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Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 234
[Regulation HH; Docket No. R–1477]
RIN No. 7100–AE09

Financial Market Utilities
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:

The Board of Governors of the
Federal Reserve System (Board) is
publishing a final rule revising the riskmanagement standards in its Regulation
HH, Designated Financial Market
Utilities. The Board is replacing the
existing two sets of risk-management
standards for payment systems and for
central securities depositories and
central counterparties with a common
set of risk-management standards for all
types of designated financial market
utilities (FMUs) and making conforming
changes to the definitions. The new
common set of risk-management
standards and the definitions are based
on the Principles for Financial Market
Infrastructures (PFMI), which were
developed by the Committee on
Payment and Settlement Systems
(CPSS) and the Technical Committee of
the International Organization of
Securities Commissions (IOSCO) and
published in April 2012.
DATES: This final rule is effective
December 31, 2014. Designated FMUs
must be in compliance with the rule by
the effective date, with the exception of
establishing plans for recovery and
orderly wind-down, set forth in
§ 234.3(a)(3)(iii); addressing uncovered
credit losses, set forth in
§ 234.3(a)(4)(vi); addressing liquidity
shortfalls, set forth in § 234.3(a)(7)(viii);
maintaining sufficient liquid net assets
funded by equity and a viable capital
plan, set forth in § 234.3(a)(15)(i) and
(ii); managing risks arising in tiered
participation arrangements, set forth in
§ 234.3(a)(19); and providing
comprehensive public disclosure, set
forth in § 234.3(a)(23)(iv), which have a
compliance date of December 31, 2015.
FOR FURTHER INFORMATION CONTACT:
Jennifer A. Lucier, Deputy Associate
Director (202) 872–7581, Paul Wong,
Manager (202) 452–2895, or Emily A.
Caron, Senior Financial Services
Analyst (202) 452–5261, Division of
Reserve Bank Operations and Payment
Systems; Christopher W. Clubb, Special
Counsel (202) 452–3904, Legal Division;
for users of Telecommunications Device
for the Deaf (TDD) only, contact (202)
263–4869.
SUPPLEMENTARY INFORMATION:

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SUMMARY:

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I. Background
Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act or Act), titled the
‘‘Payment, Clearing, and Settlement
Supervision Act of 2010,’’ was enacted
to mitigate systemic risk in the financial
system and to promote financial
stability, in part, through an enhanced
supervisory framework for FMUs that
have been designated systemically
important (designated FMUs) by the
Financial Stability Oversight Council
(Council).1 Section 803(6) of the Act
defines an FMU as a person that
manages or operates a multilateral
system for the purposes of transferring,
clearing, or settling payments,
securities, or other financial
transactions among financial
institutions or between financial
institutions and the person. Pursuant to
section 805(a)(1)(A) of the Act, the
Board is required to prescribe riskmanagement standards governing the
operations related to the payment,
clearing, and settlement activities of
certain designated FMUs.2
In July 2012, the Board adopted
Regulation HH, Designated Financial
Market Utilities, to implement, among
other things, the statutory provisions
under section 805(a)(1)(A) of the Act.3
Regulation HH established two sets of
risk-management standards for certain
designated FMUs: One set of riskmanagement standards for designated
FMUs that operate a payment system
(§ 234.3(a)) and another set for
designated FMUs that operate a central
securities depository or a central
counterparty (CCP) (§ 234.4(a)).4 The
1 The Dodd-Frank Act, Public Law 111–203, 124
Stat. 1376, was signed into law on July 21, 2010.
2 The risk-management standards promulgated by
the Board under section 805(a)(1)(A) apply to
designated FMUs for which the Board is the
Supervisory Agency. The term ‘‘Supervisory
Agency’’ is defined in Title VIII as the ‘‘Federal
agency that has primary jurisdiction over a
designated financial market utility under Federal
banking, securities, or commodity futures laws’’ (12
U.S.C. 5462(8)). Currently, the Board is the
Supervisory Agency for two FMUs that have been
designated by the Council—The Clearing House
Payments Company, L.L.C., on the basis of its role
as operator of the Clearing House Interbank
Payments System, and CLS Bank International.
These standards also apply to any designated FMU
for which another Federal banking agency is the
appropriate Title VIII Supervisory Agency. At this
time, there are no designated FMUs in this category.
3 12 CFR part 234.
4 At the time of the rulemaking, the Board
acknowledged that designated FMUs that operate as
central securities depositories or CCPs generally
would be subject to the risk-management standards
promulgated by the U.S. Commodity Futures
Trading Commission (CFTC) or U.S. Securities and
Exchange Commission (SEC). The Board, however,
adopted standards for designated FMUs that operate
as central securities depositories, CCPs, or both, to
address the event that a designated FMU operates

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Regulation HH risk-management
standards do not apply to designated
FMUs for which the U.S. Commodity
Futures Trading Commission (CFTC) or
the U.S. Securities and Exchange
Commission (SEC) is the Supervisory
Agency under Title VIII of the DoddFrank Act.5
In adopting Regulation HH, the Board
considered relevant international
standards that were in effect at the time
the rule was proposed in March 2011 as
well as the Board’s Federal Reserve
Policy on Payment System Risk (PSR
policy).6 In April 2012, CPSS and
IOSCO published the PFMI, which
updated, harmonized, strengthened, and
replaced the previous international riskmanagement standards for payment
systems that are systemically important,
central securities depositories, securities
settlement systems, and CCPs.7 The
PFMI is now widely recognized as the
most relevant set of international riskmanagement standards for payment,
clearing, and settlement systems.
In January 2014, the Board published
for comment a notice of proposed
rulemaking (NPRM) to revise the riskmanagement standards in Regulation
HH based on the PFMI.8 The revisions
were proposed to replace the riskmanagement standards in §§ 234.3 and
234.4 with a common set of riskmanagement standards applicable to all
types of designated FMUs in proposed
§ 234.3. The Board also made
conforming changes to the definitions in
proposed § 234.2. The public comment
period for the proposed revisions closed
on March 31, 2014.
as one of the two types of FMUs and is not required
to register as a derivatives clearing organization or
a clearing agency with the CFTC or SEC,
respectively.
5 12 CFR 234.1.
6 The relevant international standards were the
2001 CPSS report on the Core Principles for
Systemically Important Payment Systems, the 2001
CPSS–IOSCO report on the Recommendations for
Securities Settlement Systems, and the 2004 CPSS–
IOSCO report on the Recommendations for Central
Counterparties. The Board previously incorporated
these international standards into its PSR policy.
7 The PFMI also establishes minimum
requirements for trade repositories, which have
emerged internationally as an important category of
financial market infrastructure. The term ‘‘financial
market utility,’’ as defined in Title VIII of the Act,
excludes trade repositories.
8 Concurrent with the NPRM, the Board issued in
a separate Federal Register notice proposed
revisions to part I of the PSR policy based on the
PFMI. These revisions incorporated the headline
standards from the 24 principles with no
modification as the relevant risk-management
standards for all central securities depositories,
securities settlement systems, CCPs, and trade
repositories, as well as certain payment systems. (79
FR 2838, January 16, 2014.)

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Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations

II. Summary of Public Comments and
Analysis
The Board received four public
comment letters that were responsive to
the NPRM, all from entities that operate
designated FMUs. The Board considered
each of these comments as well as
subsequent staff analysis in developing
its final rule as discussed below. Except
as noted herein, the Board is adopting
the rule text as proposed.9

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A. Overall Approach
The Board proposed to amend
Regulation HH by replacing the existing
risk-management standards with a set of
standards based on the PFMI and
making conforming changes to the
definitions. Commenters were generally
supportive of the Board’s overall
approach. One commenter, however,
raised two general concerns with
respect to the Board’s overall approach.
The commenter expressed concern that
one uniform set of standards that
applies to all designated FMUs and all
designs of the same type of designated
FMU does not sufficiently take into
account material differences that can be
found among the same types of system.
The commenter also expressed concern
that differences in language between the
risk-management standards in
Regulation HH and in part I of the PSR
policy may result in two different sets
of risk-management standards for FMUs.
With respect to differences among
types of systems, the Board believes that
a uniform set of standards for all types
of designated FMU is appropriate
because all designated FMUs potentially
face and must manage many of the same
types of risk. Although the design of
systems may vary, the flexibility in the
standards allows individual designated
FMUs to implement, and supervisors to
enforce, the standards appropriately
based on the design of and risks that
arise in a particular designated FMU.
The Board also believes that a uniform
set of standards promotes financial
stability because it facilitates effective
and consistent risk management across
different types of FMUs and markets.
Furthermore, the Board has noted in the
rule when a particular requirement
applies only to certain types of
designated FMU because of its specific
design or function (for example, only
designated FMUs that operate a CCP are
required to have a risk-based margin
system to cover credit risk). For these
reasons, the Board continues to believe
the overall approach is appropriate.
9 The Board is also making several technical edits,
which are not specifically addressed in the
discussion below.

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With respect to the differences in the
language between Regulation HH and
part I of the PSR policy, the Board
continues to believe that such
differences are appropriate. Regulation
HH is an enforceable rule applicable to
designated FMUs other than those
supervised by the CFTC or SEC, so
additional details from the key
considerations and explanatory notes of
the PFMI were incorporated in the rule
text to provide greater clarity on the
Board’s expectations. The PSR policy,
on the other hand, is a policy statement
that provides guidance with respect to
the Board’s exercise of its other
supervisory or regulatory authority over
other financial market infrastructures
(including those operated by the Federal
Reserve Banks) or their participants, its
participation in cooperative oversight
arrangements for financial market
infrastructures, or the provision of
intraday credit to eligible Federal
Reserve account holders. Incorporating
the headline standards from the PFMI is
consistent with the purpose of the
document and the Board’s long-standing
principles-based approach to its PSR
policy. Further, the Board has stated
that it will be guided by the key
considerations and the explanatory text
of the PFMI in its application of the PSR
policy. The Board does not intend for
differences in language in the two
documents to lead to inconsistent policy
results.
B. Proposed § 234.2—Definitions
The Board proposed amendments to
the definitions in § 234.2 by revising
three definitions, adding six definitions,
and deleting one definition.10 The
revisions were proposed for clarity and
consistency with the revised riskmanagement standards. The Board
received one comment letter that
addressed several of the proposed
changes to the definitions in § 234.2.
The Board has revised the definitions of
‘‘recovery’’ and ‘‘wind-down’’ in
response to these comments. In
addition, the Board has decided to make
clarifying edits to the proposed
definition of ‘‘link’’ and to add a
definition for ‘‘trade repository.’’
Recovery. The Board proposed to add
a definition for the term ‘‘recovery’’ as
used in proposed § 234.3(a)(3) and
§ 234.3(a)(15). The proposal defined
‘‘recovery’’ for the purposes of
10 The Board proposed deletion of the term
‘‘payment system’’ because it was not used in the
proposed single set of standards for all designated
FMUs. If, in the future, the Board revises Regulation
HH to provide risk-management standards specific
to payment systems, it anticipates, at that time,
reinserting a definition of the term ‘‘payment
system,’’ if necessary.

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§ 234.3(a)(3) and § 234.3(a)(15) as ‘‘the
actions of a designated financial market
utility consistent with its rules,
procedures, and other ex-ante
contractual arrangements, to address
any uncovered credit loss, liquidity
shortfall, capital inadequacy, or
business, operational or other structural
weakness, including the replenishment
of any depleted prefunded financial
resources and liquidity arrangements, as
necessary to maintain the designated
financial market utility’s viability as a
going concern.’’ The term ‘‘recover’’ was
also used, with a different meaning, in
proposed § 234.3(a)(17) on operational
risk in the context of business
continuity management.
The commenter requested
clarification between ‘‘recovery’’ as used
in proposed § 234.3(a)(3) and proposed
§ 234.3(a)(15) and ‘‘recover’’ as used in
proposed § 234.3(a)(17). The commenter
suggested that the concept of recovery is
financial in nature and that the
reference to operational weakness in the
proposed definition concerns the
financial impact of an operational issue.
The Board agrees with the commenter’s
understanding of ‘‘recovery’’ as used in
proposed § 234.3(a)(3) and proposed
§ 234.3(a)(15). The reference in the
definition to the designated FMU’s
‘‘viability as a going concern’’ is
intended to indicate that the objective of
the recovery plan is a return to financial
health. Therefore, a designated FMU
should consider in its recovery plan
scenarios in which an operational event
could cause the designated FMU to
become insolvent. The use of ‘‘recover’’
in proposed § 234.3(a)(17), however,
refers to a designated FMU’s ability to
recover and resume its critical
operations and services in a timely
manner after an operational disruption.
This use of the term is operational in
nature, not financial. The Board is
making technical edits to the definition
for clarity.
Wind-down. The Board proposed to
add a definition for the term ‘‘winddown,’’ which is used in proposed
§ 234.3(a)(3) and proposed
§ 234.3(a)(15). The proposal defined
‘‘wind-down’’ as ‘‘the actions of a
designated financial market utility to
effect the permanent cessation, sale, or
transfer of one or more of its critical
operations or services.’’ The commenter
requested additional guidance on
whether a wind-down plan should
consider appropriate notice to
participants and the market, or whether
the plan should focus only on the
amount of time required to wind down
the corporate entity.
Although the commenter referred to
the definition of ‘‘wind-down’’ in its

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Federal Register / Vol. 79, No. 214 / Wednesday, November 5, 2014 / Rules and Regulations
comment, the Board understands that
the commenter is referring to the
requirement in proposed § 234.3(a)(3) to
develop and maintain a plan for an
orderly wind-down. As stated in the
proposed rule, the Board requires the
designated FMU to plan for an orderly
wind-down, which would include
providing appropriate notice to the
market to allow participants to
transition to alternative arrangements in
an orderly manner. This would likely
require the designated FMU to assume
a longer period for wind-down than if
the requirement were only to wind
down the corporate entity as quickly as
possible. Given that the term ‘‘winddown’’ is only used in the context of an
‘‘orderly wind-down’’ in the proposed
rule, the Board has replaced the
definition of ‘‘wind-down’’ with a
definition for ‘‘orderly wind-down.’’
The new definition is intended to clarify
that if a designated FMU were to wind
down, it would be expected to do so in
a manner that would not increase the
risk of significant liquidity or credit
problems spreading among financial
institutions or markets and thereby
threaten the stability of the U.S.
financial system.
Link. The Board proposed to add a
definition for ‘‘link,’’ which is used in
proposed § 234.3(a)(20). The proposal
defined ‘‘link’’ as ‘‘for purposes of
§ 234.3(a)(20), a set of contractual and
operational arrangements between two
or more central counterparties, central
securities depositories, or securities
settlement systems that connect them
directly or indirectly, such as for the
purposes of participating in settlement,
cross margining, or expanding their
services to additional instruments and
participants.’’
Because of the difference in the
definition of financial market
infrastructure in the PFMI, which
includes trade repositories, and
financial market utility in the DoddFrank Act, which does not, this
definition inadvertently excluded links
to trade repositories. Upon further
consideration, the Board has added
these links to the definition for
consistency with the PFMI, defined
trade repository in § 234.2 as ‘‘an entity
that maintains a centralized electronic
record of transaction data, such as a
swap data repository or a security-based
swap data repository,’’ and made
conforming changes to § 234.3(a)(20).
C. Governance
Proposed § 234.3(a)(2) outlined the
requirements for a designated FMU’s
governance arrangements. The
comments the Board received on the
proposed rule are discussed below.

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Support for public interest
considerations. Proposed
§ 234.3(a)(2)(iii) required the designated
FMU to have governance arrangements
that support the stability of the broader
financial system, other relevant public
interest considerations, and the
legitimate interests of relevant
stakeholders. One commenter noted that
public interest considerations is a vague
concept, and that private-sector systems
should not be required to consider
public interest considerations and
should focus exclusively on the needs of
participants. The Board believes that, in
addition to supporting the stability of
the broader financial system, a
designated FMU should support public
interest considerations that are
consistent with the other objectives of
Title VIII of the Act to promote robust
risk management, promote the safety
and soundness of the designated FMU,
and reduce systemic risks. For example,
in the NPRM, the Board listed
supporting fair and efficient markets as
a possible relevant public interest
consideration because a designated
FMU that creates inefficiencies in the
market may drive market participants
toward less-safe alternatives that could
increase systemic risks. Market
transparency is another public interest
consideration that may be relevant. For
example, a designated FMU that
provides information to relevant
authorities and the public about
payment flows may help to identify and
reduce sources of systemic risk. For
certain designated FMUs, however,
stability of the broader financial system
may be the predominant or only
relevant public interest consideration.
Further, in the NPRM, the Board
asked whether proposed
§ 234.3(a)(2)(iii) should specify ‘‘other
relevant public interest considerations’’
for a specific type of or a particular
designated FMU. One commenter
responded that the examples given in
the NPRM—fostering fair and efficient
markets, market transparency, and
investor protection—in combination
with the Board’s guidance through the
supervisory process would be sufficient
to assist a designated FMU in
identifying relevant public interests.
The Board is adopting the text of the
rule as proposed.
Representation on the board of
directors. Proposed § 234.3(a)(2)(iv)(D)
required that the designated FMU’s
board of directors include a majority of
individuals who are not executives,
officers, or employees of the designated
FMU or an affiliate. In the NPRM, the
Board asked whether it should set a
specific minimum percentage of these
individuals on the board of directors

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and whether it should set any
requirements for the participation of
outside directors (that is, directors who
are not participants in or executives,
officers, or employees of the designated
FMU or an affiliate). Commenters
generally indicated that the final rule
should retain flexibility on board
representation and did not advocate for
a change to the proposed text. The
Board is adopting the text of the rule as
proposed to provide some flexibility in
the composition of the board of
directors. The Board, however, believes
that outside directors should exercise
predominate influence over the board of
directors to ensure robust governance
and oversight of the designated FMU.
In the NPRM, the Board also asked
whether there should be a requirement
that the chair of the board of directors
be (a) an individual who is not an
executive, officer, or employee of the
designated FMU or an affiliate of the
designated FMU or (b) a different
individual than the designated FMU’s
chief executive officer. One commenter
responded that the chair of the board of
directors should be an independent
director. Although it believes
designating an independent director as
board chair generally results in more
robust governance, the Board recognizes
that other board structures, such as the
appointment of a lead independent
director, may achieve a similar outcome
as having an independent director as
board chair. Therefore, the Board is
adopting the text of the rule as proposed
to provide flexibility in the structure of
the board of directors. If the Board has
governance concerns regarding the
FMU, however, it may ask, as part of the
supervisory process, a designated FMU
that has a single person serving as the
chief executive officer and the board
chair to consider splitting these roles or
adding a lead independent director.
Performance reviews of the board of
directors. Proposed § 234.3(a)(2)(iv)(E)
required the board of directors to
establish policies and procedures to
review its own performance. In the
NPRM, the Board asked whether there
should be a requirement for these
regular reviews to include periodic
independent assessments of the board of
directors. One commenter responded
that an independent party should
perform such reviews but that the
precise frequency, scope, and specifics
of the review should be determined by
the designated FMU. An independent
review of board performance is a good
practice that can help strengthen the
governance of the designated FMU. A
designated FMU might consider
conducting such reviews on a periodic
basis. The Board has decided, however,

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to retain flexibility with respect to the
manner in which a designated FMU
reviews performance of its board of
directors. The Board is adopting the text
of the rule as proposed. If the Board has
governance concerns regarding the
FMU, however, it may direct, through
the supervisory process, a designated
FMU to obtain an independent
performance review of the board of
directors.
Structure and composition of the
committees of the board of directors.
Proposed § 234.3(a)(2)(iv)(H)–(I)
required that the risk-management and
internal audit functions be overseen by
a committee of the board of directors. In
the NPRM, the Board asked whether the
designated FMU’s board of directors
should be required to have a committee
of the board of directors that has only
audit responsibilities to which the audit
function reports and a risk committee of
the board of directors that has only riskmanagement responsibilities to which
the risk-management function reports.
The Board also asked whether,
alternatively, the designated FMU’s
audit and risk-management functions
should be required to report directly to
the entire board of directors. One
commenter stated that a designated
FMU’s board of directors should have
an audit committee and a riskmanagement committee and that
independent directors should chair
board committees where possible.
Another commenter stated that the
structure of the audit and riskmanagement committees should be left
to the designated FMU’s discretion and
that the audit and risk-management
committees can be composed of
professionals who are not members of
the board of directors so long as there
is reporting to the board of directors.
After further consideration, the Board
agrees that the requirement should not
be overly prescriptive with respect to
the structure of board committees. The
specific decisions regarding how the
board of directors will structure its
committees to oversee the audit and
risk-management functions should be
left to the designated FMU’s discretion.
The Board is adopting the text of the
rule as proposed.
Reporting lines for the internal audit
and risk-management functions.
Proposed § 234.3(a)(2)(iv)(H)–(I)
required that the risk-management and
internal audit functions have sufficient
authority, resources, and independence
and that each have a direct reporting
line to and be overseen by a committee
of the board of directors. A commenter
stated that a designated FMU’s riskmanagement function should have a
primary functional reporting line to the

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executive management of the designated
FMU, whereas in the case of audit, the
reporting line should be independent of
executive management.
Although a reporting line from the
risk-management function to executive
management is certainly reasonable and
useful, the Board believes that the riskmanagement function should have a
reporting line to a committee of the
board of directors to ensure that the
risk-management function has sufficient
independence from executive
management. The proposed rule
required the risk-management function
to have a direct reporting line to a
committee of the board of directors, but
it does not preclude a reporting line to
executive management as well. The
Board is adopting the text of the rule as
proposed.
D. Framework for the Comprehensive
Management of Risks
Proposed § 234.3(a)(3) required a
designated FMU to have a sound riskmanagement framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
custody, investment, and other risks
that arise in or are borne by the
designated FMU. One commenter raised
several issues with the requirements in
proposed § 234.3(a)(3), and they are
discussed below.
Frequency of review of the riskmanagement framework. Proposed
§ 234.3(a)(3) required, among other
things, that the framework for the
comprehensive management of risks be
subject to periodic review. In the NPRM,
the Board asked whether it should
establish an annual or longer minimum
frequency of review for the overall
framework. The commenter responded
that the Board should not be overly
prescriptive with respect to the review
frequency, noting that different
standards have different review
frequencies and that establishing a
general review frequency for the
comprehensive risk-management
framework could be duplicative or
contradict the review frequencies in
other proposed standards. The Board
agrees that a specific frequency for
review is not necessary, and is adopting
the proposed text in § 234.3(a)(3)
regarding periodic review for the overall
framework.
Requirement to maintain plans for
recovery and orderly wind-down.
Proposed § 234.3(a)(3)(iii) required that
a designated FMU’s risk-management
framework include plans for the
designated FMU’s recovery or orderly
wind-down that contain the elements
listed at proposed § 234.3(a)(3)(iii)(A) to
(F). The commenter stated that a

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designated FMU’s regulator should have
the discretion to determine if the
designated FMU would be required to
produce both a recovery plan and an
orderly wind-down plan.
The Board understands that there may
have been some ambiguity regarding
whether proposed § 234.3(a)(3)(iii)
required both a recovery plan and an
orderly wind-down plan or just one of
the two. The Board expects a designated
FMU to prepare plans for both recovery
and orderly wind-down. Recovery plans
should not be based on assumptions of
government intervention or support. In
addition, the Board believes that the
recovery and orderly wind-down plans
should be integrated because there may
be circumstances in which a designated
FMU attempts to recover but the
recovery effort eventually fails. In such
circumstances, the designated FMU
should have a plan as well as sufficient
capital to transition to and execute an
orderly wind-down. The Board is
therefore clarifying in § 234.3(a)(3)(iii)
that a designated FMU must prepare
integrated plans for recovery and
orderly wind-down.11 The Board is also
making conforming edits in
§ 234.3(a)(3)(iii)(C) through (F) and, for
greater clarity, has revised the
requirement in § 234.3(a)(15)(i)(A) with
respect to the cost to implement the
plans to refer back to the requirements
in § 234.3(a)(3)(iii).
Scenarios addressed by recovery and
orderly wind-down plans. Proposed
§ 234.3(a)(3)(iii)(B) required that a
designated FMU’s plans identify
scenarios that may potentially prevent
the FMU from being able to provide its
critical operations and services as a
going concern, including uncovered
credit losses, uncovered liquidity
shortfalls, and general business losses.
The commenter noted that such
scenarios should contemplate severe
and extreme scenarios and that each
scenario should be distinct so that the
analysis of the scenarios would not be
duplicative. The Board agrees that the
scenarios addressed by recovery and
orderly wind-down plans should
include severe and systemic stress
events beyond those contemplated by
business continuity planning, normal
crisis-management, or failuremanagement tools. In particular, as
indicated by the reference to the
designated FMU’s inability to continue
11 As noted above, the compliance date for
preparing plans for recovery and orderly winddown is December 31, 2015. Designated FMUs are
encouraged to share with supervisors drafts of these
plans, as well as other required plans, procedures,
or documents, in advance of the compliance date
so that final versions are in place by December 31,
2015.

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as a going concern, these scenarios
involve shocks that could potentially
cause the designated FMU to become
insolvent and cease operations. The
Board also agrees that such scenarios
should be sufficiently distinct so the
analysis related to a particular scenario
is not duplicative. The Board believes,
however, that the text of the rule is
sufficiently clear on these points. The
Board is adopting the text of the rule as
proposed.
Triggers for implementation of
recovery and orderly wind-down plans.
Proposed § 234.3(a)(3)(iii)(C) required
that a designated FMU’s plans identify
criteria that could trigger the
implementation of the recovery or
orderly wind-down plans. The
commenter stated that the designated
FMU should have discretion to decide
whether it will continue its services that
are deemed noncritical, provided that
the financial consequences are not
material to its ability to operate the
critical services. The commenter also
noted that that triggers should be
flexible and that management, working
with its regulators and other
stakeholders, should make the decision
whether to trigger the plan based on the
relevant facts and circumstances of the
given situation. Finally, the commenter
noted that triggers should not be
required to be defined solely in
quantifiable or monetary terms.
The Board agrees with the comments
provided on the triggers for the
implementation of the recovery and
orderly wind-down plans. The
designated FMU would have discretion
to decide whether it will continue its
noncritical services, as long as the
decision would not impair its ability to
recover its critical operations and
services or to wind them down in an
orderly manner. Also, the decision to
trigger a recovery or orderly wind-down
plan will depend on the relevant facts
and circumstances at the time and any
such decision will likely include
discussions between the designated
FMU and its supervisor. This is
consistent with the requirement in
proposed § 234.3(a)(3)(iii)(F) that the
recovery and orderly wind-down plans
include procedures for informing the
Board if the designated FMU is
considering initiating one of the plans.
The Board did not propose inclusion of
automatic triggers based solely on
quantifiable or monetary terms and is
not adopting such terms in the final
rule.
Requirement for rules, procedures,
policies, and tools for recovery and
orderly wind-down plans. Proposed
§ 234.3(a)(3)(iii)(D) required that the
plans include rules, procedures,

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policies, and any other tools the
designated FMU would use in a
recovery or orderly wind-down to
address the scenarios addressed in
proposed § 234.3(a)(3)(iii)(B). The
commenter stated that the application of
certain tools, such as expense reduction
or refinancing, will depend on the
circumstances at the time of distress and
therefore may not fit well into the
designated FMU’s ‘‘rules, policies, and
procedures.’’ The Board believes that if
a designated FMU contemplates using a
particular type of tool in the event of a
recovery or orderly wind-down, it
should develop rules, policies, and
procedures to provide a basis for using
the tool as well as transparency to its
participants regarding how the tool may
be used. The Board expects the
designated FMU to provide as much
detail in the rules, policies, and
procedures as possible, but recognizes
that some components may need to be
general, because the specific
implementation of the tool may depend
on the circumstances. The Board is not
revising the final rule in response to this
comment.
Requirements for informing the Board
of initiation of the recovery or orderly
wind-down plan. Proposed
§ 234.3(a)(3)(iii)(F) required that the
designated FMU have procedures to
inform the Board, as soon as practicable,
if it is considering initiating the
recovery or orderly wind-down plan.
The commenter stated that certain tools,
such as loss allocation, could be
triggered automatically pursuant to ex
ante agreements. In such circumstances,
a notification to the Board could be
contemporaneous with or after use of
such tools. The Board believes that a
designated FMU should notify the
Board that it is considering initiating the
recovery or orderly wind-down plan
before initiating the relevant plan if at
all possible. If there are specific tools or
elements of a plan that may be activated
automatically, the requirement
proposed in § 234.3(a)(3)(iii)(F) that
notification be ‘‘as soon as practicable’’
permits the designated FMU, in such
circumstances, to provide notification
contemporaneous with or immediately
after use of such tools. Accordingly, the
Board is not revising the final rule in
response to this comment.
Frequency of review of recovery and
orderly wind-down plans. The proposed
rule did not specify a frequency of
review for the recovery and orderly
wind-down plans required under
proposed § 234.3(a)(3)(iii), but the Board
stated in the NPRM that these plans
should be reviewed and tested at least
annually or following material changes
to the designated FMU’s operations or

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risk profile. The commenter urged that
such reviews occur every other year,
assuming no interim material change in
the designated FMU’s risk exposure, as
this frequency would provide sufficient
time to amend, draft, negotiate, and
discuss any such changes with
stakeholders. The commenter also noted
this frequency would be aligned with
the requirements for public disclosure
in proposed § 234.3(a)(23)(v).
The Board agrees that a designated
FMU should review its recovery and
orderly wind-down plans the earlier of
every two years or following changes to
the designated FMU or the environment
in which it operates that would
significantly affect the viability or
execution of the plans. After
considering the comments, the Board
believes a minimum requirement for
review of the plans of every two years
is more appropriate than an annual
review because an annual review cycle
may not allow sufficient time to
analyze, discuss with stakeholders and
supervisors, and implement any
required changes. The Board is revising
the rule text to clarify the requirement
in § 234.3(a)(3)(iii)(G) that the
designated FMU review the plans the
earlier of every two years or following
changes to its system or the
environment in which it operates that
would significantly affect the viability
or execution of the plans.
E. Credit Risk
Proposed § 234.3(a)(4) required a
designated FMU to measure, monitor,
and manage effectively its credit
exposures to its participants and the
credit exposures arising from its
payment, clearing, and settlement
processes. The Board received two
comments on this proposed provision
that are addressed below.
Replenishment of financial resources.
Proposed § 234.3(a)(4)(vi)(B) required
that a designated FMU establish rules
and procedures that explicitly describe
the designated FMU’s process to
replenish financial resources employed
during a stress event. One commenter
noted that circumstances would dictate
how a designated FMU manages the
replenishment of financial resources
employed in a stress scenario and that
the Board should revise the proposed
rule to allow greater flexibility. The
Board acknowledges that the details of
the replenishment process may depend
on the particular circumstances that the
designated FMU faces in a stress event
and that it may not be possible to
predict fully the future. The rules and
procedures regarding replenishment,
however, should be explicit and as
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guidance to the designated FMU’s staff,
participants, and other stakeholders
during an actual stress event. Moreover,
given that a designated FMU cannot
predict the exact circumstances it may
face, its rules and procedures for
replenishment should address a wide
range of potential circumstances. The
Board is adopting the text of the rule as
proposed.
Triggers for a ‘‘cover 2’’ requirement.
Proposed § 234.3(a)(4)(ii) provided that
the Board may direct a designated FMU
that operates as a CCP to maintain
additional prefunded financial
resources that are sufficient to cover its
credit exposure under a wide range of
significantly different stress scenarios,
including the default of the two
participants and their affiliates that
would potentially cause the largest
aggregate credit exposure to the CCP in
extreme but plausible market conditions
(a ‘‘cover 2’’ requirement). The proposal
stated further that the Board may direct
such a CCP to meet a ‘‘cover 2’’
requirement if it either is involved in
activities with a more-complex risk
profile, such as clearing financial
market instruments characterized by
discrete jump-to-default price changes
or that are highly correlated with
potential participant defaults, or has
been determined by another jurisdiction
to be systemically important in that
jurisdiction.
A commenter stated that, in applying
this provision, the Board should also
consider ‘‘the proportion of the CCP’s
clearing activities involving products
with complex risk profiles as well as the
manner in which the CCP manages
those risks.’’ The commenter asked the
Board to confirm that the ‘‘cover 2’’
requirement would not be triggered if a
CCP has a small amount of activity with
a complex risk profile relative to overall
activity or if the CCP addresses the
added risk incurred, such as through
enhanced margin systems. In making its
determination with respect to a ‘‘cover
2’’ requirement, the Board would
consider all relevant facts and
circumstances, including the CCP’s
product mix and risk profile. Except for
minor technical edits, the Board is
adopting the text of the rule as
proposed.12
F. Collateral
Proposed § 234.3(a)(5) required a
designated FMU that uses collateral to
manage its or its participants’ credit
exposure to accept collateral with low
credit, liquidity, and market risks and to
12 The Board has revised § 234.3(a)(4)(ii) to clarify
that it is the Board that makes the determination
with respect to a ‘‘cover 2’’ requirement.

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set and enforce appropriately
conservative haircuts and concentration
limits. One commenter supported
flexibility in the wording of the
requirement and urged that it not be
interpreted to exclude the use of equity
securities as collateral for equity
options. The Board believes that the text
in proposed § 234.3(a)(5) retains the
necessary flexibility to permit, where
appropriate, a designated FMU to
integrate the management of risk from
participant positions with the risk from
fluctuations in the value of collateral
provided by participants. One example
would be for the designated FMU to
hold equity securities as collateral for
options on those same securities.
Therefore, the Board is adopting the text
of the rule as proposed.
G. Liquidity Risk
Proposed § 234.3(a)(7) required a
designated FMU to measure, monitor,
and manage effectively the liquidity risk
that arises in or is borne by the
designated FMU. The comments
received on specific elements of the
liquidity risk-management requirements
are discussed below.
Participants’ affiliates. Under
proposed § 234.3(a)(7)(ii), a designated
FMU was required to maintain
sufficient liquid resources in all relevant
currencies to effect same-day and, as
applicable, intraday and multiday
settlement of payment obligations with
a high degree of confidence under a
wide range of significantly different
potential stress scenarios, including the
default of the participant and its
affiliates that would generate the largest
aggregate liquidity obligation for the
designated FMU in extreme but
plausible market conditions.13 One
commenter stated that the inclusion of
the liquidity obligations of a defaulting
participant’s affiliates in calculating the
largest aggregate liquidity obligation in
proposed § 234.3(a)(7)(ii) should be
clarified or removed because ‘‘a
designated FMU may not have the
authority to demand detailed
information on participants’ affiliates,
particularly for affiliates in peripheral
lines of business.’’
The Board believes this requirement
is sufficiently clear as written.
Participants’ affiliates that would
generate liquidity obligations to the
designated FMU would be known to the
designated FMU. Such affiliates may
include affiliates that are also
13 The Board believes that deliveries of currency
are payment obligations, rather than physical
deliveries under § 234.3(a)(10), and expects a
designated FMU subject to Regulation HH to
manage effectively the liquidity risk related to these
payments.

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participants in the designated FMU,
liquidity providers to the designated
FMU, and custodians of the assets held
in accounts for the designated FMU.
Affiliates in peripheral lines of business
would be unlikely to generate liquidity
obligations to the designated FMU.
Therefore, the Board is retaining the text
of the rule as proposed.
Qualifying liquid resources. For
purposes of meeting the liquid resource
requirement under proposed
§ 234.3(a)(7)(ii), proposed
§ 234.3(a)(7)(iii) required the designated
FMU to maintain these liquid resources
in cash in each relevant currency at the
central bank of issue or at creditworthy
commercial banks, or in assets that are
readily available and convertible into
cash through committed arrangements
without material adverse change
conditions. These committed
arrangements included, but were not
limited to, collateralized lines of credit,
foreign exchange swaps, and repurchase
agreements. Proposed § 234.3(a)(7)(iii)
required these arrangements to be
committed in order to ensure that the
resources are highly reliable even in
extreme but plausible market
conditions.14
A commenter stated that meeting the
minimum liquid resource requirement
in proposed § 234.3(a)(7)(ii) with only
cash and committed arrangements, as
required in proposed § 234.3(a)(7)(iii),
would be challenging for cash market
CCPs and their participants.
Furthermore, the commenter stated that
requiring committed arrangements for
sovereign debt, such as U.S. Treasury
securities, is inconsistent with CFTC’s
final rule for systemically important
derivatives clearing organizations, the
SEC’s proposed rules for covered
clearing agencies, and the rules for
financial market infrastructures in
foreign jurisdictions, and that requiring
committed arrangements could
14 The Board recognized that the language on
qualifying liquid resources under Principle 7 of the
PFMI is phrased differently. Principle 7 requires
qualifying liquid resources to be, among other
things, highly marketable collateral held in custody
and investments that are readily available and
convertible into cash with ‘‘prearranged and highly
reliable’’ funding arrangements. The Board has had
a longstanding expectation that FMUs under its
authority maintain cash or committed arrangements
for converting noncash assets into cash to meet the
minimum liquidity resource requirement. The
Board believes that, in order for arrangements to be
‘‘highly reliable,’’ they must be ‘‘prearranged and
committed.’’ The legal enforceability of committed
arrangements helps to ensure obligations will be
fulfilled even in extreme but plausible market
conditions. The Board recognizes, however, that
such commitments do not guarantee performance.
Supplemental resources beyond amounts needed to
meet the minimum liquid resource requirement in
§ 234.3(a)(7) may be obtained on an uncommitted
basis.

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significantly reduce the total amount of
liquidity available to CCPs. The
commenter also stated that the proposal
is inconsistent with the Board’s
treatment of Treasury securities for
systemically important financial
institutions (SIFIs) under the Board’s
Liquidity Coverage Ratio rule. The
commenter recommended that
uncommitted arrangements for
converting U.S. Treasury securities into
cash, such as customary repurchase
agreements or pre-established dealer
accounts to facilitate same-day market
sales, be included as qualifying liquid
resources.
After consideration of the comments,
the Board has determined not to include
uncommitted arrangements for U.S.
Treasuries as qualifying liquid
resources. The Board believes that legal
enforceability of committed
arrangements helps to ensure that
obligations are fulfilled even in extreme
but plausible market conditions. For
example, the Board believes committed
arrangements provide an additional
level of assurance that U.S. Treasury
securities would be converted into cash
in large quantities on a same-day basis,
even in stressed market conditions.
Furthermore, the Board believes a morerobust requirement is necessary for
designated FMUs than for SIFIs because
the timely completion of settlement is
an essential function of an FMU and an
explicit expectation of the Board for
these entities. The failure of an FMU to
complete settlement as expected can
create broader liquidity dislocations and
undermine confidence in the FMU’s
ability to manage effectively a default by
absorbing rather than transmitting
shocks to the financial system.
After consideration of the comments,
however, the Board has added a new
category of liquidity arrangements in
§ 234.3(a)(7)(iii)(C) of the final rule that
would allow prearranged uncommitted
arrangements for converting noncash
assets into cash to be considered
qualifying liquid resources if they are
determined by the Board to be highly
reliable in extreme but plausible market
conditions. The Board is adding this
category in order to allow flexibility for
future innovation in arrangements for
converting noncash assets into cash on
a same-day basis. The Board believes
that including this category improves
consistency with the text of the CFTC’s
final rule and the SEC’s proposed rule.
The Board is also adopting conforming
edits to § 234.3(a)(7)(iv) in the final rule.
Testing. Proposed § 234.3(a)(7)
contained multiple testing requirements
for the management of liquidity risk.
Proposed § 234.3(a)(7)(iv) required a
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confirm, at least annually, whether each
provider of its committed liquidity
arrangements has sufficient information
to understand and manage that
provider’s associated liquidity risks and
whether the provider has the capacity to
perform as required under the
commitment. Proposed § 234.3(a)(7)(v)
required the designated FMU to
maintain and test its procedures and
operational capacity for accessing each
type of its liquid resources at least
annually. Proposed § 234.3(a)(7)(vi)
required the designated FMU to
determine the amount and regularly
stress-test the sufficiency of the liquid
resources necessary to meet the
minimum liquid resource requirement
(A) daily using standard and
predetermined stress scenarios,
parameters, and assumptions and (B) at
least monthly through a comprehensive
and thorough analysis of the existing
stress scenarios, models, and underlying
parameters and assumptions. Proposed
§ 234.3(a)(7)(viii) required an annual
validation of the designated FMU’s
liquidity risk-management model.
A commenter stated that the testing of
the procedures and operational capacity
for accessing liquid resources required
by proposed § 234.6(a)(7)(v) should not
cause disruption to the designated
FMU’s participants or involve the use of
large amounts of participant funds. The
commenter also suggested generalizing
the requirement in proposed
§ 234.6(a)(7)(vi)(B) to perform monthly
stress testing and avoid being overly
prescriptive because the monthly review
requirement may not be appropriate for
all models or all types of designated
FMUs.
The Board agrees that none of the
testing requirements need to be or
should be met in a manner that would
cause significant disruption to the
designated FMU’s participants or the
market or involve the use of large
amounts of participant funds. In
addition, after consideration of the
comments, the Board continues to
believe that the requirement in
§ 234.3(a)(7)(vi) to perform an analysis
of the existing stress scenarios, models,
and underlying parameters and
assumptions at least monthly is
appropriate. The Board believes that all
designated FMUs should assess the
effectiveness of their stress testing at
least monthly to ensure that the
designated FMU will not neglect to
consider any relevant new information
in its stress-testing methodology and
that the stress tests continue to be
appropriate for achieving the designated
FMU’s identified liquidity needs in light
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conditions. The Board is adopting the
text of the rule as proposed.
H. Settlement Finality
Proposed § 234.3(a)(8) required, in
part, the designated FMU to provide
clear and certain final settlement
intraday or in real time as appropriate,
and at a minimum, by the end of the
value date. One commenter requested
confirmation that the proposed
provision would not require a
designated FMU that is a CCP to
accelerate its novation of certain
noncompetitive transactions, such as
backloaded over-the-counter options.
The proposed requirement in
§ 234.3(a)(8) applied to a designated
FMU’s obligations to deliver funds and
other financial instruments, at a
minimum, by the end of the value date
in accordance with the terms of the
underlying contract, and did not
address the timing of novation. The
Board is adopting the text of the rule as
proposed.
I. Participant-Default Rules and
Procedures
Proposed § 234.3(a)(13) required the
designated FMU to have effective and
clearly defined participant-default rules
and procedures that are designed to
ensure that the designated FMU can
take timely action to contain losses and
liquidity pressures and continue to meet
its obligations. The proposal also
required the designated FMU to test and
review its default procedures, including
any closeout procedures, at least
annually or following material changes
to these rules and procedures. One
commenter stated that the required
testing should not be so extensive as to
cause disruption to the designated
FMU’s members, participants, or
broader financial markets, nor require
the use of participant funds, nor
unnecessarily stress the designated
FMU’s critical services.
The Board agrees that any testing
pursuant to the requirement in proposed
§ 234.3(a)(13) should not cause
disruption to the designated FMU’s
members, participants, or broader
financial markets. To the extent such
testing would require use of participant
funds, it would likely be limited to
small or de minimus amounts. The
Board is adopting the text of the rule as
proposed.
J. Segregation and Portability
Proposed § 234.3(a)(14) required a
designated FMU that operates as a CCP
to have rules and procedures that enable
the segregation and portability of
positions of a participant’s customers
and the collateral provided to the

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designated FMU with respect to those
positions. The Board received two
comment letters on this proposed rule
that addressed portability requirements
and alternative segregation regimes.
Portability requirement. One
commenter noted that while porting
positions is a highly desirable result
when feasible, there may be scenarios in
which liquidating positions is preferred.
The commenter suggested that the rule
text permit a designated FMU to retain
broad discretion to liquidate positions
promptly where it has determined that
timely transfer would not be feasible.
The proposed rule requires that the
designated FMU’s rules and procedures
enable the segregation and portability of
positions, and does not exclude the
possibility that liquidation of positions
may take place if a timely transfer
would not be feasible. For these reasons,
the Board is adopting the text of the rule
as proposed.
Alternative segregation regimes. One
commenter encouraged the Board to
retain the flexibility to permit different
segregation regimes as appropriate for
different markets and different classes of
market participant. Another commenter
requested that the final text of the rule
acknowledge the different legal
frameworks for cash markets. The Board
acknowledged in the NPRM that
effective segregation and portability
arrangements depend not only on the
operational capabilities of the
designated FMU but also on the
applicable legal framework. The Board
notes that a CCP serving certain cash
markets, for example, may operate in a
legal regime that offers the same degree
of protection for a participant’s
customers as the segregation and
portability approaches under proposed
§ 234.3(a)(14). Where an alternative
regime exists, the Board will consider
the CCP’s assessment of whether the
applicable legal or regulatory framework
achieves the same degree of protection
and efficiency for customers that would
otherwise be achieved by segregation
and portability arrangements at the CCP
level described in the proposed
requirement. Additionally, the Board
will review whether the CCP’s own
rules enable the operation of the
relevant legal and regulatory framework.
The Board believes segregation and
portability arrangements may differ
depending on the design of and the
products and markets served by the CCP
and would work with any applicable
designated FMU through the
supervisory process to determine how
best to meet the requirements in
§ 234.3(a)(14).
Where alternative segregation and
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degree of protection, proposed
§ 234.3(a)(14) would not prohibit the
use of such arrangements. As noted
above, the requirement is that the
designated FMU’s rules and procedures
enable segregation and portability of
positions and does not prescribe a single
means by which this could be achieved.
The Board is adopting the text of the
rule as proposed.
K. General Business Risk
Proposed § 234.3(a)(15) required a
designated FMU to identify, monitor,
and manage its general business risk. To
this end, proposed § 234.3(a)(15)(i)
required a designated FMU to maintain
unencumbered liquid financial assets
that are sufficient to cover the greater of
the cost to implement the designated
FMU’s recovery or orderly wind-down
plan to address general business losses
or six months of current operating
expenses. This provision also required a
designated FMU to hold equity that is
greater than or equal to the amount of
unencumbered liquid financial assets
held to meet the requirement. Proposed
§ 234.3(a)(15)(ii) required a designated
FMU to maintain and update annually
a plan for raising additional equity
before the designated FMU’s equity falls
below the amount required under
§ 234.3(a)(15)(i).
The Board received four comment
letters that addressed this provision.
The commenters generally supported
proposed § 234.3(a)(15) but raised
specific concerns that are discussed
below.
Recovery and orderly wind-down
plans. Proposed § 234.3(a)(15)(i)(A)(1)
referred to the cost to implement the
recovery or orderly wind-down plan to
address general business losses as
required under proposed
§ 234.3(a)(3)(iii) as one possible
determinant of the amount of liquid net
assets funded by equity the designated
FMU must hold. One commenter stated
that recovery and orderly wind-down
plans should be calibrated to take into
account the existence of alternative
systems or arrangements that provide
similar services to those of the
designated FMU. The Board expects that
the designated FMU will take into
consideration in its recovery and
orderly wind-down plans any viable
alternatives to its critical operations and
services. The commenter did not suggest
any changes to the proposed rule text on
this point. For clarity and to streamline
the rule text, however, the Board is
revising § 234.3(a)(15)(i)(A)(1) to require
the designated FMU to cover the cost to
implement the plans to address general
business losses as required under
§ 234.3(a)(3)(iii).

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Required amount of unencumbered
liquid financial assets. Proposed
§ 234.3(a)(15)(i)(A) required a
designated FMU to hold unencumbered
liquid financial assets equal to the
greater of the cost to implement its
recovery or orderly wind-down plan to
address general business losses or six
months of current operating expenses or
as otherwise determined by the Board.
Two commenters provided comments
on the type of operating expenses that
should be included in the calculation of
six months of current operating
expenses. Both stated that the
requirement to hold unencumbered
liquid financial assets and equity to
fund current operating expenses would
overstate the amount actually needed in
a recovery or orderly wind-down
scenario because an FMU that suffers
losses will likely eliminate or reduce
certain expenses, such as travel and
marketing expenses. The commenters
proposed that the amount be calculated
instead as the current expenses required
to operate the FMU’s critical operations
and services in such a scenario.
After consideration of the comments,
the Board continues to believe that the
calculation of six months of current
operating expenses (or as otherwise
determined by the Board) should
include all business-as-usual operating
expenses. Although certain expenses
may decrease in a recovery or orderly
wind-down, the Board believes that
certain other expenses, such as legal and
consulting fees, would likely increase in
a recovery or orderly wind-down
scenario and that it is difficult to predict
the net effect on the designated FMU’s
expenses in such a scenario. Therefore,
the requirement to hold six months of
business-as-usual operating expenses (or
as otherwise determined by the Board)
is intended to set a floor for the
designated FMU’s holdings of
unencumbered liquid assets and equity
that is independent of the assumptions
about the specifics of the recovery and
orderly wind-down scenarios as well as
easy to calculate and verify because the
information is included on the
designated FMU’s income statement.
The Board, however, does expect that if
the designated FMU foresees significant
and lasting increases or decreases in its
business-as-usual operating expenses
due to structural or other changes to the
designated FMU’s operating
environment, the designated FMU will
include this information in its
calculation. For these reasons, the Board
is adopting § 234.3(a)(15)(i)(A)(2) as
proposed.
Type of liquid assets required.
Proposed § 234.3(a)(15)(i)(A) would
require the designated FMU to hold

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unencumbered liquid financial assets,
such as cash or highly liquid securities.
One commenter stated that a designated
FMU should be able to include as
unencumbered liquid financial assets
revenues that are projected to be
received by the designated FMU over
the same six-month period, subject to an
appropriate haircut, because the
designated FMU may be able to expect
to continue to generate fees in a
recovery or orderly wind-down
scenario.
The intent of the proposed standard,
however, is to ensure that the
designated FMU has the necessary
liquid assets and equity on hand at any
particular time. Projected revenues
would not meet the requirement
because projected revenues are not
assets held on the balance sheet.
Furthermore, the Board does not
consider accounts receivable to qualify
as unencumbered liquid financial assets
under this provision because the funds
associated with those receivables have
not yet been collected and therefore are
not available for immediate use. In a
recovery or orderly wind-down
scenario, the designated FMU may not
be able to collect its accounts receivable
in the amounts expected because market
participants may be unable to pay
amounts owed to the designated FMU.
For these reasons, neither projected
revenues nor accounts receivable should
be included in types of unencumbered
liquid financial assets held to meet the
requirement in proposed
§ 234.3(a)(15)(i)(A).
It may be appropriate, however, for a
designated FMU to consider its
expected revenues, subject to an
appropriate haircut, in its calculation of
the cost to implement its recovery and
orderly wind-down plans. Depending
on the structure of the market it serves,
a designated FMU may expect to earn
revenues in a recovery or orderly winddown scenario that could partially offset
the cost of recovering or winding down.
The size of the haircut applied to the
expected revenues would likely need to
reflect this market structure. For
example, a designated FMU that
operates in a market with viable
alternatives to the services of the
designated FMU should not assume that
it would receive a large amount of
revenue during an orderly wind-down.
Type of equity required. Proposed
§ 234.3(a)(15)(i)(B) lists common stock,
disclosed reserves, and other retained
earnings as examples of equity that
should be held to meet the requirement.
Two commenters stated that
noncumulative perpetual preferred
stock should be included in the types of
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in proposed § 234.3(a)(15)(i)(B) because
some designated FMUs do not have
ready access to public capital markets to
replenish capital. One of these
commenters also stated that such stock
should be redeemable at the discretion
of the designated FMU after five years.
Proposed § 234.3(a)(15)(i)(B) provided
a non-exhaustive illustrative list of
types of equity that would be
acceptable. There may be other types of
equity, in addition to common stock,
disclosed reserves, and other retained
earnings, that could be held to meet the
requirement in proposed
§ 234.3(a)(15)(i)(B). The purpose of the
requirement is to ensure that the
designated FMU can absorb general
business losses on an ongoing basis.
Equity that has characteristics similar to
debt will not be counted toward the
requirement. Designated FMUs should
work with supervision staff to assess
whether specific equity holdings meet
the intent of the requirement. The Board
is adopting the text of the rule as
proposed.
Application of § 234.3(a)(15)(i) to a
DFMU that is part of a larger legal
entity. In the NPRM, the Board asked
whether the proposed rule should
require a designated FMU that is part of
a larger legal entity to take into account,
when calculating the cost to implement
its recovery and orderly wind-down
plans, recovery or wind-down scenarios
in which other business lines in the
legal entity or the legal entity itself may
face an adverse business environment.
One commenter stated that a designated
FMU should consider ‘‘any adverse
environment that may be faced by the
other business lines within the legal
entity, or by the legal entity itself.’’
Another stated that the FMU should
‘‘treat the service that caused it to be
designated as systemically important as
a separate division of the company and
require liquid assets and capital to be
earmarked for that service, so that the
company’s other services are not taken
into account when calculating these
requirements.’’
In the NPRM, the Board also asked,
for a designated FMU that is engaged in
several business lines, but is designated
as systemically important for purposes
of Title VIII of the Dodd-Frank Act for
only one of those business lines,
whether there are any reasonable
methodologies for determining which of
the liquid net assets and equity held at
the legal entity level belong to a
particular business line. As a single
legal entity, the firm’s equity supports
all the business lines, but it is a
designated FMU for purposes of Title
VIII of the Dodd-Frank Act with respect
to only one of those business lines. One

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commenter stated that ‘‘it is difficult to
determine the capital specific to a
designated FMU when the designated
FMU is part of a larger legal entity’’ and
that ‘‘in insolvency it may not be
possible to ring-fence assets within a
legal entity.’’ Another commenter
suggested, however, that separate pro
forma balance sheets and income
statements could be created for a
particular business line.
After consideration of the comments,
the Board has determined to adopt the
rule text as proposed. When developing
its recovery and orderly wind-down
plans and calculating the cost of
implementing those plans, a designated
FMU that also engages in business lines
for which it has not been designated by
the Council under Title VIII should
consider business shocks to other
business lines if those shocks could
potentially cause the designated FMU to
need to recover or wind down the
critical operations and services of the
business line for which it has been
designated. When calculating six
months of current operating expenses
(or as otherwise determined by the
Board), however, the designated FMU
may include only the current operating
expenses of the business line for which
it was designated rather than the current
operating expenses of the whole legal
entity.15 Furthermore, when
determining whether the designated
FMU has sufficient unencumbered
liquid financial assets and equity on its
balance sheet to equal or exceed the
greater of the cost to implement the
recovery and orderly wind-down plans
to address general business losses or six
months of current operating expenses,
the designated FMU may use the assets
and equity held at the legal entity level
that would be available to meet the
requirement rather than having to
attribute assets and equity to a certain
business line.
Content of the plan for raising
additional equity. Proposed
§ 234.3(a)(15)(ii) required the designated
FMU to maintain a viable plan for
raising additional equity before the
designated FMU’s equity falls below the
amount required in proposed
§ 234.3(a)(15)(i). Two commenters stated
that raising equity may take time,
especially in stressed market conditions.
Another commenter suggested that the
designated FMU have a cushion above
the required amount as an alternative to
a plan to raise capital before equity falls
below the minimum amount.
15 The designated FMU’s current operating
expenses should include the designated FMU’s
share of overhead and support costs and any cost
of shared services that are allocated to the
designated FMU.

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Commenters also suggested methods for
raising equity, such as a committed
contingent funding plan or a refinancing
plan involving a loan until an orderly
equity recapitalization can be executed.
A commenter also suggested that the
designated FMU should consider the
probability of an event that could cause
equity to fall below the required amount
and the period over which the event is
likely to occur.
The Board agrees that it may not be
possible in all cases to have a viable
plan to raise equity before the
designated FMU’s equity falls below the
required amount. Business shocks may
cause equity levels to fall rapidly and
unexpectedly and in circumstances
under which it may be difficult to raise
capital quickly. The Board does not
believe, however, that the rule should
specify the features of the plan or the
methods for raising capital, because the
details of the plan will depend on the
ownership structure of the designated
FMU and the environment in which it
operates. Therefore, the Board is
modifying the text of proposed
§ 234.3(a)(15)(ii) to require a designated
FMU to maintain a viable plan for
raising equity should its equity fall
below the amount required under
proposed § 234.3(a)(15)(i).
Schedule for updating the plan for
raising additional equity. Proposed
§ 234.3(a)(15)(ii) required the designated
FMU to update its plan for raising
additional equity at least annually. One
commenter stated that the plan should
be reviewed every three years instead of
annually. The commenter also stated
that the plan could be reviewed more
frequently when there are material
changes to the designated FMU’s
financial position or to the capital
markets.
After consideration of the comment,
the Board agrees that annual review of
the plan may not be necessary in the
absence of material changes to the
designated FMU’s financial position or
to the capital markets. The Board
believes, however, that the plan should
be reviewed at least every other year,
consistent with the required review
frequency of the recovery and orderly
wind-down plans in § 234.3(a)(3)(iii)(G)
and the public disclosure in
§ 234.3(a)(23)(vi). For these reasons, the
Board is modifying proposed
§ 234.3(a)(15)(ii) to require a designated
FMU to update its plan the earlier of
every two years or following changes to
the designated FMU or the environment
in which it operates that would
significantly affect the viability or
execution of the plan.

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L. Operational Risk
Proposed § 234.3(a)(17) required a
designated FMU to manage its
operational risks by establishing a
robust operational risk-management
framework, which includes a business
continuity plan. Proposed
§ 234.3(a)(17)(vii)(B) required a
designated FMU to have a business
continuity plan that is designed to
ensure that critical information
technology systems can recover and
resume operations no later than two
hours following disruptive events. One
commenter stated that ensuring that
critical information technology systems
can meet the two-hour recovery
objective in the case of an extreme
cyberattack could be very costly and
require substantial changes to the
designated FMU’s production
infrastructure, potentially including
creating additional replicas of
production infrastructure and systems.
The commenter supported the Board’s
proposal in the NPRM to address
reasonable approaches to preparing for
potential extreme cyberattacks through
the supervisory process.
The Board believes that it is
imperative to financial stability that a
designated FMU be able to recover and
resume operations quickly after
disruptive events and to complete
settlement by the end of the day of the
disruption. For many types of disruptive
scenarios, such as a wide-scale physical
disruption, the technology and methods
exist to enable a designated FMU to
recover and resume operations within
two hours of the disruption. The Board
understands, however, that certain
threats to the designated FMU’s
operations as well as the technology to
mitigate those threats are continually
evolving. The Board expects that a
designated FMU’s business continuity
planning will be a dynamic process in
which the designated FMU works on an
ongoing basis to update its plan to
recover and resume operations no later
than two hours following disruptive
events and to complete settlement by
the end of the day of the disruption,
even in extreme circumstances. In areas
where threats and technology are
evolving, such as is the case for certain
extreme cyberattacks, the Board
recognizes that it may not be possible at
this time for the designated FMU to
recover within two hours. In such cases,
the Board will work with the designated
FMU through the supervisory process to
identify reasonable approaches to
preparing for and recovering from such
attacks. The Board is revising proposed
§ 234.3(a)(17)(vii)(B) to indicate this
intent.

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The Board is also making a technical
edit to § 234.3(a)(17)(ii) to clarify that a
designated FMU should identify,
monitor, and manage the material risks
its operations may pose to trade
repositories as well as to other financial
market utilities. As mentioned above,
because of the differences in the
definition for financial market
infrastructure in the PFMI, which
includes trade repositories, and the
definition of financial market utility in
the Dodd-Frank Act, which does not,
the Board inadvertently excluded
consideration of risks posed to trade
repositories.
M. Tiered Participation Arrangements
Proposed § 234.3(a)(19) required a
designated FMU to identify, monitor,
and manage the material risks to the
designated FMU arising from tiered
participation arrangements. These
arrangements are those in which firms
that are not members in the designated
FMU (indirect participants) rely on the
services provided by members (direct
participants) of the designated FMU to
access the designated FMU’s payment,
clearing, and settlement facilities.
Three commenters addressed this
provision of the proposed rule. Two
commenters opposed the adoption of
the provision as drafted. The third
commenter supported the proposal.
Applicability of the proposed
requirements. Two commenters
addressed the applicability of the
proposed requirements to them. One
commenter opposed the proposed rule
because it does not believe that it or its
participants bear any significant risk
from its participants’ relationships with
their customers. Another commenter
supported the view that a designated
FMU needs to understand the risks
associated with the relationships
between direct participants and their
customers in order to be able to
understand and assess what risks, if
any, the tiered arrangements may
present to the designated FMU and its
other participants. This commenter
mentioned that it had developed a
document that identifies risks that arise
from tiered participation arrangements
and best practices for mitigating these
risks. This commenter also monitors
settlement and funding metrics for
indirect participants, and encourages
indirect participants that exceed certain
thresholds to become direct participants
in order to reduce systemic risk.
After consideration of the comments
and further analysis, the Board
continues to believe that for certain
designated FMUs, based on the design
of their settlement arrangements,
material risks could arise from tiered

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participation arrangements that are
borne by the FMU or by its participants.
For example, in an FMU in which a
direct participant processes large
transaction values on behalf of a large
customer such as a large correspondent
bank, the failure of the customer could
jeopardize the direct participant’s
ability to meet its obligations to the
FMU or to the other participants in the
FMU. The failure to meet these
obligations could result in liquidity
dislocations that would pose significant
liquidity risk to the FMU or to the other
participants in the FMU. The Board
acknowledges that certain designated
FMUs with particular system designs
may not face material risks arising from
tiered participation arrangements, but
these designated FMUs should present
an analysis to that effect.
Tiered participation arrangements
could also pose other risks to the
designated FMU and its participants,
including operational risk. For example,
a designated FMU may want to
understand how its direct participants
manage any spikes or peaks in volume
submitted to the designated FMU on
behalf of indirect participants.
Understanding the potential for spikes
in volume will allow the designated
FMU to prepare to have the scalable
operational capacity necessary to
process those volumes effectively, such
that it is able to achieve its service-level
objectives.
The Board believes that a designated
FMU should seek to understand the
risks associated with the relationships
between direct participants and their
customers in order to assess whether
any material risk to the designated FMU
or its other participants exists. If
material risks exist, the designated FMU
should mitigate or manage this risk.
However, the Board does not expect a
designated FMU to manage all risks that
arise between a direct participant and
its customers, but rather to manage only
the material risks to the designated FMU
itself or to its other participants as a
result of their participation in the
system. The Board is revising
§ 234.3(a)(19) to clarify that the
designated FMU should assess the
material risks arising from tiered
participation arrangements that are
borne by the designated FMU or by its
other participants as a result of their
participation in the system.
Duplicative monitoring. One
commenter stated that a requirement for
a designated FMU to monitor the risks
posed by indirect participants would be
costly and duplicative of monitoring
activities of regulators and the direct
participants in the designated FMU.
After consideration of the comment, the

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Board continues to believe that
monitoring by direct participants or by
their supervisors may not fully and
effectively address all risks that may
arise from tiered participation
arrangements. Direct participants would
likely monitor risks posed to them by
their customers but may not consider
how their actions to mitigate or manage
those risks could affect the FMU or its
other participants. In addition, the
supervisory focus for certain direct
participants is typically different from
that for designated FMUs, and their
supervisory monitoring might not take
into account the effects of tiered
participation arrangements on the
designated FMU or its other
participants. Direct participants in a
designated FMU may also be subject to
varying degrees of supervision.
Therefore, the onus should be on the
designated FMU to understand the
tiered participation arrangements in the
system and the impact of these
relationships on the designated FMU
and its participants.
Requirements for an FMU with
respect to tiered participation
arrangements. One commenter stated
that the proposed rule was ambiguous
about what would actually be required
of a designated FMU to comply with
§ 234.3(a)(19). The commenter stated
that the Board should make clear that an
FMU that does not bear any risk from
its participants or their customers
should not need to take any action to
comply with the proposed rule. Another
commenter stated that a designated
FMU should be required to ensure that
its direct participants have sufficient
information to assess their relationships
with their customers. The designated
FMU should also ensure that its direct
participants have sufficient information
to evaluate and manage their risks with
respect to participation in the
designated FMU.
After consideration of the comments,
the Board continues to believe that
designated FMUs should manage
material risks arising from tiered
participation arrangements. The Board
is adopting provisions in the final rule
that clarify what would be expected
from a designated FMU. The Board is
including § 234.3(a)(19)(i) to clarify that
the designated FMU should conduct an
analysis to determine whether material
risks arise from tiered participation
arrangements. Depending on the nature
of their payment, clearing, or settlement
activities, designated FMUs’
methodologies for conducting the
analysis may differ. For example, some
designated FMUs may choose to gather
information about the volume and value
of activity processed by direct

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participants on behalf of indirect
participants in the designated FMU or
other relevant information. Where such
information would be useful, a
designated FMU may want to consider
defining reasonable thresholds and
other factors for gathering the
information in order to minimize
burden.
The Board is including
§ 234.3(a)(19)(ii) to clarify that, where
material risks from tiered participation
arrangements are identified, the
designated FMU must mitigate or
manage such risks. The appropriate
actions to mitigate or manage the
material risks identified will depend on
the circumstances of the designated
FMU and the risks identified. For
example, one commenter noted that it
provides a set of best practices with
respect to tiered participation
arrangements to guide participants’
understanding and facilitate the
assessment of risks related to tiered
participation. This revision to the rule is
also intended to clarify that the
designated FMU is required to take
additional action only if material risks
are identified pursuant to
§ 234.3(a)(19)(i).
The Board is including
§ 234.3(a)(19)(iii) to clarify that a
designated FMU will be required to
review and update its analysis of risks
arising from tiered participation
arrangements at the earlier of every two
years or following material changes to
the system design or operations or the
environment in which the designated
FMU operates if those changes could
affect the analysis conducted as
required in § 234.3(a)(19)(i). If a
designated FMU’s review of its analysis
indicates that the designated FMU faces
no material risks from tiered
participation arrangements, then no
further action would be required. This
provision is intended to clarify, in
response to concerns raised by one
commenter, that a designated FMU will
not be required to monitor constantly
the risks posed by tiered participation
arrangements. The review requirement
is also intended to be responsive to
another comment that the review
frequency for the assessment of risks
arising from tiered participation
arrangements should be consistent with
the review standards under proposed
§ 234.3(a)(3). The Board agrees and is
also adopting a requirement for biennial
review of the recovery and orderly
wind-down plans in § 234.3(a)(3)(iii).
Definition of ‘indirect participants’.
Proposed § 234.3(a)(19) refers to firms
that are not members of the designated
FMU (indirect participants) that rely on
the services provided by direct

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participants to access the designated
FMU’s payment, clearing, or settlement
facilities. One commenter stated that the
Board should limit the application of
the rule to firms that are known by the
designated FMU, have an agreement
binding them to the FMU’s rules, and
may have a direct connection to the
FMU. The Board believes that material
risks can originate from arrangements
with a range of indirect participants
having a range of relationships or
arrangements with the FMU. If such
arrangements may pose material risks,
the designated FMU should seek to
gather information from its direct
participants on those arrangements and
assess the risks from those
arrangements. Therefore, the Board is
retaining the concept of indirect
participant as those firms that access the
services of the designated FMU through
a direct participant, whether or not they
are bound by some part of the rules or
have a direct connection to the
designated FMU.16 The Board wishes to
clarify, however, that the designated
FMU should focus its analysis on the
direct customers of the direct
participants and need not extend its
analysis to other tiers of customers, such
as the customers of the customers of the
direct participants.
Thresholds for identifying indirect
participants that could pose risk to the
designated FMU. In the preamble to the
proposed rule, the Board asked how, if
at all, the Board should define the
thresholds for identifying indirect
participants responsible for a significant
proportion of transactions processed by
the designated FMU and for identifying
indirect participants whose transaction
volumes or values are large relative to
the capacity of the direct participant
through which the indirect participants
access the designated FMU. One
commenter stated that the Board should
not be too prescriptive in defining these
thresholds, because they may vary
across individual designated FMUs. The
Board is not defining specific thresholds
for identifying indirect participants that
may pose risk to the designated FMU.
Conflicts of interest and antitrust
issues. One commenter stated that the
proposed rule raises conflict-of-interest
and antitrust issues. The commenter
stated that the collection of data on
indirect participation that the Board
16 For

example, some firms may submit
transactions or instructions to an FMU directly
under the account of a direct participant. In this
case, the firm may be bound by the FMU’s rules,
but the direct participant would be accountable for
the firm’s performance on its obligations. In other
FMUs, indirect participants are not bound by the
rules of the FMU and do not have a direct
connection to the FMU.

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proposed in the NPRM would give the
board of directors of the designated
FMU a complete picture of each
participant’s relationships with its most
important customers, which could
create a conflict of interest if the
designated FMU’s board of directors is
made up of representatives of the
member banks. The commenter also
stated that the proposed requirement
appeared to require designated FMUs to
encourage indirect participants that are
large relative to their direct participants
to move to a larger direct participant or
become direct participants themselves,
which could create antitrust issues if the
designated FMU’s actions to comply
with the requirement appear to third
parties as an effort by the designated
FMU to favor its owner banks.
The Board believes that any conflicts
of interest or antitrust issues that may
arise from the requirements in proposed
§ 234.3(a)(19) can be avoided through
the careful design of the informationgathering and risk-management
processes developed by the designated
FMU. First, the designated FMU’s board
of directors does not have to see a
complete picture of each participant’s
relationships with its customers. The
designated FMU can put controls in
place that would minimize potential
conflicts to ensure that information is
shared in an appropriate manner that
would allow the board of directors to
carry out its responsibility for the
comprehensive management of risks.
Second, the rule does not require the
designated FMU to encourage indirect
participants that are large relative to
their direct participants to move to a
larger direct participant or become
direct participants themselves. The
designated FMU may choose other
methods for mitigating or managing
risks to the designated FMU from tiered
participation arrangements. For
example, if the designated FMU is
concerned that a direct participant’s
exposures to its customers could cause
it to default to the designated FMU, the
designated FMU may require the direct
participant to provide additional
collateral to mitigate the relevant
financial risks posed by its relationships
with its customers. Therefore, the Board
does not believe it is necessary to
modify the rule to address these
concerns.
N. Efficiency and Effectiveness
Proposed § 234.3(a)(21) required a
designated FMU to be efficient and
effective in meeting the requirements of
its participants and the markets it
serves. In the NPRM, the Board
explained that efficiency generally
encompasses what a designated FMU

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chooses to do, how it does it, and the
resources required by the designated
FMU to perform its functions.
Effectiveness refers to whether the
designated FMU is meeting its goals and
objectives, which include the
requirements of its participants and the
markets it serves.
One commenter stated that the Board
has not given sufficient weight to
market judgments regarding an FMU’s
effectiveness and that an FMU that does
not meet the requirements of its
participants and the markets it serves or
that does not meet its objectives
efficiently will not survive in the
market. The commenter suggested that
the Board remove the requirement or
redefine efficiency and effectiveness in
terms of market judgments.
The Board continues to believe that a
requirement for a designated FMU to be
efficient and effective should be
included in § 234.3(a) and that the terms
efficiency and effectiveness should not
be defined solely in terms of market
judgments. The Board agrees with the
comment that market forces may
encourage an FMU to be efficient and
effective, particularly in cases where it
has a direct competitor. Many markets
for payment, clearing and settlement
services, however, are monopolies or
oligopolies. Furthermore, it may be
difficult for market participants to
determine if a particular designated
FMU is efficient and effective because of
imperfect information about the
designated FMU. Therefore, market
judgments alone may be insufficient to
encourage the designated FMU to
operate efficiently and effectively. The
Board does not believe that changes to
the proposed requirement are necessary
and is adopting the text of the rule as
proposed.
O. Disclosure of Rules, Procedures and
Market Data
Proposed § 234.3(a)(23) required the
designated FMU to disclose relevant
information about its operations and
risk management to its participants and
to the public. Proposed § 234.3(a)(23)(ii)
required a designated FMU to disclose
publicly all rules and key procedures,
including key aspects of its default rules
and procedures. Proposed
§ 234.3(a)(23)(iii) required a designated
FMU to provide sufficient information
to enable participants to have an
accurate understanding of the risks,
fees, and other material costs they incur
by participating in the designated FMU.
The Board also asked a question in the
NPRM about whether a designated FMU
should disclose information about fees
and discount policies to the public.

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The Board received two comment
letters that addressed this provision of
the proposed rule. In response to the
proposed rule, one commenter stated
that certain procedures should not be
publicly disclosed because they would
help unauthorized persons gain access
to the system. The Board agrees that
certain procedures should not be
disclosed to the public in detail if such
detail would create vulnerabilities for
the designated FMU or undermine its
safety and soundness. Although the
Board expects disclosures to be robust,
it does not expect a designated FMU to
disclose to the public sensitive
information, such as its detailed
business continuity plan. In such cases,
it may be sufficient to disclose to the
public only the key highlights of the
plan.
In response to the Board’s question
about public disclosure of information
on fees and discount policies, one
commenter stated that high-level
information about pricing principles
and rationale for the designated FMU’s
pricing principles should be disclosed,
while another commenter opposed such
a requirement. After consideration of
the comments, the Board has
determined not to include a requirement
for a designated FMU to disclose
information about fees and discount
policies to the public. Although the
Board believes that public disclosure of,
at a minimum, high-level information
about the designated FMU’s pricing
principles and rationale for those
principles is a best practice for
transparency purposes, the Board
believes that a requirement to disclose
specific details about fees and discounts
to the public is not relevant to the
objectives of Title VIII to promote robust
risk management, promote safety and
soundness, reduce systemic risks, and
support the stability of the broader
financial system. For these reasons, the
Board is not introducing this
requirement in § 234.3(a)(23).
P. Compliance Dates
In the NPRM, the Board proposed that
the revisions to § 234.3(a) become
effective 30 days from the date final
rules are published in the Federal
Register. The Board proposed that
designated FMUs be expected to comply
with the requirements in the final rule
30 days from the date final rules are
published in the Federal Register, with
the exception of establishing plans for
recovery and orderly wind-down, set
forth in proposed § 234.3(a)(3)(iii);
addressing uncovered credit losses, set
forth in proposed § 234.3(a)(4)(vi);
addressing liquidity shortfalls, set forth
in proposed § 234.3(a)(7)(viii);

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maintaining sufficient liquid net assets
funded by equity and a viable capital
plan, set forth in proposed
§ 234.3(a)(15)(i) and (ii); managing risks
arising in tiered participation
arrangements, set forth in proposed
§ 234.3(a)(19); and providing
comprehensive public disclosure, set
forth in proposed § 234.3(a)(23)(iv). The
Board proposed that compliance with
these requirements be required within
six months of publication of the final
rules.
The Board received three comment
letters that addressed the extension to
the compliance date for certain
requirements. Two commenters agreed
with the six-month extension for these
requirements. The third commenter
stated that a minimum of 18 months
would be required to comply with
requirements in the proposed rule,
especially if the requirements set forth
in proposed § 234.3(a)(19) were adopted
as proposed. One of the commenters
also stated that the compliance date for
proposed § 234.3(a)(20) on links to other
FMUs should also be extended for at
least six months because
implementation of that rule will require
extensive cooperation and coordination
between FMUs.
The Board has adopted the effective
date of December 31, 2014 for the final
rule. Designated FMUs are also expected
to comply with the requirements in the
final rule on December 31, 2014, with
the exception of establishing plans for
recovery and orderly wind-down, set
forth in § 234.3(a)(3)(iii); addressing
uncovered credit losses, set forth in
§ 234.3(a)(4)(vi); addressing liquidity
shortfalls, set forth in § 234.3(a)(7)(viii);
maintaining sufficient liquid net assets
funded by equity and a viable capital
plan, set forth in § 234.3(a)(15)(i) and
(ii); managing risks arising in tiered
participation arrangements, set forth in
§ 234.3(a)(19); and providing
comprehensive public disclosure, set
forth in § 234.3(a)(23)(iv). Compliance
with these provisions will be required
on or before December 31, 2015.
Designated FMUs, however, are
encouraged to comply with the
provisions as soon as possible.
The Board is making these changes to
the effective date and the compliance
dates after consideration of the public
comments as well as internal analysis.
The Board decided to extend the
compliance date for the new and
heightened requirements in order to
allow sufficient time to the designated
FMUs to complete their processes and
procedures for changes to their
rulebooks and to minimize burden on
the designated FMUs and the markets
they serve. Also, the Board has decided

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not to include § 234.3(a)(20) in the list
of provisions for which there is an
extension to the compliance period
because this provision does not apply to
the designated FMUs that will be
subject to the revisions to § 234.3(a) on
the effective date of the final rule.
III. Administrative Law Matters
A. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (‘‘RFA’’) generally
requires an agency to perform an initial
and a final regulatory flexibility analysis
on the impact a rule is expected to have
on small entities. However, under
section 605(b) of the RFA, the regulatory
flexibility analysis otherwise required
under section 604 of the FRA is not
required if an agency certifies, along
with a statement providing the factual
basis for such certification, that the rule
will not have a significant economic
impact on a substantial number of small
entities. Based on current information,
the Board believes that the payment
systems that have been designated by
the Council are not ‘‘small entities’’ for
purposes of the RFA, and so, the final
rule likely would not have a significant
economic impact on a substantial
number of small entities. However, the
Board has prepared the following final
regulatory flexibility analysis pursuant
to section 604 of the RFA.
1. Statement of the need for, and
objectives of, the final rule. In
accordance with Sections 805(a) of the
Dodd-Frank Act, the Board is adopting
the final rule. The final rule amends the
risk-management standards for
systemically important FMUs in
consideration of the new international
standards. The reasons and justification
for the final rule are described above in
the Supplementary Information.
2. Summary of the significant issues
raised by public comment on the
Board’s initial analysis, the Board’s
assessment of such issues, and a
statement of any changes made as a
result of such comments. The Board did
not receive any public comments
regarding its initial regulatory flexibility
analysis. In addition, the Board did not
receive any comments filed by the Chief
Counsel for Advocacy of the Small
Business Administration in response to
the proposed rule.
3. Small entities affected by the final
rule. The final rule would affect FMUs
that the Council designates as
systemically important to the U.S.
financial system for which the Board is
the Supervisory Agency. Pursuant to
regulations issued by the Small
Business Administration (the ‘‘SBA’’)
(13 CFR 121.201), a ‘‘small entity’’

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includes an establishment engaged in (i)
providing financial transaction
processing, reserve and liquidity
services, or clearinghouse services with
an average annual revenue of $38.5
million or less (NAICS code 522320); (ii)
securities and/or commodity exchange
activities with an average annual
revenue of $38.5 million or less (NAICS
code 523210); and (iii) trust, fiduciary,
and/or custody activities with an
average annual revenue of $38.5 million
or less (NAICS code 523991). As noted
in the NPRM, based on current
information, the Board does not believe
that any of the FMUs that have been
designated by the Council, and in
particular the two designated FMUs for
which the Board is the Supervisory
Agency under Title VIII of the DoddFrank Act, would be ‘‘small entities’’
pursuant to the SBA regulation. In
addition, the Board is not, and is not
likely to become, the Supervisory
Agency pursuant to section 803(8) of the
Dodd-Frank Act for any designated
FMU that operates as a central securities
depository or central counterparty.
4. Recordkeeping, reporting, and
compliance requirements. The final rule
imposes certain reporting and
recordkeeping requirements for a
designated FMU. (See, for example,
§ 234.3(a)(3) (requiring policies,
procedures, and systems that enable the
designated FMU to identify, measure,
monitor, and manage the risks that arise
in or are borne by the designated FMU),
§ 234.3(a)(13) (requiring effective and
clearly defined rules and procedures to
manage a participant default), and
§ 234.3(a)(23) (requiring a
comprehensive public disclosure of its
legal, governance, risk management, and
operating framework).) The final rule
also contains a number of compliance
requirements, including the standards
that the designated FMU must meet,
such as (i) having a well-founded, clear,
transparent and enforceable legal basis
for each material aspect of its activities
in all relevant jurisdictions
(§ 234.3(a)(1)), (ii) effectively measuring,
monitoring, and managing its credit
exposures under a wide range of
significantly different stress scenarios
(§ 234.3(a)(4)), (iii) effectively
measuring, monitoring, and managing
the liquidity risk that arises or is borne
by the designated FMU (§ 234.3(a)(7)),
and (iv) managing its operational risks
by establishing a robust operational riskmanagement framework (§ 234.3(a)(17)).
Designated FMUs for which the Board is
the Supervisory Agency are generally
already expected to meet most of these
standards, or are at least familiar with
these or similar standards, so these

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requirements would not likely impose
material additional costs on those
designated FMUs.
The final rule, however, also includes
a number of new or heightened
standards that may impose new or
additional compliance costs on the
designated FMUs for which the Board is
the Supervisory Agency. For example,
as explained above in the
Supplementary Information, the final
rule includes requirements for
integrated plans for the designated
FMU’s recovery and orderly wind-down
(§ 234.3(a)(3)(iii)); policies and
procedures that explicitly address
uncovered credit losses
(§ 234.3(a)(4)(vi)); policies and
procedures that explicitly address
liquidity shortfalls (§ 234.3(a)(7)(viii));
maintaining sufficient liquid net assets
funded by equity sufficient to ensure a
recovery or orderly wind-down of
critical operations and services and a
viable plan for raising additional equity
should the designated FMU’s equity fall
below the amount required for a
recovery or orderly wind-down
(§ 234.3(a)(15)(i) and (ii)); managing
risks arising in tiered participation
arrangements (§ 234.3(a)(19)); and
providing comprehensive public
disclosure (§ 234.3(a)(23)(iv)).
All of these requirements would
likely require professional skills in the
legal, risk management, finance,
payments operations, and accounting
areas.
5. Significant alternatives to the
revisions. Section 805(a) of the DoddFrank Act requires the Board to
prescribe risk-management standards
governing the operations related to
payment, clearing, and settlement
activities of designated FMUs, so other
administrative methods for
accomplishing the goals of the Act were
not considered. In prescribing the riskmanagement standards, Section 805(a)
of the Act also requires the Board to take
into consideration relevant international
standards, among other things. The
PFMI is now widely recognized as the
most relevant set of international riskmanagement standards for payment,
clearing, and settlement systems.
Consistent with the PFMI, the proposed
rule generally employed a flexible,
principles-based approach to permit a
designated FMU to employ a costeffective method for compliance. In
consultation with the Council and the
other Supervisory Agencies, the Board
has included additional detail in
developing the final rule where
necessary or appropriate, such as
specific testing frequencies or other
requirements to provide the designated
FMUs with sufficient guidance for

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compliance with the standard. As noted
above, the Board has revised the level of
detail provided in the risk-management
standards in the final rule, as
appropriate, in response to the public
comments. In addition, after
consideration of the public comments as
well as additional Board analysis, the
Board has delayed the compliance date
for several of the new or heightened
requirements in order to allow
designated FMUs for which the Board is
the Supervisory Agency sufficient time
to revise their rules and associated
processes and procedures and to
minimize burden on the designated
FMUs and the markets they serve. As
noted above, the Board does not believe
that the alternative adopted in the final
rule will have a significant economic
impact on small entities.
B. Competitive Impact Analysis
As a matter of policy, the Board
subjects all operational and legal
changes that could have a substantial
effect on payment system participants to
a competitive impact analysis, even if
competitive effects are not apparent on
the face of the proposal.17 Pursuant to
this policy, the Board assesses whether
proposed changes ‘‘would have a direct
and material adverse effect on the
ability of other service providers to
compete effectively with the Federal
Reserve in providing similar services’’
and whether any such adverse effect
‘‘was due to legal differences or due to
a dominant market position deriving
from such legal differences.’’ If, as a
result of this analysis, the Board
identifies an adverse effect on the ability
to compete, the Board then assesses
whether the associated benefits—such
as improvements to payment system
efficiency or integrity—can be achieved
while minimizing the adverse effect on
competition.
This final rule promulgates revised
Regulation HH risk-management
standards, which are based on the PFMI,
for certain designated FMUs as required
by Title VIII of the Dodd-Frank Act. In
a separate, related Federal Register
notice, the Board finalized concurrently
revisions to part I of its PSR policy,
which applies to the Federal Reserve
Bank-operated Fedwire Services, based
on the PFMI. At least one currently
designated FMU that is subject to
Regulation HH (The Clearing House
Payments Company, L.L.C., with respect
to its operation of the Clearing House
Interbank Payments System (CHIPS))
competes with the Fedwire Funds
17 See ‘‘The Federal Reserve in the Payments
System,’’ Fed. Res. Reg. Svc. §§ 9–1550, 9–1558
(Apr. 2009).

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Service. One commenter expressed
concern that differences in language
between the risk-management standards
in Regulation HH and in part I of the
PSR policy may result in two different
sets of risk-management standards for
FMUs. The commenter also stated that
the Board should ensure that the
requirements in § 234.3(a)(15) with
respect to general business risk for
designated FMUs should also be
imposed on the equivalent Reserve Bank
service.
The final revisions to the riskmanagement and transparency
expectations in part I of the PSR policy
are consistent with those in final
Regulation HH. As discussed above, a
different level of detail is required for
Regulation HH as compared to part I of
the PSR policy. Regulation HH is an
enforceable rule applicable to
designated FMUs other than those
supervised by the CFTC or SEC, so
additional details from the key
considerations and explanatory notes of
the PFMI were incorporated in the rule
text to provide greater clarity on the
Board’s expectations. The PSR policy,
on the other hand, is a policy statement
that provides guidance with respect to
the Board’s exercise of its other
supervisory or regulatory authority over
other financial market infrastructures
(including those operated by the Federal
Reserve Banks) or their participants, its
participation in cooperative oversight
arrangements for financial market
infrastructures, or the provision of
intraday credit to eligible Federal
Reserve account holders. Incorporating
the headline standards from the PFMI is
consistent with the purpose of the
document and the Board’s long-standing
principles-based approach to its PSR
policy. The Board has stated that it will
be guided by the key considerations and
the explanatory text of the PFMI in its
application of the PSR policy. The
Board does not intend for differences in
language in the two documents to lead
to inconsistent requirements for Reserve
Bank-operated FMUs and their private
sector competitors.
The Board recognizes the critical role
that the Fedwire Services play in the
financial system and is committed to
applying risk-management standards to
the Reserve Banks’ Fedwire Funds
Service that are at least as stringent as
the applicable Regulation HH standards
applied to designated FMUs that
provide similar services. The final
revisions to part I of the PSR policy
provide that the treatment of Reserve
Bank systems will be consistent with
that of private-sector systems in order to
avoid any material adverse effect on the
ability of other service providers to

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compete effectively with the Reserve
Banks.
There are, however, several riskmanagement standards for which
flexibility in implementation will be
necessary for the Fedwire Services given
the Federal Reserve’s legal framework
and structure and its roles as monetary
authority and liquidity provider.18 The
Board does not expect that the
difference in approach to implementing
these standards for the Fedwire Funds
Service as compared to the requirements
for its private-sector competitor would
create a significant difference in
operating costs for the two entities, with
the possible exception of the
expectation to hold unencumbered
liquid financial assets and equity under
§ 234.3(a)(15)(i). In order to foster
competition with private-sector systems,
the Board will incorporate the cost of
this requirement into the pricing of the
Fedwire Funds Service. Although the
Fedwire Funds Service does not face the
risk that a business shock would cause
the service to wind down in a disorderly
manner and disrupt the stability of the
financial system, in order to foster
competition with private-sector systems,
the Board will require the Fedwire
Funds Service to impute the cost of
maintaining liquid assets and equity to
cover general business losses, similar to
the requirement for designated FMUs in
§ 234.3(a)(15)(i). The Board will also
monitor the implementation of the final
regulation and policy for issues of
consistency and competitive equity
between private-sector systems and the
Fedwire Funds Service. Therefore, the
Board does not believe the final rule
promulgating risk-management
standards for designated FMUs under
Title VIII will have any direct and
material adverse effect on the ability of
other service providers to compete with
the Reserve Banks.
C. Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR part 1320, Appendix A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget. As
noted in the proposal, for purposes of
calculating burden under the Paperwork
Reduction Act, a ‘‘collection of
information’’ involves 10 or more
respondents. Any collection of
18 These standards include principle 2 on
governance, principle 3 on the framework for the
comprehensive management of risks, principle 4 on
credit risk, principle 5 on collateral, principle 7 on
liquidity risk, principle 13 on participant-default
rules and procedures, principle 15 on general
business risk, and principle 18 on access and
participation requirements.

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information addressed to all or a
substantial majority of an industry is
presumed to involve 10 or more
respondents (5 CFR 1320.3(c)
introductory text and (c)(4)(ii)). The
Board estimates there are fewer than 10
respondents, and these respondents do
not represent all or a substantial
majority of the participants in payment,
clearing, and settlement systems.
Therefore, no collections of information
pursuant to the Paperwork Reduction
Act are contained in the final rule. The
Board did not receive any comments on
this analysis.
Text of Final Rule
List of Subjects in 12 CFR 234
Banks, Banking, Credit, Electronic
funds transfers, Financial market
utilities, Securities.
Authority and Issuance
For the reasons set forth in the
preamble, the Board amends 12 CFR
part 234 as set forth below.
PART 234—DESIGNATED FINANCIAL
MARKET UTILITIES (REGULATION HH)
1–2. The authority citation for part
234 continues to read as follows:

■

Authority: 12 U.S.C. 5461 et seq.
■

3. Revise § 234.2 to read as follows:

§ 234.2

Definitions.

(a) Backtest means the ex post
comparison of realized outcomes with
margin model forecasts to analyze and
monitor model performance and overall
margin coverage.
(b) Central counterparty means an
entity that interposes itself between
counterparties to contracts traded in one
or more financial markets, becoming the
buyer to every seller and the seller to
every buyer.
(c) Central securities depository
means an entity that provides securities
accounts and central safekeeping
services.
(d) Designated financial market utility
means a financial market utility that is
currently designated by the Financial
Stability Oversight Council under
section 804 of the Dodd-Frank Act (12
U.S.C. 5463).
(e) Financial market utility has the
same meaning as the term is defined in
section 803(6) of the Dodd-Frank Act
(12 U.S.C. 5462(6)).
(f) Link means, for purposes of
§ 234.3(a)(20), a set of contractual and
operational arrangements between two
or more central counterparties, central
securities depositories, or securities
settlement systems, or between one or
more of these financial market utilities

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and one or more trade repositories, that
connect them directly or indirectly,
such as for the purposes of participating
in settlement, cross margining, or
expanding their services to additional
instruments and participants.
(g) Orderly wind-down means the
actions of a designated financial market
utility to effect the permanent cessation,
sale, or transfer of one or more of its
critical operations or services in a
manner that would not increase the risk
of significant liquidity or credit
problems spreading among financial
institutions or markets and thereby
threaten the stability of the U.S.
financial system.
(h) Recovery means, for purposes of
§ 234.3(a)(3) and (15), the actions of a
designated financial market utility,
consistent with its rules, procedures,
and other ex ante contractual
arrangements, to address any uncovered
loss, liquidity shortfall, or capital
inadequacy, whether arising from
participant default or other causes (such
as business, operational, or other
structural weaknesses), including
actions to replenish any depleted
prefunded financial resources and
liquidity arrangements, as necessary to
maintain the designated financial
market utility’s viability as a going
concern and to continue its provision of
critical services.
(i) Securities settlement system means
an entity that enables securities to be
transferred and settled by book entry
and allows transfers of securities free of
or against payment.
(j) Stress test means the estimation of
credit or liquidity exposures that would
result from the realization of potential
stress scenarios, such as extreme price
changes, multiple defaults, and changes
in other valuation inputs and
assumptions.
(k) Supervisory Agency has the same
meaning as the term is defined in
section 803(8) of the Dodd-Frank Act
(12 U.S.C. 5462(8)).
(l) Trade repository means an entity
that maintains a centralized electronic
record of transaction data, such as a
swap data repository or a security-based
swap data repository.
■ 4. In § 234.3, revise paragraph (a) to
read as follows:

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§ 234.3 Standards for designated financial
market utilities.

(a) A designated financial market
utility must implement rules,
procedures, or operations designed to
ensure that it meets or exceeds the
following risk-management standards
with respect to its payment, clearing,
and settlement activities.

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(1) Legal basis. The designated
financial market utility has a wellfounded, clear, transparent, and
enforceable legal basis for each material
aspect of its activities in all relevant
jurisdictions.
(2) Governance. The designated
financial market utility has governance
arrangements that—
(i) Are clear, transparent, and
documented;
(ii) Promote the safety and efficiency
of the designated financial market
utility;
(iii) Support the stability of the
broader financial system, other relevant
public interest considerations such as
fostering fair and efficient markets, and
the legitimate interests of relevant
stakeholders, including the designated
financial market utility’s owners,
participants, and participants’
customers; and
(iv) Are designed to ensure—
(A) Lines of responsibility and
accountability are clear and direct;
(B) The roles and responsibilities of
the board of directors and senior
management are clearly specified;
(C) The board of directors consists of
suitable individuals having appropriate
skills to fulfill its multiple roles;
(D) The board of directors includes a
majority of individuals who are not
executives, officers, or employees of the
designated financial market utility or an
affiliate of the designated financial
market utility;
(E) The board of directors establishes
policies and procedures to identify,
address, and manage potential conflicts
of interest of board members and to
review its performance and the
performance of individual board
members on a regular basis;
(F) The board of directors establishes
a clear, documented risk-management
framework that includes the designated
financial market utility’s risk-tolerance
policy, assigns responsibilities and
accountability for risk decisions, and
addresses decisionmaking in crises and
emergencies;
(G) Senior management has the
appropriate experience, skills, and
integrity necessary to discharge
operational and risk-management
responsibilities;
(H) The risk-management function has
sufficient authority, resources, and
independence from other operations of
the designated financial market utility,
and has a direct reporting line to and is
overseen by a committee of the board of
directors;
(I) The internal audit function has
sufficient authority, resources, and
independence from management, and
has a direct reporting line to and is

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overseen by a committee of the board of
directors; and
(J) Major decisions of the board of
directors are clearly disclosed to
relevant stakeholders, including the
designated financial market utility’s
owners, participants, and participants’
customers, and, where there is a broad
market impact, the public.
(3) Framework for the comprehensive
management of risks. The designated
financial market utility has a sound riskmanagement framework for
comprehensively managing legal, credit,
liquidity, operational, general business,
custody, investment, and other risks
that arise in or are borne by the
designated financial market utility. This
framework is subject to periodic review
and includes—
(i) Risk-management policies,
procedures, and systems that enable the
designated financial market utility to
identify, measure, monitor, and manage
the risks that arise in or are borne by the
designated financial market utility,
including those posed by other entities
as a result of interdependencies;
(ii) Risk-management policies,
procedures, and systems that enable the
designated financial market utility to
identify, measure, monitor, and manage
the material risks that it poses to other
entities, such as other financial market
utilities, settlement banks, liquidity
providers, or service providers, as a
result of interdependencies; and
(iii) Integrated plans for the
designated financial market utility’s
recovery and orderly wind-down that—
(A) Identify the designated financial
market utility’s critical operations and
services related to payment, clearing,
and settlement;
(B) Identify scenarios that may
potentially prevent it from being able to
provide its critical operations and
services as a going concern, including
uncovered credit losses (as described in
paragraph (a)(4)(vi)(A) of this section),
uncovered liquidity shortfalls (as
described in paragraph (a)(7)(viii)(A) of
this section), and general business
losses (as described in paragraph (a)(15)
of this section);
(C) Identify criteria that could trigger
the implementation of the recovery or
orderly wind-down plan;
(D) Include rules, procedures,
policies, and any other tools the
designated financial market utility
would use in a recovery or orderly
wind-down to address the scenarios
identified under paragraph (a)(3)(iii)(B)
of this section;
(E) Include procedures to ensure
timely implementation of the recovery
and orderly wind-down plans in the

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scenarios identified under paragraph
(a)(3)(iii)(B) of this section;
(F) Include procedures for informing
the Board, as soon as practicable, if the
designated financial market utility is
considering initiating recovery or
orderly wind-down; and
(G) Are reviewed the earlier of every
two years or following changes to the
system or the environment in which the
designated financial market utility
operates that would significantly affect
the viability or execution of the plans.
(4) Credit risk. The designated
financial market utility effectively
measures, monitors, and manages its
credit exposures to participants and
those arising from its payment, clearing,
and settlement processes. In this regard,
the designated financial market utility
maintains sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence. In addition, the designated
financial market utility—
(i) If it operates as a central
counterparty, maintains additional
prefunded financial resources that are
sufficient to cover its credit exposure
under a wide range of significantly
different stress scenarios that includes
the default of the participant and its
affiliates that would potentially cause
the largest aggregate credit exposure to
the designated financial market utility
in extreme but plausible market
conditions;
(ii) If it operates as a central
counterparty, may be directed by the
Board to maintain additional prefunded
financial resources that are sufficient to
cover its credit exposure under a wide
range of significantly different stress
scenarios that includes the default of the
two participants and their affiliates that
would potentially cause the largest
aggregate credit exposure to the
designated financial market utility in
extreme but plausible market
conditions. The Board may consider
such a direction if the central
counterparty—
(A) Is involved in activities with a
more-complex risk profile, such as
clearing financial instruments
characterized by discrete jump-todefault price changes or that are highly
correlated with potential participant
defaults, or
(B) Has been determined by another
jurisdiction to be systemically important
in that jurisdiction;
(iii) If it operates as a central
counterparty, determines the amount
and regularly tests the sufficiency of the
total financial resources available to
meet the requirements of this paragraph
by—

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(A) On a daily basis, conducting a
stress test of its total financial resources
using standard and predetermined stress
scenarios, parameters, and assumptions;
(B) On at least a monthly basis, and
more frequently when the products
cleared or markets served experience
high volatility or become less liquid, or
when the size or concentration of
positions held by the central
counterparty’s participants increases
significantly, conducting a
comprehensive and thorough analysis of
the existing stress scenarios, models,
and underlying parameters and
assumptions such that the designated
financial market utility meets its
required level of default protection in
light of current and evolving market
conditions; and
(C) Having clear procedures to report
the results of its stress tests to
decisionmakers at the central
counterparty and using these results to
evaluate the adequacy of and adjust its
total financial resources;
(iv) If it operates as a central
counterparty, excludes assessments for
additional default or guaranty fund
contributions (that is, default or
guaranty fund contributions that are not
prefunded) in its calculation of financial
resources available to meet the total
financial resource requirement under
this paragraph;
(v) At least annually, provides for a
validation of the designated financial
market utility’s risk-management
models used to determine the
sufficiency of its total financial
resources that—
(A) Includes the designated financial
market utility’s models used to comply
with the collateral provisions under
paragraph (a)(5) of this section and
models used to determine initial margin
under paragraph (a)(6) of this section;
and
(B) Is performed by a qualified person
who does not perform functions
associated with the model (except as
part of the annual model validation),
does not report to such a person, and
does not have a financial interest in
whether the model is determined to be
valid; and
(vi) Establishes rules and procedures
that explicitly—
(A) Address allocation of credit losses
the designated financial market utility
may face if its collateral and other
financial resources are insufficient to
cover fully its credit exposures,
including the repayment of any funds a
designated financial market utility may
borrow from liquidity providers; and
(B) Describe the designated financial
market utility’s process to replenish any
financial resources that the designated

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financial market utility may employ
during a stress event, including a
participant default.
(5) Collateral. If it requires collateral
to manage its or its participants’ credit
exposure, the designated financial
market utility accepts collateral with
low credit, liquidity, and market risks
and sets and enforces conservative
haircuts and concentration limits, in
order to ensure the value of the
collateral in the event of liquidation and
that the collateral can be used in a
timely manner. In this regard, the
designated financial market utility—
(i) Establishes prudent valuation
practices and develops haircuts that are
tested regularly and take into account
stressed market conditions;
(ii) Establishes haircuts that are
calibrated to include relevant periods of
stressed market conditions to reduce the
need for procyclical adjustments;
(iii) Provides for annual validation of
its haircut procedures, as part of its riskmanagement model validation under
paragraph (a)(4)(v) of this section;
(iv) Avoids concentrated holdings of
any particular type of asset where the
concentration could significantly impair
the ability to liquidate such assets
quickly without significant adverse
price effects;
(v) Uses a collateral management
system that is well-designed and
operationally flexible such that it,
among other things,—
(A) Accommodates changes in the
ongoing monitoring and management of
collateral; and
(B) Allows for the timely valuation of
collateral and execution of any
collateral or margin calls.
(6) Margin. If it operates as a central
counterparty, the designated financial
market utility covers its credit
exposures to its participants for all
products by establishing a risk-based
margin system that—
(i) Is conceptually and
methodologically sound for the risks
and particular attributes of each
product, portfolio, and markets it serves,
as demonstrated by documented and
empirical evidence supporting design
choices, methods used, variables
selected, theoretical bases, key
assumptions, and limitations;
(ii) Establishes margin levels
commensurate with the risks and
particular attributes of each product,
portfolio, and market it serves;
(iii) Has a reliable source of timely
price data;
(iv) Has procedures and sound
valuation models for addressing
circumstances in which pricing data are
not readily available or reliable;

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(v) Marks participant positions to
market and collects variation margin at
least daily and has the operational
capacity to make intraday margin calls
and payments, both scheduled and
unscheduled, to participants;
(vi) Generates initial margin
requirements sufficient to cover
potential changes in the value of each
participant’s position during the
interval between the last margin
collection and the closeout of positions
following a participant default by—
(A) Ensuring that initial margin meets
an established single-tailed confidence
level of at least 99 percent with respect
to the estimated distribution of future
exposure; and
(B) Using a conservative estimate of
the time horizons for the effective
hedging or closeout of the particular
types of products cleared, including in
stressed market conditions; and
(vii) Is monitored on an ongoing basis
and regularly reviewed, tested, and
verified through—
(A) Daily backtests;
(B) Monthly sensitivity analyses,
performed more frequently during
stressed market conditions or significant
fluctuations in participant positions,
with this analysis taking into account a
wide range of parameters and
assumptions that reflect possible market
conditions that captures a variety of
historical and hypothetical conditions,
including the most volatile periods that
have been experienced by the markets
the designated financial market utility
serves; and
(C) Annual model validations of the
designated financial market utility’s
margin models and related parameters
and assumptions, as part of its riskmanagement model validation under
paragraph (a)(4)(v) of this section.
(7) Liquidity risk. The designated
financial market utility effectively
measures, monitors, and manages the
liquidity risk that arises in or is borne
by the designated financial market
utility. In this regard, the designated
financial market utility—
(i) Has effective operational and
analytical tools to identify, measure,
and monitor its settlement and funding
flows on an ongoing and timely basis,
including its use of intraday liquidity;
(ii) Maintains sufficient liquid
resources in all relevant currencies to
effect same-day and, where applicable,
intraday and multiday settlement of
payment obligations with a high degree
of confidence under a wide range of
significantly different potential stress
scenarios that includes the default of the
participant and its affiliates that would
generate the largest aggregate liquidity
obligation for the designated financial

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market utility in extreme but plausible
market conditions;
(iii) Holds, for purposes of meeting
the minimum liquid resource
requirement under paragraph (a)(7)(ii) of
this section,—
(A) cash in each relevant currency at
the central bank of issue or creditworthy
commercial banks;
(B) assets that are readily available
and convertible into cash, through
committed arrangements without
material adverse change conditions,
such as collateralized lines of credit,
foreign exchange swaps, and repurchase
agreements; or
(C) subject to the determination of the
Board, highly marketable collateral and
investments that are readily available
and convertible into cash with
prearranged and highly reliable funding
arrangements, even in extreme but
plausible market conditions;
(iv) Evaluates and confirms, at least
annually, whether each provider of the
arrangements as described in paragraphs
(a)(7)(iii)(B) and (C) of this section has
sufficient information to understand
and manage that provider’s associated
liquidity risks, and whether the
provider has the capacity to perform;
(v) Maintains and tests its procedures
and operational capacity for accessing
each type of liquid resource required
under this paragraph at least annually;
(vi) Determines the amount and
regularly tests the sufficiency of the
liquid resources necessary to meet the
minimum liquid resource requirement
under this paragraph by—
(A) On a daily basis, conducting a
stress test of its liquid resources using
standard and predetermined stress
scenarios, parameters, and assumptions;
(B) On at least a monthly basis, and
more frequently when products cleared
or markets served experience high
volatility or become less liquid, or when
the size or concentration of positions
held by the designated financial market
utility’s participants increases
significantly, conducting a
comprehensive and thorough analysis of
the existing stress scenarios, models,
and underlying parameters and
assumptions such that the designated
financial market utility meets its
identified liquidity needs and resources
in light of current and evolving market
conditions; and
(C) Having clear procedures to report
the results of its stress tests to
decisionmakers at the designated
financial market utility and using these
results to evaluate the adequacy of and
make adjustments to its liquidity riskmanagement framework;
(vii) At least annually, provides for a
validation of its liquidity risk-

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management model by a qualified
person who does not perform functions
associated with the model (except as
part of the annual model validation),
does not report to such a person, and
does not have a financial interest in
whether the model is determined to be
valid; and
(viii) Establishes rules and procedures
that explicitly—
(A) Address potential liquidity
shortfalls that would not be covered by
the designated financial market utility’s
liquid resources and avoid unwinding,
revoking, or delaying the same-day
settlement of payment obligations; and
(B) Describe the designated financial
market utility’s process to replenish any
liquid resources that it may employ
during a stress event, including a
participant default.
(8) Settlement finality. The designated
financial market utility provides clear
and certain final settlement intraday or
in real time as appropriate, and at a
minimum, by the end of the value date.
The designated financial market utility
clearly defines the point at which
settlement is final and the point after
which unsettled payments, transfer
instructions, or other settlement
instructions may not be revoked by a
participant.
(9) Money settlements. The designated
financial market utility conducts its
money settlements in central bank
money where practical and available. If
central bank money is not used, the
designated financial market utility
minimizes and strictly controls the
credit and liquidity risks arising from
conducting its money settlements in
commercial bank money, including
settlement on its own books. If it
conducts its money settlements at a
commercial bank, the designated
financial market utility—
(i) Establishes and monitors
adherence to criteria based on high
standards for its settlement banks that
take account of, among other things,
their applicable regulatory and
supervisory frameworks,
creditworthiness, capitalization, access
to liquidity, and operational reliability;
(ii) Monitors and manages the
concentration of credit and liquidity
exposures to its commercial settlement
banks; and
(iii) Ensures that its legal agreements
with its settlement banks state clearly—
(A) When transfers on the books of
individual settlement banks are
expected to occur;
(B) That transfers are final when
funds are credited to the recipient’s
account; and

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(C) That the funds credited to the
recipient are available immediately for
retransfer or withdrawal.
(10) Physical deliveries. A designated
financial market utility that operates as
a central counterparty, securities
settlement system, or central securities
depository clearly states its obligations
with respect to the delivery of physical
instruments or commodities and
identifies, monitors, and manages the
risks associated with such physical
deliveries.
(11) Central securities depositories. A
designated financial market utility that
operates as a central securities
depository has appropriate rules and
procedures to help ensure the integrity
of securities issues and minimizes and
manages the risks associated with the
safekeeping and transfer of securities. In
this regard, the designated financial
market utility maintains securities in an
immobilized or dematerialized form for
their transfer by book entry.
(12) Exchange-of-value settlement
systems. If it settles transactions that
involve the settlement of two linked
obligations, such as a transfer of
securities against payment or the
exchange of one currency for another,
the designated financial market utility
eliminates principal risk by
conditioning the final settlement of one
obligation upon the final settlement of
the other.
(13) Participant-default rules and
procedures. The designated financial
market utility has effective and clearly
defined rules and procedures to manage
a participant default that are designed to
ensure that the designated financial
market utility can take timely action to
contain losses and liquidity pressures so
that it can continue to meet its
obligations. In this regard, the
designated financial market utility tests
and reviews its default procedures,
including any closeout procedures, at
least annually or following material
changes to these rules and procedures.
(14) Segregation and portability. A
designated financial market utility that
operates as a central counterparty has
rules and procedures that enable the
segregation and portability of positions
of a participant’s customers and the
collateral provided to the designated
financial market utility with respect to
those positions.
(15) General business risk. The
designated financial market utility
identifies, monitors, and manages its
general business risk, which is the risk
of losses that may arise from its
administration and operation as a
business enterprise (including losses
from execution of business strategy,
negative cash flows, or unexpected and

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excessively large operating expenses)
that are neither related to participant
default nor separately covered by
financial resources maintained for credit
or liquidity risk. In this regard, in
addition to holding financial resources
required to manage credit risk
(paragraph (a)(4) of this section) and
liquidity risk (paragraph (a)(7) of this
section), the designated financial market
utility—
(i) Maintains liquid net assets funded
by equity that are at all times sufficient
to ensure a recovery or orderly winddown of critical operations and services
such that it—
(A) Holds unencumbered liquid
financial assets, such as cash or highly
liquid securities, that are sufficient to
cover the greater of—
(1) The cost to implement the plans to
address general business losses as
required under paragraph (a)(3)(iii) of
this section and
(2) Six months of current operating
expenses or as otherwise determined by
the Board; and
(B) Holds equity, such as common
stock, disclosed reserves, and other
retained earnings, that is at all times
greater than or equal to the amount of
unencumbered liquid financial assets
that are required to be held under
paragraph (a)(15)(i)(A) of this section;
and
(ii) Maintains a viable plan, approved
by the board of directors, for raising
additional equity should the designated
financial market utility’s equity fall
below the amount required under
paragraph (a)(15)(i) of this section, and
updates the plan the earlier of every two
years or following changes to the
designated financial market utility or
the environment in which it operates
that would significantly affect the
viability or execution of the plan.
(16) Custody and investment risks.
The designated financial market
utility—
(i) Safeguards its own and its
participants’ assets and minimizes the
risk of loss on and delay in access to
these assets by—
(A) Holding its own and its
participants’ assets at supervised and
regulated entities that have accounting
practices, safekeeping procedures, and
internal controls that fully protect these
assets; and
(B) Evaluating its exposures to its
custodian banks, taking into account the
full scope of its relationships with each;
and
(ii) Invests its own and its
participants’ assets—
(A) In instruments with minimal
credit, market, and liquidity risks, such
as investments that are secured by, or

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are claims on, high-quality obligors and
investments that allow for timely
liquidation with little, if any, adverse
price effect; and
(B) Using an investment strategy that
is consistent with its overall riskmanagement strategy and fully
disclosed to its participants.
(17) Operational risk. The designated
financial market utility manages its
operational risks by establishing a
robust operational risk-management
framework that is approved by the board
of directors. In this regard, the
designated financial market utility—
(i) Identifies the plausible sources of
operational risk, both internal and
external, and mitigates their impact
through the use of appropriate systems,
policies, procedures, and controls that
are reviewed, audited, and tested
periodically and after major changes;
(ii) Identifies, monitors, and manages
the risks its operations might pose to
other financial market utilities and trade
repositories, if any;
(iii) Has policies and systems that are
designed to achieve clearly defined
objectives to ensure a high degree of
security and operational reliability;
(iv) Has systems that have adequate,
scalable capacity to handle increasing
stress volumes and achieve the
designated financial market utility’s
service-level objectives;
(v) Has comprehensive physical,
information, and cyber security policies,
procedures, and controls that address
potential and evolving vulnerabilities
and threats;
(vi) Has business continuity
management that provides for rapid
recovery and timely resumption of
critical operations and fulfillment of its
obligations, including in the event of a
wide-scale disruption or a major
disruption; and
(vii) Has a business continuity plan
that—
(A) Incorporates the use of a
secondary site that is located at a
sufficient geographical distance from
the primary site to have a distinct risk
profile;
(B) Is designed to enable critical
systems, including information
technology systems, to recover and
resume operations no later than two
hours following disruptive events;
(C) Is designed to enable it to
complete settlement by the end of the
day of the disruption, even in case of
extreme circumstances; and
(D) Is tested at least annually.
(18) Access and participation
requirements. The designated financial
market utility has objective, risk-based,
and publicly disclosed criteria for
participation, which permit fair and

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open access. The designated financial
market utility—
(i) Monitors compliance with its
participation requirements on an
ongoing basis and has the authority to
impose more-stringent restrictions or
other risk controls on a participant in
situations where the designated
financial market utility determines the
participant poses heightened risk to the
designated financial market utility; and
(ii) Has clearly defined and publicly
disclosed procedures for facilitating the
suspension and orderly exit of a
participant that fails to meet the
participation requirements.
(19) Tiered participation
arrangements. The designated financial
market utility identifies, monitors, and
manages the material risks arising from
arrangements in which firms that are
not direct participants in the designated
financial market utility rely on the
services provided by direct participants
to access the designated financial
market utility’s payment, clearing, or
settlement facilities, whether the risks
are borne by the designated financial
market utility or by its participants as a
result of their participation. The
designated financial market utility—
(i) Conducts an analysis to determine
whether material risks arise from tiered
participation arrangements;
(ii) Where material risks are
identified, mitigates or manages such
risks; and
(iii) Reviews and updates the analysis
conducted under paragraph (a)(19)(i) of
this section the earlier of every two
years or following material changes to
the system design or operations or the
environment in which the designated
financial market utility operates if those
changes could affect the analysis
conducted under paragraph (a)(19)(i) of
this section.
(20) Links. If it operates as a central
counterparty, securities settlement
system, or central securities depository
and establishes a link with one or more
of these types of financial market
utilities or trade repositories, the
designated financial market utility
identifies, monitors, and manages risks
related to this link. In this regard, each
central counterparty in a link
arrangement with another central
counterparty covers, at least on a daily
basis, its current and potential future
exposures to the linked central
counterparty and its participants, if any,
fully with a high degree of confidence
without reducing the central
counterparty’s ability to fulfill its
obligations to its own participants.
(21) Efficiency and effectiveness. The
designated financial market utility—

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(i) Is efficient and effective in meeting
the requirements of its participants and
the markets it serves, in particular, with
regard to its—
(A) Clearing and settlement
arrangement;
(B) Risk-management policies,
procedures, and systems;
(C) Scope of products cleared and
settled; and
(D) Use of technology and
communication procedures;
(ii) Has clearly defined goals and
objectives that are measurable and
achievable, such as minimum service
levels, risk-management expectations,
and business priorities; and
(iii) Has policies and procedures for
the regular review of its efficiency and
effectiveness.
(22) Communication procedures and
standards. The designated financial
market utility uses, or at a minimum
accommodates, relevant internationally
accepted communication procedures
and standards in order to facilitate
efficient payment, clearing, and
settlement.
(23) Disclosure of rules, key
procedures, and market data. The
designated financial market utility—
(i) Has clear and comprehensive rules
and procedures;
(ii) Publicly discloses all rules and
key procedures, including key aspects of
its default rules and procedures;
(iii) Provides sufficient information to
enable participants to have an accurate
understanding of the risks, fees, and
other material costs they incur by
participating in the designated financial
market utility;
(iv) Provides a comprehensive public
disclosure of its legal, governance, risk
management, and operating framework,
that includes—
(A) Executive summary. An executive
summary of the key points from
paragraphs (a)(23)(iv)(B) through (D) of
this section;
(B) Summary of major changes since
the last update of the disclosure. A
summary of the major changes since the
last update of paragraph (a)(23)(iv)(C),
(D), or (E) of this section;
(C) General background on the
designated financial market utility. A
description of—
(1) The designated financial market
utility’s function and the markets it
serves,
(2) Basic data and performance
statistics on its services and operations,
such as basic volume and value
statistics by product type, average
aggregate intraday exposures to its
participants, and statistics on the
designated financial market utility’s
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(3) The designated financial market
utility’s general organization, legal and
regulatory framework, and system
design and operations;
(D) Standard-by-standard summary
narrative. A comprehensive narrative
disclosure for each applicable standard
set forth in this paragraph (a) with
sufficient detail and context to enable a
reader to understand the designated
financial market utility’s approach to
controlling the risks and addressing the
requirements in each standard; and
(E) List of publicly available
resources. A list of publicly available
resources, including those referenced in
the disclosure, that may help a reader
understand how the designated
financial market utility controls its risks
and addresses the requirements set forth
in this paragraph (a); and
(v) Updates the public disclosure
under paragraph (a)(23)(iv) of this
section the earlier of every two years or
following changes to its system or the
environment in which it operates that
would significantly change the accuracy
of the statements provided under
paragraph (a)(23)(iv) of this section.
*
*
*
*
*
§ 234.4
■

[Removed]

5. Remove § 234.4

§§ 234.5 through 234.7 [Redesignated as
§§ 234.4 through 234.6]

6. Redesignate §§ 234.5 through 234.7
as §§ 234.4 through 6, respectively.

■

§ 234.5

[Amended]

7. In newly redesignated § 234.5,
redesignate paragraph (b)(3)(iv) as
paragraph (b)(3)(iii).

■

By order of the Board of Governors of the
Federal Reserve System, October 28, 2014.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2014–26090 Filed 11–4–14; 8:45 am]
BILLING CODE 6210–01–P

DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 25
[Docket No. FAA–2012–1207; Special
Conditions No. 25–517–SC]

Special Conditions: Airbus Model
A350–900 Series Airplane; FlightEnvelope Protection (Icing and NonIcing Conditions); High-Incidence
Protection and Alpha-Floor Systems
Federal Aviation
Administration (FAA), DOT.
ACTION: Final special conditions.
AGENCY:

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