[Federal Register Volume 79, Number 219 (Thursday, November 13, 2014)]
[Rules and Regulations]
[Pages 67326-67340]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26791]


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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.

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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 
(Dodd-Frank 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 
risk-management 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

[[Page 67327]]

or create supervisory or regulatory authority over any particular class 
of institutions or arrangements where the Board does not have such 
authority.
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    \1\ Part 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.
    \2\ Prior to this notice, part I of the PSR policy incorporated 
the international standards for payment, clearing, and settlement 
systems set out 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.)
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    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 risk-management 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.
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    \3\ 79 FR 2838 (January 16, 2014).
    \4\ The PFMI is available at http://www.bis.org/cpmi/publ/d101a.pdf.
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    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.<SUP>7 8</SUP> The public comment 
period for the proposed revisions closed on March 31, 2014.
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    \5\ The 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.
    \6\ The 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.
    \7\ Concurrent with this final policy statement, the Board is 
adopting final revisions to Regulation HH that take into 
consideration the PFMI.
    \8\ The term ``Supervisory Agency'' is defined in Title VIII as 
the ``Federal agency that has primary jurisdiction over a designated 
financial market utility under Federal banking, securities, or 
commodity futures laws'' (12 U.S.C. 5462(8)). Currently, the Board 
is the Supervisory Agency for two FMUs that have been designated by 
the Council--The Clearing House Payments Company, L.L.C., on the 
basis of its role as operator of the Clearing House Interbank 
Payments System, and CLS Bank International; these 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.
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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\
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    \9\ Concurrent 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.
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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 risk-management 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

[[Page 67328]]

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 PFMI-based 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 risk-management 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 Dodd-Frank 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 private-
sector systems should not be required to consider public interest 
considerations and should focus exclusively on the needs of 
participants.
    The Board believes that 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 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 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 risk-
management 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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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 over-the-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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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 private-sector systems and the Fedwire Funds 
Service.
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    \11\ As 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).
    \12\ Consistent with the PFMI, the calculation of these current 
operating expenses would exclude depreciation and amortization 
expenses.
    \13\ Federal 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 
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 well-capitalized 
institution.
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    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 service-level 
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

[[Page 67331]]

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.
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    \14\ For 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.
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    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 information-gathering 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\
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    \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.
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    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.
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    \16\ Designated FMUs are subject to Regulation HH (Sec.  
234.3(a)(23)(iv)) rather than this policy.
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    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

[[Page 67332]]

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.
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    \17\ See sections I.C.2.a.xix and I.C.2.b.xi of the existing 
policy.
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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.
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    \18\ These 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)).
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    This final policy sets forth revised risk-management standards, 
which are based on the PFMI, for certain FMIs, including the Federal 
Reserve Bank-operated 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 Sec.  234.3(a)(15) should 
also be imposed on the equivalent Reserve Bank service.
    The final revisions to the risk-management 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 risk-management 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

[[Page 67333]]

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 Sec.  234.3(a)(15)(i). The Board will also monitor 
the implementation of the final policy for issues of consistency and 
competitive equity between private-sector 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.
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    \19\ These 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.
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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 Dodd-Frank 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 Risk-
Management Framework
    c. Establish Clear and Appropriate Rules and Procedures To Carry 
Out the Risk-Management 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 Risk-Management 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.<SUP>1 2</SUP> 
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.
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    \1\ This 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.
    \2\ The 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.
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    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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    \3\ The 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 systemically important. The Board's Regulation HH is 
discussed in section I.B.1.b below.

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[[Page 67334]]

    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.
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    \4\ To 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 self-
assessment and filing a cap resolution, as well as information on 
other aspects of the policy.
    \5\ The 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.
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    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\
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    \6\ The definitions of credit risk, liquidity risk, operational 
risk, and legal risk are consistent with those presented in the 
PFMI.
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    <bullet> 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.
    <bullet> 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.
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    \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.
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    <bullet> 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\
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    \8\ Operational 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.
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    <bullet> 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\
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    \9\ Several 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.
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    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

[[Page 67335]]

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.<SUP>10 11</SUP> 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 (cross-border systems) and may involve 
currencies other than the U.S. dollar (non-U.S. dollar systems and 
multi-currency 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\
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    \10\ A ``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.
    \12\ A ``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.
    \13\ Non-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.
    \14\ The daily gross value threshold will be calculated on a 
U.S. dollar equivalent basis.
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    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\
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    \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.
    \16\ The 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.
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    The Board believes that the implementation of the PFMI by the FMIs 
within the scope of this section will help promote their safety and

[[Page 67336]]

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\
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    \17\ The Board's Regulation HH contains risk-management 
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.
    \18\ The 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.
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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\
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    \19\ Certain 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.
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b. Designated Financial Market Utilities for Which the Board is the 
Supervisory Agency Under Title VIII of the Dodd-Frank 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 risk-management 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.
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    \20\ The term ``Supervisory Agency'' is defined in Title VIII as 
the ``Federal agency that has primary jurisdiction over a designated 
financial market utility under Federal banking, securities, or 
commodity futures laws'' (12 U.S.C. 5462(8)). Under Title VIII, the 
Board must prescribe risk-management 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.
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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.
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    \21\ These 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.
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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.
---------------------------------------------------------------------------

    \22\ The Board's Regulation HH imposes an equivalent public 
disclosure requirement.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \23\ See CPSS-IOSCO, Principles for Financial Market 
Infrastructures: Disclosure Framework and Assessment Methodology, 
December 2012, available at http://www.bis.org/cpmi/publ/d106.pdf.
    \24\ Although 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).
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    To ensure each FMI's accountability for the accuracy and 
completeness of its disclosure, the Board expects the FMI's

[[Page 67337]]

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.
---------------------------------------------------------------------------

    \25\ Any 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.
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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 risk-
management 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 risk-management framework is the clear 
identification of all risks that have the potential to arise in or 
result from the system's settlement process and the development of 
clear and transparent objectives regarding the system's tolerance for 
and management of such risks. System operators should identify the 
forms of risk present in their system's settlement process as well as 
the parties posing and bearing each risk. In particular, system 
operators should identify the risks posed to and borne by 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 inter-relationships 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. Risk-
management objectives should also be communicated to and understood by 
both the system operator's staff and system participants.
    System operators should reevaluate their risks in conjunction with 
any major changes in the settlement process or operations, the 
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 Risk-
Management 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 risk-
management process; and enable the effective use of information 
reported by the system operator's management, internal auditors, and 
external auditors to monitor the performance of the risk-management 
process.\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 risk-management information is shared in forms, 
and at times, that allow

[[Page 67338]]

individuals responsible for governance to fulfill their duties 
effectively.
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    \27\ The risk-management and internal audit functions should 
also be independent of those responsible for day-to-day functions.
---------------------------------------------------------------------------

c. Establish Clear and Appropriate Rules and Procedures To Carry out 
the Risk-Management Objectives
    Systems should have rules and procedures that are appropriate and 
sufficient to carry out the system's risk-management 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\
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    \28\ Examples 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 loss-
allocation procedures.
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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 Risk-Management 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.
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    \29\ To 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.
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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.
---------------------------------------------------------------------------

    \30\ An 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.
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    In working with other authorities, the Board will seek to establish 
arrangements for effective and practical cooperation that promote sound 
risk-management 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.
---------------------------------------------------------------------------

    \31\ See 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.
---------------------------------------------------------------------------

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

[[Page 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 risk-management 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, risk-based, 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

[[Page 67340]]

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