Alert November 30, 2010

FSOC Seeks Comment on Financial Market Utilities Risk

On November 23, 2010, the Financial Stability Oversight Council (“FSOC”) issued an advance notice of proposed rulemaking (the “ANPR”) on the designation of certain financial market utilities as systemically important.  The Dodd-Frank Act (“DFA”) defines a “financial market utility” as “any 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,” with certain exclusions for designated contract markets, national securities exchanges and some others.  The ANPR notes that financial market utilities perform critical functions in the financial system and that some utilities may require designation as systemically important.  Payment, clearing or settlement activities performed by financial institutions are not covered by the ANPR and will be addressed separately.

In considering whether a financial market utility should be designated as systemically important, the DFA requires the FSOC to consider:

  1. The aggregate monetary value of transactions processed by the financial market utility;
  2. The aggregate exposure of the financial market utility to its counterparties;
  3. The relationship, interdependencies, or other interactions of the financial market utility with other financial market utilities or payment, clearing or settlement activities;
  4. The effect that the failure of or a disruption to the financial market utility would have on critical markets, financial institutions, or the broader financial system; and
  5. Any other factors that the FSOC deems appropriate.

The ANPR seeks comment on the criteria the FSOC should use in meeting the DFA requirements.  Several questions included in the ANPR invite public comment on the types of information that should be used in the designation process, objective measures that may be considered in determining systemic importance, and means to assess relationships and interdependencies of financial market utilities.  Comments on the ANPR are due 30 days after publication in the Federal Register.