Fed calls for new rules on financial market utility risk management

The Federal Reserve is considering changes to how it oversees risk management by systemically important financial market utilities.

The Fed is seeking to modernize its requirements for the nonbank entities it supervises that are deemed financial market utilities, or FMUs, to address contemporary risks related to cybersecurity, severe weather and other exogenous threats. 

"In light of the rapidly evolving risk landscape, the proposed changes will help ensure that key financial market utilities operate with a high level of resilience and remain a source of strength for the financial system," Vice Chair Lael Brainard said in a statement.

FMUs are firms that facilitate transactions between financial institutions, including clearing and settling payments and transfers, as well as securities-related transactions, such as swaps. The organizations help make sure such agreements are carried out even if one party fails to meet its obligations. 

The Fed's proposal, released Friday afternoon, includes four broad categories of changes. It would require FMUs to report operational incidents and disruptions to the Fed Board immediately, establish and regularly update a plan for reconnecting to its participants after a disruption, create policy for managing third-party risk and adhere to more specific testing and review standards. 

The Fed notes that because many of the provisions called for would simplify practices already in effect within most FMUs, it expects the costs of complying with these standards will be minimal. Also, the Fed will hold its Fedwire Services, which provides a similar service to that of the FMUs, to the same standards, preventing it from having an advantage over the private market. 

Title VIII of the Dodd-Frank Act gave the Financial Stability Oversight Council the authority to designate transaction-process firms as systemically important FMUs if they were large enough to pose a threat to financial stability were they to fail. Eight firms have been given that designation: the Chicago Mercantile Exchange.; ICE Clear Credit; the Options Clearing Corp.; Depository Trust Co.; Fixed Income Clearing Corp.; National Securities Clearing Corp.; The Clearing House Payments Co.; and CLS Bank International.

The Fed has supervisory authority over The Clearing House and CLS Bank. No new FMUs have been designated since 2012.

Since the passage of Dodd-Frank, there has been a debate about the ability for FMUs to be supervised by bank regulators. During the Trump administration, congressional Republicans sought to strip the Fed and other agencies of their ability to designate nonbanks as systemically important as part of a broader effort to roll back Dodd-Frank. Those efforts were ultimately unsuccessful, but speak to a skepticism about the regulatory regime for large clearing institutions.

In its proposal, the Fed notes that the rules around FMUs have not been updated since 2014, when the Fed applied a common set of standards to payments-focused organizations and those focused on securities. It cited the COVID-19 pandemic and a rise in cyber security threats, such as disruptions to supply chains and ransomware attacks, as key developments that needed to be addressed specifically in its risk management rules.

The Fed's proposal will be open to public comment for 60 days following its publication in the Federal Register.