Federal Reserve finalizes financial market utility rules

From: Association of Corporate Counsel

Jeff Werthan/Katten Muchin Rosenman LLP

On July 30, the Board of Governors of the Federal Reserve System (Board) announced the approval of a final rule establishing risk-management standards for certain financial market utilities (FMUs) designated as systemically important by the Financial Stability Oversight Council. The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures, or operations of certain designated FMUs. FMUs, such as payment systems, central securities depositories, and central counterparties, provide the infrastructure to clear and settle payments and other financial transactions. The final rule (Regulation HH) is substantively similar to the proposed rulemaking, with two exceptions. The final rule includes a new provision that would allow the Board to waive the application of certain RegulationHH standards to a particular type of designated FMU, “where the risks presented by or the design of that designated FMU would make application of certain standards inappropriate.” In addition, the Board has revised the illustrative list of changes that do not require an advance notice, in part to include changes to a designated FMU’s fees, prices, or other charges.

The final rule implements two provisions of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). It establishes risk-management standards governing the operations related to the payment, clearing, and settlement activities of designated FMUs, except those registered as clearing agencies with the Securities and Exchange Commission or as derivatives clearing organizations with the Commodity Futures Trading Commission. (Under Section 805(a)(2) of the Dodd-Frank Act, the CFTC and the SEC are also required to take relevant international standards and existing prudential requirements into consideration in prescribing regulations containing risk-management standards governing designated clearing entities.) The risk-management standards are based on the recognized international standards developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions that were in existence at the time of the proposed rulemaking, which were incorporated previously into the Board’s Policy on Payment System Risk.

The final rule also establishes requirements for advance notice of proposed material changes to the rules, procedures, or operations of a designated FMU for which the Board is the supervisory agency under Title VIII of the Dodd-Frank Act. The advance notice requirements set the threshold above which a proposed change would be considered material and thus require an advance notice to the Board, and also include provisions on the length of the review period.

The final rule will be effective on September 14, 2012.

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