A Financial Market Utility (FMU) is defined as a multilateral system that provides the essential infrastructure for transferring, clearing, and settling payments, securities, and other financial transactions among financial institutions or between financial institutions and the system¹. In July of 2012, the Financial Stability Oversight Council (FSOC) designated the below eight FMUs as systematically important because failure or a disruption to the functioning of the FMU could create significant liquidity or credit problems spreading among financial institutions or markets threatening the stability of the U.S. financial system¹.
Financial Market Utility²
Supervisory Agency²
Description
The Clearing House Payments Company, L.L.C., on the basis of its role as operator of the Clearing House Interbank Payments System
Board
Clearing House Interbank Payments System is the largest private-sector U.S.-dollar funds-transfer system in the world

CLS Bank International

Board
Operates the largest multicurrency cash settlement system to mitigate settlement risk for the FX transactions of its Members and their customers

Chicago Mercantile Exchange, Inc.
CFTC
Serves the risk management needs of customers around the globe; provide the widest range of benchmark futures and options products available on any exchange, covering all major asset classes

The Depository Trust Company

SEC
DTCC, through its subsidiaries, provides clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives

Fixed Income Clearing Corporation
SEC
A subsidiary of DTCC – provides fixed income transaction processing by integrating the Government Securities Clearing Corporation and the Mortgage-Backed Securities Clearing Corporation
ICE Clear Credit L.L.C.
CFTC

Dynamic CDS clearing framework and reliable end of day pricing
Capital efficiencies through leading risk management methodology and portfolio margining

Dealer and buy-side clearing
National Securities Clearing Corporation
SEC
A subsidiary of DTCC – provides clearing, settlement, risk management, central counterparty services and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts
The Options Clearing Corporation
SEC
World’s largest equity derivatives clearing organization
Note: The Fed has the authority to impose a stricter standard or waive a standard on a case-by-case basis.²
Source: Accenture 2013
Risk Management Standards
In August of 2012, The Federal Reserve Board (FRB) finalized the Risk Management Standards required for FMUs²:
  • International Standards – The Risk Management Standards are based on the international risk-management standards developed by the Committee on Payment and Settlement Systems (“CPSS”) and the Technical Committee of the International Organization of Securities Commissions (“IOSCO”) which set standards for central counterparties (CCPs) and central securities depositories (CSDs).
  • Applicability of standards to retail payment systems – This standard states that retail payment systems (automated clearing houses and check clearing houses) could be waived of individual risk management standard in a situation that could not appropriately be applied. In addition, if a designated FMU operates more than one payment system – the standards would only apply to the system which was the basis for the FMU designation.
  • Scope of Risk Management Standards – Debated set of standards that address efficiency, access, criteria and governance. These standards are debatable as some suggest these address operational issues rather than systemic risk.
  1. Efficiency – A designated FMU “should provide a means of making payments that is practical for its users and efficient for the economy.”
  2. Access Criteria – A designated FMU “should have objective and publicly disclosed criteria for participation, which permit fair and open access.”
    Governance – A designated FMU’s governance “should be effective, accountable, and transparent.”
  3. Independent Model Valuations – Requires a designated FMU that operates as a CCP to have a qualified person to evaluate the designated FMU’s margin model. This person should not perform functions associated with the CCP and commenters have suggested that this person also be independent of the CCP.
  • Financial Resource Coverage – CSDs are required to institute risk controls that include collateral requirements and limits, and ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle when the CSD extends intraday credit. CCPs are required to maintain sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions.
  • Legal Certainty of Netting Arrangements – The netting permitted by the designated FMU will be given legal effect in default and insolvency situations through an analysis provided by outside legal counsel that is a nationally recognized expert in matters of corporate insolvency.
  • Advance Notice of Material Changes – A designated FMU must provide 60 days advance written notice to its Supervisory Agency to any proposed change to its rules, procedures or operations that could affect the nature or level of risks presented.

FMU Designation Challenges
We believe that the FMU designation will likely have implications for 1) the FMUs and 2) the financial institutions.  Below we look at what some of the specific challenges are for FMUs and financial institutions.

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Figure 1 – Financial Market Utility

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Figure 2 – Financial Institution

Where Accenture can help
Accenture has a number of experienced and skilled resources that have helped clients navigate this type of regulatory change. Our skilled resources can help clients define a target operating model, design, build and test new systems and identify 3rd party vendors who can validate internal risk models.

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Figure 3 – Where Can Accenture Help?

For additional information on Accenture’s perspectives on this topic, please contact: Kyle Sullivan from the Risk Management Practice.

Sources
¹http://federalreserve.gov/paymentsystems/designated_fmu_about.htm
²http://www.theclearinghouse.org/index.html?f=074147

Copyright © 2013 Accenture. All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances. [If you require advice or further details on any matters referred to, please contact your Accenture representative.]

Regulatory Compliance Team

Accenture Regulatory Compliance Team, Finance & Risk Practice

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