Oct 5 -- The Board of Governors of the Federal Reserve System (Board) is proposing to amend the requirements relating to operational risk management in the Board's Regulation HH, which applies to certain financial market utilities that have been designated as systemically important (designated FMUs) by the Financial Stability Oversight Council (FSOC) under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or Act). The proposal would update, refine, and add specificity to the operational risk management requirements in Regulation HH to reflect changes in the operational risk, technology, and regulatory landscapes in which designated FMUs operate since the Board last amended this regulation in 2014. The proposal would also adopt specific incident-notification requirements. Comments must be received by December 5, 2022.
A financial market utility (FMU) is 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. FMUs provide essential infrastructure to clear and settle payments and other financial transactions. Financial institutions, including banking organizations, participate in FMUs pursuant to a common set of rules and procedures, technical infrastructure, and risk-management framework.
If a systemically important FMU fails to perform as expected or fails to effectively measure, monitor, and manage its risks, it could pose significant risk to its participants and the financial system more broadly. For example, the inability of an FMU to complete settlement on time could create credit or liquidity problems for its participants or other FMUs. An FMU, therefore, should have an appropriate and robust risk-management framework, including appropriate policies and procedures to measure, monitor, and manage the range of risks that arise in or are borne by the FMU.
In recognition of the criticality of FMUs to the stability of the financial system, Title VIII of the Dodd-Frank Act (the Dodd-Frank Act or Act) established a framework for enhanced supervision of certain FMUs. Section 804 of the Dodd-Frank Act states that the FSOC shall designate those FMUs that it determines are, or are likely to become, systemically important. Such a designation by the FSOC makes an FMU subject to the supervisory framework set out in Title VIII of the Act.
Section 805(a)(1)(A) of the Act requires the Board to prescribe risk-management standards governing the operations related to payment, clearing, and settlement activities of designated FMUs. As set out in section 805(b) of the Act, the applicable risk-management standards must (1) promote robust risk management, (2) promote safety and soundness, (3) reduce systemic risks, and (4) support the stability of the broader financial system.
A designated FMU is subject to examination by the federal agency that has primary jurisdiction over the FMU under federal banking, securities, or commodity futures laws (the “Supervisory Agency”). At present, the FSOC has designated eight FMUs as systemically important, and the Board is the Supervisory Agency for two of these designated FMUs—The Clearing House Payments Company, L.L.C. (on the basis of its role as operator of the Clearing House Interbank Payments System (CHIPS)) and CLS Bank International. The risk-management standards in the Board's Regulation HH apply to Board-supervised designated FMUs.
The Board is proposing to amend its operational risk management standard to reflect changes in the operational risk and threat landscape, as well as to incorporate developments in designated FMUs' operations and technology usage since the Board last amended Regulation HH in 2014. The proposal focuses on four areas: (1) review and testing, (2) incident management and notification, (3) business continuity management and planning, and (4) third-party risk management. The Board is also proposing several technical or clarifying amendments throughout §§ 234.2 and 234.3(a).
The Board believes that the proposal continues to employ a flexible, principles-based approach in Regulation HH. Further, the Board believes the proposed amendments are largely consistent with existing measures that designated FMUs take to comply with Regulation HH and would create minimal added burden for the designated FMUs that are subject to Regulation HH. Accordingly, the Board is proposing that the proposed changes would become effective and require compliance 60 days from the date a final rule is published in the Federal Register.
The Board requests comment on all aspects of the proposed amendments, including the proposed effective and compliance date. In addition, the Board requests comment on the specific questions below. Where possible, commenters should provide both quantitative data and detailed analysis in their comments, particularly with respect to suggested alternatives to the proposed amendments. Commenters should also explain the rationale for their suggestions.