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WASHINGTON — Under a federal rule approved Monday, regulators will use a "two-stage process" to decide whether certain companies that facilitate clearing transactions are systemically important.
July 18
WASHINGTON — U.S. regulators on Wednesday formally designated the first batch of 'systemically important' firms that will fall under new regulatory oversight mandated by the Dodd-Frank Act.
The Financial Stability Oversight Council, headed by Treasury Secretary Tim Geithner, voted to include eight financial-market utilities in the new regime.
The eight firms are: The Clearing House Payments Company LLC, CLS Bank International, Chicago Mercantile Exchange Inc., The Depository Trust Company, Fixed Income Clearing Corp., ICE Clear Credit LLC, National Securities Clearing Corp, and The Options Clearing Corp.
"These critical market infrastructure entities will be subject to heightened risk management standards," Geithner said in remarks prepared for the public portion of FSOC's meeting.
An FSOC rule outlines the criteria for selecting which financial-market utilities are systemically important. Organizations covered by the rule include central securities depositories and interbank payment systems. Regulators used a two-stage process to decide whether certain companies that facilitate clearing transactions are systemically important, which led to the designations.
Firms essentially had to meet four criteria, including a set monetary value of transactions processed by a firm; exposure to counterparties; relationships or interdependence with other FMUs; and the effect a firm's failure would have on the broader financial system. The council has discretion to consider other factors as well.
Once designated, FMUs that are registered derivatives clearing organizations or clearing agencies are to be regulated by the Commodity Futures Trading Commission or the Securities and Exchange Commission, respectively. All other systemically important FMUs would be supervised by the Federal Reserve Board. Regulators are still working on what new standards will apply to each of the utilities, and standards will vary by firm.
The first round of designations is only the beginning of the council's expected steps under Dodd-Frank. Under the reform law, FSOC is charged with deciding which giant companies throughout the financial system should fall under greater scrutiny to prevent a repeat of the 2008 crisis.
Separately, the council submitted its annual report to Congress highlighting market and regulatory developments across the system, and making its recommendations to further strengthen the system.
While Geithner cited several areas of progress in reforming regulation since the crisis — including tougher capital requirements, the first submission by large financial companies of their resolution plans and stronger oversight of derivatives — he said more progress is needed.
"This work is not done," said Geithner. "We still have unfinished business."
Left on the list of things to accomplish, he said, was providing enforcement agencies with the resources to do their job, additional reforms for money market funds, stronger protections for customer accounts, and fixing a broken housing system.
