During the financial crisis, global regulators recognized that Financial Market Utilities (“FMUs”) serve a critical role by reducing risk for their participants and counterparts (“Members”), but as a result they can potentially transmit risk throughout the financial system. FMUs conduct important market infrastructure activities (supporting multilateral payment, clearing and settlement activities), so they must be able to withstand significant market disruptions, including the default of their Members. They must also be able to effectively manage the liquidation of collateral resulting from such default.
Title VIII of the Dodd-Frank Act provides for the designation of “systemically important” FMUs (“SIFMUs”) by the Financial Stability Oversight Council. After being designated, SIFMUs are subject to heightened risk management standards which, except for designated clearing entities, are established by the Federal Reserve.
This FS Regulatory Brief offers our view of the actions SIFMUs should be undertaking (a) to meet enhanced risk management and other requirements resulting from designation, and (b) to develop Recovery and Resolution Plans based on our experience with systemically important bank plans and on our view of the Recovery and Resolution of Financial Market Infrastructures consultative paper.