On Monday, July 30, the Federal Reserve Board announced that it had established finalized standards for risk management at financial market utilities (FMUs) that are designated as "systemically important" by the Financial Stability Oversight Council.
FMUs are institutions that provide infrastructure to clear and settle payments and other financial transactions. Some examples include central securities depositories, payment systems and central counterparties.
The final rule – termed Regulation HH – implements two provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010. The new regulations establish standards for managing the risks involved in payment, clearing and settlement operations at critical FMUs. Institutions that are registered as clearing agencies with the Securities and Exchange Commission or Commodity Futures Trading Commission are exempt from the new rules.
Regulation HH also establishes requirements for designated FMUs to provide advance notice before implementing material changes to their rules, procedures or operations.
The standards are based on those developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions.
The Board described the new rule as "substantively similar" to the version that had been proposed previously. It includes one new provision empowering the Federal Reserve Board to waive certain elements of Regulation HH for particular FMUs where the nature of its operational risk would make adherence to specific standards inappropriate.
For any firms that may be affected by these new regulations, which will officially go into effect on September 14, 2012, working with a financial project consulting service can be extremely helpful in navigating the transitional process and ensuring that compliance does not come at the price of operational flexibility and efficiency.