Alert July 26, 2011

FSOC Releases Final Rule on Designating Financial Market Utilities as Systemically Important

The Financial Stability Oversight Council (“FSOC”) has issued a final rule (the “Rule”) establishing the criteria for designating financial market utilities that facilitate the transfer, clearing or settlement of financial transactions as systemically important. The Rule creates a two-stage process to determine whether the failure or disruption of a financial market utility 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 United States financial system. The first stage consists of a quantitative review of the systemic importance or connectedness of financial market utilities that the FSOC will use to determine a preliminary set of systemically important financial market utilities. In the second stage, the financial market utilities identified through the first stage will be subject to a more in-depth review, with a greater focus on qualitative factors, in addition to institutional and market specific considerations. The quantitative review will take into consideration the aggregate monetary value of transactions cleared by the financial market utility, its exposure to counterparties, its relationship or interdependence with other financial market utilities, and the effect a failure or disruption of the financial market utility would have on the broader financial system. The FSOC may also consider other factors that it deems appropriate.

If a financial market utility is subject to the second stage of review, the FSOC will notify such financial market utility and provide it with an opportunity to submit written materials to the FSOC in support of or in opposition to its designation as systemically important. Financial market utilities that are designated as systemically important will be subject to specific risk management standards as well as additional examinations and reporting requirements. Systemically important financial market utilities that are registered clearing agencies will be regulated by the SEC; systemically important financial market utilities that are registered derivatives clearing agencies will be regulated by the CFTC; systemically important financial market utilities that are insured depository institutions will be regulated by their primary federal banking regulator; and all other systemically important financial market utilities will be regulated by the FRB. Systemically important financial market utilities will have access to the FRB’s emergency lending facilities.