Tuesday, November 23, 2010

FSOC Issues ANPR in Effort to Determine Which Securities Clearance and Settlement Utilities Are Systemically Important

As envisioned by the Dodd-Frank Act, the Financial Stability Oversight Council has issued an advanced notice of proposed rulemaking (ANPR) as a precursor of adopting regulations governing a determination when a financial market utility is systemically important. As defined in Section 803(6) of Dodd-Frank, a “financial market utility” is any person that 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 that person. In Dodd-Frank, Congress recognized that the utility-like arrangements used to settle financial transactions, whether involving payments, securities, or derivatives are critical parts of the financial infrastructure and are integral to the soundness of the financial system. The importance of these arrangements has been highlighted by the recent period of market stress. Dodd-Frank authorizes the Council to designate as systemically important a financial market utility if the Council determines that the failure, 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.

Financial market utilities exist in a number of markets and provide many benefits, but also concentrate risk. The payment and settlement processes of such systems are also highly interdependent, either directly through operational, contractual or affiliation linkages, or indirectly through liquidity flows or common participants. Problems in the completion of settlement at one system could spill over to other systems or financial institutions in the form of liquidity and credit disruptions.

Through the ANPR the Council is seeking to gather information as it begins to develop the specific criteria and analytical framework by which it will designate financial market utilities as systemically important under Title VIII of the Act.