire Services. In a 

separate, related Federal Register 

notice, the Board amended its 

Regulation HH risk-management 

standards, which apply to certain 

designated FMUs as required by Title 

VIII of the Dodd-Frank Act, 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 

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 for designated FMUs in 

Regulation HH with respect to general 

business risk in § 234.3(a)(15) 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 will be guided by the 

key considerations and the explanatory 

text of the PFMI, as well as its 

interpretation of the corresponding 

provisions of Regulation HH, 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 FMIs 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.19 The 

Board does not expect that the 

difference in approach to implementing 


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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 67333 

1This definition is based on the definition 

provided in the Committee on Payment and 

Settlement Systems (CPSS) and Technical 

Committee of the International Organization of 

Securities Commissions (IOSCO) report on 

Principles for Financial Market Infrastructures 

(PFMI), April 2012, available at http://www.bis.org/ 

cpmi/publ/d101a.pdf. (Effective September 2014, 

the CPSS changed its name to the Committee on 

Payments and Market Infrastructures.) Further, an 

FMI generally embodies one or more of the 

following characteristics: (1) A multilateral 

arrangement with three or more participants; (2) a 

set of rules and procedures, common to all 

participants, that govern the clearing (comparison 

and/or netting), settlement, or recording of 

payments, securities, derivatives, or other financial 

transactions; (3) a common technical infrastructure 

for conducting the clearing, settlement, or recording 

process; and (4) a risk-management or capital 

structure that takes into account the multilateral 

dependencies inherent in the system. 

2The term ‘‘financial institution,’’ as used in this 

policy, refers to a broad array of organizations that 

engage in financial activity, including depository 

institutions, securities dealers, and futures 

commission merchants. 

3The term ‘‘financial market utility’’ is defined in 

Title VIII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act) as ‘‘any 

person that manages or operates a multilateral 

system for the purpose of transferring, clearing, or 

settling payments, securities, or other financial 

transactions among financial institutions or 

between financial institutions and the person.’’ 

Trade repositories, which the Dodd-Frank Act 

defines as providing ‘‘facilities for comparison of 

data respecting the terms of settlement of securities 

or futures transactions,’’ are not included in the 

term ‘‘financial market utility’’ (12 U.S.C. 5462). 

Financial market utilities are, therefore, a subset of 

the broader set of entities defined as FMIs. Under 

Title VIII, the Financial Stability Oversight Council 

designates certain financial market utilities as 

Continued 

these standards for the Fedwire Funds 

Service as compared to the requirements 

for CHIPS 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 

principle 15. 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. As discussed 

above, 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 

policy for issues of consistency and 

competitive equity between privatesector systems and the Fedwire Funds 

Service. Therefore, the Board believes 

the policy will have no material adverse 

effect on the ability of other service 

providers to compete effectively with 

the Reserve Banks. 

B. 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 policy under 

the authority delegated to the Board by 

the Office of Management and Budget. 

For purposes of calculating burden 

under the Paperwork Reduction Act, a 

‘‘collection of information’’ involves 10 

or more respondents. Any collection of 

information addressed to all or a 

substantial majority of an industry is 

presumed to involve 10 or more 

respondents (5 CFR 1320.3(c), 

1320.3(c)(4)(ii)). The Board estimates 

there are fewer than 10 respondents, 

and these respondents do not represent 

all or a substantial majority of payment, 

clearing, and settlement systems. 

Therefore, no collections of information 

pursuant to the Paperwork Reduction 

Act are contained in the final policy. 

IV. Federal Reserve Policy On Payment 

System Risk 

Introduction 

Risks In Payment, Clearing, Settlement, and 

Recording Systems 

Part I. Risk Management for Financial Market 

Infrastructures 

A. Scope 

B. Policy Expectations for Certain 

Financial Market Infrastructures 

1. Risk Management 

a. Fedwire Services 

b. Designated Financial Market Utilities for 

Which the Board Is the Supervisory 

Agency Under Title VIII of the DoddFrank Act 

c. Other Financial Market Infrastructures 

That Are Subject to the Board’s 

Supervisory Authority Under the Federal 

Reserve Act 

d. All Other Central Securities 

Depositories, Securities Settlement 

Systems, Central Counterparties, and 

Trade Repositories 

e. Other Systemically Important Offshore 

and Cross-Border Payment Systems 

2. Transparency 

C. General Policy Expectations for Other 

Payment Systems Within the Scope of 

the Policy 

1. Establishment of a Risk-Management 

Framework 

a. Identify Risks Clearly and Set Sound 

Risk-Management Objectives 

b. Establish Sound Governance 

Arrangements To Oversee the RiskManagement Framework 

c. Establish Clear and Appropriate Rules 

and Procedures To Carry Out the RiskManagement Objectives 

d. Employ the Resources Necessary To 

Achieve the System’s Risk-Management 

Objectives and Implement Effectively Its 

Rules and Procedures 

2. Other Considerations for a RiskManagement Framework 

D. Cooperation With Other Authorities in 

Regulating, Supervising, and Overseeing 

Financial Market Infrastructures 

Part II. Federal Reserve Intraday Credit 

Policies 

Appendix—CPSS–IOSCO Principles for 

Financial Market Infrastructures 

Introduction 

Financial market infrastructures 

(FMIs) are critical components of the 

nation’s financial system. FMIs are 

multilateral systems among 

participating financial institutions, 

including the system operator, used for 

the purposes of clearing, settling, or 

recording payments, securities, 

derivatives, or other financial 

transactions.1 2 FMIs include payment 

systems, central securities depositories, 

securities settlement systems, central 

counterparties, and trade repositories. 

The safety and efficiency of these 

systems may affect the safety and 

soundness of U.S. financial institutions 

and, in many cases, are vital to the 

financial stability of the United States. 

Given the importance of FMIs, the 

Board of Governors of the Federal 

Reserve System (Board) has developed 

this policy to set out the Board’s views, 

and related standards, regarding the 

management of risks that FMIs present 

to the financial system and to the 

Federal Reserve Banks (Reserve Banks). 

In adopting this policy, the Board’s 

objective is to foster the safety and 

efficiency of payment, clearing, 

settlement, and recording systems and 

to promote financial stability, more 

broadly. 

Part I of this policy sets out the 

Board’s views, and related standards, 

regarding the management of risks in 

FMIs, including those operated by the 

Reserve Banks. In setting out its views, 

the Board seeks to encourage FMIs and 

their primary regulators to take the 

standards in this policy into 

consideration in the design, operation, 

monitoring, and assessment of these 

systems. The Board will be guided by 

this part, in conjunction with relevant 

laws, regulations, and other Federal 

Reserve policies, when exercising its 

supervisory and regulatory authority 

over FMIs or their participants, 

providing accounts and services to 

FMIs, participating in cooperative 

oversight and similar arrangements for 

FMIs with other authorities, or 

providing intraday credit to eligible 

Federal Reserve account holders. 

Designated financial market utilities 

subject to the Board’s Regulation HH are 

not subject to the risk-management or 

transparency expectations set out in this 

policy.3


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systemically important. The Board’s Regulation HH 

is discussed in section I.B.1.b below. 4To assist depository institutions in 

implementing part II of this policy, the Board has 

prepared two documents, the Overview of the 

Federal Reserve’s Payment System Risk Policy 

(Overview) and the Guide to the Federal Reserve’s 

Payment System Risk Policy (Guide), which are 

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

paymentsystems/psr_relpolicies.htm. The Overview 

summarizes the Board’s policy on the provision of 

intraday credit, including net debit caps and 

daylight overdraft fees, and is intended for use by 

institutions that incur only small amounts of 

daylight overdrafts. The Guide explains in detail 

how these policies apply to different institutions 

and includes procedures for completing a selfassessment and filing a cap resolution, as well as 

information on other aspects of the policy. 

5The term ‘‘depository institution,’’ as used in 

this policy, refers not only to institutions defined 

as depository institutions in 12 U.S.C. 461(b)(1)(A), 

but also to U.S. branches and agencies of foreign 

banking organizations, Edge and agreement 

corporations, trust companies, and bankers’ banks, 

unless the context indicates a different reading. 

6The definitions of credit risk, liquidity risk, 

operational risk, and legal risk are consistent with 

those presented in the PFMI. 

7 Deliveries of currency are payments, and FMIs 

that conduct such activity should consider these 

deliveries to be payments in the management of 

liquidity risk. 

8Operational risk also includes physical threats, 

such as natural disasters and terrorist attacks, and 

information security threats, such as cyberattacks. 

Further, deficiencies in information systems or 

internal processes include errors or delays in 

processing, system outages, insufficient capacity, 

fraud, data loss, and leakage. 

9Several existing regulatory and bank supervision 

guidelines and policies also are directed at financial 

institutions’ management of the risks posed by 

interbank payment and settlement activity. For 

example, the Board’s Regulation F (12 CFR part 

206) directs insured depository institutions to 

establish policies and procedures to avoid excessive 

exposures to any other depository institution, 

including exposures that may be generated through 

the clearing and settlement of payments. 

Part II of this policy governs the 

provision of intraday credit or ‘‘daylight 

overdrafts’’ in accounts at the Reserve 

Banks and sets out the general methods 

used by the Reserve Banks to control 

their intraday credit exposures.4 Under 

this part, the Board recognizes that the 

Federal Reserve has an important role in 

providing intraday balances and credit 

to foster the smooth operation of the 

payment system. The Reserve Banks 

provide intraday balances by way of 

supplying temporary, intraday credit to 

healthy depository institutions, 

predominantly through collateralized 

intraday overdrafts.5 The Board believes 

that such a strategy enhances intraday 

liquidity while controlling risk to the 

Reserve Banks by providing incentives 

to collateralize daylight overdrafts. The 

Board also aims to limit the burden of 

the policy on healthy depository 

institutions that use small amounts of 

intraday credit. 

Through this policy, the Board 

expects financial system participants, 

including private-sector FMIs and the 

Reserve Banks, to reduce and control 

settlement and other systemic risks 

arising in FMIs, consistent with the 

smooth operation of the financial 

system. This policy is also designed to 

govern the provision of intraday 

balances and credit while controlling 

the Reserve Banks’ risk by (1) making 

financial system participants and FMIs 

aware of the types of basic risks that 

may arise in the payment, clearing, 

settlement, or recording process; (2) 

setting explicit risk-management 

expectations; (3) promoting appropriate 

transparency by FMIs to help inform 

participants and the public; and (4) 

establishing the policy conditions 

governing the provision of Federal 

Reserve intraday credit to eligible 

account holders. The Board’s adoption 

of this policy in no way diminishes the 

primary responsibilities of financial 

system participants to address the risks 

that may arise through their operation of 

or participation in FMIs. 

Risks in Payment, Clearing, Settlement, 

and Recording Systems 

The basic risks in payment, clearing, 

settlement, and recording systems may 

include credit risk, liquidity risk, 

operational risk, and legal risk. In the 

context of this policy, these risks are 

defined as follows: 6

• Credit risk: The risk that a 

counterparty, whether a participant or 

other entity, will be unable to meet fully 

its financial obligations when due, or at 

any time in the future. 

• Liquidity risk: The risk that a 

counterparty, whether a participant or 

other entity, will be unable to meet fully 

its financial obligations when due, 

although it may be able to do so in the 

future. An FMI, through its design or 

operation, may bear or generate 

liquidity risk in one or more currencies 

in its payment or settlement process.7 In 

this context, liquidity risk may arise 

between or among the system operator 

and the participants in the FMI, the 

system operator and other entities (such 

as settlement banks, nostro agents, or 

liquidity providers), the participants in 

the FMI and other entities, or two or 

more participants in the FMI. 

• Operational risk: The risk that 

deficiencies in information systems or 

internal processes, human errors, 

management failures, or disruptions 

from external events will result in the 

reduction, deterioration, or breakdown 

of services provided by the FMI.8

• Legal risk: The risk of loss from the 

unexpected or uncertain application of 

a law or regulation. 

These risks also arise between 

financial institutions as they clear, 

settle, and record payments and other 

financial transactions and must be 

managed by institutions, both 

individually and collectively.9

Further, FMIs may increase, shift, 

concentrate, or otherwise transform 

risks in unanticipated ways. FMIs, for 

example, may pose systemic risk to the 

financial system because the inability of 

one or more of its participants to 

perform as expected may cause other 

participants to be unable to meet their 

obligations when due. The failure of one 

or more of an FMI’s participants to settle 

their payments or other financial 

transactions as expected, in turn, could 

create credit or liquidity problems for 

participants and their customers, the 

system operator, other financial 

institutions, and the financial markets 

the FMI serves. Thus, such a failure 

might lead ultimately to a disruption in 

the financial markets more broadly and 

undermine public confidence in the 

nation’s financial system. 

Mitigating the risks that arise in FMIs 

is especially important because of the 

interdependencies such systems 

inherently create among financial 

institutions. In many cases, 

interdependencies are a normal part of 

an FMI’s structure or operations. 

Although they can facilitate the safety 

and efficiency of the FMI’s payment, 

clearing, settlement, or recording 

processes, interdependencies can also 

present an important source or 

transmission channel of systemic risk. 

Disruptions can originate from any of 

the interdependent entities, including 

the system operator, the participants in 

the FMI, and other systems, and can 

spread quickly and widely across 

markets if the risks that arise among 

these parties are not adequately 

measured, monitored, and managed. For 

example, interdependencies often create 

complex and time-sensitive transaction 

and payment flows that, in combination 

with an FMI’s design, can lead to 

significant demands for intraday credit 

or liquidity, on either a regular or an 

extraordinary basis. 

The Board recognizes that the Reserve 

Banks, as settlement institutions, have 

an important role in providing intraday 

balances and credit to foster the smooth 

operation and timely completion of 

money settlement processes among 

financial institutions and between 

financial institutions and FMIs. To the 

extent that the Reserve Banks are the 

source of intraday credit, they may face 

a risk of loss if such intraday credit is 

not repaid as planned. In addition, 

measures taken by Reserve Banks to 

limit their intraday credit exposures 


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10A ‘‘payment system’’ is a set of instruments, 

procedures, and rules for the transfer of funds 

between or among participants. Payment systems 

include, but are not limited to, large-value funds 

transfer systems, automated clearinghouse systems, 

check clearinghouses, and credit and debit card 

settlement systems. The scope of this policy also 

includes payment-versus-payment settlement 

systems for foreign exchange transactions. 

11 In determining whether it is included in the 

scope of this policy, a payment system should look 

at its projected ‘‘next’’ twelve-month period. 

‘‘Aggregate gross value of U.S. dollar-denominated 

transactions’’ refers to the total dollar value of 

individual U.S. dollar transactions settled in the 

payment system, which also represents the sum of 

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

before or in absence of any netting of transactions. 

12A ‘‘central securities depository’’ is an entity 

that provides securities accounts and central 

safekeeping services. A ‘‘securities settlement 

system’’ is an entity that enables securities to be 

transferred and settled by book entry and allows 

transfers of securities free of or against payment. A 

‘‘central counterparty’’ is 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. A 

‘‘trade repository’’ is an entity that maintains a 

centralized electronic record of transaction data. 

These definitions are based on those in the PFMI. 

13Non-U.S. dollar systems may be of interest to 

the Board if they are used by U.S. financial 

institutions or may have the ability to affect 

financial stability, more broadly. 

14The daily gross value threshold will be 

calculated on a U.S. dollar equivalent basis. 

15 In addition to these risk-management 

standards, the PFMI sets out responsibilities for 

authorities for FMIs, including central banks, in 

order to provide for effective regulation, 

supervision, and oversight of FMIs. 

16The FSB’s Key Standards for Sound Financial 

Systems are available at http://

www.financialstabilityboard.org/cos/key_

standards.htm. The FSB is an international forum 

that was established to develop and promote the 

implementation of effective regulatory, supervisory 

and other financial sector policies. The FSB 

includes the U.S. Department of the Treasury, the 

Board, and the SEC. 

may shift some or all of the associated 

risks to financial institutions and FMIs. 

In addition, mitigating the risks that 

arise in certain FMIs is critical to the 

areas of monetary policy and banking 

supervision. The effective 

implementation of monetary policy, for 

example, depends on both the orderly 

settlement of open market operations 

and the efficient movement of funds 

throughout the financial system via the 

financial markets and the FMIs that 

support those markets. Likewise, 

supervisory objectives regarding the 

safety and soundness of financial 

institutions must take into account the 

risks FMIs, both in the United States 

and abroad, pose to financial 

institutions that participate directly or 

indirectly in, or provide settlement, 

custody, or credit services to, such 

systems. 

Part I. Risk Management for Financial 

Market Infrastructures 

This part sets out the Board’s views, 

and related standards, regarding the 

management of risks in FMIs, including 

those operated by the Reserve Banks. 

The Board will be guided by this part, 

in conjunction with relevant laws, 

regulations, and other Federal Reserve 

policies, when exercising its authority 

in (1) supervising the Reserve Banks 

under the Federal Reserve Act; (2) 

supervising state member banks, Edge 

and agreement corporations, and bank 

holding companies, including the 

exercise of authority under the Bank 

Service Company Act, where applicable; 

(3) carrying out certain of its 

responsibilities under Title VIII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act); (4) setting or reviewing the terms 

and conditions for the use of Reserve 

Bank accounts and services; and (5) 

developing and applying policies for the 

provision of intraday liquidity to 

eligible Reserve Bank account holders. 

This part will also guide the Board, as 

appropriate, in its interactions and 

cooperative efforts with other domestic 

and foreign authorities that have 

responsibilities for regulating, 

supervising, or overseeing FMIs within 

the scope of this part. The Board’s 

adoption of this policy is not intended 

to exert or create supervisory or 

regulatory authority over any particular 

class of institutions or arrangements 

where the Board does not have such 

authority. 

A. Scope 

FMIs within the scope of part I 

include public- and private-sector 

payment systems that expect to settle a 

daily aggregate gross value of U.S. 

dollar-denominated transactions 

exceeding $5 billion on any day during 

the next 12 months.10 11 FMIs within the 

scope of this part also include central 

securities depositories, securities 

settlement systems, central 

counterparties, and trade repositories 

irrespective of the value or nature of the 

transactions processed by the system.12

These FMIs may be organized, located, 

or operated within the United States 

(domestic systems), outside the United 

States (offshore systems), or both (crossborder systems) and may involve 

currencies other than the U.S. dollar 

(non-U.S. dollar systems and multicurrency systems).13 The scope of the 

policy also includes any payment 

system based or operated in the United 

States that engages in the settlement of 

non-U.S. dollar transactions if that 

payment system would be otherwise 

subject to the policy.14

Part I does not apply to market 

infrastructures such as trading 

exchanges, trade-execution facilities, or 

multilateral trade-compression systems. 

This part is also not intended to apply 

to bilateral payment, clearing, or 

settlement relationships, where an FMI 

is not involved, between financial 

institutions and their customers, such as 

traditional correspondent banking and 

government securities clearing services. 

The Board believes that these market 

infrastructures and relationships do not 

constitute FMIs for purposes of this 

policy and that risk-management issues 

associated with these market 

infrastructures and relationships are 

more appropriately addressed through 

other relevant supervisory and 

regulatory processes. 

B. Policy Expectations for Certain 

Financial Market Infrastructures 

This section sets out the Board’s 

views, and related standards, with 

respect to risk-management and 

transparency for the subset of FMIs 

described below in section B.1, 

including the Reserve Banks’ Fedwire 

Funds Service and Fedwire Securities 

Service (collectively, Fedwire Services). 

The Board believes these FMIs should 

have comprehensive risk management 

as well as a high degree of transparency. 

1. Risk Management 

Authorities, including central banks, 

have promoted sound risk-management 

practices by developing internationally 

accepted minimum standards that 

promote the safety and efficiency of 

FMIs. Specifically, the Committee on 

Payment and Settlement Systems 

(CPSS) and Technical Committee of the 

International Organization of Securities 

Commissions (IOSCO) report on 

Principles for Financial Market 

Infrastructures (PFMI) establishes 

minimum standards for payment 

systems that are systemically important, 

central securities depositories, securities 

settlement systems, central 

counterparties, and trade repositories 

for addressing areas such as legal risk, 

governance, credit and liquidity risks, 

general business risk, operational risk, 

and other types of risk.15 The PFMI 

reflects broad market input and has 

been widely recognized, supported, and 

endorsed by U.S. authorities, including 

the Federal Reserve, U.S. Securities and 

Exchange Commission (SEC), and U.S. 

Commodity Futures Trading 

Commission (CFTC). These standards 

are also part of the Financial Stability 

Board’s (FSB’s) Key Standards for 

Sound Financial Systems.16

The Board believes that the 

implementation of the PFMI by the 

FMIs within the scope of this section 

will help promote their safety and 


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17The Board’s Regulation HH contains riskmanagement standards that are based on the PFMI 

for certain designated financial market utilities. 

Regulation HH (12 CFR part 234) is available at 

http://www.federalreserve.gov/bankinforeg/

reglisting.htm#HH. 

18The Board will also look to the CPSS–IOSCO 

Principles for Financial Market Infrastructures: 

Disclosure Framework and Assessment 

Methodology, which is available at http://

www.bis.org/cpmi/publ/d106.pdf, and other related 

documents. 

19Certain standards may require flexibility in the 

way they are applied to central bank-operated 

systems because of central banks’ unique role in the 

financial markets and their public responsibilities. 

These principles 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. For instance, the Reserve Banks 

should refer to part II of this policy for managing 

their credit risk arising from the provision of 

intraday credit to users of the Fedwire Services. 

20The 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)). 

Under Title VIII, the Board must prescribe riskmanagement standards for designated financial 

market utilities for which the Board or another 

Federal banking agency is the appropriate 

Supervisory Agency (12 U.S.C. 5464(a)). There are 

currently no designated financial market utilities 

for which another federal banking agency is the 

Supervisory Agency. 

21These systems may be used by U.S. financial 

institutions, clear or settle U.S. dollars, or have the 

ability to affect financial stability, more broadly. 

22The Board’s Regulation HH imposes an 

equivalent public disclosure requirement. 

23See CPSS–IOSCO, Principles for Financial 

Market Infrastructures: Disclosure Framework and 

Assessment Methodology, December 2012, available 

at http://www.bis.org/cpmi/publ/d106.pdf. 

24Although the Board expects disclosures to be 

robust, it does not expect FMIs to disclose to the 

public sensitive information that could expose 

system vulnerabilities or otherwise put the FMI at 

risk (for example, specific business continuity 

plans). 

efficiency in the financial system and 

foster greater financial stability in the 

domestic and global economy. 

Accordingly, the Board has incorporated 

into the PSR policy principles 1 through 

24 from the PFMI, as set forth in the 

appendix.17 In applying part I of this 

policy, the Board will be guided by the 

key considerations and explanatory 

notes from the PFMI as well as its 

interpretation of the corresponding 

provisions of Regulation HH.18

a. Fedwire Services 

The Board recognizes the critical role 

the Reserve Banks’ Fedwire Services 

play in the financial system and 

requires them to meet or exceed the 

standards set forth in the appendix to 

this policy, consistent with the guidance 

on central bank-operated systems 

provided in the PFMI and with the 

requirements in the Monetary Control 

Act.19

b. Designated Financial Market Utilities 

for Which the Board is the Supervisory 

Agency Under Title VIII of the DoddFrank Act 

The Board’s Regulation HH imposes 

risk-management standards applicable 

to a designated financial market utility 

for which the Board is the Supervisory 

Agency.20 The risk-management 

standards in Regulation HH are based 

on the PFMI. As required under Title 

VIII of the Dodd-Frank Act, the riskmanagement standards seek to promote 

robust risk management, promote safety 

and soundness, reduce systemic risks, 

and support the stability of the broader 

financial system. Designated financial 

market utilities for which the Board is 

the Supervisory Agency are required to 

comply with the risk-management 

standards in Regulation HH and are not 

subject to the standards in the appendix. 

c. Other Financial Market 

Infrastructures That are Subject to the 

Board’s Supervisory Authority Under 

the Federal Reserve Act 

The Board expects all other FMIs that 

are subject to its supervisory authority 

under the Federal Reserve Act, 

including FMIs that are members of the 

Federal Reserve System, to meet or 

exceed the risk-management standards 

in the appendix. 

d. All Other Central Securities 

Depositories, Securities Settlement 

Systems, Central Counterparties, and 

Trade Repositories 

The Board encourages all other 

central securities depositories, securities 

settlement systems, central 

counterparties, and trade repositories, 

whether they are located within or 

outside the United States, to meet or 

exceed the risk-management standards 

in the appendix to this policy. Where 

the Board does not have authority over 

a central securities depository, 

securities settlement system, central 

counterparty, or trade repository, the 

Board will be guided by this policy in 

its cooperative efforts with other FMI 

authorities. 

e. Other Systemically Important 

Offshore and Cross-Border Payment 

Systems 

The Board encourages systemically 

important offshore and cross-border 

payment systems that are not included 

in any of the categories above to meet 

or exceed the risk-management 

standards in the appendix to this 

policy.21 The Board will be guided by 

this policy in its cooperative efforts with 

other payment system authorities. 

2. Transparency 

Transparency helps ensure that 

relevant information is provided to an 

FMI’s participants, authorities, and the 

public to inform sound decisionmaking, 

improve risk management, enable 

market discipline, and foster confidence 

in markets more broadly. In particular, 

public disclosures play a critical role in 

allowing current and prospective 

participants, as well as other 

stakeholders, to understand an FMI’s 

operations and the risks associated with 

using its services and to manage more 

effectively their risks with respect to the 

FMI. The Board believes that FMIs are 

well-positioned to provide the 

information necessary to support greater 

market transparency and to maintain 

financial stability. 

The Board expects an FMI that is 

subject to its supervisory authority, but 

not subject to Regulation HH, to disclose 

to its participants information about the 

risks and costs that they incur by 

participating in the FMI, consistent with 

the requirements in principle 23 in the 

appendix.22 At a minimum, the FMI 

should disclose to its participants 

overviews of the FMI’s system design 

and operations, rules and key 

procedures, key highlights of business 

continuity arrangements, fees and other 

material costs, aggregate transaction 

volumes and values, levels of financial 

resources that can be used to cover 

participant defaults, and other 

information that would facilitate its 

participants’ understanding of the FMI 

and its operations and their evaluation 

of the risks associated with using that 

FMI. 

In addition, the Board expects such an 

FMI to complete the disclosure 

framework set forth in the CPSS–IOSCO 

Principles for Financial Market 

Infrastructures: Disclosure Framework 

and Assessment Methodology 

(‘‘disclosure framework’’ and 

‘‘assessment methodology’’).23 The 

disclosure framework establishes the 

international baseline set of information 

that all FMIs are expected to disclose 

publicly and review regularly.24 An FMI 

is encouraged to use the guiding 

questions in the assessment 

methodology to guide the content and 

level of detail in their disclosures. The 

Board expects each FMI to make its 

disclosure readily available to the 

public, such as by posting it on the 

FMI’s public Web site, to achieve 

maximum transparency. 

To ensure each FMI’s accountability 

for the accuracy and completeness of its 

disclosure, the Board expects the FMI’s 


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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 67337 

25Any review of a disclosure by the Board should 

not be viewed as an approval or guarantee of the 

accuracy of an FMI’s disclosure. Without the 

express approval of the Board, an FMI may not state 

that its disclosure has been reviewed, endorsed, 

approved, or otherwise not objected to by the 

Board. 

26 If the Board materially disagrees with the 

content of an FMI’s disclosure, it will communicate 

its concerns to the FMI’s senior management and 

possibly to its board of directors, as appropriate. 

The Board may also discuss its concerns with other 

relevant authorities, as appropriate. 

27The risk-management and internal audit 

functions should also be independent of those 

responsible for day-to-day functions. 

senior management and board of 

directors to review and approve each 

disclosure upon completion. Further, in 

order for an FMI’s disclosure to reflect 

its current rules, procedures, and 

operations, the Board expects the FMI to 

update the relevant parts of its 

disclosure following changes to the FMI 

or the environment in which it operates, 

which would significantly change the 

accuracy of the statements in its 

disclosure. At a minimum, the FMI is 

expected to review and update as 

warranted its disclosure every two 

years. 

As part of its ongoing oversight of 

FMIs, the Board will review public 

disclosures by FMIs subject to its 

supervisory authority to ensure that the 

Board’s policy objectives and 

expectations are being met.25 Where 

necessary, the Board will provide 

feedback to the FMIs regarding the 

content of these disclosures and their 

effectiveness in achieving the policy 

objectives discussed above.26 The Board 

acknowledges that FMIs vary in terms of 

the scope of instruments they settle and 

markets they serve. It also recognizes 

that FMIs may operate under different 

legal and regulatory constraints, 

charters, and corporate structures. The 

Board will consider these factors when 

reviewing the disclosures and in 

evaluating how an FMI addresses a 

particular standard. Where the Board 

does not have statutory or exclusive 

authority over an FMI, it will be guided 

by this policy in cooperative efforts with 

other domestic or foreign authorities to 

promote comprehensive disclosures by 

FMIs as a means to achieve greater 

safety and efficiency in the financial 

system. 

C. General Policy Expectations for Other 

Payment Systems Within the Scope of 

the Policy 

The Board encourages payment 

systems within the scope of this policy, 

but that are not included in any of the 

categories in section B above, to 

implement a general risk-management 

framework appropriate for the risks the 

payment system poses to the system 

operator, system participants, and other 

relevant parties as well as the financial 

system more broadly. 

1. Establishment of a Risk-Management 

Framework 

A risk-management framework is the 

set of objectives, policies, arrangements, 

procedures, and resources that a system 

employs to limit and manage risk. 

Although there are a number of ways to 

structure a sound risk-management 

framework, all frameworks should 

a. identify risks clearly and set sound 

risk-management objectives; 

b. establish sound governance 

arrangements to oversee the riskmanagement framework; 

c. establish clear and appropriate 

rules and procedures to carry out the 

risk-management objectives; and 

d. employ the resources necessary to 

achieve the system’s risk-management 

objectives and implement effectively its 

rules and procedures. 

a. Identify Risks Clearly and Set Sound 

Risk-Management Objectives 

The first element of a sound riskmanagement framework is the clear 

identification of all risks that have the 

potential to arise in or result from the 

system’s settlement process and the 

development of clear and transparent 

objectives regarding the system’s 

tolerance for and management of such 

risks. System operators should identify 

the forms of risk present in their 

system’s settlement process as well as 

the parties posing and bearing each risk. 

In particular, system operators should 

identify the risks posed to and borne by 

them, the system participants, and other 

key parties such as a system’s settlement 

banks, custody banks, and third-party 

service providers. System operators 

should also analyze whether risks might 

be imposed on other external parties 

and the financial system more broadly. 

In addition, system operators should 

analyze how risk is transformed or 

concentrated by the settlement process. 

System operators should also consider 

the possibility that attempts to limit one 

type of risk could lead to an increase in 

another type of risk. Moreover, system 

operators should be aware of risks that 

might be unique to certain instruments, 

participants, or market practices. Where 

payment systems have interrelationships with or dependencies on 

other FMIs, system operators should 

also analyze whether and to what extent 

any cross-system risks exist and who 

bears them. 

Using their clear identification of 

risks, system operators should establish 

the risk tolerance of the system, 

including the levels of risk exposure 

that are acceptable to the system 

operator, system participants, and other 

relevant parties. System operators 

should then set risk-management 

objectives that clearly allocate 

acceptable risks among the relevant 

parties and set out strategies to manage 

this risk. Risk-management objectives 

should be consistent with the objectives 

of this policy, the system’s business 

purposes, and the type of payment 

instruments and markets for which the 

system clears and settles. Riskmanagement objectives should also be 

communicated to and understood by 

both the system operator’s staff and 

system participants. 

System operators should reevaluate 

their risks in conjunction with any 

major changes in the settlement process 

or operations, the transactions settled, 

the system’s rules or procedures, or the 

relevant legal and market environments. 

System operators should review the 

risk-management objectives regularly to 

ensure that they are appropriate for the 

risks posed by the system, continue to 

be aligned with the system’s purposes, 

remain consistent with this policy, and 

are being effectively adhered to by the 

system operator and participants. 

b. Establish Sound Governance 

Arrangements To Oversee the RiskManagement Framework 

Systems should have sound 

governance arrangements to implement 

and oversee their risk-management 

frameworks. The responsibility for 

sound governance rests with a system 

operator’s board of directors or similar 

body and with the system operator’s 

senior management. Governance 

structures and processes should be 

transparent; enable the establishment of 

clear risk-management objectives; set 

and enforce clear lines of responsibility 

and accountability for achieving these 

objectives; ensure that there is 

appropriate oversight of the riskmanagement process; and enable the 

effective use of information reported by 

the system operator’s management, 

internal auditors, and external auditors 

to monitor the performance of the riskmanagement process.27 Individuals 

responsible for governance should be 

qualified for their positions, understand 

their responsibilities, and understand 

their system’s risk-management 

framework. Governance arrangements 

should also ensure that riskmanagement information is shared in 

forms, and at times, that allow 


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28Examples of key features that might be 

specified in a system’s rules and procedures are 

controls to limit participant-based risks, such as 

membership criteria based on participants’ financial 

and operational health; limits on credit exposures; 

and the procedures and resources to liquidate 

collateral. Other examples of key features might be 

business continuity requirements and lossallocation procedures. 

29To facilitate analysis of settlement disruptions, 

systems may need to develop the capability to 

simulate credit and liquidity effects on participants 

and on the system resulting from one or more 

participant defaults, or other possible sources of 

settlement disruption. Such simulations may need 

to include, if appropriate, the effects of changes in 

market prices, volatilities, or other factors. 

30An FMI may be subject to supervision or 

oversight by the Board and other authorities, as a 

result of its legal framework, operating structure (for 

example, multi-currency or cross-border systems), 

or participant base. In such cases, the Board will be 

sensitive to the potential for duplicative or 

conflicting requirements, oversight gaps, or 

unnecessary costs and burdens imposed on the 

FMI. 

31See Central Bank Oversight of Payment and 

Settlement Systems, part B on ‘‘Principles for 

international cooperative oversight,’’ May 2005, 

available at http://www.bis.org/cpmi/publ/d68.pdf. 

individuals responsible for governance 

to fulfill their duties effectively. 

c. Establish Clear and Appropriate Rules 

and Procedures To Carry out the RiskManagement Objectives 

Systems should have rules and 

procedures that are appropriate and 

sufficient to carry out the system’s riskmanagement objectives and that are 

consistent with its legal framework. 

Such rules and procedures should 

specify the respective responsibilities of 

the system operator, system 

participants, and other relevant parties. 

Rules and procedures should establish 

the key features of a system’s settlement 

and risk-management design and 

specify clear and transparent crisis 

management procedures and settlement 

failure procedures, if applicable.28

d. Employ the Resources Necessary To 

Achieve the System’s Risk-Management 

Objectives and Implement Effectively its 

Rules and Procedures 

System operators should ensure that 

the appropriate resources and processes 

are in place to allow the system to 

achieve its risk-management objectives 

and implement effectively its rules and 

procedures. In particular, the system 

operator’s staff should have the 

appropriate skills, information, and 

tools to apply the system’s rules and 

procedures and achieve the system’s 

risk-management objectives. System 

operators should also ensure that their 

facilities and contingency arrangements, 

including any information system 

resources, are sufficient to meet their 

risk-management objectives. 

2. Other Considerations for a RiskManagement Framework 

Payment systems differ widely in 

form, function, scale, and scope of 

activities, and these characteristics 

result in differing combinations and 

levels of risks. Thus, the exact features 

of a system’s risk-management 

framework should be tailored to the 

risks of that system. The specific 

features of a risk-management 

framework may entail tradeoffs between 

efficiency and risk reduction, and 

payment systems will need to consider 

these tradeoffs when designing 

appropriate rules and procedures. In 

considering such tradeoffs, however, it 

is critically important that system 

operators take into account the costs 

and risks that may be imposed on all 

relevant parties, including parties with 

no direct role in the system. 

Furthermore, in light of rapidly evolving 

technologies and risk-management 

practices, the Board encourages all 

system operators to consider making 

risk-management improvements when 

cost-effective. 

The Board may seek to understand 

how a system achieves the four 

elements of a sound risk-management 

framework set out above. In this context, 

the Board may seek to obtain 

information from system operators 

regarding their risk-management 

framework, risk-management objectives, 

rules and procedures, significant legal 

analyses, general risk analyses, analyses 

of the credit and liquidity effects of 

settlement disruptions, business 

continuity plans, crisis management 

procedures, and other relevant 

documentation.29 The Board also may 

seek to obtain data or statistics on 

system activity on an ad hoc or ongoing 

basis. All information provided to the 

Federal Reserve for the purposes of this 

policy will be handled in accordance 

with all applicable Federal Reserve 

policies on information security, 

confidentiality, and conflicts of interest. 

D. Cooperation With Other Authorities 

in Regulating, Supervising, and 

Overseeing Financial Market 

Infrastructures 

When the Board does not have 

statutory or exclusive authority over an 

FMI covered by this policy, this section 

will guide the Board, as appropriate, in 

its interactions with other domestic and 

foreign authorities to promote effective 

risk management in and transparency by 

FMIs. For example, the Federal Reserve 

may have an interest in the safety and 

efficiency of FMIs outside the United 

States that are subject to regulation, 

supervision, or oversight by another 

authority but that provide services to 

financial institutions supervised by the 

Board or conduct activity that involves 

the U.S. dollar.30 In its interactions with 

other domestic and foreign authorities, 

the Board will encourage these 

authorities to adopt and to apply the 

internationally accepted principles set 

forth in the appendix when evaluating 

the risks posed by and to FMIs and 

individual system participants that 

these authorities regulate, supervise, or 

oversee. 

In working with other authorities, the 

Board will seek to establish 

arrangements for effective and practical 

cooperation that promote sound riskmanagement outcomes. The Board 

believes that cooperative arrangements 

among relevant authorities can be an 

effective mechanism for, among other 

things, (1) sharing relevant information 

concerning the policies, procedures, and 

operations of an FMI; (2) sharing 

supervisory views regarding an FMI; (3) 

discussing and promoting the 

application of robust risk-management 

standards; and (4) serving as a forum for 

effective communication, coordination, 

and consultation during normal 

circumstances, as well as periods of 

market stress. 

When establishing such cooperative 

arrangements, the Board will be guided, 

as appropriate, by international 

principles on cooperative arrangements 

for the regulation, supervision, and 

oversight of FMIs. In particular, 

responsibility E in the PFMI addresses 

domestic and international cooperation 

among central banks, market regulators, 

and other relevant authorities and 

provides guidance to these entities for 

supporting each other in fulfilling their 

respective mandates with respect to 

FMIs. The CPSS report on Central Bank 

Oversight of Payment and Settlement 

Systems also provides important 

guidance on international cooperation 

among central banks.31 The Board 

believes this international guidance 

provides important frameworks for 

cooperating and coordinating with other 

authorities to address risks in domestic, 

cross-border, multi-currency, and, 

where appropriate, offshore FMIs. 

Part II. Federal Reserve Intraday Credit 

Policies 

[No change to existing part II of the 

policy.] 

Appendix—CPSS–IOSCO Principles for 

Financial Market Infrastructures 

Principle 1: Legal basis 

An FMI should have a well-founded, 

clear, transparent, and enforceable legal 


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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 67339 

basis for each material aspect of its 

activities in all relevant jurisdictions. 

Principle 2: Governance 

An FMI should have governance 

arrangements that are clear and 

transparent, promote the safety and 

efficiency of the FMI, and support the 

stability of the broader financial system, 

other relevant public interest 

considerations, and the objectives of 

relevant stakeholders. 

Principle 3: Framework for the 

Comprehensive Management of Risks 

An FMI should have a sound riskmanagement framework for 

comprehensively managing legal, credit, 

liquidity, operational, and other risks. 

Principle 4: Credit Risk 

An FMI should effectively measure, 

monitor, and manage its credit 

exposures to participants and those 

arising from its payment, clearing, and 

settlement processes. An FMI should 

maintain sufficient financial resources 

to cover its credit exposure to each 

participant fully with a high degree of 

confidence. In addition, a central 

counterparty that is involved in 

activities with a more-complex risk 

profile or that is systemically important 

in multiple jurisdictions should 

maintain additional financial resources 

sufficient to cover a wide range of 

potential stress scenarios that should 

include, but not be limited to, the 

default of the two participants and their 

affiliates that would potentially cause 

the largest aggregate credit exposure to 

the central counterparty in extreme but 

plausible market conditions. All other 

central counterparties should maintain 

additional financial resources sufficient 

to cover a wide range of potential stress 

scenarios that should include, but not 

be limited to, the default of the 

participant and its affiliates that would 

potentially cause the largest aggregate 

credit exposure to the central 

counterparty in extreme but plausible 

market conditions. 

Principle 5: Collateral 

An FMI that requires collateral to 

manage its or its participants’ credit 

exposure should accept collateral with 

low credit, liquidity, and market risks. 

An FMI should also set and enforce 

appropriately conservative haircuts and 

concentration limits. 

Principle 6: Margin 

A central counterparty should cover 

its credit exposures to its participants 

for all products through an effective 

margin system that is risk-based and 

regularly reviewed. 

Principle 7: Liquidity Risk 

An FMI should effectively measure, 

monitor, and manage its liquidity risk. 

An FMI should maintain sufficient 

liquid resources in all relevant 

currencies to effect same-day and, 

where appropriate, intraday and 

multiday settlement of payment 

obligations with a high degree of 

confidence under a wide range of 

potential stress scenarios that should 

include, but not be limited to, the 

default of the participant and its 

affiliates that would generate the largest 

aggregate liquidity obligation for the 

FMI in extreme but plausible market 

conditions. 

Principle 8: Settlement Ginality 

An FMI should provide clear and 

certain final settlement, at a minimum 

by the end of the value date. Where 

necessary or preferable, an FMI should 

provide final settlement intraday or in 

real time. 

Principle 9: Money Settlements 

An FMI should conduct its money 

settlements in central bank money 

where practical and available. If central 

bank money is not used, an FMI should 

minimize and strictly control the credit 

and liquidity risk arising from the use 

of commercial bank money. 

Principle 10: Physical Deliveries 

An FMI should clearly state its 

obligations with respect to the delivery 

of physical instruments or commodities 

and should identify, monitor, and 

manage the risks associated with such 

physical deliveries. 

Principle 11: Central Securities 

Depositories 

A central securities depository should 

have appropriate rules and procedures 

to help ensure the integrity of securities 

issues and minimize and manage the 

risks associated with the safekeeping 

and transfer of securities. A central 

securities depository should maintain 

securities in an immobilized or 

dematerialized form for their transfer by 

book entry. 

Principle 12: Exchange-of-Value 

Settlement Systems 

If an FMI settles transactions that 

involve the settlement of two linked 

obligations (for example, securities or 

foreign exchange transactions), it should 

eliminate principal risk by conditioning 

the final settlement of one obligation 

upon the final settlement of the other. 

Principle 13: Participant-Default Rules 

and Procedures 

An FMI should have effective and 

clearly defined rules and procedures to 

manage a participant default. These 

rules and procedures should be 

designed to ensure that the FMI can take 

timely action to contain losses and 

liquidity pressures and continue to meet 

its obligations. 

Principle 14: Segregation and Portability 

A central counterparty should have 

rules and procedures that enable the 

segregation and portability of positions 

of a participant’s customers and the 

collateral provided to the central 

counterparty with respect to those 

positions. 

Principle 15: General Business Risk 

An FMI should identify, monitor, and 

manage its general business risk and 

hold sufficient liquid net assets funded 

by equity to cover potential general 

business losses so that it can continue 

operations and services as a going 

concern if those losses materialize. 

Further, liquid net assets should at all 

times be sufficient to ensure a recovery 

or orderly wind-down of critical 

operations and services. 

Principle 16: Custody and Investment 

Risks 

An FMI should safeguard its own and 

its participants’ assets and minimize the 

risk of loss on and delay in access to 

these assets. An FMI’s investments 

should be in instruments with minimal 

credit, market, and liquidity risks. 

Principle 17: Operational Risk 

An FMI should identify the plausible 

sources of operational risk, both internal 

and external, and mitigate their impact 

through the use of appropriate systems, 

policies, procedures, and controls. 

Systems should be designed to ensure a 

high degree of security and operational 

reliability and should have adequate, 

scalable capacity. Business continuity 

management should aim for timely 

recovery of operations and fulfilment of 

the FMI’s obligations, including in the 

event of a wide-scale or major 

disruption. 

Principle 18: Access and Participation 

Requirements 

An FMI should have objective, riskbased, and publicly disclosed criteria 

for participation, which permit fair and 

open access. 

Principle 19: Tiered Participation 

Arrangements 

An FMI should identify, monitor, and 

manage the material risks to the FMI 


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67340 Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations 

arising from tiered participation 

arrangements. 

Principle 20: FMI Links 

An FMI that establishes a link with 

one or more FMIs should identify, 

monitor, and manage link-related risks. 

Principle 21: Efficiency and 

Effectiveness 

An FMI should be efficient and 

effective in meeting the requirements of 

its participants and the markets it 

serves. 

Principle 22: Communication 

Procedures and Standards 

An FMI should use, or at a minimum 

accommodate, relevant internationally 

accepted communication procedures 

and standards in order to facilitate 

efficient payment, clearing, settlement, 

and recording. 

Principle 23: Disclosure of Rules, Key 

Procedures, and Market Data 

An FMI should have clear and 

comprehensive rules and procedures 

and should 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 FMI. All 

relevant rules and key procedures 

should be publicly disclosed. 

Principle 24: Disclosure of Market Data 

by Trade Repositories 

A trade repository should provide 

timely and accurate data to relevant 

authorities and the public in line with 

their respective needs. 

By order of the Board of Governors of the 

Federal Reserve System, November 6, 2014. 

Robert deV. Frierson, 

Secretary of the Board. 

[FR Doc. 2014–26791 Filed 11–12–14; 8:45 am] 

BILLING CODE P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2014–0437; Directorate 

Identifier 2012–CE–036–AD; Amendment 

39–18019; AD 2014–23–03] 

RIN 2120–AA64 

Airworthiness Directives; Piper 

Aircraft, Inc. 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule. 

SUMMARY: We are superseding 

Airworthiness Directive (AD) 76–06–09 

for certain Piper Aircraft, Inc. Model 

PA–31P airplanes. AD 76–06–09 

required repetitive inspection of certain 

exhaust system parts with replacement 

of parts mating with the turbocharger, as 

necessary, and allowed installation of a 

certain tailpipe v-band coupling as 

terminating action. This new AD 

requires the use of new service 

information and expands the scope of 

the inspections of the turbocharger 

exhaust system. This AD was prompted 

by reports of exhaust system failures, 

new service information, and the 

tailpipe v-band coupling used for 

terminating action is obsolete. We are 

issuing this AD to correct the unsafe 

condition on these products. 

DATES: This AD is effective December 

18, 2014. 

The Director of the Federal Register 

approved the incorporation by reference 

of certain publications listed in this AD 

as of December 18, 2014. 

The Director of the Federal Register 

approved the incorporation by reference 

of certain other publications listed in 

this AD as of July 17, 2013 (78 FR 

35110, June 12, 2013). 

ADDRESSES: For service information 

identified in this AD, contact Piper 

Aircraft, Inc., 2926 Piper Drive, Vero 

Beach, Florida 32960; telephone: (772) 

567–4361; fax: (772) 978–6573; Internet: 

www.piper.com/home/pages/ 

Publications.cfm; or Lycoming Engines, 

652 Oliver Street, Williamsport, 

Pennsylvania 17701; telephone: (570) 

323–6181; Internet: http:// 

www.lycoming.textron.com/support/ 

publications/index.html; as applicable. 

You may review copies of the 

referenced service information at the 

FAA, Small Airplane Directorate, 901 

Locust, Kansas City, Missouri 64106. 

For information on the availability of 

this material at the FAA, call (816) 329– 

4148. 

Examining the AD Docket 

You may examine the AD docket on 

the Internet at http:// 

www.regulations.govby searching for 

and locating Docket No. FAA–2014– 

0437; or in person at the Docket 

Management Facility between 9 a.m. 

and 5 p.m., Monday through Friday, 

except Federal holidays. The AD docket 

contains this AD, the regulatory 

evaluation, any comments received, and 

other information. The address for the 

Docket Office (phone: 800–647–5527) is 

Document Management Facility, U.S. 

Department of Transportation, Docket 

Operations, M–30, West Building 

Ground Floor, Room W12–140, 1200 

New Jersey Avenue SE., Washington, 

DC 20590. 

FOR FURTHER INFORMATION CONTACT: Gary 

Wechsler, Aerospace Engineer, Atlanta 

Aircraft Certification Office, FAA, 1701 

Columbia Avenue, College Park, Georgia 

30337; telephone: (404) 474–5575; fax: 

(404) 474–5606; email: 

gary.wechsler@faa.gov. 

SUPPLEMENTARY INFORMATION: 

Discussion 

We issued a notice of proposed 

rulemaking (NPRM) to amend 14 CFR 

part 39 to supersede AD 76–06–09, 

Amendment 39–3325 (43 FR 50417, 

October 30, 1978), (‘‘AD 76–06–09’’). 

AD 76–06–09 applied to certain Piper 

Aircraft, Inc. Model PA–31P airplanes. 

The NPRM published in the Federal 

Register on July 9, 2014 (79 FR 38806). 

The NPRM was prompted by reports of 

exhaust system failure. The NPRM 

proposed to retain certain requirements 

of AD 76–06–09. The NPRM also 

proposed to require the use of the new 

service information and expand the 

scope of the inspections of the 

turbocharger exhaust system. We are 

issuing this AD to correct the unsafe 

condition on these products. 

Comments 

We gave the public the opportunity to 

participate in developing this AD. We 

received no comments on the NPRM (79 

FR 38806, July 9, 2014) or on the 

determination of the cost to the public. 

Conclusion 

We reviewed the relevant data and 

determined that air safety and the 

public interest require adopting this AD 

as proposed except for minor editorial 

changes. We have determined that these 

minor changes: 

• Are consistent with the intent that 

was proposed in the NPRM (79 FR 

38806, July 9, 2014) for correcting the 

unsafe condition; and 

• Do not add any additional burden 

upon the public than was already 

proposed in the NPRM (79 FR 38806, 

July 9, 2014). 

Costs of Compliance 

We estimate that this AD affects 85 

airplanes of U.S. registry. 

We estimate the following costs to 

comply with this AD: 


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