Financial Market Utilities

SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act" or "Act") permits the Board of Governors of the Federal Reserve System (the "Board") to authorize a Federal Reserve Bank to establish and maintain an account for, and through the account provide certain financial services to, financial market utilities ("FMUs") that are designated as systemically important by the Financial Stability Oversight Council (the "Council"). In addition, the Dodd-Frank Act permits a Reserve Bank to pay interest on the balances maintained by or on behalf of a designated FMU. The Board is promulgating regulations to implement these provisions of the Dodd-Frank Act.

DATES: This final rule is effective February 18, 2014.

FOR FURTHER INFORMATION CONTACT: Jeff Stehm, Senior Associate Director (202) 452-2217 or Stuart Sperry, Assistant Director (202) 452-3832, Division of Reserve Bank Operations and Payment Systems; Christopher W. Clubb, Special Counsel (202) 452-3904 or Kara L. Handzlik, Counsel (202) 452-3852, Legal Division; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

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

FMUs, such as payment systems, central securities depositories, and central counterparties, are critical components of the nation's financial system 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. FMUs operate multilateral systems in which financial institutions, such as banks, participate pursuant to a common set of rules and procedures, a technical infrastructure, and a risk-management framework. /1/

FOOTNOTE 1 Under section 803 of the Act, 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. 12 U.S.C. 5462(6). END FOOTNOTE

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 an enhanced supervisory framework for FMUs designated as systemically important by the Council. /2/ Designation by the Council makes an FMU subject to the supervisory and risk reduction framework set out in Title VIII of the Dodd-Frank Act. This framework includes risk management standards, promulgated by the designated FMU's Supervisory Agency, that take into consideration relevant international standards and existing prudential requirements, with the objectives of promoting robust risk management and safety and soundness of the designated FMU, reducing systemic risks, and supporting the stability of the broader financial system. /3/ The framework also includes ex ante review of changes to the rules, procedures, or operations of a designated FMU that could materially affect the nature or level of risk presented by the designated FMU, enhanced annual examinations of designated FMUs, and enhanced enforcement and information collection provisions.

FOOTNOTE 2 The Dodd-Frank Act, Public Law. 111-203, 124 Stat. 1376, was signed into law on July 21, 2010. Section 803(9) of the Act authorizes the Council to designate an FMU for enhanced supervision when the Council finds, among other things, that the failure of, or a disruption to the functioning of, an FMU would 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(3) and (9). END FOOTNOTE

FOOTNOTE 3 Pursuant to section 803(8) of the Act, the "Supervisory Agency" generally means the Federal agency that has primary jurisdiction over a designated FMU under Federal banking, securities, or commodity futures law, including the Securities and Exchange Commission (SEC) with respect to a designated FMU that is a clearing agency registered with the SEC, the Commodity Futures Trading Commission (CFTC) with respect to a designated FMU that is a derivatives clearing organization registered with the CFTC, and the Board with respect to a designated FMU that is an institution subject to the Board's jurisdiction as described in section 3(q) of the Federal Deposit Insurance Act. The Board is also the Supervisory Agency for any designated FMU that is otherwise not subject to the jurisdiction of any agency as listed in section 803(8) of the Act. END FOOTNOTE

In addition to these provisions, section 806(a) of the Act permits the Board to authorize a Federal Reserve Bank ("Reserve Bank") to establish and maintain an account for a designated FMU and provide to the designated FMU the services listed in section 11A(b) of the Federal Reserve Act (12 U.S.C. 248a(b)) that the Reserve Bank is authorized to provide to a depository institution, subject to any applicable rules, orders, standards, or guidelines prescribed by the Board. /4/ The services listed in Section 11A(b) include wire transfers, settlement, and securities safekeeping, as well as services regarding currency and coin, check clearing and collection, and automated clearing house transactions. Section 806(c) of the Dodd-Frank Act permits a Reserve Bank to pay earnings on balances maintained by or on behalf of a designated FMU in the same manner and to the same extent as the Reserve Bank may pay earnings to a depository institution under the Federal Reserve Act, subject to any applicable rules, orders, standards, or guidelines prescribed by the Board.

FOOTNOTE 4 Section 806(a) of the Act also permits the Board to authorize a Reserve Bank to establish deposit accounts under the first undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342). END FOOTNOTE

On March 4, 2013, the Board published a notice of proposed rulemaking ("NPRM") to amend Regulation HH by adding two new sections set to out the conditions and requirements for a Reserve Bank to open and maintain accounts for and provide financial services to designated FMUs, as well as to set out provisions regarding a Reserve Bank's payment of interest on the balances maintained by a designated FMU at the Reserve Banks. The public comment period for the NPRM closed on May 3, 2013.

II. Summary of Public Comments and Analysis

The Board received five comment letters on the NPRM. /5/ Comments were submitted by three entities that were designated FMUs or affiliates of designated FMUs, one banking trade association, and an individual at a university-based research center. The Board considered these comments in developing its final rule as discussed in more detail below.

FOOTNOTE 5 The comment letters are available at http://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R-1455&doc_ver=1. END FOOTNOTE

A. Section 234.1(b)--Purpose and Scope

Proposed SEC 234.1(b) clarified that Part 234 also includes standards, restrictions, and guidelines for the establishment and maintenance of an account at, and provision of financial services from, a Reserve Bank for a designated FMU. Proposed SEC 234.1(b) also clarified that Part 234 confirms the terms under which a Reserve Bank may pay a designated FMU interest on the designated FMU's balances held at the Reserve Bank. The Board did not receive any comments regarding its proposed amendments to SEC 234.1(b) and is adopting revised SEC 234.1(b) as proposed.

B. Section 234.6--Access to Reserve Bank Accounts and Services

Generally sound financial condition. Proposed SEC 234.6 set out the conditions and requirements for a Federal Reserve Bank to establish and maintain an account for, and provide services to, a designated FMU pursuant to section 806(a) of the Act. As noted in the NPRM, the proposed terms and conditions are designed to provide the Federal Reserve Bank and the Board with sufficient information to assess a designated FMU's ongoing condition as it pertains to the FMU's ability to settle promptly and to manage its settlement process and Reserve Bank account(s) safely. /6/ Proposed SEC 234.6(b) required that a Reserve Bank ensure that its establishment and maintenance of an account for, or provision of services to, a designated FMU does not create undue credit, settlement, or other risks to the Reserve Bank and, in this regard, sets out minimum conditions that a designated FMU must meet, in the Reserve Bank's judgment, in order for the Reserve Bank to establish and maintain an account for, or provide services to, a designated FMU. The minimum requirements are set out in proposed SEC 234.6(b)(1) through (4).

FOOTNOTE 6 As noted in the NPRM, unlike depository institutions, designated FMUs do not have regular access to discount window lending, so the Board expects that Reserve Banks will provide accounts and services, and designated FMUs will structure their settlement processes and use of Reserve Bank accounts and services, in a manner that would seek to avoid inadvertent intraday account overdrafts where possible. Nevertheless, there may be instances where a designated FMU could incur an inadvertent overdraft. In such cases, the Board would expect a designated FMU to have the resources to promptly rectify any such overdrafts. END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rulemaking.

CFR Part: "12 CFR Part 234"

RIN Number: "RIN 7100 AD-94"

Citation: "78 FR 76973"

Document Number: "Regulation HH; Docket No. R-1455"

Federal Register Page Number: "76973"

"Rules and Regulations"