FSOC Final Rule: Authority to Designate Financial Market Utilities as Systemically Important

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Dodd-Frank Timeline, Financial Market Utilities, FSOC
Proposal Date Final Rule Issue Effective Date
March 28, 2011 July 27, 2011 August 26, 2011

Fifth meeting of the Financial Stability Oversight Council.

Meeting Agenda

The Financial Stability Oversight Council (FSOC) convened its sixth meeting at the U.S. Department of the Treasury on July 18, 2011. Among the topics discussed:

  • Approval of a final fule regarding the designation of financial market utilities (FMUs) as "systemically important;"
  • presentation and discussion of a study regarding the haircutting of secured creditors; and
  • consideration of, and a vote on, the minutes from the May 24, 2011 meeting.[1]

Final Rule: Authority to Designate Financial Market Utilities as Systemically Important

One of the provisions of the Dodd-Frank Act is for the FSOC to identify FMUs whose failure or disruption of operations "could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system." Any such systemically important FMU would be subject to heightened risk management, financial resource, and other standards, but would also gain access to the Federal Reserve's emergency lending facilities. [2]

At its November 23, 2010 meeting, the council approved an advance notice of proposed rulemaking (ANPR) regarding the designation of financial market utilities (FMUs) as "systemically important." This was followed by a notice of proposed rulemaking (NPR) and request for public comments at its March 17, 2011 meeting.

The final rule keeps intact the basic structure of the proposed rule, which consists of a two-stage structure for determining systemic importance:
Stage 1 A data-driven, five-consideration process for the Council to identify a preliminary set of FMUs, whose failure or disruption could potentially threaten the stability of the U.S. financial system:

  1. Aggregate monetary value of transactions processed by an FMU;
  2. Aggregate exposure of an FMU to its counterparties;
  3. Relationship, interdependencies, or other interactions of an FMU with other FMUs or payment, clearing or settlement activities;
  4. Effect that the failure of or disruption to an FMU would have on critical markets, financial institutions or the broader financial system; and
  5. Any other factors that the Council deems appropriate.

Stage 2 FMUs identified through the first stage of review will be subject to a more in-depth review, with a greater focus on qualitative factors, in addition to other institution and market specific considerations.

The Council notes that this final rule only addresses the designation of FMUs. The Council expects to address the designation of payment, clearing, or settlement activities as systemically important in a separate rulemaking.[3]

References

  1. Documents from the FSOC's July 18, 2011 Meeting. U.S. Department of the Treasury. Retrieved on July 19, 2011.
  2. U.S. risk council identifies initial set of clearinghouses. Reuters. Retrieved on May 23, 2012.
  3. Authority to Designate Financial Market Utilities as Systemically Important. U.S. Department of the Treasury. Retrieved on July 19, 2011.

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