10:29 am - Wednesday June 28, 2017

DFA and Framework for payment, clearing and settlement regulation,

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 enhanced supervision of designated FMUs. Section 803 of the Dodd-Frank Act defines an FMU 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. The basic risks that FMUs must manage include credit risk, liquidity risk, settlement risk, operational risk, and legal risk. These risks arise between financial institutions and FMUs as they settle payments and other financial transactions. In order to maintain financial stability, FMUs must be well-designed and operated in a safe and sound manner. If a systemically important FMU fails to measure, monitor, and manage its risks effectively, it could pose significant risk to its participants and the financial system more broadly

Under Dodd-Frank Act, the Federal Reserve Board is required to promulgate risk-management standards governing the operations related to the payment, clearing, and settlement (“PCS”) activities of certain FMUs that are designated as systemically important by the Council. It also requires the Board to take into consideration relevant international standards and existing prudential requirements in prescribing the regulations. For a designated FMU that is a derivatives clearing organization (“DCO”), the Commodity Futures Trading Commission (“CFTC”) or the Securities and Exchange Commission (“SEC”), respectively, are granted authority to prescribe regulations, in consultation with the Council and the Board, containing applicable risk-management standards

Dodd Frank Act sets out the following objectives and principles for the risk-management standards:

(a) promote robust risk management,

(b) promote safety and soundness,

(c) reduce systemic risks, and

(d) support the stability of the broader financial system.

The Act states that risk-management standards may address areas such as

(1) risk-management policies and procedures,

(2) margin and collateral requirements,

(3) participant or counterparty default policies and procedures,

(4) the ability to complete timely clearing and settlement of financial transactions,

(5) capital and financial resource requirements for designated FMUs, and

(6) other areas that are necessary to achieve the objectives and principles for risk-management standards

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