[Federal Register Volume 76, Number 64 (Monday, April 4, 2011)]
[Proposed Rules]
[Pages 18445-18454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-7812]


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FEDERAL RESERVE SYSTEM

12 CFR Part 234

[Regulation HH; Docket No. R-1412]
RIN 7100-AD71


Financial Market Utilities

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Under section 805(a)(1)(A) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the ``Dodd-Frank Act''), the Board 
of Governors of the Federal Reserve System (the ``Board'') is required 
to promulgate risk-management standards governing the operations 
related to the payment, clearing, and settlement activities of certain 
financial market utilities (``FMUs'') that are designated as 
systemically important by the Financial Stability Oversight Council 
(the ``Council''). In addition, under section 806(e) of the Dodd-Frank 
Act, the Board is required to prescribe regulations setting forth the 
standards for determining when advance notice is required to be 
provided by a designated FMU for which the Board is the Supervisory 
Agency when the designated FMU proposes to change its rules, 
procedures, or operations that could materially affect the nature or 
level of risks presented by the designated FMU. The Board is proposing 
new Part 234 to Title 12 of the Code of Federal Regulations to 
implement these provisions of the Dodd-Frank Act.

DATES: Comments on this notice of proposed rulemaking must be received 
by May 19, 2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1412 and 
RIN No. AD-7100-AD71, by any of the following methods:
     Agency Web site: http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Facsimile: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jennifer A. Lucier, Manager (202) 872-
7581, Division of Reserve Bank Operations and Payment Systems; 
Christopher W. Clubb, Senior Counsel (202) 452-3904, or Kara L. 
Handzlik, Senior Attorney (202) 452-3852, Legal Division; for users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

[[Page 18446]]

I. Background

A. Financial Market Utilities

    FMUs, such as payment systems, central securities depositories, and 
central counterparties, are critical components of the nation's 
financial system. FMUs are multilateral organizations that provide the 
essential infrastructure to clear and settle payments and other 
financial transactions, upon which the financial markets and the 
broader economy rely to function effectively. Financial institutions, 
such as banks, participate in FMUs pursuant to a common set of rules 
and procedures, a technical infrastructure, and a risk-management 
framework. The basic risks that FMUs must manage include credit risk, 
liquidity risk, settlement risk, operational risk, and legal risk. 
These risks arise between financial institutions and FMUs as they 
settle payments and other financial transactions. The FMUs and their 
participating institutions are responsible for managing these risks on 
an individual and a collective basis.
    Financial stability requires that the financial infrastructure, 
including FMUs, be robust and well managed. If a systemically important 
FMU fails to perform as expected or fails to measure, monitor, and 
manage its risks effectively, it could pose significant risk to its 
participants and the financial system more broadly. For example, the 
inability of an FMU to complete settlement on time could create credit 
or liquidity problems for its participants or other FMUs. An FMU, 
therefore, should have an appropriate and robust risk-management 
framework, including sound governance arrangements, and appropriate 
policies and procedures to measure, monitor, and manage its risks.

B. Dodd-Frank Wall Street Reform and Consumer Protection Act

    Title VIII of the Dodd-Frank Act, titled the ``Payment, Clearing, 
and Settlement Supervision Act of 2010,'' was enacted to mitigate 
systemic risk in the financial system and to promote financial 
stability, in part, through enhanced supervision of designated FMUs.\1\ 
Under section 803, an FMU is defined as a 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. Pursuant to section 804 of the Dodd-Frank 
Act, the Council is required to designate those FMUs that the Council 
determines are, or are likely to become, systemically important.\2\ 
Designation by the Council makes an FMU subject to the supervisory 
framework set out in Title VIII.
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    \1\ The Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376, was 
signed into law on July 21, 2010.
    \2\ For these purposes, section 803(9) of the Dodd-Frank Act 
defines ``systemically important'' as a situation in which the 
failure of or a disruption to the functioning of an FMU 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. 12 U.S.C. 5462(9). The Council issued an advance notice of 
proposed rulemaking on the criteria for FMU designations on November 
23, 2010 (see 75 FR 79982 (Dec. 21, 2010)).
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    Section 805(a)(1)(A) of the Dodd-Frank Act requires the Board to 
prescribe, by rule or order, risk-management standards governing the 
operations related to the payment, clearing, and settlement activities 
of certain designated FMUs. With respect to a designated FMU that is a 
derivatives clearing organization registered under section 5b of the 
Commodity Exchange Act or a clearing agency registered under section 
17A of the Securities Exchange Act of 1934 (collectively, ``designated 
clearing entities''), the Commodity Futures Trading Commission 
(``CFTC'') or the Securities and Exchange Commission (``SEC''), 
respectively, may each prescribe regulations, in consultation with the 
Council and the Board, containing applicable risk-management 
standards.\3\
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    \3\ Dodd-Frank Act section 805(a)(2) 12 U.S.C. 5464(a)(2).
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    In prescribing the standards, section 805(a)(1) requires the Board 
to take into consideration relevant international standards and 
existing prudential requirements.\4\ In addition, as set out in section 
805(b) of the Dodd-Frank Act, the objectives and principles for the 
risk-management standards are to (1) promote robust risk management, 
(2) promote safety and soundness, (3) reduce systemic risks, and (4) 
support the stability of the broader financial system. Section 805(c) 
of the Dodd-Frank Act also states that risk-management standards may 
address areas such as (1) risk-management policies and procedures, (2) 
margin and collateral requirements, (3) participant or counterparty 
default policies and procedures, (4) the ability to complete timely 
clearing and settlement of financial transactions, (5) capital and 
financial resource requirements for designated FMUs, and (6) other 
areas that are necessary to achieve the objectives and principles for 
risk-management standards in section 805(b). Designated FMUs are 
required to conduct their operations in compliance with the applicable 
risk-management standards.
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    \4\ Section 805(a)(2) similarly requires the CFTC and SEC to 
take into consideration relevant international standards and 
existing prudential requirements when prescribing regulations 
containing risk-management standards for designated clearing 
entities.
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    In addition to compliance with the applicable risk-management 
standards, section 806(e)(1)(B) of the Dodd-Frank Act requires a 
designated FMU to provide at least 60 days' advance notice to its 
Supervisory Agency (as defined below) of any proposed change to its 
rules, procedures, or operations that could, as defined in rules of 
each Supervisory Agency, materially affect the nature or level of risks 
presented by the designated FMU. Each Supervisory Agency must prescribe 
regulations that define and describe the standards for determining when 
such advance notice is required. Under section 803(8) of the Dodd-Frank 
Act, a ``Supervisory Agency'' means the federal agency that has primary 
jurisdiction over a designated FMU under federal banking, securities, 
or commodity futures laws.\5\
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    \5\ A Supervisory Agency includes the SEC and CFTC with respect 
to their respective designated clearing entities (as defined above), 
the appropriate federal banking agencies with respect to FMUs that 
are institutions described in section 3(q) of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(q)), and the Board with respect to a 
designated FMU this is otherwise not subject to the jurisdiction of 
any of the agencies listed above.
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II. Explanation of Proposed Rules

A. Authority, Purpose, and Scope

    Proposed Sec.  234.1(a) clarifies that sections 805, 806, and 810 
of the Dodd-Frank Act provide the statutory authority for the Board to 
promulgate the proposed part. Proposed Sec.  234.1(b) explains that the 
proposed rules include risk-management standards for designated FMUs 
and that this part does not apply to designated clearing entities 
governed by the risk-management standards promulgated by the CFTC or 
the SEC, as appropriate. Proposed Sec.  234.1(b) also clarifies that 
the requirements and procedures in this part for a designated FMU that 
proposes to make a change to its rules, procedures, or operations that 
could materially affect the nature or level of risks presented by the 
designated FMU apply only to designated FMUs for which the Board is the 
Supervisory Agency.

B. Definitions

    The proposed rule includes definitions that are necessary to 
implement the rules. Several definitions (including ``designated 
financial market

[[Page 18447]]

utility,'' ``financial market utility,'' and ``Supervisory Agency'') 
reference the statutory language in section 803 of the Dodd-Frank Act. 
Other proposed definitions (including ``central counterparty,'' 
``central securities depository,'' and ``payment system'') are based on 
similar terms used in the risk-management standards issued by the 
Committee on Payment and Settlement Systems (the ``CPSS'') and the 
Technical Committee of the International Organization of Securities 
Commissions (``IOSCO''), which are discussed in detail below. The Board 
is requesting comment on all aspects of the proposed definitions except 
those defined in the Dodd-Frank Act. In particular, the Board requests 
comment on whether the definitions are clear and sufficiently detailed 
and whether additional definitions are needed to implement the proposed 
rules.

C. Risk-Management Standards for Designated FMUs

    As noted above, in prescribing risk-management standards for 
designated FMUs, section 805(a) of the Dodd-Frank Act directs the Board 
to take into consideration relevant international standards and 
existing prudential requirements. The current international standards 
most relevant to risk management of FMUs are the standards developed by 
the CPSS and IOSCO.\6\ In 2001, the CPSS published a set of principles 
for the design and operation of systemically important payment systems 
(the ``Core Principles''). That same year the CPSS and IOSCO jointly 
issued a set of minimum standards for securities settlement systems 
(the ``Recommendations for Securities Settlement Systems''). In 2004, 
the CPSS and IOSCO jointly published recommendations for the risk 
management of central counterparties (the ``Recommendations for Central 
Counterparties,'' and collectively with the Recommendations for 
Securities Settlement Systems, the ``CPSS-IOSCO Recommendations''). The 
Board has adopted the three sets of standards in its Policy on Payment 
System Risk (``PSR policy''). Furthermore, the Board has been guided by 
this policy, in conjunction with relevant laws and other Federal 
Reserve policies, when exercising its authority in (1) supervising 
state member banks, Edge and agreement corporations, bank holding 
companies, and clearinghouse arrangements, including the exercise of 
authority under the Bank Service Company Act, where applicable; (2) 
setting or reviewing the terms and conditions for use of Federal 
Reserve payment and settlement services by system operators and 
participants; (3) developing and applying policies for the provision of 
intraday credit to Reserve Bank account holders; and (4) interacting 
with other domestic and foreign financial system authorities on 
payments and settlement risk issues.\7\ Thus, the Board has had several 
years experience with interpreting and applying the three sets of 
standards to payment, clearing, and settlement systems.
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    \6\ See full reports for the Core Principles for Systemically 
Important Payment Systems (Core Principles) (http://www.bis.org/publ/cpss43.htm) and the CPSS-IOSCO Recommendations for Securities 
Settlement Systems (Recommendations for Securities Settlement 
Systems) (http://www.bis.org/publ/cpss46.htm) and Central 
Counterparties (http://www.bis.org/publ/cpss64.htm) (Recommendations 
for Central Counterparties).
    \7\ See the full PSR policy at http://www.federalreserve.gov/paymentsystems/psr_policy.htm. The Board requested comment on these 
standards prior to adopting them as part of its PSR policy. See 71 
FR 36800 (June 28, 2006) and 72 FR 2518 (Jan. 19, 2007).
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    The Board believes that the Core Principles and the CPSS-IOSCO 
Recommendations further the objectives and principles for designated 
FMU standards set out in section 805(b) of the Dodd-Frank Act. These 
international standards were formulated by central banks and securities 
regulators to promote sound risk-management practices, encourage the 
safe design and operation of relevant FMUs, reduce systemic risk, and, 
in certain instances, improve selected market practices or actions by 
regulators. The Federal Reserve collaborated with participating 
financial system authorities in developing the three sets of standards. 
In addition, the SEC and CFTC participated in the development of the 
CPSS-IOSCO Recommendations. The Core Principles and Recommendations for 
Securities Settlement Systems are also part of the Financial Stability 
Board's Compendium of Standards, which has been widely recognized, 
supported, and endorsed by U.S. authorities as integral to 
strengthening the stability of the financial system. Furthermore, while 
the Recommendations for Central Counterparties have not been recognized 
formally by the Financial Stability Board, they are widely accepted and 
applied by central banks and market regulators around the world. The 
Board, therefore, believes that the Core Principles and CPSS-IOSCO 
Recommendations are an appropriate basis for risk-management standards 
for designated FMUs, and the Board is proposing to adopt by regulation 
a set of standards based on the Core Principles and CPSS-IOSCO 
Recommendations to implement section 805(a) of the Dodd-Frank Act.
    The Board believes, however, that it should adopt a modified 
version of the standards for the purpose of section 805(a). In 
particular, the Board is proposing to adopt by regulation only those 
Core Principles and CPSS-IOSCO Recommendations, or portions thereof, 
that directly apply to an FMU's risk-management or operational 
framework, rather than those standards that apply more generally to 
financial markets (for example, market convention, pre-settlement 
activities) or regulators (for example, regulation and oversight). The 
Board acknowledges that the scope of the standards is broad. For 
example, the Core Principles and the CPSS-IOSCO Recommendations contain 
a standard requiring a clear and well founded legal framework, which 
includes legislation and administrative rulemaking. While the Board 
acknowledges that an FMU cannot control or dictate legislation or 
regulatory rulemaking, it expects that a designated FMU will manage its 
legal risk within the context of current applicable statutes and 
regulations, in ways such as ensuring that its rules, procedures, and 
contractual provisions are clear and accessible to participants and 
such rules, procedures, and contractual provisions will be enforceable 
with a high degree of certainty. In order to facilitate compliance, 
designated FMUs may refer to the CPSS and CPSS-IOSCO documents for 
background.
    The Board expects to interpret and apply the proposed standards 
consistent with its interpretation and application of those standards 
under its existing PSR policy. For instance, when considering the 
adequacy of risk controls or the sufficiency of financial resources 
that a payment system, central securities depository, or central 
counterparty would require to complete timely settlement in the event 
the participant with the largest settlement obligation is unable to 
complete settlement, the Board usually has interpreted the term 
``participant'' to mean the largest family of affiliated participants 
where there is more than one affiliated participant.\8\ Furthermore, 
the Board would continue to expect a central securities depository that 
extends intraday credit to its participants to institute risk controls 
that cover fully its credit risk exposure to all participants, not only 
the participant with the largest payment

[[Page 18448]]

obligation.\9\ In addition, the Board would expect a designated FMU to 
meet the sound practices set forth in the ``Interagency Paper on Sound 
Practices to Strengthen the Resilience of the U.S. Financial System'' 
as one element of complying with the risk-management standards in 
proposed Sec. Sec.  234.3(a)(7) and 234.4(a)(4).\10\ Specifically, a 
designated FMU should develop the capacity to recover and resume its 
payment, clearing, and settlement activities within the business day on 
which the disruption occurs with the overall goal of achieving recovery 
and resumption within two hours after an event.\11\ The Board requests 
comment on whether these provisions need further definition in the text 
of the proposed standards.
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    \8\ See, for example, proposed standards in Sec. Sec.  
234.3(a)(5) and 234.4(a)(18).
    \9\ See proposed standard in Sec.  234.4(a)(15).
    \10\ The interagency paper is available at http://www.federalreserve.gov/boarddocs/SRLETTERS/2003/SR0309a1.pdf.
    \11\ This interpretation is consistent with the Board's 
supervision of banking organizations that are core clearing and 
settlement organizations or act as large-value payment system 
operators. See Supervision and Regulation letter 03-9 (May 28, 2003) 
at http://www.federalreserve.gov/boarddocs/srletters/2003/sr0309.htm.
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    The Board believes that the adoption of risk-management standards 
under Title VIII that are based on the current international standards 
will have several important benefits, including easing the potential 
burden for designated FMUs to comply with the standards; reducing 
potential conflicts among regulators regarding prudential requirements; 
providing a common framework among relevant regulators for overseeing 
and assessing the risks and risk management of FMUs with cross-market, 
cross-border, or cross-currency operations; aiding international 
efforts to strengthen the risk management of critical FMUs; and 
reducing systemic risk.
    The Board requests comment on the set of standards set out in the 
proposed rule and the use of CPSS and CPSS-IOSCO documents as further 
information. In particular, given the familiarity of most FMUs with the 
existing relevant international standards, the Board requests comment 
on whether the proposed standards provide sufficient guidance for 
designated FMUs to comply with the standards pursuant to Title VIII of 
the Dodd-Frank Act.
    The CPSS and IOSCO are currently reviewing the three sets of 
international standards. This review is intended to strengthen and 
clarify the standards based on experience with the Core Principles and 
CPSS-IOSCO Recommendations since their publication and to incorporate 
lessons learned during the recent financial crisis. The CPSS and IOSCO 
published a consultative report on March 10, 2011; final international 
standards are expected in early 2012.\12\ At that time, the Board 
anticipates that it will review the new standards, consult with other 
appropriate agencies and the Council, and likely seek public comment on 
the adoption of revised standards for designated FMUs under section 
805(a) of the Dodd-Frank Act based on the new international standards.
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    \12\ See consultative report for Principles for Financial Market 
Infrastructures at http://www.bis.org/publ/cpss94.htm.
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    Payment systems. Proposed Sec.  234.3(a) sets out risk-management 
standards for designated FMUs that operate as payment systems, in 
accordance with section 805(a) of the Dodd-Frank Act. The Board is 
proposing a set of standards based on the Core Principles for such 
designated FMUs. The Core Principles are widely accepted by the 
international regulatory community, and numerous payment systems around 
the world already follow them. These standards address the types of 
areas of supervisory concern for designated FMUs set out in section 
805(c) of the Dodd-Frank Act. For example, the standards address risk-
management policies and procedures, participant default policies and 
procedures, and the ability to complete timely settlement of payments.
    Proposed Sec.  234.3(b) clarifies that the Board will apply the 
standards set out in proposed Sec.  234.3(a) in its supervision of 
designated FMUs that operate as payment systems and for which the Board 
is the Supervisory Agency. All designated FMUs are expected to employ a 
risk-management framework that is appropriate for their risks, so the 
Board may require a particular designated FMU to exceed the standards 
set out in the proposed rules in this notice. To that end, Sec.  
234.3(b) states that the Board may, by order, apply heightened risk-
management standards to a particular FMU in response to the risks 
presented by that FMU.
    The Board requests comment on all aspects of the appropriateness of 
the proposed standards for designated FMUs that are payment systems, 
including whether there are any areas of supervisory concern regarding 
a payment system's operations that are not sufficiently addressed by 
the proposed rules. The Board also requests comment on whether the 
proposed standards achieve the statutory objectives outlined above to 
(1) promote robust risk management, (2) promote safety and soundness, 
(3) reduce systemic risks, and (4) support the stability of the broader 
financial system.
    Central securities depositories and central counterparties. 
Proposed Sec.  234.4(a) of the proposed rule sets out risk-management 
standards for designated FMUs that operate as central securities 
depositories or central counterparties, in accordance with section 
805(a) of the Dodd-Frank Act. Each proposed standard states whether it 
is applicable to a central securities depository, a central 
counterparty, or both.
    Most designated FMUs that operate as central securities 
depositories or central counterparties will be designated clearing 
entities subject to the risk-management standards promulgated by the 
CFTC or SEC. The Board is proposing standards for designated FMUs that 
operate as central securities depositories, central counterparties, or 
both, to address the unlikely event that a designated FMU operates as a 
central securities depository or central counterparty and is not 
required to be registered as a clearing agency or derivatives clearing 
organization with the SEC or CFTC, respectively. Pursuant to section 
805(a)(1) of the Dodd-Frank Act, the Board's risk-management standards 
apply to any designated FMU that is otherwise not subject to the 
jurisdiction of the SEC or the CFTC.\13\
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    \13\ 12 U.S.C. 5464(a)(1).
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    The Board is proposing a set of standards for such designated FMUs 
that is based on the majority of the CPSS-IOSCO Recommendations 
presented in a modified format. Specifically, the Board is proposing to 
prescribe only those portions of the CPSS-IOSCO Recommendations that 
apply directly to FMUs, rather than those portions that apply to market 
convention, pre-settlement activities, and regulation and oversight, 
which are outside the control of the individual FMUs and are more 
appropriately addressed by other entities.\14\ While the Board endorses 
the CPSS-IOSCO

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Recommendations in their entirety as a policy matter, its primary 
interest for purposes of this rulemaking is in those recommendations 
related to the clearing and settlement aspects of financial 
transactions, including the delivery of securities or other financial 
instruments against payment, and related risks. In addition, the 
standards in the Recommendations for Securities Settlement Systems and 
the Recommendations for Central Counterparties that overlap 
significantly have been consolidated to avoid repetition.
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    \14\ The Board is not proposing to include the following CPSS-
IOSCO Recommendations as risk-management standards for designated 
FMUs: Recommendations 2 (trade confirmation), 3 (settlement cycles), 
4 (central counterparties), 5 (securities lending), 12 (protection 
of customers' securities), and 18 (regulation and oversight) of the 
Recommendations for Securities Settlement Systems and recommendation 
15 (regulation and oversight) in the Recommendations for Central 
Counterparties. In addition, the Board is not proposing to prescribe 
a rule to adopt Recommendation 16 in the Recommendations for 
Securities Settlement Systems (communication procedures and 
standards) because the Board believes that at this time the purpose 
of this recommendation is sufficiently captured in the proposed 
risk-management standard regarding the efficient operation of a 
central securities depository.
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    Finally, the Board has modified the margin-related standards set 
forth in the Recommendations for Central Counterparties by adding two 
components on testing set forth in proposed Sec.  234.4(a)(17). The 
components added by the Board are consistent with the frequencies 
recommended in the explanatory text of the Recommendations for Central 
Counterparties; however, proposed Sec.  234.4(a)(17)(i) would introduce 
more specific parameters on who may conduct model validations for 
central counterparties.\15\ In conducting supervision of central 
counterparties, the Board typically has required systems to employ a 
qualified, independent party to conduct validations of proposed and 
existing models to evaluate the performance of the model, along with 
parameters and assumptions, in a range of scenarios. The Board believes 
that in order for the validator to offer independent, unbiased 
conclusions and recommendations, the model validation should be 
performed by a person who is not responsible for developing the margin 
model and does not report to a person who performs these functions. A 
central counterparty's margin model is a critical component in its 
risk-management framework and should be tested rigorously and validated 
at least annually to ensure it is performing reliably and achieving the 
desired coverage. The Board requests comment on whether the proposed 
rule for model validation is sufficiently clear. The Board also 
requests comment on all aspects of the proposed rule, including the 
proposed frequency and whether a model validation should be triggered 
as a result of any material change to a central counterparty, such as 
revisions to the margin model, introduction of new products, or 
formation of new margining arrangements (for example, portfolio or 
cross-margining).
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    \15\ Proposed Sec.  234.4(a)(17)(i)--(ii) are generally 
consistent with Recommendations 4 and 5 in the Recommendations for 
Central Counterparties. Proposed rule 234.4.(17)(i) is based on 
Recommendation 5 (financial resources), paragraph 4.5.4, that 
recommends that a central counterparty conduct comprehensive stress 
tests involving a full validation of model parameters and 
assumptions at least annually. Proposed Sec.  234.4(17)(ii) is based 
on Recommendation 4 (margin requirements), paragraph 4.4.2, that 
states that margin models and parameters should be reviewed and 
backtested regularly (at least quarterly) to assess the reliability 
of the methodology in achieving the desired coverage.
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    The Board believes that the standards in proposed Sec.  234.4(a) 
appropriately address the types of areas of supervisory concern set out 
in section 805(c) of the Dodd-Frank Act. For example, the standards 
address collateral requirements and the ability to complete timely 
clearing and settlement of financial transactions for central 
securities depositories, and margin requirements and counterparty 
default policies and procedures for central counterparties.
    Proposed Sec.  234.4(b) clarifies that the Board will apply the 
standards in proposed Sec.  234.4(a) in its supervision of designated 
FMUs that operate as a central securities depository or a central 
counterparty and for which the Board is the Supervisory Agency. A 
designated FMU should comply with the standards that are applicable to 
it as determined by its function as a central securities depository, a 
central counterparty, or both. In addition, proposed Sec.  234.4(b) 
states that the Board may, by order, apply heightened risk-management 
standards to a particular FMU in response to the risks presented by 
that FMU, for the same reasons as discussed above regarding heightened 
standards for designated FMUs operating as payment systems.
    The Board requests comment on all aspects of the proposed standards 
for designated FMUs that act as central securities depositories or 
central counterparties, including whether there are any areas of 
supervisory concern regarding the operations of a central securities 
depository or a central counterparty that are not sufficiently 
addressed by the proposed rules. The Board also requests comment on 
whether these standards achieve the statutory objectives outlined above 
to (1) promote robust risk management, (2) promote safety and 
soundness, (3) reduce systemic risks, and (4) support the stability of 
the broader financial system.
    The Board also requests comment on all aspects of proposed rules in 
Sec. Sec.  234.3 and 234.4, but, in particular, the Board requests 
comment on the following specific issues:
     Under Sec. Sec.  234.3(a)(5), 234.4(a)(2), 234.4(a)(15), 
and 234.4(a)(18), should the Board require designated FMUs to maintain 
sufficient financial resources to withstand the default by the 
participant with the largest exposure or obligation in extreme but 
plausible market conditions, where participant means the family of 
affiliated participants where there is more than one affiliated 
participant (``cover one''); or should the Board require sufficient 
financial resources to withstand defaults by the two participants, plus 
any affiliated participants, with the largest exposures or obligations 
in extreme but plausible market conditions (``cover two'')? Should the 
Board require that financial resource requirements be different for 
certain types of designated FMUs in the same category, such as central 
counterparties, depending on the risk and other characteristics of the 
particular products that it clears or settles? What competitive 
impacts, if any, should the Board consider?
     How would a cover two requirement compare with the current 
practices of payment, clearing, and settlement systems? What would be 
the expected incremental financial resource costs, separately including 
incremental liquidity costs on the system, and its participants, in 
connection with potentially increasing the current cover one 
requirement to a cover two requirement?

D. Material Changes to Rules, Procedures, or Operations Requiring 
Advanced Notice

    As noted above, section 806(e)(1) of the Dodd-Frank Act requires a 
designated FMU to provide 60 days' advance notice to its Supervisory 
Agency of any changes to its rules, procedures, or operations that 
``materially affect the nature or level of risks presented.'' Section 
806(e) further requires each Supervisory Agency to describe in a rule 
what changes are considered material and thus would require advance 
notice by the designated FMU. The Board is currently evaluating the 
manner in which these types of advance notice should be submitted. The 
Board will provide guidance at a future date regarding the advance 
notice submission procedures.
    Proposed Sec.  234.5(a) requires designated FMUs for which the 
Board is the Supervisory Agency to provide the Board with 60 days' 
advance notice of any proposed change to its rules, procedures, or 
operations that could materially affect the nature or level of risks 
presented by the designated FMU. The proposed rule includes procedural 
requirements regarding such notices, such as the required contents of 
the notices and the procedures and timing for the methods for approving 
such changes. These provisions of the proposed rules essentially 
reiterate

[[Page 18450]]

similar provisions in section 806(e) of the Dodd-Frank Act.
    As required by section 806(e), the Board is proposing to define 
under Sec.  234.5(c) changes that ``materially affect the nature or 
level of risks presented'' as those that could be reasonably expected 
to affect the performance of payment, clearing, or settlement functions 
or the overall nature or level of risk (including credit, liquidity, 
settlement, legal, or operational risks) presented by the designated 
FMU. Under this proposed definition, material changes would generally 
include changes that may affect the designated FMU's ability or 
approach to measure or manage the risks posed by or to itself. Material 
changes also include changes to the designated FMU's design that not 
only affect the FMU and its direct participants, but, even when 
properly implemented, could also affect the financial system more 
broadly. For example, given the operational and risk interdependencies 
of a designated FMU, it is possible that attempts to reduce or limit 
one type of risk could lead to the concentration or creation of 
different risks. Material changes, therefore, are not limited to those 
changes that would adversely affect or increase the risks of the FMU, 
and include those that may transfer or transform risks.
    To assist designated FMUs in determining whether a proposed change 
is material, the Board's proposed rule sets out a non-exclusive list of 
changes that would be considered material and require advance notice to 
the Board. Under the proposed rule, material changes would include, but 
not be limited to, changes that affect participant eligibility or 
access criteria; product eligibility; risk management; settlement 
failure or default procedures; financial resources; business continuity 
and disaster recovery plans; daily or intraday settlement procedures; 
the scope of services, including the addition of a new service or 
discontinuation of an existing service; technical design or operating 
platform, which result in nonroutine changes to the underlying 
technological framework for payment, clearing, or settlement functions; 
or governance.
    The proposed rule also includes a non-exclusive list of routine 
changes to a designated FMU's rules, procedures, or operations that 
will not be deemed to materially affect an FMU's nature or level of 
risks or impact or cause disruption to the financial system more 
broadly. The Board believes the relevant safety and soundness issues 
associated with these routine changes are more appropriately addressed 
through ongoing communications with the designated FMU rather than 
through the formal advance notice process under section 806(e) of the 
Dodd-Frank Act. For the purposes of the advance notice provision, 
changes that would not be deemed to materially affect the FMU's risks 
include, but are not limited to, changes to an existing rule, 
procedure, or operation that do not modify the contractual rights or 
obligations of the designated FMU or persons using its payment, 
clearing, or settlement services; changes to an existing procedure, 
control, or service that do not adversely affect the safeguarding of 
securities, collateral, or funds in the custody or control of the 
designated FMU or for which it is responsible; routine technology 
systems upgrades; changes related solely to the administration of the 
designated FMU or related to the routine, daily administration, 
direction, and control of employees; or clerical changes and other 
nonsubstantive revisions to rules, procedures, or other documentation.
    The material and nonmaterial lists are not exhaustive regarding the 
types of changes that the Board may deem material under section 806(e). 
There would be many proposed changes to a designated FMU's rules, 
procedures, or operations that are not included in either list. If a 
designated FMU had any question regarding whether a particular change 
to a rule, procedure, or operation, which was not covered by either 
list, met the general materiality standard, the Board anticipates that 
the FMU would contact Board staff.
    The Board requests comment on all aspects of the proposed rule 
regarding changes to rule, procedures, or operations of a designated 
FMU. The Board requests comment on whether the proposed rule's 
provisions regarding the requirements, content, and timing of advance 
notices of proposed changes are clear. In addition, the Board requests 
comment on whether the proposed non-exclusive illustrative lists for 
material and nonmaterial changes to an FMU's rules, procedures, or 
operations would be helpful to designated FMUs in determining whether 
advance notice of such changes is required. The Board also requests 
comment on whether there are any areas or items on either list that 
should be deleted as inappropriate. Finally, the Board requests comment 
on whether there are other areas or items that appropriately should be 
added to either list as material or not material to an FMU's risks. In 
responding to these questions, commenters are requested to explain why 
they believe an item or area on either list should be deleted or added.

III. Administrative Law Matters

A. Regulatory Flexibility Act Analysis

    Congress enacted the Regulatory Flexibility Act (the ``RFA'') (5 
U.S.C. 601 et seq.) to address concerns related to the effects of 
agency rules on small entities, and the Board is sensitive to the 
impact its rules may impose on small entities. The RFA requires 
agencies either to provide an initial regulatory flexibility analysis 
with a proposed rule or to certify that the proposed rule will not have 
a significant economic impact on a substantial number of small 
entities. In accordance with section 3(a) of the RFA, the Board has 
reviewed the proposed regulation. In this case, the proposed rule would 
apply to FMUs that are identified and designated by the Council as 
systemically important to the U.S. financial system. Based on current 
information, the Board believes that the payment system FMUs that would 
likely be designated by the Council would not be ``small entities'' for 
purposes of the RFA, and so, the proposed rule likely would not have a 
significant economic impact on a substantial number of small entities 
(5 U.S.C. 605(b)). The authority to designate systemically important 
FMUs, however, resides with the Council, rather than the Board, and the 
Board cannot therefore be assured of the identity of the FMUs that the 
Council may designate in the future. Accordingly, an Initial Regulatory 
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603, 
based on current information. The Board will, if necessary, conduct a 
final regulatory flexibility analysis after consideration of comments 
received during the public comment period.
    1. Statement of the need for, objectives of, and legal basis for, 
the proposed rule. The Board is proposing a regulation to implement 
certain provisions of Title VIII of the Dodd-Frank Act. Section 
805(a)(1)(A) of the Dodd-Frank Act requires the Board to promulgate 
risk-management standards governing the operations related to the 
payment, clearing, and settlement activities of designated FMUs. The 
proposed rule clarifies that the Board would apply the standards set 
out in the proposed rule to designated FMUs for which the Board is the 
Supervisory Agency. In addition, under section 806(e) of the Dodd-Frank 
Act, the Board is required to prescribe regulations setting forth the 
standards for determining when advance notice is required to be 
provided by a designated FMU for which the Board is the Supervisory 
Agency that proposes to change its rules, procedures, or operations 
that could materially affect

[[Page 18451]]

the nature or level of risks presented by the designated FMU. The Board 
believes that the proposed regulation implements Congress's requirement 
that the Board prescribe regulations that carry out the purposes of 
Title VIII of the Dodd-Frank Act.
    2. Small entities affected by the proposed rule. The proposed rule 
would affect FMUs that the Council designates as systemically important 
to the U.S. financial system. The Board estimates that fewer than five 
large-value payment systems would meet these conditions and be affected 
by this proposed rule. Pursuant to regulations issued by the Small 
Business Administration (the ``SBA'') (13 CFR 121.201), a ``small 
entity'' includes an establishment engaged in providing financial 
transaction processing, reserve and liquidity services, or 
clearinghouse services with an average revenue of $7 million or less 
(NAICS code 522320). Based on current information, the Board does not 
believe that any of the payment systems that would likely be designated 
by the Council would be ``small entities'' pursuant to the SBA 
regulation. The Board does not at this time believe that, pursuant to 
section 803(8) of the Dodd-Frank Act, it would be the Supervisory 
Agency for any FMU that operates as a central securities depository or 
a central counterparty and that would likely be designated by the 
Council. The Board seeks information and comment on the number of small 
entities to which the proposed rule would apply.
    3. Projected reporting, recordkeeping, and other compliance 
requirements. The proposed rule imposes certain reporting and 
recordkeeping requirements for a designated FMU. (See, for example, 
Sec.  234.3(a)(3) of the proposed rule (requiring clearly defined 
procedures for the management of credit risks and liquidity risks), 
Sec. Sec.  234.5(a)(1) and (2) of the proposed rule (requiring advance 
notice of changes that could materially affect the nature or level of 
risks presented by the designated FMU), and Sec. Sec.  234.5(a)(2) and 
(3) of the proposed rule (requiring notice of an emergency change 
implemented by a designated FMU).) The proposed rule also contains a 
number of compliance requirements, including the standards that the 
designated FMU must meet, such as having a well-founded legal basis 
under all relevant jurisdictions and having rules and procedures that 
enable participants to understand clearly the FMU's impact on each of 
the financial risks they incur by participation in it. Payment systems 
under the Board's jurisdiction (including certain payment systems the 
Board believes could be designated as systemically important) generally 
already have implemented these standards, so the proposed rule would 
not likely impose additional costs on those payment systems. The Board 
seeks information and comment on any costs, compliance requirements, or 
changes in operating procedures that would arise from the application 
of the proposed rule.
    4. Identification of duplicative, overlapping, or conflicting 
Federal rules. The Board does not believe that any Federal rules 
conflict with the proposed rule. There is an overlap between the risk-
management standards for FMUs in the proposed rule and the Board's PSR 
policy; however, the proposed standards are consistent with the PSR 
policy. The Board seeks comment regarding any statutes or regulations 
that would duplicate, overlap, or conflict with the proposed rule.
    5. Significant alternatives to the proposed rule. The Board is 
unaware of any significant alternatives to the proposed rule that 
accomplish the stated objectives of the Dodd-Frank Act and that 
minimize any significant economic impact of the proposed rule on small 
entities. FMUs that are designated as systemically important by the 
Council and present similar risk profiles should be held to consistent 
standards. Promoting uniform standards for designated FMUs is one of 
the stated purposes of Title VIII of the Dodd-Frank Act.\16\ The 
standards in the proposed rule are being proposed for adoption in part 
because the payment systems that would likely be designated by the 
Council are already familiar with the international standards and could 
implement them with relatively less burden than if the Board adopted a 
wholly new and unfamiliar set of standards at this time. Similarly, the 
standards in the proposed rule for central securities depositories and 
central counterparties are a consolidated and streamlined compilation. 
They are based on the CPSS-IOSCO Recommendations, and most central 
securities depositories and central counterparties are already familiar 
with them. The Board requests comment on whether there are additional 
ways to reduce regulatory burden on small entities associated with this 
proposed rule.
---------------------------------------------------------------------------

    \16\ See 12 U.S.C. 5461(b)(1)(A).
---------------------------------------------------------------------------

B. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320, Appendix A.1), the Board reviewed the proposed rule 
under the authority delegated to the Board by the Office of Management 
and Budget. For purposes of calculating burden under the Paperwork 
Reduction Act, a ``collection of information'' involves 10 or more 
respondents. Any collection of information addressed to all or a 
substantial majority of an industry is presumed to involve 10 or more 
respondents (5 CFR 1320.3(c), 1320.3(c)(4)(ii)). The Board estimates 
there are fewer than 10 respondents, and these respondents do not 
represent all or a substantial majority of the participants in payment, 
clearing, and settlement systems. Therefore, no collections of 
information pursuant to the Paperwork Reduction Act are contained in 
the proposed rule.

IV. Statutory Authority

    Pursuant to the authority in Title VIII of the Dodd-Frank Act, 
particularly sections 805(a) and 806(e) (12 U.S.C. 5464(a) and 
5465(e)), the Board proposes to adopt part 234 to govern designated 
financial market utilities (Regulation HH).

V. Text of Proposed Rules

List of Subjects in 12 CFR Part 234

    Banks, Banking, Credit, Electronic funds transfers, Financial 
market utilities, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR, Chapter II by adding part 234 as set forth below.

PART 234--DESIGNATED FINANCIAL MARKET UTILITIES (REGULATION HH)

Sec.
234.1 Authority, purpose, and scope
234.2 Definitions
234.3 Standards for payment systems
234.4 Standards for central securities depositories and central 
counterparties
234.5 Changes to rules, procedures, or operations

    Authority:  12 U.S.C. 5461 et seq.


Sec.  234.1  Authority, purpose, and scope.

    (a) Authority. This part is issued under the authority of sections 
805, 806, and 810 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376; 12 
U.S.C. 5464, 5465, and 5469).
    (b) Purpose and scope. This part establishes risk-management 
standards governing the operations related to the payment, clearing, 
and settlement activities of designated financial market utilities. The 
risk-management standards do not apply, however, to a designated 
financial market utility that

[[Page 18452]]

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), which are 
governed by the risk-management standards promulgated by the Commodity 
Futures Trading Commission or the Securities and Exchange Commission, 
respectively, for which each is the Supervisory Agency (as defined in 
Sec.  234.2). In addition, this part sets out requirements and 
procedures for a designated financial market utility that proposes to 
make a change to its rules, procedures, or operations that could 
materially affect the nature or level of risks presented by the 
designated financial market utility and for which the Board is the 
Supervisory Agency.


Sec.  234.2  Definitions.

    (a) Central counterparty means a designated financial market 
utility that interposes itself between the counterparties to trades, 
acting as the buyer to every seller and the seller to every buyer.
    (b) Central securities depository means a designated financial 
market utility that holds securities in custody to enable securities 
transactions to be processed by means of book entries or a designated 
financial market utility that enables securities to be transferred and 
settled by book entry either free of or against payment.
    (c) Designated financial market utility means a financial market 
utility (as defined in paragraph (d) of this section) that the 
Financial Stability Oversight Council has designated as systemically 
important under section 804 of the Dodd-Frank Act (12 U.S.C. 5463).
    (d) Financial market utility has the same meaning as the term is 
defined in section 803(6) of the Dodd-Frank Act (12 U.S.C. 5462(6)).
    (e) Payment system means a designated financial market utility that 
consists of a set of payment instructions, procedures, and rules for 
the transfer of funds among system participants.
    (f) Supervisory Agency has the same meaning as the term is defined 
in section 803(8) of the Dodd-Frank Act (12 U.S.C. 5462(8)).


Sec.  234.3  Standards for payment systems.

    (a) A designated financial market utility that operates as a 
payment system should meet or exceed the following risk-management 
standards with respect to its payment, clearing, and settlement 
activities:
    (1) The payment system should have a well-founded legal basis under 
all relevant jurisdictions.
    (2) The payment system's rules and procedures should enable 
participants to have a clear understanding of the payment system's 
impact on each of the financial risks they incur through participation 
in it.
    (3) The payment system should have clearly defined procedures for 
the management of credit risks and liquidity risks, which specify the 
respective responsibilities of the payment system operator and the 
participants and which provide appropriate incentives to manage and 
contain those risks.
    (4) The payment system should provide prompt final settlement on 
the day of value, preferably during the day and at a minimum at the end 
of the day.
    (5) A payment system in which multilateral netting takes place 
should, at a minimum, be capable of ensuring the timely completion of 
daily settlements in the event of an inability to settle by the 
participant with the largest single settlement obligation.
    (6) Assets used for settlement should preferably be a claim on the 
central bank; where other assets are used, they should carry little or 
no credit risk and little or no liquidity risk.
    (7) The payment system should ensure a high degree of security and 
operational reliability and should have contingency arrangements for 
timely completion of daily processing.
    (8) The payment system should provide a means of making payments 
that is practical for its users and efficient for the economy.
    (9) The payment system should have objective and publicly disclosed 
criteria for participation, which permit fair and open access.
    (10) The payment system's governance arrangements should be 
effective, accountable, and transparent.
    (b) Designated financial market utilities that operate as payment 
systems and for which the Board is the Supervisory Agency must meet or 
exceed the risk-management standards in Sec.  234.3(a). The Board, by 
order, may apply heightened risk-management standards to an individual 
designated financial market utility in accordance with the risks 
presented by the designated financial market utility.


Sec.  234.4  Standards for central securities depositories and central 
counterparties.

    (a) A designated financial market utility that operates as a 
central securities depository or a central counterparty should meet or 
exceed the following risk-management standards with respect to its 
payment, clearing, and settlement activities:
    (1) The central securities depository or central counterparty 
should have a well-founded, transparent, and enforceable legal 
framework for each aspect of its activities in all relevant 
jurisdictions.
    (2) The central securities depository or central counterparty 
should require participants to have sufficient financial resources and 
robust operational capacity to meet obligations arising from 
participation in the central securities depository or central 
counterparty. The central securities depository or central counterparty 
should have procedures in place to monitor that participation 
requirements are met on an ongoing basis. The central securities 
depository's or central counterparty's participation requirements 
should be objective and publicly disclosed, and permit fair and open 
access.
    (3) The central securities depository or central counterparty 
should hold assets in a manner whereby risk of loss or of delay in its 
access to them is minimized. Assets invested by a central securities 
depository or central counterparty should be held in instruments with 
minimal credit, market, and liquidity risks.
    (4) The central securities depository or central counterparty 
should identify sources of operational risk and minimize them through 
the development of appropriate systems, controls, and procedures; have 
systems that are reliable and secure, and have adequate, scalable 
capacity; and have business continuity plans that allow for timely 
recovery of operations and fulfillment of the central securities 
depository's or central counterparty's obligations.
    (5) The central securities depository or central counterparty 
should employ money settlement arrangements that eliminate or strictly 
limit its settlement bank risks, that is, its credit and liquidity 
risks from the use of banks to effect money settlements with its 
participants and should require funds transfers to the central 
securities depository or central counterparty be final when effected.
    (6) The central securities depository or central counterparty 
should be cost-effective in meeting the requirements of participants 
while maintaining safe and secure operations.
    (7) The central securities depository or central counterparty 
should evaluate the potential sources of risks that can arise when the 
central securities depository or central counterparty establishes links 
either cross-border or domestically to settle transactions or

[[Page 18453]]

clear trades, and ensure that the risks are managed prudently on an 
ongoing basis.
    (8) The central securities depository or central counterparty 
should have governance arrangements that are clear and transparent to 
fulfill public interest requirements and to support the objectives of 
owners and participants and should promote the effectiveness of a 
central securities depository's or central counterparty's risk-
management procedures.
    (9) The central securities depository or central counterparty 
should provide market participants with sufficient information for them 
to identify and evaluate accurately the risks and costs associated with 
using its services.
    (10) The central securities depository or central counterparty 
should establish default procedures that ensure that the central 
securities depository or central counterparty can take timely action to 
contain losses and liquidity pressures and to continue meeting its 
obligations and should provide for key aspects of the default 
procedures to be publicly available.
    (11) The central securities depository or central counterparty 
should ensure that final settlement occurs no later than the end of the 
settlement day and should require that intraday or real-time finality 
be provided where necessary to reduce risks.
    (12) The central securities depository or central counterparty 
should eliminate principal risk by linking securities transfers to 
funds transfers in a way that achieves delivery versus payment.
    (13) The central securities depository or central counterparty 
should state its obligations with respect to physical deliveries, and 
the risks from these obligations should be identified and managed.
    (14) The central securities depository should immobilize or 
dematerialize securities certificates and transfer them by book entry 
to the greatest extent possible.
    (15) The central securities depository should institute risk 
controls that include collateral requirements and limits, and ensure 
timely settlement in the event that the participant with the largest 
payment obligation is unable to settle when the central securities 
depository extends intraday credit.
    (16) The central counterparty should measure its credit exposures 
to its participants at least once a day and limit its exposures to 
potential losses from defaults by its participants in normal market 
conditions so that the operations of the central counterparty would not 
be disrupted and non-defaulting participants would not be exposed to 
losses that they cannot anticipate or control.
    (17) The central counterparty should use margin requirements to 
limit its credit exposures to participants in normal market conditions 
and use risk-based models and parameters to set margin requirements and 
review them regularly. Specifically, the central counterparty should--
    (i) Provide for annual model validation consisting of evaluating 
the performance of the clearing agency's margin models and the related 
parameters and assumptions associated with such models by a qualified 
person who does not perform functions associated with the clearing 
agency's margin models (except as part of the annual model validation) 
and does not report to such a person.
    (ii) Review and backtest margin models and parameters at least 
quarterly.
    (18) The central counterparty should maintain sufficient financial 
resources to withstand, at a minimum, a default by the participant to 
which it has the largest exposure in extreme but plausible market 
conditions.
    (b) Designated financial market utilities that operate as central 
securities depositories or central counterparties and for which the 
Board is the Supervisory Agency must meet or exceed the risk-management 
standards in Sec.  234.4(a). The Board, by order, may apply heightened 
risk-management standards to individual designated financial market 
utilities in accordance with the risks presented by the designated 
financial market utility.


Sec.  234.5  Changes to rules, procedures, or operations.

    (a) Advance notice.
    (1) A designated financial market utility shall provide at least 
60-days advance notice to the Board of any proposed change to its 
rules, procedures, or operations that could materially affect the 
nature or level of risks presented by the designated financial market 
utility.
    (2) The notice of the proposed change shall describe--
    (i) The nature of the change and expected effects on risks to the 
designated financial market utility, its participants, or the market; 
and
    (ii) How the designated financial market utility plans to manage 
any identified risks.
    (3) The Board may require the designated financial market utility 
to provide additional information necessary to assess the effect the 
proposed change would have on the nature or level of risks associated 
with the utility's payment, clearing, or settlement activities and the 
sufficiency of any proposed risk-management techniques.
    (4) A designated financial market utility shall not implement a 
change to which the Board has an objection.
    (5) The Board will notify the designated financial market utility 
of any objection within 60 days from the later of--
    (i) The date the Board receives the notice of proposed change; or
    (ii) The date the Board receives any further information it 
requests for consideration of the notice.
    (6) A designated financial market utility may implement a change if 
it has not received an objection to the proposed change within 60 days 
of the later of--
    (i) The date the Board receives the notice of proposed change; or
    (ii) The date the Board receives any further information it 
requests for consideration of the notice.
    (7) With respect to proposed changes that raise novel or complex 
issues, the Board may, by written notice during the 60-day review 
period, extend the review period for an additional 60 days. Any 
extension under this paragraph will extend the time periods under 
paragraphs (a)(5) and (a)(6) to 120 days.
    (8) A designated financial market utility may implement a proposed 
change before the expiration of the applicable review period if the 
Board notifies the designated financial market utility in writing that 
the Board does not object to the proposed change and authorizes the 
designated financial market utility to implement the change on an 
earlier date, subject to any conditions imposed by the Board.
    (b) Emergency changes.
    (1) A designated financial market utility may implement a change 
that would otherwise require advance notice under this section if it 
determines that--
    (i) An emergency exists; and
    (ii) Immediate implementation of the change is necessary for the 
designated financial market utility to continue to provide its services 
in a safe and sound manner.
    (2) The designated financial market utility shall provide notice of 
any such emergency change to the Board as soon as practicable and no 
later than 24 hours after implementation of the change.
    (3) In addition to the information required for changes requiring 
advance notice in paragraph (a)(2) of this section, the notice of an 
emergency change shall describe:
    (i) The nature of the emergency; and
    (ii) The reason the change was necessary for the designated 
financial

[[Page 18454]]

market utility to continue to provide its services in a safe and sound 
manner.
    (4) The Board may require modification or rescission of the change 
if it finds that the change is not consistent with the purposes of the 
Dodd-Frank Act or any applicable rules, order or standards prescribed 
under section 805(a) of the Dodd-Frank Act.
    (c) Materiality.
    (1) The term ``materially affect the nature or level of risks 
presented'' in paragraph (a)(1) of this section means matters as to 
which there is a reasonable possibility that the change could 
materially affect the performance of clearing, settlement, or payment 
functions or the overall nature or level of risk presented by the 
designated financial market utility.
    (2) A change to rules, procedures, or operations that would 
materially affect the nature or level of risks presented includes, but 
is not limited to, changes that affect the following:
    (i) Participant eligibility or access criteria;
    (ii) Product eligibility;
    (iii) Risk management;
    (iv) Settlement failure or default procedures;
    (v) Financial resources;
    (vi) Business continuity and disaster recovery plans;
    (vii) Daily or intraday settlement procedures;
    (viii) The scope of services, including the addition of a new 
service or discontinuation of an existing service;
    (ix) Technical design or operating platform, which results in non-
routine changes to the underlying technological framework for payment, 
clearing, or settlement functions; or
    (x) Governance.
    (3) A change to rules, procedures, or operations that does not meet 
the conditions of paragraph (c)(2) of this section and would not 
materially affect the nature or level of risks presented includes, but 
is not limited to the following:
    (i) A change that does not modify the contractual rights or 
obligations of the designated financial market utility or persons using 
its payment, clearing, or settlement services;
    (ii) A change to an existing procedure, control, or service that 
does not adversely affect the safeguarding of securities, collateral, 
or funds in the custody or control of the designated financial market 
utility or for which it is responsible;
    (iii) A routine technology systems upgrade;
    (iv) A change related solely to the administration of the 
designated financial market utility or related to the routine, daily 
administration, direction, and control of employees; or
    (v) A clerical change and other non-substantive revisions to rules, 
procedures, or other documentation.

    By order of the Board of Governors of the Federal Reserve 
System, March 29, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-7812 Filed 4-1-11; 8:45 am]
BILLING CODE 6210-01-P