Sunday, June 20, 2010

Senate Conferees Defend Payment, Clearance and Settlement Provisions of Financial Reform Legislation

The Chair of the Senate Banking Committee, Senator Chris Dodd, and his Ranking Member Senator Richard Shelby strongly defended Title VIII of the financial reform legislation at the June 17, 2010 meeting of the House-Senate conference reconciling the House-Semate bills. With the vast new duties on clearinghouses, particualrly in the derivatives area, a robust payment, clearing and settlement system is critical. The House had proposed to strike Title VIII from the bill.

Senator Dodd said that Title VIII preserves the role of the front line regulators like the SEC and CFTC. But it also requires robust prudential standards for entities designated by the Financial Stability Oversight Council as systemically important.

The title requires tough and heightened regulation of systemically important financial market utilities. There is presently no safety valve if they cannot perform their functions. The title would reduce systemic risk and complement existing SEC and CFTC regulation. It is a safeguard for financial market utilities that run into extraordinary liquidity problems. Plus, financial market utilities should not be carved out of systemic risk oversight. Financial market utilities provide critical services to the financial system, such as the clearing and settlement of US government securities, municipal securities, and derivatives.

Title VIII authorizes the Financial Stability Oversight Council to designate financial market utilities as systemically important and subject them to tougher regulation and reduce systemic risk and allow the Fed to prescribe heightened regulation as a complement to existing SEC and CFTC regulation. Title VIII creates safeguards for financial market utilities that run into extraordinary liquidity problems engendered by crises. It also ensures the managing of risk across market utilities. There are currently no consistent risk management standards for financial market utilities.
The Fed would be authorized to provide account and settlement services to non-bank financial market utilities. Title VIII also would bring US regulation in line with international consensus that gives central banks a role in payment, clearance and settlement.

According to Senator Shelby, the legislation provides for enormous new duties for central clearinghouses. Derivatives legislation will mandate the clearing of many OTC derivatives for the first time. In this regard, he said that it is not possible to have an effective derivatives title without an effective payment, clearance and settlement title. Risk oversight role for Fed and discount window access for clearinghouses in a liquidity crunch will be important to ensure the stability of the financial system,


Senator Jack Reed said that clearing platforms underlie the trading platforms. Title VIII recognizes that in case of market disruptions the Fed will provide liquidity and minimize disruptions of the payment, clearance and settlement systems caused by natural disasters and cyber attacks.