Fed proposal takes stab at operational risk management for systemically important FMUs

Requirements relating to operational risk management, particularly with regard to systemically important financial market utilities (FMUs), under the Federal Reserve’s Regulation HH would be amended under a proposal published Wednesday in the Federal Register.

The proposal applies to certain FMUs that have been designated as systemically important (designated FMUs) by the Financial Stability Oversight Council (FSOC) under Title VIII of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Fed stated in its notice in the Register.

According to the notice, 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 Fed last amended this regulation in 2014.

An FMU is a person who 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, according to the notice. “FMUs provide essential infrastructure to clear and settle payments and other financial transactions,” the Fed stated. “Financial institutions, including banking organizations, participate in FMUs pursuant to a common set of rules and procedures, technical infrastructure, and risk-management framework.”

However, the Fed asserted that 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,” the Fed stated. “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.”

Comments are due Dec. 5, culminating a 60-day period.

Reg lookup: Financial Market Utilities