[Federal Register Volume 76, Number 59 (Monday, March 28, 2011)]
[Proposed Rules]
[Pages 17047-17062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7003]


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FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Part 1320

RIN 4030-AA01


Authority To Designate Financial Market Utilities as Systemically 
Important

AGENCY: Financial Stability Oversight Council.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Section 804 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``DFA'') provides the Financial Stability Oversight 
Council (the ``Council'') the authority to designate a financial market 
utility (an ``FMU'') the Council determines is or is likely to become 
systemically important--that is, the failure of or a disruption to the 
functioning of which 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 United States 
financial

[[Page 17048]]

system. This notice of proposed rulemaking (NPR) describes the criteria 
that will inform, and the processes and procedures established under 
the DFA for, the Council's designation of FMUs as systemically 
important under the DFA. The Council, on December 21, 2010, published 
an advance notice of proposed rulemaking regarding the designation 
criteria in section 804.

DATES: Comments must be received on or before May 27, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding 
this notice of proposed rulemaking according to the instructions below. 
All submissions must refer to the document title. The Council 
encourages the early submission of comments.
    Electronic submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
http://www.regulations.gov. Electronic submission of comments allows 
the commenter maximum time to prepare and submit a comment, ensures 
timely receipt, and enables the Council to make them available to the 
public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    Mail: Send comments to Financial Stability Oversight Council, Attn: 
Lance Auer, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.

    Note:  To receive consideration as public comments, comments 
must be submitted through the method specified. Again, all 
submissions must refer to the title of the notice.

    Public Inspection of Public Comments. All properly submitted 
comments will be available for inspection and downloading at http://www.regulations.gov.
    Additional Instructions. In general comments received, including 
attachments and other supporting materials, are part of the public 
record and are available to the public. Do not submit any information 
in your comment or supporting materials that you consider confidential 
or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Lance Auer, Deputy Assistant Secretary 
(Financial Institutions), Treasury, at (202) 622-1262, Kirsten J. 
Harlow, Senior Policy Advisor, Treasury, at (202) 622-2612, or Steven 
D. Laughton, Senior Counsel, Office of the General Counsel, Treasury, 
at (202) 622-8413. All responses to this Notice should be submitted via 
http://www.regulations.gov to ensure consideration.

SUPPLEMENTARY INFORMATION:

I. Background

    The DFA generally defines an FMU as any person that manages or 
operates a multilateral system for the purposes of transferring, 
clearing, or settling payments, securities, or other financial 
transactions among financial institutions or between financial 
institutions and that person. Section 803(6)(B) of the DFA specifically 
excludes a number of entities, such as designated contract markets and 
national securities exchanges meeting certain criteria, from the 
definition of an FMU. FMUs form a critical part of the nation's 
financial infrastructure and their smooth functioning is integral to 
the soundness of the financial system and the overall economy. The 
importance of these utility-like arrangements has been highlighted by 
the recent period of market stress. FMUs exist in many financial 
markets to support and facilitate the transferring, clearing or 
settlement of financial transactions. Their function, however, as well 
as their interconnectedness also concentrates a significant amount of 
risk in the market. The payment and settlement processes of these 
systems are highly interdependent, either directly through operational, 
contractual or affiliation linkages, or indirectly through liquidity 
flows or common participants. Problems at one system could spill over 
to other systems or financial institutions in the form of liquidity and 
credit disruptions.
    Section 111 of the DFA established the Council. Among the purposes 
of the Council under section 112 is to ``(J) identify systemically 
important FMUs * * * (as that term is defined in title VIII).'' Section 
804 of the DFA gives the Council the authority to identify and 
designate an FMU that is, or is likely to become, systemically 
important if the Council determines that a failure of or disruption to 
an FMU could create, or increase, the risk of significant liquidity or 
credit problems spreading across financial institutions and markets and 
thereby threaten the stability of the U.S. financial system. Any 
designation of an FMU requires a two-thirds vote of serving members 
(including an affirmative vote by the Chairperson), after consultation 
with the Federal Reserve Board of Governors (the ``Board of 
Governors'') and the relevant federal agency that has primary 
jurisdiction over a designated FMU under Federal banking, securities, 
or commodity futures laws (``Supervisory Agency'').
    The designation of an FMU as systemically important by the Council 
then subjects the designated FMU to the requirements of Title VIII. In 
particular, section 805(a) authorizes the Board of Governors, the CFTC, 
and the SEC, in consultation with the Council and one or more 
Supervisory Agencies, to prescribe risk management standards governing 
the operations related to the payment, clearing, and settlement 
activities of systemically important FMUs. The objective and principles 
for the risk management standards prescribed under section 805(a) shall 
be to promote robust risk management and safety and soundness, reduce 
systemic risk, and support the stability of the broader financial 
system. These standards may address areas, as outlined in section 
805(c), such as risk management policies and procedures, margin and 
collateral requirements, participant or counterparty default policies 
and procedures, the ability to complete timely clearing and settlement 
of financial transactions, capital and financial resource requirements 
for designated FMUs and other areas that are necessary to achieve these 
objectives and principles. In addition, as set forth in section 806(a), 
the Board of Governors may authorize a Federal Reserve Bank to 
establish and maintain an account for a designated FMU and provide the 
services listed in section 11A(b) of the Federal Reserve Act to the 
designated FMU. Designation further subjects the designated FMU to 
additional examinations, enforcement actions and reporting 
requirements.
    On December 21, 2010, the Council published an advance notice of 
proposed rulemaking (an ``ANPR'') with 10 questions to invite public 
comment on the statutory criteria, as laid out in section 804(a)(2), 
and the analytical framework that should be applied by the Council in 
designating FMUs under the DFA. This comment period closed on January 
20, 2011. This NPR describes the criteria that will inform, and the 
processes and procedures established under the DFA for, the Council's 
designation of FMUs under the DFA. This NPR does not address the 
designation criteria and analytical framework for payment, clearing, or 
settlement activities carried out by financial institutions, as defined 
in section 803(7) of the DFA, which the Council is considering 
separately.

II. Public Responses to ANPR

    The Council received 12 comments in response to the ANPR from 
industry groups, advocacy and public interest

[[Page 17049]]

groups, individual FMUs and financial institutions.\1\ These comments 
addressed the Council's specific questions, as well as a range of other 
issues. Commenters generally encouraged the development of metrics and 
an analytical framework as laid out under section 804(a)(2) emphasizing 
the need for the Council to apply consistent standards that incorporate 
both qualitative and quantitative factors across all FMUs under 
consideration for designation. Some commenters provided specific 
feedback on particular metrics and considerations that should be used 
in the designation process, while many also commented more broadly on 
the analytical framework that should be applied by the Council. In 
addition, a few commenters asked for the Council to apply a transparent 
and clear communication strategy surrounding all designation decisions. 
The questions asked by the Council in the ANPR are provided below, 
along with an overview of the comments received in response to each 
question.
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    \1\ Comments were received from: American Bankers Association, 
Better Markets, The Clearing House, Debevoise & Plimpton, The 
Depository Trust & Clearing Corporation, The Financial Services 
Roundtable, International Swaps and Derivatives Association, 
LCH.Clearnet Group Limited, NACHA--The Electronic Payments 
Association, The Pew Charitable Trusts, TIAA-CREF, and Visa. 
Comments are available at http://www.regulations.gov.
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    1. What quantitative and qualitative information should the Council 
use to measure the factors it is required to consider in Section 
804(a)(2) when making determinations under Section 804 of the DFA? How 
should quantitative and qualitative considerations be incorporated into 
the determination process?
    The majority of comments stressed the need to apply consistent 
standards that incorporate both qualitative and quantitative factors 
that are not overly mechanical across all FMUs.\2\ Most commenters 
stated that while there could be no ``one-size-fits-all'' approach, all 
criteria should be used to measure each FMU under consideration, with 
the relative importance of each criterion varying depending upon the 
FMU under consideration. Considerations such as the differences in the 
type of market served by the FMU, the nature and size of the 
counterparties, and the complexity and liquidity of products accepted 
should be taken into account. Furthermore, one commenter in particular 
cautioned the Council to ensure that FMUs that serve the same market 
are provided identical treatment, so as not to affect competition.\3\ 
One commenter, however, emphasized the need for the flexible 
application of each criterion within the framework due to the different 
types and concentrations of risk, different market structures, 
different governance and risk management standards across FMUs, and 
differences in the potential impact of an FMU's disruption on markets, 
households, and the financial system.\4\
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    \2\ See, e.g. comment letter from International Swaps and 
Derivatives Association, Inc. (Jan. 20, 2011) (hereinafter the 
``ISDA letter''), pp. 2-3, and comment letter from Depository Trust 
& Clearing Corporation (Jan. 20, 2011) (hereinafter the ``DTCC 
letter''), pp. 2-4.
    \3\ See the DTCC letter, p. 3.
    \4\ See comment letter from TIAA-CREF (Jan. 20, 2011) 
(hereinafter the ``TIAA-CREF letter''), p. 9.
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    In addition, there was widespread consensus on the primary factors 
that should be used for consideration by the Council to assist in the 
assessment of systemic importance. Notably, these factors included: The 
level of interdependence of an FMU and its participants, the 
characteristics of the participants in an FMU, the type of market 
served by the FMU, the availability of substitute services, whether the 
FMU operates under finality of settlement, the risk management 
framework, including capital, margin and liquidity practices and 
financial resources available to the FMU, governance arrangements, and 
the extent of existing regulatory oversight. Some commenters also 
proposed that the Council use a matrix of criteria that incorporates 
actual historic measures as a way to interpret metrics based on 
relative thresholds. Please see the discussion of public responses to 
question (5b) of the ANPR below for a more comprehensive discussion of 
these factors.
    A few commenters also noted that the process used for designation 
should be transparent to the public, or at least to the FMUs being 
considered. Many noted the importance for the Council to consider 
ongoing work and developments in the adoption of international 
standards in the area of payments, clearing and settlement 
organizations to ensure that a uniform and consistent cross-border 
approach is established that incorporates existing best practices and 
core principles.
    2. Can the considerations listed in section 804(a)(2) be broken 
down into easily measured factors that the Council should use to 
determine whether financial market utilities are systemically 
important? Are there certain levels of quantitative measures (e.g., for 
value and exposure) or qualitative characteristics (e.g., registered 
clearing agencies versus exempt clearing agencies) that should trigger 
a review for systemic importance by the Council?
    There was significant consensus among commenters expressing support 
for the statutory considerations listed to measure an FMU, with many 
noting that metrics should be relatively easy to develop for these 
considerations.\5\ However, as mentioned in the discussion of public 
response to question (1) of the ANPR above, most commenters emphasized 
the importance for the Council to consider these factors in conjunction 
with qualitative measures and professional judgments.
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    \5\ See, e.g. the ISDA letter, p. 4.
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    3. Which of the considerations listed in section 804(a)(2) are most 
important for the Council to consider? Should the application of the 
considerations differ depending on the type of FMU, and if so how?
    Most commenters believed that all the considerations listed in the 
statute were equally important for the Council to consider. Some 
commenters placed particular emphasis on systemic importance, size, 
interconnectedness, the availability of substitutes, and concentration, 
as well as the need to balance quantitative metrics with qualitative 
judgments for a more accurate assessment.
    4. How should the Council measure and assess the aggregate monetary 
value of transactions processed by financial market utilities?
    One commenter specifically suggested that absolute terms of value 
be considered relative to factors such as an FMU's market share, size, 
importance of the market served, and the number of households affected. 
An FMU, for example, may process a high absolute value of transactions 
but may not be systemically important if there are other FMUs that 
could readily provide an alternative in the event of a disruption, or 
if the market it serves were not systemically important. The idea that 
readily available substitutes for the services of an FMU would reduce 
its systemic importance was a common theme among the majority of 
commenters, although the operational practicality of switching to a 
substitute would have to be considered. This commenter also suggested 
that the value and volume of transactions be considered in light of the 
FMU's potential performance during actual or projected times of 
stress.\6\
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    \6\ See the TIAA-CREF letter, p. 8.
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    One commenter argued that, while the absolute number of contracts 
and aggregate notional value of contracts cleared over a period of time 
are useful indicators for the measuring of value, it

[[Page 17050]]

is important to consider average and peak daily levels of open interest 
to have a more comprehensive analysis. Furthermore, the commenter 
suggested the importance of also considering risk and liquidity in 
conjunction with any measures of value. To do so, risk should be 
measured using the average and peak daily levels of posted margin as 
well as the day-over-day change in margin levels using gross margin 
calls. For liquidity, the commenter suggested measuring the size and 
historic volatility of bid/ask spreads, the number of members that 
actively trade the contracts cleared, and the diversity of member 
trading volumes.\7\
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    \7\ See comment letter from Better Markets (Jan. 20. 2011) 
(hereinafter the ``Better Markets letter''), p. 7.
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    a. For each type of financial market utility (e.g., central 
counterparty, funds transfer system), what is the best approach for 
measuring value (e.g., notional values, margin flows, net versus gross 
values)?
    As noted, most commenters stated that regardless of the type of 
FMU, the same criteria and metrics should be applied to each FMU under 
consideration for designation.
    One commenter indicated that for central counterparties (``CCPs''), 
daily variation margin flow--the changes in values of securities and 
derivatives contracts that are cleared--and initial margin 
requirements, should be the primary quantitative references used. In 
addition, the commenter suggested that the assessment also separately 
examine the value of securities and commodities that are delivered 
between a CCP and its members upon maturity of contracts. This 
commenter also noted that there are two different conventions used by 
CCPs to process changes in mark-to-market values. Revaluations of 
derivatives positions tend to result in daily payments and collection 
of cash, while mark-to-market changes in cash markets affect collateral 
requirements but not cash obligations. To make assessments of 
transactional values, both conventions must be covered. The commenter 
also noted that for both types of conventions used by CCPs to process 
changes in mark-to-market values, it is important to consider how 
netting impacts such values.\8\
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    \8\ See comment letter from LCH.Clearnet (Jan. 20, 2011) 
(hereinafter the ``LCH.Clearnet letter''), p. 4.
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    To assess the systemic importance of the aggregate monetary value 
of transactions, one commenter suggested looking at the size of an FMU 
at both the aggregate and transaction level.\9\ Another commenter 
maintained that the aggregate monetary value of transactions between an 
FMU and its members is a rough measure of the exposure of the rest of 
the financial system to an FMU. This commenter lays out a framework, as 
outlined in response to question (9) of the ANPR that considers credit, 
liquidity, portfolio and fire-sale exposures, as well as the value of 
positions held in a depositary, the value of credit lines available to 
the FMU, and the gross flow between an FMU and its members.\10\
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    \9\ See the TIAA-CREF letter, p. 8.
    \10\ See comment letter from The Pew Charitable Trust (Jan. 19, 
2011) (hereinafter the ``Pew letter''), p. 8.
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    b. What time horizon/statistic should be used when assessing value 
(e.g., daily, monthly or annual averages; daily, monthly, or annual 
peaks?). Should the Council consider historical values, projected 
future values, or both?
    There was some difference in opinion expressed by commenters in 
response to this question with regard to the time horizons that should 
be used to assess value. One commenter believed that the most 
significant consideration is an FMU's performance during times of 
actual or projected market stress, arguing that no single time horizon 
would effectively capture this performance in all cases. The number of 
measures should be looked at together with one another and in 
conjunction with periodic stress tests that are tailored in volume and 
time horizon to be situation specific and contain qualitative factors. 
The commenter argued that a measure such as an annual peak will only 
show an FMU's ability to handle that volume at a given moment, but not 
whether it would be adequate to handle this same volume under different 
market conditions or whether it could absorb additional transactions if 
needed.\11\
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    \11\ See the TIAA-CREF letter, pp. 8-9.
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    In contrast, a different commenter argued that annual peaks, 
calculated on the basis of a rolling 365 days rather than on the 
previous calendar year, would be the most appropriate and conservative 
estimates that would ensure that periods of stress are captured.\12\ 
Another commenter also argued that annual historical values were the 
most verifiable and readily available form of information and should be 
used when assessing value. The commenter argued that the time horizon 
need not be shorter to better capture the importance of an FMU to the 
financial system, noting that this level of importance is unlikely to 
change from month to month or quarter to quarter.\13\
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    \12\ See the Pew letter, p. 10.
    \13\ See comment letter from The Financial Services Roundtable 
(Jan 20, 2011) (hereinafter the ``Financial Services Roundtable 
letter''), p. 3.
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    One commenter argued that consideration should be given to both the 
maximum daily value of transactions processed within a given timeframe 
(at least one year) and, in the case of CCPs, this measure should be 
stress-tested using the same scenarios as required by supervisors to 
measure the adequacy of the FMU's default backing and liquidity 
resources. This would mean that if a CCP's financial resource 
requirement is greater than a specified value, then it should be 
designated. The commenter also argued that the Council should also 
consider whether the FMU processes a significant share of transactions 
of a specific type and the extent to which the FMU's major participants 
are domiciled, or have parent companies that are domiciled, in the 
U.S.\14\
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    \14\ See the LCH.Clearnet letter, p. 5.
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    c. Should different measures be applied to different types of 
financial market utilities based on their activities, products, or 
markets?
    As already mentioned, the majority of commenters argued that the 
same framework of criteria should be applied equally to each FMU under 
consideration.\15\ However, it was also widely emphasized that the 
Council must employ flexibility and qualitative judgment in its 
application of the criteria to evaluate each FMU under consideration in 
light of differences in the activities, products and markets served by 
FMUs.
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    \15\ See, e.g. the TIAA-CREF letter, p. 9.
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    d. What is the best approach for measuring potential aggregate 
monetary values for start-up financial market utilities?
    One commenter argued that in light of the lack of data that would 
be available in the case of a start-up and the lack of reliable 
estimates of projected volumes, the Council would have to give greater 
weight to other qualitative factors, such as the sophistication of risk 
management techniques in the market.\16\ Another commenter said that 
credible forecasts would be possible and should be considered by 
supervisors in addition to factors such as stress scenarios and the 
potential markets to be served.\17\
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    \16\ See the TIAA-CREF letter, p. 9.
    \17\ See the LCH.Clearnet letter, pp. 5-6.
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    e. Should certain payment systems that transfer relatively low 
aggregate values be considered by the Council for designation as 
systemically important given that the system's failure or

[[Page 17051]]

disruption could still cause widespread disruption, especially if there 
is no ready alternative means of making payments? For example, the 
failure or disruption of a system used extensively to make payments 
could leave a significant portion of the general public with unexpected 
overdrafts and/or lack of liquid funds. If so, what factors should the 
Council consider in making a determination of systemic importance for 
such systems?
    Many commenters urged the Council to consider only the largest 
interbank payment systems for designation, arguing that smaller retail 
systems do not fit the definition of ``systemically important.'' \18\ 
There was significant consensus among commenters in the reasons 
provided for this argument, namely that: (i) Retail systems operate 
relatively low-aggregate monetary value systems that do not settle 
transactions for important financial markets or other payment systems; 
(ii) there are reliable and timely substitutes for retail payments; 
(iii) retail systems do not operate real-time final settlement systems, 
meaning that the liquidity would not be guaranteed to be available 
immediately for pending outgoing payments; and (iv) retail systems are 
already under strong regulatory oversight and designations would result 
in unnecessary costs and regulatory burdens.\19\ Also of note, one 
commenter mentioned that the ability of depository institutions to 
permit overdrafts to cover retail payments strongly mitigates the 
potential for a disruption to a low-value system to have a systemic 
impact that could threaten the stability of the U.S. financial 
system.\20\
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    \18\ See, e.g., comment letter from The Clearing House (Jan. 20, 
2011) (hereinafter ``Clearing House letter''), pp. 1-2 and comment 
letter from NACHA--The Electronic Payments Association (Jan. 18, 
2011) (hereinafter the ``NACHA letter''), pp. 3-4.
    \19\ See, e.g., comment letter from the American Bankers 
Association (Jan. 20, 2010) (hereinafter ``ABA letter''), pp. 3-5, 
comment letter VISA (Jan. 20, 2011) (hereinafter the ``VISA 
letter''), pp. 3-6, and the Financial Services Roundtable Letter, p. 
4.
    \20\ See the NACHA letter, p. 4.
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    While largely mentioning similar reasoning for why low-value 
systems would likely not qualify for designation, two commenters argued 
that such systems should first be evaluated to determine if a 
disruption to them would have a significant impact on a substantial 
market or a large number of households, or if there were no readily-
available substitutes.\21\
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    \21\ See the TIAA-CREF letter, p. 9 and the Pew letter, p. 10.
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    5. How should the Council measure and assess the aggregate exposure 
of financial market utilities engaged in payment, clearing, or 
settlement activities to its counterparties?
    a. How should the Council identify the extent to which financial 
market utilities bear and create risk exposures for themselves and 
their participants?
    b. What measures of exposure should be considered (e.g., liquidity 
exposures, current and potential future counterparty credit exposures, 
operational risk, and the degree of concentration of exposures across 
participants)?
    There was significant consensus among commenters on the types of 
factors that should be used by the Council. These include: (i) The 
liquidity, complexity and volatility of the asset classes/market served 
by the FMU; (ii) whether the FMU has the potential to create 
significant liquidity disruptions or dislocations in the event of a 
failure; (iii) whether the FMU has the potential to create large credit 
or liquidity exposures relative to participants' financial capacity; 
(iv) whether the FMU covers a high proportion of large-value 
transactions; (v) if, and, if so, how many, large financial 
institutions and/or other FMUs rely on the FMU for its own operations; 
(vi) whether there are reliable and timely substitutes with other FMUs; 
\22\ (vii) whether the FMU offers finality in settlement, arguing that 
participants rely on real-time finality to settle positions elsewhere 
such that a disruption in such a system is more likely to have an 
effect on a participant's counterparties than in a system without 
immediate settlement finality; \23\ (viii) how the ownership and 
governance arrangements affect the incentives and risk-tolerance of an 
FMU; \24\ and (ix) whether the FMU is already subject to an existing 
regulatory regime, arguing that an FMU already under supervision would 
be less likely to require further designation and that therefore a 
systemically important designation under Title VIII would result in 
unnecessary costs and regulatory burdens, as well as the establishment 
of duplicate regimes of oversight.\25\ While some commenters did not 
specify which types of existing oversight were adequate to avoid 
designation, several commenters specifically indicated that 
institutions that are already subject to comprehensive Federal Reserve 
oversight, have access to central bank liquidity, and/or are already 
subject to designation under Title I of the DFA, should not be 
designated.\26\
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    \22\ See, e.g. the VISA letter, pp. 8-9.
    \23\ See, e.g. the VISA letter, p. 8.
    \24\ See, e.g., the ISDA letter, p. 3.
    \25\ See, e.g. the ABA letter, p. 2, 5.
    \26\ See, e.g., the comment letter from Debevoise & Plimpton 
(Jan. 20, 2011) (hereinafter ``the Debevoise letter''), pp. 2-5.
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    A majority of commenters also suggested that if standards and 
policy in risk management, governance, capital, margin, and liquidity 
were strong and well-managed, this would reduce the need for 
designation. Several commenters emphasized the importance of 
considering the governance and ownership arrangements of FMUs, noting 
the importance of aligning the interests of an FMU so that it engages 
in prudent behavior. For those FMUs that have achieved this balance 
such that a significant portion of equity capital is at risk, they 
argue that the FMU would pose a lesser degree of systemic risk. These 
commenters suggest that the inherent risk alone that an FMU may 
concentrate or be exposed to should not be considered in isolation. 
Rather, they argue that the adoption of strong risk mitigating 
practices could greatly reduce systemic risk, and therefore the need 
for designation.
    c. For each type of financial market utility (e.g., central 
counterparty, funds transfer system), what is the best approach for 
measuring current credit exposure or, where relevant, potential future 
exposures? For liquidity (funding), how might the Council assess the 
potential liquidity risks that a financial market utility may bear or 
liquidity risks it may impose on the broader financial system should it 
fail to settle as expected?
    When assessing credit risk, most commenters emphasized the 
importance of looking at both the quality of the counterparties and the 
products served by the FMU. When assessing liquidity risk, many 
commenters emphasized the importance of considering the concentration 
of the FMU in the market and the capacity/substitutability available 
among other FMUs. Several commenters also suggested that the Council 
make use of existing risk assessment tools such as approaches outlined 
under Basel and in the CPSS/IOSCO Recommendations for CCPs as a 
foundation to build on.\27\ In addition, many emphasized the importance 
of using stress tests as a useful way to measure liquidity risk, as 
well as reverse stress tests to help identify issues of macro 
prudential concern.
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    \27\ See, e.g., ISDA letter, p. 5; CPSS-IOSCO, ``Recommendations 
for Central Counterparties'' (November 2004); ``Guidance on the 
Application of the 2004 CPSS-IOSCO Recommendations for Central 
Counterparties to OTC Derivatives CCPs--Consultative Report'' (May 
2010).

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[[Page 17052]]

    One commenter argued that the sources of liquidity for an FMU, 
which are highly related to the underlying credit of members, should be 
ignored or severely discounted in any analysis. The commenter argued 
that during a time of stress, sources of liquidity are unreliable 
because members will be unlikely to respond to an FMU's call for 
additional support during a severe market event and major default of 
another member. Similarly, the commenter argued that lines of credit 
and liquidity will not likely be available in a major default 
scenario.\28\
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    \28\ See the Better Markets letter, pp. 7-8.
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    6. How should the Council identify, measure, and assess the effects 
of relationships, interdependencies, and other interactions of 
financial market utilities listed as considerations in section 
804(a)(2)?
    a. What role should models of interdependencies (e.g., 
correlations; stress tests) play in the Council's determinations?
    Many commenters discussed the importance of using stress tests and 
correlations in any model to measure levels of interdependence, 
although there was some variation in the appropriate assumptions and 
time horizons that should be used. One commenter, for example, 
emphasized the need for the stress scenarios to use both historical 
worst-case scenarios as well as future potential events in order to 
apply more extreme cases of market illiquidity.\29\ In addition, some 
argued that correlations both between counterparties and industry 
sectors and between financial markets and instruments should be 
incorporated and appropriately stress-tested.\30\
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    \29\ See the Better Markets letter, p. 8.
    \30\ See, e.g., the LCH.Clearnet letter, p. 7.
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    b. What role should the nature of participants or counterparties 
play in the Council's determinations (e.g. common participants across 
utilities, systemic importance of participants)?
    The majority of commenters emphasized the importance of examining 
the nature of participants and counterparties to an FMU, particularly 
as a means of measuring interdependence and concentration. This should 
include considerations such as the type and number of counterparties, 
particularly if they are significant financial firms or FMUs, as well 
as the nature of relationships these counterparties have to each other 
and other FMUs.
    c. Should the Council consider the legal, corporate, or contractual 
relationships of financial market utilities in assessing relationships, 
interdependencies, and other interactions (e.g., common holding 
company, joint ventures, cross-margining agreements, and service 
provider relationships)?
    One commenter emphasized the importance for FMUs to operate under a 
well-established and enforceable legal framework. In particular, the 
commenter emphasized the importance of assessing the legal risks 
arising from cross-border relationships, governance and corporate 
structures and any affiliates or holding companies that are under the 
same control as the FMU and thus depend on the same creditors. 
Furthermore, the commenter noted that the Council should consider any 
cross-margining and/or outsourcing and servicing relationships that an 
FMU may have.\31\ Please see the discussion of public responses 
provided to question (7) of the ANPR for more detailed information.
---------------------------------------------------------------------------

    \31\ See the TIAA-CREF letter, p. 11.
---------------------------------------------------------------------------

    Another commenter emphasized this point as well, noting the 
importance for the Council to consider legal, corporate, or contractual 
relationships of FMUs. This commenter emphasized the importance of 
paying attention to cases where the same legal entity is acting in 
multiple capacities, for example if a legal entity acts both as a 
market operator and a CCP, and also as a participant in a money or tri-
party market. Furthermore, this commenter argued that the Council 
should carefully consider cases in which the holding company of an FMU 
has significant exposure to foreign markets.\32\
---------------------------------------------------------------------------

    \32\ See the LCH.Clearnet letter, p. 7.
---------------------------------------------------------------------------

    d. Should the Council consider whether there are readily available 
substitutes for the payment, clearing, and settlement services of 
financial market utilities?
    The importance of readily available substitutes for an FMU was a 
theme common among all commenters, who argued that the availability of 
a readily-available alternative would significantly reduce the systemic 
threat an FMU posed to the financial system, thereby reducing the need 
for designation by the Council.
    7. How should the Council assess whether failures or disruptions to 
a financial market utility could potentially threaten the financial 
system of the United States?
    a. What measures, information and thresholds should be used in 
assessing the effect of a financial market utility failure or 
disruption on critical markets and financial institutions? For example, 
how might the Council assess potential credit and liquidity effects and 
spillovers from a financial market utility disruption?
    The vast majority of commenters emphasized the importance of 
considering the level of interconnectedness of participants--both 
directly and indirectly--of an FMU as well as between FMUs. These 
relationships would help inform the Council on the potential effect on 
all relevant market participants in the event that an FMU is unable to 
function. While some explicitly believed that this should be limited to 
a more permanent long-term loss of function, noting that temporary 
disruptions such as operational failures should not be considered, one 
commenter believed that any potential disruption should be examined to 
understand the dependencies of participants on the FMU and the 
resulting impact on the economy as a whole.
    Furthermore, nearly all commenters noted the importance of 
considering the type of counterparties to an FMU, and whether they 
themselves are systemically important, as well as the concentration of 
the market and the availability of substitutes. Other factors mentioned 
widely by commenters, as elaborated on in question (5b) were the 
capital and liquidity cushions of an FMU, its governance structure, 
whether or not it offered finality of settlement, and the nature, in 
terms of size, depth and volatility, of the market that it serves.
    As mentioned in question (6a) as well, many suggested the 
importance of using stress tests and a variety of extreme but plausible 
assumptions in order to assess the effects from any disruption.
    b. What factors should the Council consider when determining 
whether markets served by financial market utilities are critical? What 
qualitative or quantitative characteristics might lead the Council to 
scope in or out particular markets?
    Many commenters emphasized the importance of considering the size, 
depth and volatility of a particular market in order to determine its 
systemic importance. Furthermore, many argue that the Council should 
also consider the type and number of participants to the market--for 
example, if they themselves are systemically important, this will 
increase the likelihood that the market itself is critical--as well as 
what percentage of a market may be used by a large percentage of U.S. 
households.
    One commenter argued that all types of disruptions--both temporary 
and permanent--must be examined by the Council. In addition, the 
commenter suggested considering whether the

[[Page 17053]]

failure or suspension of a market for a significant period of time 
interrupts the supply of vital foodstuffs or energy, halts commercial 
activity, or prevents financial institutions from managing their own 
risks.\33\
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    \33\ See the LCH.Clearnet letter, p. 8.
---------------------------------------------------------------------------

    8. Title VIII of the DFA contains distinct provisions with respect 
to financial market utilities and financial institutions engaged in 
payment, clearing and settlement activities. What factors should the 
Council consider in distinguishing between a systemically important 
financial market utility and a financial institution that is very 
substantially engaged in a systemically important payment, clearing, or 
settlement activity?
    Most commenters urged the Council to ensure that any designations 
did not lead to duplicative oversight regimes.\34\ Furthermore, it was 
noted that if an institution were designated under Title I, it should 
not also be subject to designation under Title VIII. One commenter 
believes that the same qualitative and quantitative criteria and 
metrics should be applied in all cases, including if the potential 
designee is a financial institution.\35\
---------------------------------------------------------------------------

    \34\ See, e.g. the Debevoise letter, p. 2.
    \35\ See the LCH.Clearnet letter, p. 8.
---------------------------------------------------------------------------

    A different commenter stated that the distinction is a critical 
issue for market participants but that it requires clarification by the 
Council in order to allow stakeholders the ability to provide a 
substantive answer.\36\
---------------------------------------------------------------------------

    \36\ See the Financial Services Roundtable letter, p. 5.
---------------------------------------------------------------------------

    9. What other types of information would be effective in helping 
the Council determine systemic importance? What additional factors does 
your organization consider when assessing exposure to, or the 
interconnectedness of, financial market utilities?
    In addition to the set of common factors elaborated on in question 
(5b), one commenter also suggested that the Council consider an FMU's 
opacity/complexity/disclosure, leverage, rate of change of activity, 
role in monetary and/or fiscal policy, segregation of client margin, 
business conduct rules, execution requirements, and methodology of 
margin calculation.\37\
---------------------------------------------------------------------------

    \37\ See the ISDA letter, pp. 5-7.
---------------------------------------------------------------------------

    One commenter developed a framework for consideration by the 
Council. This framework attempts to measure three broad components in 
order to value systemic significance: fragility of the FMU, exposure of 
its financial firm members to its failure, and fragility of the 
members. The framework involves seven steps: (1) Developing a set of 
``heightened reporting firms;'' (2) identifying factors--such as 
leverage, liquidity, concentration, risk management, complexity, and 
credit exposure--that can affect systemic significance, defining 
measures for each factor and dividing them into factors that affect 
fragility of the FMU and factors that affect exposure of firms to FMUs; 
(3) estimating the fragility of each heightened reporting firm that is 
a member of each FMU; (4) estimating the exposure of members to each 
FMU and for each FMU candidate; (5) creating a single measure of the 
system's vulnerability by adding up the measures of exposures of all 
heightened reporting member firms to the candidate FMU, weighted by 
their fragility estimates; (6) estimating systemic importance of an FMU 
using several statistical factors; and (7) applying a universal 
threshold to each FMU to ultimately determine designation.\38\
---------------------------------------------------------------------------

    \38\ See the Pew letter, pp. 3-7.
---------------------------------------------------------------------------

    Lastly, one commenter noted that a supervisory gap existed in the 
oversight of internet-based payment systems, including P2P payment 
systems, and asked for the Council to consider the appropriate actions 
to take to close this loophole.\39\
---------------------------------------------------------------------------

    \39\ See the Clearing House letter, p. 10.
---------------------------------------------------------------------------

    10. What role should international considerations play in 
designating financial market utilities?
    In response to this question, many commenters emphasized the 
importance of adopting international standards and best practices, such 
as the CPSS Core Principles \40\ and the work of the Financial 
Stability Board \41\ to promote common standards and cross-border 
cooperation. Particularly in light of the interconnectedness of global 
markets, commenters emphasized that adherence to internationally agreed 
upon standards would help ensure consistency in practice across FMUs 
globally.\42\
---------------------------------------------------------------------------

    \40\ See CPSS ``Core Principles for Systemically Important 
Payment Systems'' (Jan. 2001).
    \41\ See, e.g. http://www.financialstabilityboard.org.
    \42\ See, e.g., the ISDA letter, pp. 6-7.
---------------------------------------------------------------------------

    One commenter argued that the global nature of markets serviced by 
FMUs as well as the interconnectedness of the global financial system 
as a whole means that there should be no differences in criteria 
employed when considering the designation of FMUs that may have 
substantial foreign activities. As a result, the commenter argued that 
U.S. supervisors have a justification and need for concomitant 
supervisory access to any foreign FMU deemed systemically 
important.\43\
---------------------------------------------------------------------------

    \43\ See the LCH.Clearnet letter, p. 9.
---------------------------------------------------------------------------

    One commenter urged the Council to be conservative when applying 
Title VIII to non-U.S. entities because Title VIII does not expressly 
provide for extra-territorial application. To the extent that the 
Council does apply Title VIII to non-U.S. entities, this commenter 
urged the Council to ensure that any determination maintains a level 
playing field for domestic and foreign FMUs with a comparable 
regulatory regime. Furthermore, the commenter noted that participation 
in government support programs should not be a factor in identifying 
whether an FMU is systemically important.\44\
---------------------------------------------------------------------------

    \44\ See the Financial Services Roundtable letter, pp. 5-6.
---------------------------------------------------------------------------

III. Overview of Proposed Rule

    Proposed part 1320 of Title 12 (``Rule 1320'') lays out the 
framework that the Council proposes to use to determine whether an FMU 
should be designated as systemically important. The proposed rule 
incorporates and augments the requirements set forth in the DFA with 
respect to the determination of whether to designate an FMU as 
systemically important. The Council requests comment on all aspects of 
the proposed rule, but in particular, comments in response to the 
specific questions raised below. The Council is providing a sixty (60) 
day comment period for this proposed rule.

A. Considerations for Determination

    Section 804 of the DFA provides the Council with the authority to 
designate those FMUs the Council determines are systemically 
important--that is, the failure of or a disruption to the functioning 
of which 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. 
Section 803(6)(A) of the DFA generally defines an FMU as any person 
that manages or operates a multilateral system for the purposes of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and that person. Under section 804(a)(2) of the 
DFA, in making a determination on whether the FMU should be designated 
as systemically important, the Council must consider:
    A. The aggregate monetary value of transactions processed by the 
FMU;
    B. The aggregate exposure of the FMU to its counterparties;
    C. The relationship, interdependencies, or other interactions of 
the FMU with other FMUs or

[[Page 17054]]

payment, clearing or settlement activities;
    D. The effect that the failure of or a disruption to the FMU would 
have on critical markets, financial institutions, or the broader 
financial system; and
    E. Any other factors that the Council deems appropriate.
    As discussed in Part II, there were several themes in the ANPR 
commentary regarding how the Council should apply the statutory 
considerations to the designation process.
    One broad theme from the commenters is that the analytical 
framework for evaluating an FMU should be applied consistently across 
all FMUs and that the process used for designation be transparent to 
the public, or at least to the FMUs under consideration. The Council 
agrees with the broad theme raised by commenters that it is important 
to have a consistent framework and transparent process for all FMUs 
under consideration. However, not all criteria will be relevant to each 
FMU under consideration. The Council believes it would be appropriate 
to adopt a flexible approach to the analysis of metrics applicable to 
each FMU under consideration. Thus, the framework itself should 
accommodate the range of payment, clearing, and settlement activities 
that FMUs may engage in and allow the application of relevant criteria 
to each FMU under consideration, with the relative importance of the 
criteria applied to be informed by the specific circumstances of the 
FMU's role in the financial system and the Title VIII definition of 
``financial market utility.'' Several commenters also supported the 
need to weigh qualitative considerations in addition to quantitative 
factors.
    The Council shares the concerns of commenters and proposes to 
develop a systematic and robust process that is consistent with the 
intent of the DFA. Such an analytical framework would be based on the 
four specific considerations for systemic importance set forth in 
section 804(a)(2) of the DFA. This framework would apply consistent 
criteria to FMUs under consideration, recognizing differences across 
FMUs, including differences in risk management structures and in the 
potential impact of an FMU's disruption on markets, households, and the 
financial system. In addition, the Council shares the view of the 
commenters that both quantitative and qualitative judgments be applied 
to this process. The Council provides further information with regard 
to this analytical framework and related process in sections III.B and 
III.C below.
    The Council is equally interested in maintaining a transparent 
process, which is in keeping with one of the broader goals of the DFA. 
In particular, there is a provision in the proposed rule for 
notification of each FMU prior to a vote on a proposed designation, 
providing the FMU an opportunity to present the Council with arguments 
and information supporting or opposing its designation. In providing 
for an appropriately transparent process to the public, the Council 
will need to take into account that much of the information gathered 
and decisions made will be sensitive and likely require confidential 
handling so as not to reveal proprietary information or affect 
competition. Nonetheless, the Council will establish as transparent a 
process as is appropriate.
    With respect to the criteria for designation, there was broad 
consensus in the comments on the factors that the Council should 
incorporate into the analytical framework. The most common suggestions 
included: an examination of the type of market served by the FMU, the 
potential for large credit or liquidity dislocations in the event of a 
disruption, the proportion of large-value transactions that the FMU 
serves, the nature of counterparties to the FMU, the availability of 
substitutes for participants in the event of an FMU disruption, and 
whether the FMU offers finality in settlement.
    The Council agrees with commenters that many of these factors could 
offer considerable insight into the designation process and will 
consider incorporating them into the analytical framework that is 
developed. As noted, further insight into the types of factors that may 
be incorporated into the Council's analysis is further detailed in 
section III.B.
    Many commenters also urged the Council to only consider the largest 
interbank payment systems for designation, arguing that smaller retail 
systems do not fit the definition of systemically important. Many of 
the commenters argued that retail systems settle relatively low-
aggregate monetary value, that there are reliable and timely 
substitutes for retail payments, and that such systems do not operate 
with finality in settlement and are already under strong regulatory 
oversight.
    While the Council recognizes that the definition of an FMU covers a 
wide variety of systems, including low-value and large-value payment 
systems, it acknowledges that the factors raised by several commenters 
concerning retail payment systems are important considerations. In 
considering the systemic importance of various FMUs, the Council will 
take these factors into consideration as well as other relevant 
characteristics. The Council has decided not to include any categorical 
exclusion for retail payment or other systems in the proposed 
regulations because it believes that such exclusions would impair the 
Council's ability to effectively respond to changing market conditions 
and industry developments.
    Several commenters specifically indicated that institutions that 
are already subject to comprehensive Federal Reserve oversight, have 
access to central bank accounts and liquidity, or are already subject 
to designation under Title I should not be designated. Some also argued 
that FMUs that are already subject to prudential oversight, have strong 
risk management frameworks, governance standards, and sufficient 
financial resources in place have developed controls that would reduce 
the need for designation since the risk of a systemic disruption would 
be considerably lower.
    The Council recognizes the importance of oversight and of FMU's 
maintaining strong controls to mitigate the risk of failure. However, 
the purpose of Title VIII is to consider designating certain FMUs as 
systemically important because while FMUs that conduct or support 
multilateral payment, clearing, or settlement activities may reduce 
risks for their participants, such utilities may also concentrate and 
create new risks. Recognizing this, Title VIII instructs the Council to 
designate as systemically important any FMU whose failure or disruption 
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 financial system of the U.S. Thus, the 
Council is instructed to designate FMUs based on the effect that a 
disruption or failure of the FMU would have on the stability of the 
U.S. financial system. The likelihood of that precipitating event--that 
is to say, the likelihood, in light of any risk mitigating practices 
that may be in place, that an FMU would experience a disruption or 
failure is not one of the statutory considerations.
    There were several other suggestions raised in the comment letters 
in which there was no consensus. In particular, there were a number of 
different suggestions provided in response to ANPR question 4 on how 
the Council should measure and assess the aggregate monetary value of 
transactions processed by an FMU. Commenters suggested a variety of 
approaches for measuring value (notional values, margin flows, net 
versus gross values, etc.) and defining time horizons and

[[Page 17055]]

statistics (annual, peak, etc.). There was further divergence in 
thought with regard to ANPR question 6 on the type of model that should 
be used to measure interdependencies, (e.g., correlations, stress 
tests). The Council appreciates the range of suggestions provided by 
the commenters. The analytical framework and associated subcategories 
and metrics reflect the Council's efforts to incorporate commenters' 
suggestions, which are further outlined in section III.B.
    Lastly, in response to ANPR question 10, many commenters took the 
opportunity to stress the importance of applying consistent standards 
across borders, specifically advocating the use of international core 
principles and best practices to ensure consistency and a level playing 
field. One commenter cautioned the Council to be conservative in 
applying Title VIII to non-U.S. entities. The Council requests further 
comment on the role international considerations should play in this 
rule making, in particular on the application of the proposed 
analytical framework and the subcategories contained in the proposed 
section 1320.10 given cross-border payment, clearing and settlement 
flows, and cross-border participation in FMUs.

B. Statutory and Analytical Framework for Designations

    The proposed rule incorporates each of the statutory factors that 
must be considered into the analytical framework to determine whether 
an FMU should be designated. In developing the proposed rule, the 
Council has also taken into consideration the comments received on the 
ANPR. If adopted into a final rule, this framework would be used by the 
Council to meet its statutory obligations of assessing the threat the 
failure or disruption of an FMU may pose to the stability of the U.S. 
financial system. In addition, the Council would consider any other 
risk-related factors that the Council deems appropriate, under section 
804(a)(2)(E).
    The Council would evaluate FMUs under each of the four statutory 
considerations as laid out in section 804(a)(2) of the DFA, in addition 
to any additional factors it deems appropriate, using quantitative 
metrics where possible. The Council expects to use its judgment, 
informed by data on the four considerations, to determine whether an 
FMU should be designated as systemically important and thus subject to 
heightened risk management standards prescribed by the Board of 
Governors, the SEC, or the CFTC, in consultation with the Council and 
relevant Supervisory Agencies. These standards will take into 
consideration relevant international standards and existing prudential 
requirements governing the operations related to the payment, clearing 
and settlement activities of designated FMUs.
    Any determinations of the Council made under the proposed rule 
using the analytical framework would be based on whether the failure or 
disruption of the FMU could pose a threat to the financial stability of 
the U.S. financial system as described in DFA section 803(9).
    Under the proposal, the Council expects to use the four statutory 
considerations as a base for the framework for assessing the systemic 
importance of FMUs, regardless of the type of payment, clearing and/or 
settlement activities that they are engaged in. However, the 
application of this framework would be adapted for the risks presented 
by a particular type of FMU and business model. For example, the 
metrics that are best suited to measure the four categories of systemic 
importance will likely vary across FMUs. The Council will review these 
metrics on a periodic basis and revise them as appropriate.
    In addition, the process that the Council will use to evaluate 
potential FMUs for designation under an analytical framework is 
outlined in more detail under section III.C. Briefly, the Council is 
considering using a two stage process for evaluating FMUs prior to a 
vote of proposed designation by the Council. The first stage will 
consist of a largely data-driven process for the Council, working with 
its committees \45\ to identify a preliminary set of FMUs, whose 
failure or disruption could potentially threaten the stability of the 
U.S. financial system. In the second stage, the FMUs identified through 
the initial review will be subject to a more in-depth review, with a 
greater focus on qualitative factors, in addition to FMU and market 
specific considerations.
---------------------------------------------------------------------------

    \45\ See ``Financial Stability Oversight Council Committee 
Structure'' (Nov. 23, 2010 Council Meeting Document), available at 
http://www.treasury.gov/initiatives/Pages/FSOC-index.aspx.
---------------------------------------------------------------------------

Proposed Analytical Framework
    To provide further transparency into the analytical framework that 
the Council is considering, set forth below is additional information 
regarding the types of metrics that may be considered by the Council.
Stage One
    As described above, the Council is proposing subcategories to 
further build out the four specific statutory considerations that are 
set forth in DFA section 804(a)(2). Some of these subcategories and 
associated metrics are described below to provide illustrative examples 
of how the factors will be considered in assessing systemic importance.
    Consideration (A): Aggregate monetary value of transactions 
processed by an FMU
     Number of transactions processed, cleared or settled by 
the FMU
    Within this subcategory, examples of the types of metrics that the 
Council may consider include the mean and median daily gross and net 
volumes processed, cleared or settled; the historical peak daily gross 
and net volumes processed; and the volumes processed, cleared or 
settled as a percentage of the total market volume; and for derivatives 
central counterparties, the median and peak daily changes in open 
interest.
     Value of transactions processed, cleared or settled, by 
the FMU
    For this second subcategory, examples of the types of metrics that 
the Council may consider include the mean and median daily gross and 
net values processed, cleared or settled; the historical peak daily 
gross and net values processed, cleared or settled; and the values 
processed, cleared or settled as a percentage of the total market 
value.
     Value of other financial flows that may flow through an 
FMU
    For this third subcategory, the Council may consider the mean and 
median daily value of variation margin; the peak daily value and change 
of variation margin; and the peak daily value of funding flows.
    Consideration (B): Aggregate exposure of an FMU to its 
counterparties
     Credit exposures \46\ to counterparties
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    \46\ In the context of derivatives clearing, the term ``credit 
exposures'' refers to potential future exposures.
---------------------------------------------------------------------------

    Within this first subcategory, the Council may consider the use of 
metrics that measure the mean daily and historical peak aggregate 
intraday credit provided to participants; the mean and peak daily 
changes in the value of variation margin collected by an FMU; the mean 
and peak daily value of initial margin held by an FMU; and the mean and 
peak aggregate value of an FMU's financial resources held to address 
the credit risks arising from a potential participant default (i.e., 
participant, clearing or margin fund).
     Liquidity exposures to counterparties
    Under the second subcategory, the Council may consider measures of 
the

[[Page 17056]]

estimated peak liquidity need in the case of the default of the largest 
single participant to the FMU, the mean and peak aggregate dollar value 
of pay outs by an FMU to participants; and the mean and peak value of 
financial resources available to the FMU, broken out by liquidity and 
quality.
    Consideration (C): Relationship, interdependencies, or other 
interactions of an FMU with other FMUs or payment, clearing or 
settlement activities
    Within this category, the Council may consider metrics that measure 
the relationships and interdependencies of an FMU, including those that 
measure interactions of an FMU with different participants, such as 
systemically important financial and/or nonfinancial companies, central 
banks, or other payment, clearing or settlement systems, with trading 
platforms (such as exchanges and alternative trading systems), and with 
the market environment more generally, including contractual 
relationships, that support the operations of an FMU.
    Consideration (D): Effect that the failure of or disruption to an 
FMU would have on critical markets, financial institutions or the 
broader financial system
     Role of an FMU in the market served
    The Council may consider metrics such as the type of market(s) 
served by an FMU and the FMU's role in primary and secondary markets.
     Availability of substitutes
    Under the second subcategory, the Council may consider the number 
of other FMUs that may serve the same function and/or product and how 
readily available a potential substitute would be for participants, 
considering such additional factors as operational capability and 
timing.
     Concentration of participants
    Under the third subcategory, the Council may consider metrics that 
look at concentrations of the single largest participant, the top five 
participants and the top ten participants, as a percentage of the value 
and volume of activity by all participants.
     Concentration by product type
    Under this subcategory, the Council may consider information 
regarding the degree to which the FMU is a major or sole processor for 
a particular financial contract or instrument.
     Degree of tiering
    Under this subcategory, the Council may consider information 
regarding the number of an FMU's indirect participants, as well as the 
concentration of such indirect clearing through an FMU's direct 
participants.
     Potential impact/spillover in the event of a failure or 
disruption.
    Lastly, under this sixth subcategory, some examples of the types of 
metrics that the Council may consider include the number and type of 
systemically important financial and non-financial institutions 
participating in the activities of the FMU; and the daily gross value 
of repurchase agreements (both securities-driven and cash-driven), as 
well as other instruments that are cleared or settled by an FMU.
    Consideration (E): Any other factors that the Council deems 
appropriate
    Under this statutory consideration, the Council retains its ability 
to consider additional subcategories, metrics and qualitative factors 
as may be relevant based on the particular characteristics of an 
individual FMU being reviewed, including for example the nature of its 
operations, corporate structure and business model, and to add any 
relevant subcategories and metrics to the proposed analytical 
framework.
Stage Two
    The second stage will provide the Council with the opportunity to 
perform a more in-depth review and analysis of specific FMUs from both 
a quantitative and qualitative perspective. In this stage, the Council 
can consider any elements that may be particular to a specific FMU, a 
type of FMU or market. Each FMU under consideration will undergo a 
tailored analysis of the potential impact that a failure of or a 
disruption to the function of the FMU has on the stability of the U.S. 
financial system, such as the creation of, or increase to, the risk of 
significant liquidity or credit problems spreading among financial 
institutions or markets.
Review of Prior Considerations and Designations
    The Council expects to begin assessing the systemic importance of 
FMUs under the proposed analytical framework shortly after adopting a 
final rule. Subsequently, on at least an annual basis, the Council will 
continue to evaluate whether there are other FMUs that require 
designation, and whether previous designations of systemically 
important FMUs should be rescinded.

C. Evaluation Process for Designations

Overview of Process
    The proposed rule implements provisions of Title VIII of the DFA 
that outline the process that the Council, working with its committees, 
will carry out in making designations. As noted, the Council is 
considering using a two stage process for evaluating FMUs prior to a 
presentation to the Council of an initial assessment of the FMU for a 
formal vote of proposed designation by the Council. If an FMU reaches 
the second stage of this evaluation process, the Council will notify 
the FMU under consideration and provide the FMU with an opportunity to 
submit written materials to the Council in support of or in opposition 
to, as it deems relevant, designation by the Council as outlined in 
proposed section 1320.11. In the case of an affirmative formal vote of 
the proposed designation by two-thirds of the Council, including the 
Chairperson, an FMU will be notified and given the opportunity to 
request a written or oral hearing before the Council to demonstrate 
that the proposed designation or rescission is not supported by 
substantial evidence as outlined in proposed section 1320.12. Following 
this, the Council will complete its considerations and carry out its 
final vote and notification to the FMU. Below is a more detailed stage-
by-stage discussion of the proposed process.
Stage One Process: Identification of FMUs for Further Evaluation
    The first stage will be largely data-driven to identify a 
preliminary set of FMUs, whose failure or disruption could potentially 
threaten the stability of the financial system of the United States, 
and which therefore should be subject to a more thorough review under 
the second stage. This first stage will be informed by both publicly 
available information and information that is available to a Federal 
agency with jurisdiction over the FMU. The assessments in stage one 
will result in materials that provide an overview of the FMUs for 
further review and consideration. This first-stage identification of 
potentially systemically important FMUs will be performed at least 
annually. A reassessment of already designated FMUs will also occur at 
least annually.
Stage Two Process: In-Depth Evaluation of FMUs under Consideration
    The second stage will involve a more in-depth review and analysis, 
from both a quantitative and qualitative perspective, of the FMUs 
determined to merit further assessment based on the first-stage review. 
This stage involves consideration of additional elements that may be 
particular to a specific FMU or type of FMU and assembly of a detailed 
assessment of the FMU and in-depth analysis for consideration by the 
Council in connection with the Council's determination whether to

[[Page 17057]]

make a formal vote of proposed designation. The Council will provide an 
FMU with the opportunity to submit a written statement in support of or 
opposition to, as it deems relevant, designation by the Council as 
provided in proposed section 1320.11. Any statement submitted by an FMU 
will be included in information provided to the Council for its 
consideration in connection with the Council's formal vote of proposed 
designation. The Council is proposing to provide this opportunity as 
part of the two-stage evaluative process, in addition to the statutory 
requirement affording an FMU notification and opportunity for hearing 
before the Council's final vote on whether to designate an FMU as 
systemically important.
    In addition, the Council has the opportunity under stage two to 
request further information from an FMU (as per section 809(a)(1) of 
the DFA), if the information needed is not available publicly or from a 
federal agency with jurisdiction over the FMU. The FMU will be notified 
that this information is being collected to help evaluate whether it 
should be designated by the Council, based on the Council's 
determination that there is reasonable cause to believe the FMU meets 
the regulatory criteria for designation.

IV. Explanation and Proposed Rules

    The Council is providing a sixty (60) day comment period for this 
proposed rule.

A. Authority and Purpose

    Proposed section 1320.1(a) clarifies that sections 111, 112, 804, 
809, and 810 of the DFA provide the statutory authority for the Council 
to promulgate this part. Proposed section 1320.1(b) explains that the 
principal purpose of the part is to set forth standards and procedures 
governing the Council's designation of FMUs that the Council determines 
are, or are likely to become, systemically important.

B. Definitions

    Proposed section 1320.2 contains definitions that are necessary to 
implement the proposed rules. The proposed definitions (including 
``financial market utility,'' ``Supervisory Agency,'' and 
``systemically important'') are taken from the statutory language in 
sections 2 and 803 of the DFA. The Council is soliciting comment on all 
aspects of the proposed definitions. In particular, the Council 
requests comment on whether additional definitions are needed to 
implement the proposed rules.

C. Considerations for Designating FMUs

    Proposed section 1320.10 lists five factors for the Council to 
consider in making a determination on whether to designate or rescind 
the designation of an FMU. The five factors are derived from section 
804(a)(2) of the DFA. Of the five factors, four are specific and the 
fifth--any other factors that the Council deems appropriate--is open-
ended. For purposes of providing greater transparency as to how the 
Council will apply each of the specific factors, the Council proposes 
to include subcategories in the proposed rule. These subcategories are 
not exclusive, and the Council may take additional items into 
consideration under each statutory factor when appropriate, in the 
Council's experience and judgment in light of the particular 
circumstances of any FMU, but the Council believes including 
illustrative subcategories will give the public a better understanding 
of the designation process.
    With regard to the first factor covering the aggregate monetary 
value of transactions processed by an FMU, the Council proposes to 
consider the number of transactions processed, the value of 
transactions cleared, settled, and processed, and the value of other 
financial flows.\47\ The Council believes that information derived from 
this subcategory will inform an evaluation of the extent of an FMU's 
operations.
---------------------------------------------------------------------------

    \47\ Examples of the value other financial flows may include 
analysis of the gains, losses or collateral related to other 
transactions.
---------------------------------------------------------------------------

    For the second factor covering the aggregate exposure of the FMU to 
its counterparties, the Council proposes to consider credit exposures 
\48\ and liquidity exposures. The Council believes that these two 
subcategories will assist in formulating an assessment of an FMU's 
exposures to its counterparties.
---------------------------------------------------------------------------

    \48\ In the context of derivatives clearing, the term ``credit 
exposures'' refers to potential future exposures as opposed to 
actual credit extended.
---------------------------------------------------------------------------

    For the third factor covering the relationship, interdependencies, 
or other interactions of an FMU with other FMUs or payment, clearing, 
or settlement activities, the proposed rule focuses on understanding 
the FMU's interactions by types of participants. The Council believes 
that this subcategory will help provide a foundation for an evaluation 
of the extent to which an FMU is interconnected with other FMUs, the 
payment, clearing, or settlement activities of financial institutions 
or the financial markets as a whole.
    For the fourth factor covering the effect that the failure of or a 
disruption to an FMU would have on critical markets, financial 
institutions, or the broader financial system, the proposed rule lists 
subcategories focused on the roles of the FMU in the market served, the 
availability of substitutes, the concentration of participants and 
product types, the degree of tiering, and the potential impact or 
spillover in the event of a failure or disruption. The Council believes 
that these six subcategories will assist the Council's evaluation of 
the effect of the failure of or a disruption to an FMU on critical 
markets, financial institutions, and the broader financial system.
    The Council requests comment on whether the subcategories in each 
specific factor are clear, sufficiently detailed, and appropriate. In 
particular, the Council requests comment on whether the Council should 
add subcategories, and whether the Council should eliminate or modify 
any of the proposed subcategories.

D. Consultation With Financial Market Utility

    Proposed section 1320.11 provides that before providing an FMU with 
notice of a proposed determination under section 1320.12, the Council 
will provide an FMU with written notice that the Council is reviewing 
the FMU under this part and allow the FMU to submit written materials 
to the Council in support of or in opposition to, as the FMU deems 
relevant, designation by the Council. Written materials may also 
include any actions the FMU proposes to take to reduce or increase its 
systemic risk. The proposed rule does not fix the time frame for an FMU 
to submit written materials, but rather leaves it up to the Council to 
decide such timing on a case-by-case basis. The Council believes such 
flexibility is appropriate to provide FMUs appropriate time to gather 
and submit information. The Council believes that affording FMUs that 
progress to Stage 2 of the review process an opportunity to voluntarily 
submit information to the Council will be mutually beneficial. 
Specifically, the Council believes an FMU will benefit by having an 
opportunity to provide the Council with information and analysis that 
the FMU deems relevant on whether to make a proposed determination. The 
Council believes that any written materials provided by an FMU will 
allow it to make a more informed decision regarding a proposed 
determination. However, the Council notes that the submission of any 
written materials by an FMU under this proposed section 1320.11 is 
strictly voluntary. The Council requests comment on the utility of the 
proposed

[[Page 17058]]

voluntary collection of information. In particular, the Council 
requests comment on whether the Council should establish a set time 
period for FMUs to submit written materials to the Council or whether 
flexibility in the time permitted for FMUs to submit information is 
appropriate.

E. Advance Notice of Proposed Determination

    Proposed section 1320.12 sets out the process by which the Council 
will provide an FMU with advance notice and an opportunity for a 
hearing to contest the Council's proposed determination. As set forth 
in section 804(c)(2) of the DFA, the Council will provide an FMU with 
advance written notice of its proposed determination. The FMU will 
generally have thirty (30) calendar days to request a hearing before 
the Council to demonstrate that the Council's proposed determination is 
not supported by substantial evidence. Upon receipt of a timely request 
for a hearing, the Council will fix a time for the hearing, which in 
most instances will be through the submission of written materials to 
the Council, not more than thirty (30) calendar days after receipt of 
the request for a hearing. The Council requests comment on whether the 
proposed process is sufficiently detailed and clear.

F. Council Determination Regarding Systemic Importance

    Proposed section 1320.13 sets out the requirement for the Council 
to designate an FMU and rescind the designation of a designated FMU 
depending on whether the standards for systemic importance are met. 
Proposed section 1320.13 makes clear that any Council proposed or final 
determination is non-delegable and requires at least a two-thirds vote 
of the voting members then serving, including the affirmative vote of 
the Chairperson of the Council. The proposed rule also requires the 
Council to consult with the relevant Supervisory Agency and the Federal 
Reserve Board before making any proposed or final determination. These 
requirements are taken from the statutory language in section 804(a), 
(b), and (c)(1) of the DFA. The Council requests comment on whether the 
proposed process is sufficiently detailed and clear.

G. Emergency Exception

    Proposed section 1320.14 sets out an emergency exception that 
allows the Council to waive or modify the notice, consultation and 
hearing requirements set forth in the proposed rules and designate an 
FMU as systemically important. The Council may invoke this exception 
only where the Council makes a determination that an emergency 
designation is necessary to prevent or mitigate an immediate threat to 
the financial system posed by the FMU. The exercise of this emergency 
exception requires at least a two-thirds vote of the voting members of 
the Council then serving, including the affirmative vote of the 
Chairperson of the Council. In addition, the Council must provide 
notice of its use of the emergency exception to the FMU no later than 
24 hours after such exception is invoked. The emergency exception is 
based on statutory language in section 804(c)(3) of the DFA. The 
Council requests comment on whether the proposed emergency exception is 
sufficiently detailed and clear. In particular, the Council requests 
comment on whether it should provide a designated FMU an opportunity 
for a hearing to contest the Council's determination to waive the 
notification and hearing requirements and the extent to which the 
opportunity for a hearing should mirror section 113(f)(4) and (5) of 
the DFA.

H. Notification of Final Determination

    In accordance with section 804(d) of the DFA, proposed section 
1320.15 sets out the deadline for the Council to notify an FMU of the 
Council's final determination after providing an FMU notice of the 
proposed determination and an opportunity for a hearing. If the FMU has 
timely requested a hearing, the Council must notify the FMU in writing 
of its final determination within 60 calendar days of the hearing, 
which must also include the Council's findings of fact upon which the 
Council's determination is based. If an FMU does not timely request a 
hearing, the Council will notify the FMU in writing of its final 
determination within 30 calendar days after the expiration of the date 
by which the FMU could have requested a hearing. The Council requests 
comment on whether the notification process is sufficiently detailed 
and clear. In particular, the Council requests comment on whether the 
notification to an FMU that did not timely request a hearing should 
also include the Council's findings of fact.

I. Extension of Time Periods

    As set forth in section 804(e) of the DFA, proposed section 1320.16 
authorizes the Council to extend the time periods by which an FMU may 
request a hearing and submit written materials to contest the Council's 
proposed determination, the 24 hour time period for the Council to 
notify an FMU of an emergency designation, and the time period for the 
Council to notify an FMU of its final determination. The Council 
requests comment on whether the extension of time periods process is 
sufficiently detailed and clear.

J. Council Information Collection and Coordination

    Proposed section 1320.20 authorizes the Council to require any FMU 
to submit information that the Council may require for the sole purpose 
of assessing whether the FMU is systemically important. However, before 
the Council may impose an information collection burden on an FMU, the 
Council must have reasonable cause to believe that the FMU meets the 
standards for systemic importance. The Council must also coordinate 
with the FMU's Supervisory Agency to determine if the requested 
information is available from or may be obtained by the Supervisory 
Agency. If the Supervisory Agency is unable to provide the Council with 
the requested information in less than 15 calendar days after the date 
the material is requested, the Council may then request the information 
directly from the FMU. In requesting information from an FMU, the 
Council must provide a written explanation of the basis for the 
Council's reasonable cause determination. The Council believes that 
providing a written explanation to the FMU will help reduce or mitigate 
an FMU's paperwork burden by providing specific context to the 
Council's request. This information collection and coordination 
authority is substantially derived from the statutory language in 
section 809 of the DFA. The Council requests comment on whether the 
information collection and consultation process is sufficiently 
detailed and clear. In particular, the Council requests comment on the 
utility of the Council providing an FMU with a written explanation of 
the basis for its belief that the FMU is systemically important.

V. Regulatory Flexibility Act

    It is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities. The rule 
would apply only to FMUs whose failure could pose a threat to the 
stability of the U.S. financial system Size is an important factor, 
although not the exclusive factor, in assessing whether an FMU's 
failure could pose a threat the stability of the U.S. financial system. 
The Council does not expect the rule to directly affect a substantial 
number of small entities. Accordingly, a regulatory flexibility 
analysis under the Regulatory

[[Page 17059]]

Flexibility Act (5 U.S.C. 601, et seq.) is not required.

VI. Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Financial Stability Oversight Council, Office of Information and 
Regulatory Affairs, Washington, DC 20503, with copies to Kirsten J. 
Harlow, Department of the Treasury, Washington, DC 20220. Comments on 
the collection of information must be received by May 27, 2011. 
Comments are specifically requested concerning: Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the Council, including:
    Whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations are 
found in Sec.  1320.11, Sec.  1320.12, and Sec.  1320.20.
    Estimated total annual reporting burden: 500 hours.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

VII. Executive Order 12866

    Executive Orders 13563 and 12866 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated a ``significant regulatory 
action'' although not economically significant, under section 3(f) of 
Executive Order 12866. Accordingly, the rule has been reviewed by the 
Office of Management and Budget.

List of Subjects in 12 CFR Part 1310

    Administrative practice and procedure, Banks, banking, Commodity 
futures, Electronic funds transfers, Financial market utilities, 
Securities.

Financial Stability Oversight Council

Authority and Issuance

    For the reasons set forth in the preamble, the Financial Stability 
Oversight Council proposes to add a new part 1320 to 12 CFR chapter 
XIII, as proposed to be established at 76 FR 4562, January 26, 2011, to 
read as follows:

PART 1320--DESIGNATION OF FINANCIAL MARKET UTILITIES

Sec.
Subpart A--General
1320.1 Authority and purpose.
1320.2 Definitions.
Subpart B--Consultations, Determinations and Hearings
1320.10 Factors for consideration in designations.
1320.11 Consultation with Financial Market Utility.
1320.12 Advance notice of proposed determination.
1320.13 Council determination regarding systemic importance.
1320.14 Emergency exception.
1320.15 Notification of final determination.
1320.16 Extension of time periods.
Subpart C--Information Collection
1320.20 Council information collection and coordination.

    Authority:  12 U.S.C. 5321; 12 U.S.C. 5322; 12 U.S.C. 5463; 12 
U.S.C. 5468; 12 U.S.C. 5469

Subpart A--General


Sec.  1320.1  Authority and purpose.

    (a) Authority. This part is issued by the Financial Stability 
Oversight Council under sections 111, 112, 804, 809, and 810 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'') (12 U.S.C. 5321, 5322, 5463, 5468, and 5469).
    (b) Purpose. The principal purpose of this part is to set forth the 
standards and procedures governing the Council's designation of a 
financial market utility that the Council determines is, or is likely 
to become, systemically important.


Sec.  1320.2  Definitions.

    The terms used in this regulation have the following meanings:
    Appropriate Federal banking agency. The term ``appropriate Federal 
banking agency'' has the same meaning as in section 3(q) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(q)), as amended.
    Board of Governors. The term ``Board of Governors'' means the Board 
of Governors of the Federal Reserve System.
    Council. The term ``Council'' means the Financial Stability 
Oversight Council.
    Designated financial market utility. The term ``designated 
financial market utility'' means a financial market utility that the 
Council has designated as systemically important under Sec.  1320.13.
    Designated clearing entity. The term ``designated clearing entity'' 
means a designated financial market utility that is a derivatives 
clearing organization registered under section 5b of the Commodity 
Exchange Act (7 U.S.C. 7a-1) or a clearing agency registered with the 
Securities and Exchange Commission under section 17A of the Securities 
Exchange Act of 1934 (15 U.S.C. 78q-1).
    Financial institution. The term ``financial institution''--
    (1) Means--
    (i) A depository institution as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813);
    (ii) A branch or agency of a foreign bank, as defined in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101);
    (iii) An organization operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601-604a and 611 through 631);
    (iv) A credit union, as defined in section 101 of the Federal 
Credit Union Act (12 U.S.C. 1752);
    (v) A broker or dealer, as defined in section 3 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c);
    (vi) An investment company, as defined in section 3 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3);
    (vii) An insurance company, as defined in section 2 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2);
    (viii) An investment adviser, as defined in section 202 of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-2);
    (ix) A futures commission merchant, commodity trading advisor, or 
commodity pool operator, as defined in section 1a of the Commodity 
Exchange Act (7 U.S.C. 1a); and

[[Page 17060]]

    (x) Any company engaged in activities that are financial in nature 
or incidental to a financial activity, as described in section 4 of the 
Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
    (2) Does not include designated contract markets, registered 
futures associations, swap data repositories, and swap execution 
facilities registered under the Commodity Exchange Act (7 U.S.C. 1 et 
seq.), or national securities exchanges, national securities 
associations, alternative trading systems, securities information 
processors solely with respect to the activities of the entity as a 
securities information processor, security-based swap data 
repositories, and swap execution facilities registered under the 
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), or designated 
clearing entities, provided that the exclusions in this paragraph apply 
only with respect to the activities that require the entity to be so 
registered.
    Financial market utility. The term ``financial market utility''--
    (1) Means 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; and
    (2) Does not include--
    (i) Designated contract markets, registered futures associations, 
swap data repositories, and swap execution facilities registered under 
the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, and swap data execution 
facilities registered under the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.), solely by reason of their providing facilities for 
comparison of data respecting the terms of settlement of securities or 
futures transactions effected on such exchange or by means of any 
electronic system operated or controlled by such entities, provided 
that the exclusions in this clause apply only with respect to the 
activities that require the entity to be so registered; and
    (ii) Any broker, dealer, transfer agent, or investment company, or 
any futures commission merchant, introducing broker, commodity trading 
advisor, or commodity pool operator, solely by reason of functions 
performed by such institution as part of brokerage, dealing, transfer 
agency, or investment company activities, or solely by reason of acting 
on behalf of a financial market utility or a participant therein in 
connection with the furnishing by the financial market utility of 
services to its participants or the use of services of the financial 
market utility by its participants, provided that services performed by 
such institution do not constitute critical risk management or 
processing functions of the financial market utility.
    Payment, clearing, or settlement activity.
    (1) The term ``payment, clearing, or settlement activity'' means an 
activity carried out by 1 or more financial institutions to facilitate 
the completion of financial transactions, but shall not include any 
offer or sale of a security under the Securities Act of 1933 (15 U.S.C. 
77a et seq.), or any quotation, order entry, negotiation, or other pre-
trade activity or execution activity.
    (2) For purposes of paragraph (1), the term ``financial 
transaction'' includes--
    (i) Funds transfers;
    (ii) Securities contracts;
    (iii) Contracts of sale of a commodity for future delivery;
    (iv) Forward contracts;
    (v) Repurchase agreements;
    (vi) Swaps;
    (vii) Security-based swaps;
    (viii) Swap agreements;
    (ix) Security-based swap agreements;
    (x) Foreign exchange contracts;
    (xi) Financial derivatives contracts; and
    (xii) Any similar transaction that the Council determines to be a 
financial transaction for purposes of this part.
    (3) When conducted with respect to a financial transaction, 
payment, clearing, and settlement activities may include--
    (i) The calculation and communication of unsettled financial 
transactions between counterparties;
    (ii) The netting of transactions;
    (iii) Provision and maintenance of trade, contract, or instrument 
information;
    (iv) The management of risks and activities associated with 
continuing financial transactions;
    (v) Transmittal and storage of payment instructions;
    (vi) The movement of funds;
    (vii) The final settlement of financial transactions; and
    (viii) Other similar functions that the Council may determine.
    (4) Payment, clearing, and settlement activities shall not include 
public reporting of swap transactions under section 727 or 763(i) of 
the Dodd-Frank Act.
    Supervisory Agency. The term ``Supervisory Agency''--
    (1) Means the Federal agency that has primary jurisdiction over a 
designated financial market utility under Federal banking, securities, 
or commodity futures laws as follows--
    (i) The Securities and Exchange Commission, with respect to a 
designated financial market utility that is a clearing agency 
registered with the Securities and Exchange Commission.
    (ii) The Commodity Futures Trading Commission, with respect to a 
designated financial market utility that is a derivatives clearing 
organization registered with the Commodity Futures Trading Commission.
    (iii) The appropriate Federal banking agency, with respect to a 
designated financial market utility that is an institution described in 
section 3(q) of the Federal Deposit Insurance Act.
    (iv) The Board of Governors, with respect to a designated financial 
market utility that is otherwise not subject to the jurisdiction of any 
agency listed in clauses (i), (ii), and (iii).
    (2) If a designated financial market utility is subject to the 
jurisdictional supervision of more than one agency listed in paragraph 
(1), then such agencies should agree on one agency to act as the 
Supervisory Agency, and if such agencies cannot agree on which agency 
has primary jurisdiction, the Council shall decide which is the 
Supervisory Agency for purposes of this part.
    Systemically important and systemic importance. The terms 
``systemically important'' and ``systemic importance'' mean a situation 
where the failure of or a disruption to the functioning of a financial 
market utility 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 financial system of 
the United States.

Subpart B--Consultations, Determinations and Hearings


Sec.  1320.10  Factors for consideration in designations.

    In making any proposed or final determination with respect to 
whether a financial market utility is, or is likely to become, 
systemically important under this part, the Council shall take into 
consideration:
    (a) The aggregate monetary value of transactions processed by the 
financial market utility, including without limitation--
    (1) The number of transactions processed, cleared or settled;
    (2) The value of transactions processed, cleared or settled; and
    (3) The value of other financial flows.
    (b) The aggregate exposure of the financial market utility to its 
counterparties, including without limitation--

[[Page 17061]]

    (1) Credit exposures, which includes but is not limited to 
potential future exposures; and
    (2) Liquidity exposures.
    (c) The relationship, interdependencies, or other interactions of 
the financial market utility with other financial market utilities or 
payment, clearing, or settlement activities, including without 
limitation interactions by types of participants.
    (d) The effect that the failure of or a disruption to the financial 
market utility would have on critical markets, financial institutions, 
or the broader financial system, including without limitation--
    (1) Role of the financial market utility in the market served;
    (2) Availability of substitutes;
    (3) Concentration of participants;
    (4) Concentration by product type;
    (5) Degree of tiering; and
    (6) Potential impact or spillover in the event of a failure or 
disruption.
    (e) Any other factors that the Council deems appropriate.


Sec.  1320.11  Consultation with Financial Market Utility.

    Before providing a financial market utility notice of a proposed 
determination under section 1320.12, the Council shall provide the 
financial market utility with--
    (a) Written notice that the Council is considering whether to make 
a proposed determination with respect to the financial market utility 
under Sec.  1320.13; and
    (b) An opportunity to submit written materials to the Council, 
within such time as the Council determines to be appropriate, 
concerning--
    (1) Whether the financial market utility is systemically important 
taking into consideration the factors set out in Sec.  1320.10; and
    (2) Proposed changes by the financial market utility that could--
    (i) Reduce or increase the inherent systemic risk the financial 
market utility poses; and
    (ii) Reduce or increase the need for designation under Sec.  
1320.13; or
    (iii) Reduce or increase the appropriateness of rescission under 
Sec.  1320.13.
    (3) The Council shall consider any written materials submitted by 
the financial market utility under this section before making a 
proposed determination under section 1320.13.


Sec.  1320.12  Advance notice of proposed determination.

    (a) Notice of proposed determination and opportunity for hearing. 
Before making any final determination under Sec.  1320.13, the Council 
shall provide the financial market utility with advance notice of the 
proposed determination of the Council, and proposed findings of fact 
supporting that determination.
    (b) Request for hearing. Within 30 calendar days from the date of 
any provision of notice of the proposed determination of the Council, 
the financial market utility may request, in writing, an opportunity 
for a written or oral hearing before the Council to demonstrate that 
the proposed designation or rescission of designation is not supported 
by substantial evidence.
    (c) Written submissions. Upon receipt of a timely request, the 
Council shall fix a time, not more than 30 calendar days after receipt 
of the request, unless extended at the request of the financial market 
utility, and place at which the financial market utility may appear, 
personally or through counsel, to submit written materials, or, at the 
sole discretion of the Council, oral testimony or oral argument.


Sec.  1320.13  Council determination regarding systemic importance.

    (a) Designation determination. The Council shall designate a 
financial market utility if the Council determines that the financial 
market utility is, or is likely to become, systemically important.
    (b) Rescission determination. The Council shall rescind a 
designation of systemic importance for a designated financial market 
utility if the Council determines that the financial market utility no 
longer meets the standards for systemic importance.
    (c) Vote required. Any proposed or final determination under 
paragraph (a) or (b) of this section shall--
    (1) Be made by the Council and may not be delegated by the Council; 
and
    (2) Require the vote of not fewer than two-thirds of the members of 
the Council then serving, including the affirmative vote of the 
Chairperson of the Council.
    (d) Consultations. Before making any determination under paragraph 
(a) or (b) of this section, the Council shall consult with the relevant 
Supervisory Agency and the Board of Governors.


Sec.  1320.14  Emergency exception.

    (a) Emergency exception. Notwithstanding Sec. Sec.  1320.11 and 
1320.12, the Council may waive or modify any or all of the notice, 
hearing, and other requirements of Sec. Sec.  1320.11 and 1320.12 with 
respect to a financial market utility if--
    (1) The Council determines that the waiver or modification is 
necessary to prevent or mitigate an immediate threat to the financial 
system posed by the financial market utility; and
    (2) The Council provides notice of the waiver or modification to 
the financial market utility concerned, as soon as practicable, but not 
later than 24 hours after the waiver or modification.
    (b) Vote required. Any determination by the Council under paragraph 
(a) to waive or modify any of the requirements of Sec. Sec.  1320.11 
and 1320.12 shall--
    (1) Be made by the Council;
    (2) Require the affirmative vote of not fewer than two-thirds of 
members then serving, including the affirmative vote of the Chairperson 
of Council.


Sec.  1320.15  Notification of final determination.

    (a) Notification of final determination after a hearing. (1) Within 
60 calendar days of any hearing under Sec.  1320.12, the Council shall 
provide to the financial market utility written notification of the 
final determination of the Council under Sec.  1320.13, which shall 
include findings of fact upon which the determination of the Council is 
based.
    (b) Notification of final determination if no hearing. If the 
Council does not receive a timely request for a hearing under Sec.  
1320.12, the Council shall provide the financial market utility written 
notification of the final determination of the Council under Sec.  
1320.13 not later than 30 calendar days after the expiration of the 
date by which a financial market utility could have requested a 
hearing.


Sec.  1320.16  Extension of time periods.

    The Council may extend the time periods established in Sec. Sec.  
1320.12, 1320.14, or 1320.15 as the Council determines to be necessary 
or appropriate.

Subpart C--Information Collection


Sec.  1320.20  Council information collection and coordination.

    (a) Information collection to assess systemic importance. The 
Council may require any financial market utility to submit such 
information to the Council as the Council may require for the sole 
purpose of assessing whether the financial market utility is 
systemically important.
    (b) Prerequisites to information collection. Before requiring any 
financial market utility to submit information to the Council under 
paragraph (a) of this section, the Council shall--
    (1) Determine that it has reasonable cause to believe that the 
financial market utility meets the standards for systemic importance in 
Sec.  1320.10; or

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    (2) Determine that that it has reasonable cause to believe that the 
designated financial market utility no longer meets the standards for 
systemic importance in Sec.  1320.10; and
    (3) Coordinate with the Supervisory Agency for the financial market 
utility to determine if the information is available from or may be 
obtained by the Supervisory Agency in the form, format, or detail 
required by the Council.
    (c) Timing of response from the appropriate Supervisory Agency. If 
the information, reports, records, or data requested by the Council 
under paragraph (b)(3) of this section are not provided in full by the 
Supervisory Agency in less than 15 calendar days after the date on 
which the material is requested, the Council may request the 
information directly from the financial market utility with notice to 
the Supervisory Agency.
    (d) Notice to financial market utility of information collection 
requirement. In requiring a financial market utility to submit 
information to the Council, the Council shall provide to the financial 
market utility the following--
    (1) Written notice that the Council is considering whether to make 
a proposed determination under Sec.  1320.13; and
    (2) A description of the basis for the Council's belief under 
paragraphs (b)(1) or (b)(2) of of this section.

    Dated: March 18, 2011.
Alastair Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the 
Treasury.
[FR Doc. 2011-7003 Filed 3-25-11; 8:45 am]
BILLING CODE 4810-25-P