Section 804 of the Dodd-Frank Wall Street Reform and Consumer Protection Act  provides the Financial Stability Oversight Council, or FSOC, the authority to designate a financial market utility, or  FMU, that FSOC determines is or is likely to become systemically important because the failure of or a disruption to the functioning of the FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the United States financial system.  FSOC has adopted its final rule.  This final rule only addresses the designation of FMUs. FSOC expects to address the designation of payment, clearing, or settlement activities as systemically important in a separate rulemaking.

The designation of an FMU as systemically important by FSOC subjects the designated FMU to the requirements of Title VIII of the Dodd-Frank Act. For example, Section 805(a) of the Dodd-Frank Act authorizes the Board of Governors of the Federal Reserve Board, the CFTC and the SEC, in consultation with FSOC and one or more of the other supervisory agencies and taking into consideration relevant international standards and existing prudential requirements, to prescribe risk management standards governing the operations related to the payment, clearing, and settlement activities of systemically important FMUs.

Section 804(a)(2) of the Dodd-Frank Act provides that, in determining whether an FMU should be designated as systemically important, FSOC must consider:

  • The aggregate monetary value of transactions processed by the FMU;
  • The aggregate exposure of the FMU to its counterparties;
  • The relationship, interdependencies, or other interactions of the FMU with other FMUs or payment, clearing or settlement activities;
  • The effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions, or the broader financial system; and
  • Any other factors that FSOC deems appropriate.

FSOC expects to use a two-stage process for evaluating FMUs prior to a vote of proposed designation. The first stage will consist of a largely data-driven process for FSOC to identify a preliminary set of FMUs, whose failure or disruption could potentially threaten the stability of the U.S. financial system.  In the second stage, the FMUs identified through the first stage of review will be subject to a more in-depth review, with a greater focus on qualitative factors, in addition to other institution and market specific considerations.

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