The Financial Stability Oversight Council (“FSOC”) has finalized a rule explaining the “systemic importance” designation process for financial market utilities (“FMUs”). The review will be split into two stages: one quantitatively-based “qualifying round”, and a more in-depth, qualitative review of the riskiest candidates.
The quantitative factors in play during the first stage are drawn primarily from the suggestions Congress provided in the Dodd-Frank Act. FMUs will be judged based on:
- Aggregate monetary value of transactions;
- Aggregate exposure to its counterparties;
- Relationship, inter-dependencies, or other interactions with other FMUs or payment clearing or settlement activities;
- Effect that its failure or disruption would have on critical markets, financial institutions, or the broader financial system;
- Anything else FSOC deems relevant (i.e. corporate structure, business model).
FMUs that appear on paper to pose a threat to nationwide financial stability will then be subject to a second round of scrutiny by FSOC, focusing on qualitative matters that take into account the firm’s specific circumstances. Once a firm has passed through both stages of review and is still found to be “systemically important,” it is voted on by the Council. The FMU may request a hearing, to contest the designation. Exemptions to this process may be made if an FMU poses an immediate threat to the economy.
For the purpose of this rule, this designation process applies only to FMUs. An FMU is “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 the FMU and a financial institution.” This includes financial intermediaries such as clearinghouses. There is an exception made for several exchange and registration types, such as Swap Execution Facilities (“SEFs”) and Designated Contact Markets (“DCMs”).