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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations

(1) Regular rate. The total AMS
laboratory service program personnel
direct pay divided by direct hours,
which is then multiplied by the next
year’s percentage of cost of living
increase, plus the benefits rate, plus the
operating rate, plus the allowance for
bad debt rate. If applicable, travel
expenses may also be added to the cost
of providing the service.
(2) Overtime rate. The total AMS
laboratory service program personnel
direct pay divided by direct hours,
which is then multiplied by the next
year’s percentage of cost of living
increase and then multiplied by 1.5 plus
the benefits rate, plus the operating rate,
plus an allowance for bad debt. If
applicable, travel expenses may also be
added to the cost of providing the
service.
(3) Holiday rate. The total AMS
laboratory service program personnel
direct pay divided by direct hours,
which is then multiplied by the next
year’s percentage of cost of living
increase and then multiplied by 2, plus
benefits rate, plus the operating rate,
plus an allowance for bad debt. If
applicable, travel expenses may also be
added to the cost of providing the
service.
(b)(1) For each calendar year, based
on previous fiscal year/historical actual
costs, AMS will calculate the benefits,
operating, and allowance for bad debt
components of the regular, overtime and
holiday rates as follows:
(i) Benefits rate. The total AMS
laboratory service program direct
benefits costs divided by the total hours
(regular, overtime, and holiday) worked,
which is then multiplied by the next
calendar year’s percentage cost of living
increase. Some examples of direct
benefits are health insurance,
retirement, life insurance, and Thrift
Savings Plan (TSP) retirement basic and
matching contributions.
(ii) Operating rate. The total AMS
laboratory service program operating
costs divided by total hours (regular,
overtime, and holiday) worked, which is
then multiplied by the percentage of
inflation.
(iii) Allowance for bad debt rate. Total
AMS laboratory service program
allowance for bad debt divided by total
hours (regular, overtime, and holiday)
worked.
(2) The calendar year cost of living
expenses and percentage of inflation
factors used in the formulas in this
section are based on the most recent
Office of Management and Budget’s
Presidential Economic Assumptions.
*
*
*
*
*

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46. Amend § 91.38 by revising
paragraph (a) to read as follows:

■

§ 91.38 Additional fees for appeal of
analysis.

(a) The applicant for appeal sample
testing will be charged a fee based on
the formulas in § 91.37.
*
*
*
*
*
47. Amend § 91.39 by revising
paragraph (a) to read as follows:

■

§ 91.39 Premium hourly fee rates for
overtime and legal holiday service.

(a) When analytical testing in a
Science and Technology facility
requires the services of laboratory
personnel beyond their regularly
assigned tour of duty on any day or on
a day outside the established schedule,
such services are considered as overtime
work. When analytical testing in a
Science and Technology facility
requires the services of laboratory
personnel on a Federal holiday or a day
designated in lieu of such a holiday,
such services are considered holiday
work. Laboratory analyses initiated at
the request of the applicant to be
rendered on Federal holidays, and on an
overtime basis will be charged fees
based on the formulas in § 91.37.
*
*
*
*
*
Dated: November 5, 2014.
Erin M. Morris,
Associate Administrator, Agricultural
Marketing Service.
[FR Doc. 2014–26655 Filed 11–12–14; 8:45 am]
BILLING CODE 3410–02–P

Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (DoddFrank Act or Act). The Board also made
conforming and technical changes to
part I of the PSR policy.
DATES: The Board will be guided by the
PSR policy revisions when exercising
the authorities discussed therein as of
December 31, 2014, with the exception
of the following measures, which the
Board would expect to be met on or
before December 31, 2015:
Transparency, set forth in section I.B.2;
establishing plans for recovery and
orderly wind-down as necessary to meet
the expectations of principle 3;
establishing rules and procedures that
explicitly address uncovered credit
losses and liquidity shortfalls as
necessary to meet the expectations of
principles 4 and 7, respectively;
maintaining sufficient liquid net assets
funded by equity and a viable plan for
raising additional equity as necessary to
meet the expectations of principle 15;
and managing risks arising in tiered
participation arrangements as necessary
to meet the expectations of principle 19.
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:

FEDERAL RESERVE SYSTEM

I. Background

12 CFR Chapter II

In adopting the PSR policy, the
Board’s objectives have been to foster
the safety and efficiency of payment,
clearing, and settlement systems. Part I
of the policy sets forth the Board’s
views, and related principles and
minimum standards, regarding the
management of risks in and
transparency of payment, clearing, and
settlement systems, including those
operated by the Federal Reserve Banks
(Reserve Banks).1 Part I of the policy
incorporates relevant international riskmanagement standards developed by
central banks and market regulators as
the baseline for its expectations for
payment, clearing, and settlement
systems.2 Part I is not intended to exert

[Docket No. OP–1478]

Policy on Payment System Risk
Board of Governors of the
Federal Reserve System.
ACTION: Policy statement.
AGENCY:

The Board of Governors of the
Federal Reserve System (Board) has
adopted revisions to part I of its Federal
Reserve Policy on Payment System Risk
(PSR policy) to reflect the prevailing
international standards, 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,
and the supervisory framework for
designated financial market utilities
(FMUs) established in Title VIII of the

SUMMARY:

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1 Part II governs the provision of intraday credit
in accounts at the Reserve Banks and sets out the
general methods used by the Reserve Banks to
control their intraday credit exposures.
2 Prior to this notice, part I of the PSR policy
incorporated the international standards for
payment, clearing, and settlement systems set out

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or create supervisory or regulatory
authority over any particular class of
institutions or arrangements where the
Board does not have such authority.
In January 2014, the Board requested
comment on proposed revisions to part
I of the PSR policy.3 The key aspects of
the proposal were (1) revising the
Board’s existing minimum riskmanagement standards in the PSR
policy to reflect the PFMI, which now
represents the relevant set of
international standards; 4 (2) including
all central securities depositories,
securities settlement systems, and
central counterparties (CCPs) in the
scope of part I of the PSR policy; (3)
expanding the scope of part I of the PSR
policy to include trade repositories; (4)
establishing six mutually exclusive
categories of financial market
infrastructures (FMIs) and clarifying the
Board’s risk-management expectations
for FMIs in each category; (5) replacing
the existing self-assessment framework
with a broader disclosure expectation;
and (6) recognizing responsibility E
from the PFMI, in addition to other
relevant international guidance, as the
basis for cooperation with other
authorities in overseeing FMIs. The
proposed changes did not affect part II
of the PSR policy.
The Board proposed revisions to the
policy to incorporate the new
international risk-management
standards for financial market
infrastructures in the PFMI, including
the expectation for FMIs to complete the
disclosure framework set out in the
December 2012 CPSS–IOSCO report on
the Principles for Financial Market
Infrastructures: Disclosure Framework
and Assessment Methodology
(‘‘disclosure framework’’ and
‘‘assessment methodology’’).5 The Board
also proposed revisions to the policy to
reflect the enhanced supervisory
framework for designated FMUs as set
forth in Title VIII of the Dodd-Frank
Act.6 In particular, the Board proposed
in the CPSS Core Principles for Systemically
Important Payment Systems, the CPSS–IOSCO
Recommendations for Securities Settlement
Systems, and the CPSS–IOSCO Recommendations
for Central Counterparties, which are available at
http://www.bis.org/cpmi/publ/d43.pdf, http://www.
bis.org/cpmi/publ/d46.pdf, and http://www.bis.org/
cpmi/publ/d64.pdf, respectively. (Effective
September 2014, the CPSS changed its name to the
Committee on Payments and Market
Infrastructures.)
3 79 FR 2838 (January 16, 2014).
4 The PFMI is available at http://www.bis.org/
cpmi/publ/d101a.pdf.
5 The CPSS–IOSCO report on the Principles for
Financial Market Infrastructures: Disclosure
Framework and Assessment Methodology is
available at http://www.bis.org/cpmi/publ/d106.pdf.
6 The term ‘‘financial market utility’’ is defined in
Title VIII as ‘‘any person that manages or operates

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certain revisions that were necessary to
clarify that designated FMUs for which
the Board is the Supervisory Agency
under Title VIII of the Act are required
to comply with Regulation HH and not
the risk-management or transparency
expectations set out in the policy.7 8 The
public comment period for the proposed
revisions closed on March 31, 2014.
II. Summary of Comments and Analysis
The Board received three comment
letters that were responsive to the
January proposal, all from entities that
operate designated FMUs.9 The Board
considered each of the comments on the
proposed revisions to the PSR policy in
developing its final policy as discussed
in more detail below. Except as noted
herein, the Board is adopting the policy
as proposed.10
A. Overall Approach To Incorporating
the New Standards
The Board proposed to revise part I of
the PSR policy by replacing the existing
risk-management standards with the 24
a multilateral system for the purpose of transferring,
clearing, or settling payments, securities, or other
financial transactions among financial institutions
or between financial institutions and the person’’
(12 U.S.C. 5462(6)). FMUs are a subset of FMIs; for
example, trade repositories are excluded from the
definition of a FMU. Pursuant to section 804 of the
Dodd-Frank Act, the Financial Stability Oversight
Council (Council) is required to designate those
FMUs that the Council determines are, or are likely
to become, systemically important. Such a
designation by the Council makes an FMU subject
to the supervisory framework set out in Title VIII
of the Dodd-Frank Act.
7 Concurrent with this final policy statement, the
Board is adopting final revisions to Regulation HH
that take into consideration the PFMI.
8 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 designated FMUs are
subject to the Regulation HH risk-management
standards promulgated by the Board under section
805(a)(1)(A). The Regulation HH 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.
9 Concurrent with the proposal, the Board issued
in a separate Federal Register notice a proposal 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 (79 FR 3666 (January 22, 2014)).
All three commenters addressed the proposed
revisions to both part I of the PSR policy and
Regulation HH in one letter. Where the commenters
addressed specific provisions of Regulation HH that
did not appear in the revisions to the PSR policy,
the Board addressed those comments only in the
notice of final rulemaking for Regulation HH.
10 In addition, the Board is making several
technical edits to the proposed policy. These edits
are minor and are not discussed in this notice.

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headline standards from the PFMI
verbatim. 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 FMIs and all designs of the
same type of FMI does not sufficiently
take into account material differences
that can be found among the different
systems. 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
FMIs.
With respect to differences among
types of systems, the Board believes that
a uniform set of standards is appropriate
because, in many instances, FMIs face
and must manage certain common risks.
Although the design of systems may
vary, the flexibility in the standards
allows individual FMIs to implement,
and supervisors to enforce, the
standards appropriately based on the
design of and risks that arise in a
particular FMI. 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
FMIs and markets. For specific riskmanagement standards in the PSR
policy that are applicable only to certain
types of FMI, however, those standards
are made expressly applicable only to
those FMI types (for example, only CCPs
are expected to have a risk-based margin
system to cover credit risk). For these
reasons, the Board continues to believe
the overall approach is appropriate.
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

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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 will be
guided by the key considerations and
the explanatory text of the PFMI, as well
as its interpretation of the
corresponding provisions of Regulation
HH, in its application of the PSR policy.
The Board does not intend for the
differences in language in the two
documents to lead to inconsistent policy
results.
B. Overall Approach To Applying the
Policy
The proposed revised policy stated
that the Board sets out its views
regarding management of risks in FMIs
in part I of the PSR policy in order to
encourage these systems and their
primary regulators to take the standards
in the policy into consideration in the
design, operation, monitoring, and
assessment of these systems. One
commenter stated that the Board should
acknowledge in the final PSR policy
that if a regulatory agency other than the
Board is the Supervisory Agency for a
designated FMU, then the Board would
consider compliance by the designated
FMU with the corresponding PFMIbased regulations of such Supervisory
Agency as sufficient.
In carrying out its Title VIII
responsibilities, the Board participates
in examinations of designated FMUs by
other Supervisory Agencies and
provides input to those Agencies with
respect to the designated FMU’s riskmanagement practices. Although the
Supervisory Agency would apply its
own rules in assessing the sufficiency of
the designated FMU’s compliance, the
Board’s input will be informed by the
principles in the PSR policy as well as
the Agency’s rules and the general
framework of Title VIII of the DoddFrank Act. Therefore, the Board will
maintain the overall approach of the
policy as proposed.

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C. Governance
Proposed principle 2 stated that an
FMI should have governance
arrangements that are clear and
transparent, promote the safety and
efficiency of the FMI, and support the
stability of the broader financial system,
other relevant public interest
considerations, and the objectives of
relevant stakeholders. One commenter
noted that public interest considerations
is a vague concept, and that privatesector systems should not be required to
consider public interest considerations

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and should focus exclusively on the
needs of participants.
The Board believes that taking public
interest considerations into account is
consistent with the 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,
public interests may include supporting
fair and efficient markets because an
FMI 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
because, for example, an FMI that
provides information to relevant
authorities and the public about
payment flows may help to identify and
reduce sources of systemic risk. For
certain FMIs, stability of the broader
financial system may be the only
relevant public interest consideration.
The final policy retains the text of the
principle as proposed.
D. Credit Risk
Proposed principle 4 stated that an
FMI should measure, monitor, and
manage effectively its credit exposures
to its participants and the credit
exposures arising from its payment,
clearing, and settlement processes. The
principle also stated that an FMI should
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence. In addition, a CCP that is
involved in activities with a morecomplex risk profile or that is
systemically important in multiple
jurisdictions should maintain additional
financial resources sufficient to cover a
wide range of potential stress scenarios
that should include, but not be limited
to, the default of the two participants
and their affiliates that would
potentially cause the largest credit
exposure to the CCP in extreme but
plausible market conditions (a ‘‘cover 2’’
expectation).
One commenter stated that, in setting
a ‘‘cover 2’’ expectation for a particular
FMI, 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’’
expectation 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. The Board’s
‘‘cover 2’’ expectation for a particular

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FMI would depend on all relevant facts
and circumstances, including the mix of
activities with varying risk profiles. The
Board believes that the proposed policy
language provides sufficient flexibility
and has adopted the text of the principle
as proposed.
E. Collateral
Proposed principle 5 stated that an
FMI that requires collateral to manage
its or its participants’ credit exposure
should accept collateral with low credit,
liquidity, and market risks and should
set and enforce appropriately
conservative haircuts and concentration
limits. One commenter supported the
flexibility in the wording of the
principle and urged that it not be
interpreted to exclude the use of equity
securities as collateral for equity
options. The Board believes that the
principle would permit, where
appropriate, an FMI 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
a CCP to hold equity securities as
collateral for options on those same
securities. The final policy retains the
text of the principle as proposed.
F. Liquidity Risk
In the proposed policy, the Board
defined liquidity risk as ‘‘the risk that a
counterparty, whether a participant or
other entity, will be unable to meet fully
its financial obligations when due,
although it may be able to do so in the
future.’’ The definition went on to
explain that an FMI, through its design
or operation, may bear or generate
liquidity risk in one or more currencies
in its payment or settlement process. In
this context, liquidity risk may arise
between or among the system operator
and the participants in the FMI, the
system operator and other entities (such
as settlement banks, nostro agents, or
liquidity providers), the participants in
the FMI and other entities, or two or
more participants in the FMI.
After further consideration, the Board
has added a footnote to the definition of
liquidity risk to clarify that the Board
believes that deliveries of currency are
payments, and FMIs that conduct such
activity should consider these deliveries
to be payments in the management of
liquidity risk. The Board added this
footnote to clarify that it does not
believe that such deliveries of currency
should be treated as physical deliveries
under principle 10 in the revised riskmanagement standards, but rather it
would expect an FMI subject to its
authority to manage effectively the
liquidity risk related to these payments.

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G. Settlement Finality
Proposed principle 8 stated that an
FMI should provide clear and certain
final settlement, at a minimum by the
end of the value date. One commenter
requested confirmation that the
proposed provision would not require
an FMI that is a CCP to accelerate its
novation of certain noncompetitive
transactions, such as backloaded overthe-counter options. The principle
applies to an FMI’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
does not address the timing of novation.
The Board believes that the proposed
policy language provides sufficient
flexibility, and the final policy retains
the text of the principle as proposed.

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H. Segregation and Portability
Proposed principle 14 stated that a
CCP should have rules and procedures
that enable the segregation and
portability of positions of a participant’s
customers and the collateral provided to
the CCP with respect to those positions.
The Board received two comment letters
on this principle that addressed
portability and alternative segregation
regimes.
Portability. One commenter noted
that, while porting positions is a highly
desirable result where feasible, there
may be scenarios where liquidating
positions is preferred. The commenter
suggested that the Board allow an FMI
to retain broad discretion to liquidate
positions promptly where it has
determined that timely transfer would
not be feasible. The Board interprets the
principle, which states that a central
counterparty should have rules and
procedures that enable the segregation
and portability of positions, not to
exclude the possibility that liquidation
of positions may take place if a timely
transfer would not be feasible. The
Board believes that the proposed policy
language provides sufficient flexibility,
and the final policy retains the text of
the principle as proposed.
Alternative segregation regimes. One
commenter encouraged the Board to
state in the policy that different
segregation regimes are appropriate for
different markets and different classes of
market participant. Another commenter
requested that the final text of the policy
acknowledge the different legal
frameworks for cash markets. The Board
acknowledges that effective segregation
and portability arrangements depend
not only on the operational capabilities
of the CCP but also on the applicable
legal framework. The Board notes that a

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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
addressed in principle 14 of the PFMI.
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. Additionally, the Board will
consider whether the CCP’s own rules
enable the operation of the relevant
legal and regulatory framework.
Where alternative segregation and
portability arrangements offer the same
degree of protection, proposed principle
14 would not prohibit the use of such
arrangements. As noted above, the
expectation is that an FMI’s rules and
procedures enable segregation and
portability of positions, and the policy
does not prescribe a single means by
which this could be achieved. The final
policy retains the text of the principle
as proposed.
I. General Business Risk
Proposed principle 15 stated that an
FMI should identify, monitor, and
manage its general business risk and
hold sufficient liquid net assets funded
by equity to cover potential general
business losses so that it can continue
operations and services as a going
concern if those losses materialize.
Further, liquid net assets should at all
times be sufficient to ensure a recovery
or orderly wind-down of critical
operations and services. Commenters
generally supported the principle, but
made two specific points that are
addressed below.
Treatment of Reserve Bank services
under the principle. One commenter
stated that the Board should ensure that
the requirements with respect to
principle 15 in Regulation HH for
designated FMUs are the same as those
imposed on the equivalent Reserve Bank
service. The Board expects that the
Fedwire Services will meet or exceed
the applicable standards set forth in this
policy. The Board will be guided by the
key considerations and explanatory
notes in the PFMI, including the
guidance on central bank-operated
systems, as well as its interpretation of
the corresponding provisions of
Regulation HH, in supervising the
Fedwire Services. This expectation is
consistent with past practice.
Consistent with the previous
international standards, the PFMI
recognizes that flexibility in

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implementation is warranted for central
bank-operated systems to meet the
objectives of the standards because of
central banks’ roles as monetary
authorities and liquidity providers. As
noted in the proposal, the Board will
allow flexibility in application of
principle 15 on general business risk for
the Fedwire Services. A key
consideration in principle 15 of the
PFMI requires FMIs to maintain viable
recovery or orderly wind-down plans
that consider general business risk and
to hold sufficient liquidity and capital
reserves to implement the plans. The
Fedwire Services do 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. Given the fundamental
role of the Fedwire Services in the U.S.
financial system, the Federal Reserve
would need to consider the impact of
sudden or disorderly changes and
would need to pursue policies
consistent with financial stability and
established principles of entering and
exiting priced services. Therefore, the
Board will not require the Fedwire
Services to develop recovery or orderly
wind-down plans under principle 3.
In order to foster competition with
private-sector FMIs, however, the Board
will require the Federal Reserve priced
services to hold six months of the
Fedwire Funds Service’s current
operating expenses as liquid financial
assets and equity on the pro forma
balance sheet used in determining
Reserve Bank fees for priced
services.11 12 This balance sheet is used
for imputing costs in the private-sector
adjustment factor used to establish
Fedwire Funds Service fees.13 If it is
11 As required by the Monetary Control Act of
1980, the Board has historically required and will
continue to require that the Fedwire Services be
operated and priced in a manner that fosters
competition, improves the efficiency of the
payment mechanism, and lowers costs of these
services to society. The Board established a set of
pricing principles that governs the schedule of fees
for the Federal Reserve priced services, including
the Fedwire Services, that is consistent with these
objectives. (12 U.S.C. 248a(c)(3); http://
www.federalreserve.gov/paymentsystems/pfs_
principles.htm).
12 Consistent with the PFMI, the calculation of
these current operating expenses would exclude
depreciation and amortization expenses.
13 Federal Reserve priced services fees are set to
recover, over the long run, all direct and indirect
costs and imputed costs, including financing costs,
taxes, and certain other expenses, as well as the
return on equity (profit) that would have been
earned if a private business provided the services.
The imputed costs and imputed profit are
collectively referred to as the private-sector
adjustment factor. The Board’s current method for
calculating the private-sector adjustment factor
involves developing an estimated Federal Reserve
priced services pro forma balance sheet using actual

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necessary to impute additional assets or
equity, the incremental cost will be
incorporated into the pricing of Fedwire
Funds Service fees. In applying the PSR
policy, the Board will monitor the
implementation of Regulation HH and
the final policy for issues of consistency
and competitive equity between privatesector systems and the Fedwire Funds
Service.
Expectations for certain FMIs that are
part of a larger legal entity. An FMI may
be one of several business lines of a
larger legal entity. As a single legal
entity, the firm’s equity supports all of
the business lines, but the Board’s
expectations under principle 15 may
only apply to one of those business
lines. In the proposal, the Board asked
whether there are any reasonable
methodologies for determining which of
the liquid financial assets and equity
held at the legal entity level belong to
a particular business line. One
commenter suggested that separate pro
forma balance sheets could be created
for a particular business line. After
consideration of the comment, the
Board believes it may not be useful for
certain FMIs to attribute assets and
equity to a business line on separate pro
forma statements because it may not be
possible to ring-fence assets within a
legal entity in insolvency. Therefore,
consistent with the approach described
above for the Fedwire Funds Service
and the approach in the final rule for
Regulation HH, the Board would allow
an FMI to use the assets and equity held
at the legal entity level to meet the
relevant requirements in principle 15.
J. Tiered Participation Arrangements

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Proposed principle 19 stated that an
FMI should identify, monitor, and
manage the material risks to the FMI
arising from tiered participation
arrangements. These arrangements are
those in which firms that are not
members in the FMI (indirect
participants) rely on the services
provided by members of the FMI (direct
participants) to access the FMI’s
payment, clearing, and settlement
facilities. The Board received two
comment letters that addressed this
proposed principle.
Applicability of the proposed
principle. A commenter stated that the
Board did not adequately articulate the
priced services assets and liabilities. The remaining
components on the balance sheet, such as equity,
are imputed as if these services were provided by
a publicly traded firm. The capital structure of
imputed equity is derived from the market for
publicly traded firms, subject to minimum equity
constraints consistent with those required by the
Federal Deposit Insurance Corporation for a wellcapitalized institution.

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risk that tiered participation
arrangements pose and opposed the
principle because it does not believe
that it or its participants bear any
significant risk from its participants’
relationships with their customers. After
consideration of the comment and
analysis, the Board continues to believe
that for certain FMIs, based on the
design of their settlement arrangements,
material risks could arise from tiered
participation arrangements that are
borne by the FMI, including by its
participants. For example, in an FMI 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 FMI or to the other
participants in the FMI, potentially
resulting in liquidity dislocations.
Tiered participation arrangements
could also pose other risks to the FMI,
including operational risk. For example,
an FMI may need to understand how its
direct participants manage any spikes in
volume submitted to the FMI on behalf
of indirect participants. Understanding
the potential for spikes in volume will
allow the FMI to prepare to have the
scalable operational capacity necessary
to process those volumes effectively,
such that it is able to achieve its servicelevel objectives.
Therefore, the Board believes that
material risks to an FMI, including to its
participants, may arise from tiered
participation arrangements. The Board
expects FMIs to seek to understand the
risks associated with the relationships
between direct participants and their
customers in order to be able to assess
whether any material risk to the FMI,
including to its other participants,
exists. The Board recognizes, however,
that certain FMIs, including their
participants, may not bear any material
risks from these arrangements due to the
design of their settlement arrangements
or due to the characteristics of the
markets they serve. These FMIs should
conduct an analysis to support their
conclusion.
Expectations for an FMI with respect
to tiered participation arrangements.
One commenter stated that it is unclear
what would actually be expected of an
FMI under the proposed principle. The
commenter stated that the Board should
make clear that it does not expect an
FMI that does not bear any risk from its
participants or their customers to take
any action with respect to principle 19.
The Board expects that an FMI will
conduct an analysis to determine
whether any material risks arise from
tiered participation arrangements that

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are borne by the FMI, including by its
participants as a result of their
participation in the FMI. Depending on
the nature of their payment, clearing,
settlement, or recording activities, FMIs’
methodologies for conducting the
analysis may differ. For example, some
FMIs may choose to gather information
about the volume and value of activity
processed by direct participants on
behalf of indirect participants in the
FMI or other relevant information.
Where such information would be
useful, an FMI may consider defining
reasonable thresholds and other factors
for gathering the information in order to
minimize burden. If the FMI determines
that no material risks exist to the FMI,
including to its participants, from tiered
participation arrangements, the Board
would not expect the FMI to take any
further action. If material risks are
identified, the Board would expect the
FMI to take steps to mitigate or manage
these risks. The Board does not expect,
however, an FMI to manage risks that
arise between a direct participant and
its customers, but rather only to manage
the material risks to the FMI, including
to its other participants.
The Board expects that an FMI will
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 FMI operates
if those changes could affect its analysis.
If an FMI’s review of its analysis
indicates that the FMI faces no material
risks from tiered participation
arrangements, then no further action
would be required.
Duplicative monitoring. One
commenter stated that an expectation
that an FMI will monitor the risks posed
by indirect participants would be costly
and duplicative of monitoring activities
of regulators and the direct participants
in the FMI. After consideration of the
comment, the Board continues to
believe that monitoring by direct
participants or by their supervisors may
not fully 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 FMI, including its other
participants. In addition, the
supervisory focus for certain direct
participants is typically different from
that for FMIs, and supervisory
monitoring of direct participants also
might not take into account the effects
of tiered participation arrangements on
the FMI, including its other
participants. Direct participants in an

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FMI may also be subject to varying
degrees of supervision. Therefore, the
onus should be on the FMI to
understand the tiered participation
arrangements in the system and the
impact of these relationships on the
FMI, including on its participants.
Scope of the principle. One
commenter stated that the Board should
expect FMIs to consider material risks
arising from tiered participation
arrangements only where the indirect
participants are known by the FMI, have
an agreement binding them to the FMI’s
rules, or may have a direct connection
to the FMI. 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
FMI. If such arrangements may pose
material risks, the FMI should seek to
gather information from its direct
participants on those arrangements and
assess the risks from those
arrangements. Therefore, the Board will
expect an FMI to understand generally
the arrangements between its direct
participants and firms that access the
services of the FMI through the direct
participants, whether or not these firms
are bound by some part of the rules or
have a direct connection to the FMI.14
The FMI, however, 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.
Conflicts of interest and antitrust
issues. One commenter stated that
proposed principle 19 raises conflicts of
interest and antitrust issues. The
commenter stated that collecting data on
indirect participation would give the
board of directors of the FMI a complete
picture of each participant’s
relationships with its most important
customers, which could create a conflict
of interest if the FMI’s board of directors
is made up of representatives of the
member banks. The commenter also
stated that the proposed principle
appeared to require FMIs 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
FMI’s actions to meet the principle
14 For example, some firms may submit
transactions or instructions to an FMI directly
under the account of a direct participant. In this
case, the firm may be bound by the FMI’s rules, but
the direct participant would be accountable for the
firm’s performance on its obligations. In other FMIs,
indirect participants are not bound by the rules of
the FMI and do not have a direct connection to the
FMI.

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appear to third parties as an effort by the
FMI to favor its owner banks.
The Board believes that conflicts of
interest or antitrust issues that may arise
from expectations with respect to
principle 19 can be avoided through the
careful design of the informationgathering and risk-management
processes developed by the FMI. First,
the FMI’s board of directors does not
have to see a complete picture of each
participant’s relationships with its
customers. The FMI 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 Board does not necessarily
expect an FMI 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 FMI
may choose other methods for
mitigating or managing risks arising
from tiered participation arrangements.
For example, if the FMI is concerned
that a direct participant’s exposures to
its indirect participants could cause it to
default to the FMI, the FMI may require
the direct participant to provide
additional collateral to mitigate the
relevant financial risks posed by its
relationships with its customers.
The Board has adopted the text of this
principle as proposed.
K. Efficiency and Effectiveness
Proposed principle 21 stated that an
FMI should be efficient and effective in
meeting the requirements of its
participants and the markets it serves.
One commenter stated that an FMI that
does not meet the requirements of its
participants and the market it serves or
that does not meet its objectives
efficiently will not survive in the
market. The commenter suggested that
the Board remove the principle or
redefine efficiency and effectiveness in
terms of market judgments.15
The Board continues to believe that
the expectation for an FMI to be
efficient and effective should be
included in the policy 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
15 In the NPRM for Regulation HH, the Board
explained that efficiency generally encompasses
what a designated FMU 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.

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may encourage an FMI 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
FMI is efficient and effective due to
imperfect information about the FMI.
Therefore, market judgments alone may
be insufficient to encourage the FMI to
operate efficiently and effectively. The
Board has adopted the text of this
principle as proposed.
L. Transparency
Proposed principle 23 stated that an
FMI should publicly disclose all
relevant rules and key procedures.
Consistent with the principle, section
I.B.2 of the proposed policy sets forth
the Board’s expectation that FMIs
subject to its supervisory authority
complete the CPSS–IOSCO disclosure
framework and make their disclosure
readily available to the public.16 A
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 publicly
disclosed in detail if such detail would
undermine the FMI’s safety and
soundness. The Board stated in the
proposed policy that, although
disclosures should be robust, the Board
does not expect FMIs to disclose to the
public sensitive information that could
expose system vulnerabilities or
otherwise put the FMI at risk. For
example, disclosing the detail included
in the FMI’s business continuity plan
could expose the vulnerabilities of the
system, and in this case it would be
sufficient to disclose publicly only key
highlights of the plan. The Board has
adopted the text of the policy as
proposed.
M. Compliance Dates
The Board proposed that the revised
policy become effective upon
publication of the final version in the
Federal Register. The Board also noted
that several of the expectations in the
proposed policy were new or
heightened and may require additional
time to implement, such as up to six
months after adoption of the policy. The
Board noted that these expectations may
include the revised expectations in
section I.B.2 on transparency and the
expectation to manage risks arising in
16 Designated FMUs are subject to Regulation HH
(§ 234.3(a)(23)(iv)) rather than this policy.

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tiered participation arrangements under
principle 19. New or heightened
expectations also included the
establishment of plans for recovery and
orderly wind-down as necessary to meet
the expectations under principle 3; the
establishment of rules and procedures
that explicitly address uncovered credit
losses and liquidity shortfalls as
necessary to meet the expectations
under principles 4 and 7, respectively;
and the maintenance of sufficient liquid
net assets funded by equity and a viable
plan for raising additional equity as
necessary to meet the expectations
under principle 15. In the proposal, the
Board asked whether there are any other
expectations that may require additional
time to implement and whether six
months is sufficient to implement the
changes necessary to meet the
expectations.
The Board received three comment
letters that addressed the compliance
date for the new or heightened
expectations proposed in the revised
policy. One commenter agreed with the
six-month extension. Two commenters
stated that a longer extension may be
necessary, and one of these suggested
that a minimum of 18 months be
allowed to meet the expectations in the
proposed policy, especially if the
expectations under principle 19 on
tiered participation arrangements are
finalized as proposed.
After consideration of the comments
and analysis, the Board is adopting an
overall effective date for the PSR policy
revisions of December 31, 2014.
However, the Board will begin to apply
the new or heightened risk-management
and transparency expectations as of
December 31, 2015. The Board believes
that this additional time may be
necessary to allow FMIs time to
complete their processes and
procedures for changes to their
rulebooks and to minimize burden on
FMIs and the markets they serve. FMIs,
however, are encouraged to meet the
expectations in the PSR policy as soon
as possible.
One commenter also stated that the
expectations under proposed principle
20 on links may require additional time
to implement because implementation
will require extensive cooperation and
coordination between FMIs. These
expectations, however, are included in
the existing PSR policy and are not new
or heightened.17 Therefore, the Board
will retain its expectation that FMIs
subject to the policy meet principle 20
17 See sections I.C.2.a.xix and I.C.2.b.xi of the
existing policy.

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on the effective date of the final revised
PSR policy.
III. Administrative Law Matters
A. Competitive Impact Analysis
The Board has established procedures
for assessing the competitive impact of
rule or policy changes that have a
substantial impact on payment system
participants.18 Under these procedures,
the Board will assess whether a change
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 due to differing legal
powers or constraints, or due to a
dominant market position of the Federal
Reserve deriving from such differences.
If no reasonable modifications would
mitigate the adverse competitive effects,
the Board will determine whether the
anticipated benefits are significant
enough to proceed with the change
despite the adverse effects.
This final policy sets forth revised
risk-management standards, which are
based on the PFMI, for certain FMIs,
including the Federal Reserve Bankoperated Fedwire Services. In a
separate, related Federal Register
notice, the Board amended its
Regulation HH risk-management
standards, which apply to certain
designated FMUs as required by Title
VIII of the Dodd-Frank Act, 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
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 for designated FMUs in
Regulation HH with respect to general
business risk in § 234.3(a)(15) 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
18 These procedures are described in the Board’s
policy statement ‘‘The Federal Reserve in the
Payments System,’’ as revised in March 1990 (55 FR
11648 (Mar. 29, 1990)).

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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 will be guided by the
key considerations and the explanatory
text of the PFMI, as well as its
interpretation of the corresponding
provisions of Regulation HH, 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 FMIs 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
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.19 The
Board does not expect that the
difference in approach to implementing
19 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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these standards for the Fedwire Funds
Service as compared to the requirements
for CHIPS 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
principle 15. 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. As discussed
above, 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
policy for issues of consistency and
competitive equity between privatesector systems and the Fedwire Funds
Service. Therefore, the Board believes
the policy will have no material adverse
effect on the ability of other service
providers to compete effectively with
the Reserve Banks.
B. 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 policy under
the authority delegated to the Board by
the Office of Management and Budget.
For purposes of calculating burden
under the Paperwork Reduction Act, a
‘‘collection of information’’ involves 10
or more respondents. Any collection of
information addressed to all or a
substantial majority of an industry is
presumed to involve 10 or more
respondents (5 CFR 1320.3(c),
1320.3(c)(4)(ii)). The Board estimates
there are fewer than 10 respondents,
and these respondents do not represent
all or a substantial majority of payment,
clearing, and settlement systems.
Therefore, no collections of information
pursuant to the Paperwork Reduction
Act are contained in the final policy.
IV. Federal Reserve Policy On Payment
System Risk
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Introduction
Risks In Payment, Clearing, Settlement, and
Recording Systems
Part I. Risk Management for Financial Market
Infrastructures
A. Scope
B. Policy Expectations for Certain
Financial Market Infrastructures

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1. Risk Management
a. Fedwire Services
b. Designated Financial Market Utilities for
Which the Board Is the Supervisory
Agency Under Title VIII of the DoddFrank Act
c. Other Financial Market Infrastructures
That Are Subject to the Board’s
Supervisory Authority Under the Federal
Reserve Act
d. All Other Central Securities
Depositories, Securities Settlement
Systems, Central Counterparties, and
Trade Repositories
e. Other Systemically Important Offshore
and Cross-Border Payment Systems
2. Transparency
C. General Policy Expectations for Other
Payment Systems Within the Scope of
the Policy
1. Establishment of a Risk-Management
Framework
a. Identify Risks Clearly and Set Sound
Risk-Management Objectives
b. Establish Sound Governance
Arrangements To Oversee the RiskManagement Framework
c. Establish Clear and Appropriate Rules
and Procedures To Carry Out the RiskManagement Objectives
d. Employ the Resources Necessary To
Achieve the System’s Risk-Management
Objectives and Implement Effectively Its
Rules and Procedures
2. Other Considerations for a RiskManagement Framework
D. Cooperation With Other Authorities in
Regulating, Supervising, and Overseeing
Financial Market Infrastructures
Part II. Federal Reserve Intraday Credit
Policies
Appendix—CPSS–IOSCO Principles for
Financial Market Infrastructures

Introduction
Financial market infrastructures
(FMIs) are critical components of the
nation’s financial system. FMIs are
multilateral systems among
participating financial institutions,
including the system operator, used for
the purposes of clearing, settling, or
recording payments, securities,
derivatives, or other financial
transactions.1 2 FMIs include payment
1 This

definition is based on the definition
provided in the Committee on Payment and
Settlement Systems (CPSS) and Technical
Committee of the International Organization of
Securities Commissions (IOSCO) report on
Principles for Financial Market Infrastructures
(PFMI), April 2012, available at http://www.bis.org/
cpmi/publ/d101a.pdf. (Effective September 2014,
the CPSS changed its name to the Committee on
Payments and Market Infrastructures.) Further, an
FMI generally embodies one or more of the
following characteristics: (1) A multilateral
arrangement with three or more participants; (2) a
set of rules and procedures, common to all
participants, that govern the clearing (comparison
and/or netting), settlement, or recording of
payments, securities, derivatives, or other financial
transactions; (3) a common technical infrastructure
for conducting the clearing, settlement, or recording
process; and (4) a risk-management or capital
structure that takes into account the multilateral
dependencies inherent in the system.

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systems, central securities depositories,
securities settlement systems, central
counterparties, and trade repositories.
The safety and efficiency of these
systems may affect the safety and
soundness of U.S. financial institutions
and, in many cases, are vital to the
financial stability of the United States.
Given the importance of FMIs, the
Board of Governors of the Federal
Reserve System (Board) has developed
this policy to set out the Board’s views,
and related standards, regarding the
management of risks that FMIs present
to the financial system and to the
Federal Reserve Banks (Reserve Banks).
In adopting this policy, the Board’s
objective is to foster the safety and
efficiency of payment, clearing,
settlement, and recording systems and
to promote financial stability, more
broadly.
Part I of this policy sets out the
Board’s views, and related standards,
regarding the management of risks in
FMIs, including those operated by the
Reserve Banks. In setting out its views,
the Board seeks to encourage FMIs and
their primary regulators to take the
standards in this policy into
consideration in the design, operation,
monitoring, and assessment of these
systems. The Board will be guided by
this part, in conjunction with relevant
laws, regulations, and other Federal
Reserve policies, when exercising its
supervisory and regulatory authority
over FMIs or their participants,
providing accounts and services to
FMIs, participating in cooperative
oversight and similar arrangements for
FMIs with other authorities, or
providing intraday credit to eligible
Federal Reserve account holders.
Designated financial market utilities
subject to the Board’s Regulation HH are
not subject to the risk-management or
transparency expectations set out in this
policy.3
2 The term ‘‘financial institution,’’ as used in this
policy, refers to a broad array of organizations that
engage in financial activity, including depository
institutions, securities dealers, and futures
commission merchants.
3 The term ‘‘financial market utility’’ is defined in
Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) as ‘‘any
person that manages or operates a multilateral
system for the purpose of transferring, clearing, or
settling payments, securities, or other financial
transactions among financial institutions or
between financial institutions and the person.’’
Trade repositories, which the Dodd-Frank Act
defines as providing ‘‘facilities for comparison of
data respecting the terms of settlement of securities
or futures transactions,’’ are not included in the
term ‘‘financial market utility’’ (12 U.S.C. 5462).
Financial market utilities are, therefore, a subset of
the broader set of entities defined as FMIs. Under
Title VIII, the Financial Stability Oversight Council
designates certain financial market utilities as

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Part II of this policy governs the
provision of intraday credit or ‘‘daylight
overdrafts’’ in accounts at the Reserve
Banks and sets out the general methods
used by the Reserve Banks to control
their intraday credit exposures.4 Under
this part, the Board recognizes that the
Federal Reserve has an important role in
providing intraday balances and credit
to foster the smooth operation of the
payment system. The Reserve Banks
provide intraday balances by way of
supplying temporary, intraday credit to
healthy depository institutions,
predominantly through collateralized
intraday overdrafts.5 The Board believes
that such a strategy enhances intraday
liquidity while controlling risk to the
Reserve Banks by providing incentives
to collateralize daylight overdrafts. The
Board also aims to limit the burden of
the policy on healthy depository
institutions that use small amounts of
intraday credit.
Through this policy, the Board
expects financial system participants,
including private-sector FMIs and the
Reserve Banks, to reduce and control
settlement and other systemic risks
arising in FMIs, consistent with the
smooth operation of the financial
system. This policy is also designed to
govern the provision of intraday
balances and credit while controlling
the Reserve Banks’ risk by (1) making
financial system participants and FMIs
aware of the types of basic risks that
may arise in the payment, clearing,
settlement, or recording process; (2)
setting explicit risk-management
expectations; (3) promoting appropriate
transparency by FMIs to help inform
participants and the public; and (4)
establishing the policy conditions
governing the provision of Federal
Reserve intraday credit to eligible
account holders. The Board’s adoption
systemically important. The Board’s Regulation HH
is discussed in section I.B.1.b below.
4 To assist depository institutions in
implementing part II of this policy, the Board has
prepared two documents, the Overview of the
Federal Reserve’s Payment System Risk Policy
(Overview) and the Guide to the Federal Reserve’s
Payment System Risk Policy (Guide), which are
available at http://www.federalreserve.gov/
paymentsystems/psr_relpolicies.htm. The Overview
summarizes the Board’s policy on the provision of
intraday credit, including net debit caps and
daylight overdraft fees, and is intended for use by
institutions that incur only small amounts of
daylight overdrafts. The Guide explains in detail
how these policies apply to different institutions
and includes procedures for completing a selfassessment and filing a cap resolution, as well as
information on other aspects of the policy.
5 The term ‘‘depository institution,’’ as used in
this policy, refers not only to institutions defined
as depository institutions in 12 U.S.C. 461(b)(1)(A),
but also to U.S. branches and agencies of foreign
banking organizations, Edge and agreement
corporations, trust companies, and bankers’ banks,
unless the context indicates a different reading.

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of this policy in no way diminishes the
primary responsibilities of financial
system participants to address the risks
that may arise through their operation of
or participation in FMIs.
Risks in Payment, Clearing, Settlement,
and Recording Systems
The basic risks in payment, clearing,
settlement, and recording systems may
include credit risk, liquidity risk,
operational risk, and legal risk. In the
context of this policy, these risks are
defined as follows: 6
• Credit risk: The risk that a
counterparty, whether a participant or
other entity, will be unable to meet fully
its financial obligations when due, or at
any time in the future.
• Liquidity risk: The risk that a
counterparty, whether a participant or
other entity, will be unable to meet fully
its financial obligations when due,
although it may be able to do so in the
future. An FMI, through its design or
operation, may bear or generate
liquidity risk in one or more currencies
in its payment or settlement process.7 In
this context, liquidity risk may arise
between or among the system operator
and the participants in the FMI, the
system operator and other entities (such
as settlement banks, nostro agents, or
liquidity providers), the participants in
the FMI and other entities, or two or
more participants in the FMI.
• Operational risk: The risk that
deficiencies in information systems or
internal processes, human errors,
management failures, or disruptions
from external events will result in the
reduction, deterioration, or breakdown
of services provided by the FMI.8
• Legal risk: The risk of loss from the
unexpected or uncertain application of
a law or regulation.
These risks also arise between
financial institutions as they clear,
settle, and record payments and other
financial transactions and must be
managed by institutions, both
individually and collectively.9
6 The definitions of credit risk, liquidity risk,
operational risk, and legal risk are consistent with
those presented in the PFMI.
7 Deliveries of currency are payments, and FMIs
that conduct such activity should consider these
deliveries to be payments in the management of
liquidity risk.
8 Operational risk also includes physical threats,
such as natural disasters and terrorist attacks, and
information security threats, such as cyberattacks.
Further, deficiencies in information systems or
internal processes include errors or delays in
processing, system outages, insufficient capacity,
fraud, data loss, and leakage.
9 Several existing regulatory and bank supervision
guidelines and policies also are directed at financial
institutions’ management of the risks posed by
interbank payment and settlement activity. For
example, the Board’s Regulation F (12 CFR part

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Further, FMIs may increase, shift,
concentrate, or otherwise transform
risks in unanticipated ways. FMIs, for
example, may pose systemic risk to the
financial system because the inability of
one or more of its participants to
perform as expected may cause other
participants to be unable to meet their
obligations when due. The failure of one
or more of an FMI’s participants to settle
their payments or other financial
transactions as expected, in turn, could
create credit or liquidity problems for
participants and their customers, the
system operator, other financial
institutions, and the financial markets
the FMI serves. Thus, such a failure
might lead ultimately to a disruption in
the financial markets more broadly and
undermine public confidence in the
nation’s financial system.
Mitigating the risks that arise in FMIs
is especially important because of the
interdependencies such systems
inherently create among financial
institutions. In many cases,
interdependencies are a normal part of
an FMI’s structure or operations.
Although they can facilitate the safety
and efficiency of the FMI’s payment,
clearing, settlement, or recording
processes, interdependencies can also
present an important source or
transmission channel of systemic risk.
Disruptions can originate from any of
the interdependent entities, including
the system operator, the participants in
the FMI, and other systems, and can
spread quickly and widely across
markets if the risks that arise among
these parties are not adequately
measured, monitored, and managed. For
example, interdependencies often create
complex and time-sensitive transaction
and payment flows that, in combination
with an FMI’s design, can lead to
significant demands for intraday credit
or liquidity, on either a regular or an
extraordinary basis.
The Board recognizes that the Reserve
Banks, as settlement institutions, have
an important role in providing intraday
balances and credit to foster the smooth
operation and timely completion of
money settlement processes among
financial institutions and between
financial institutions and FMIs. To the
extent that the Reserve Banks are the
source of intraday credit, they may face
a risk of loss if such intraday credit is
not repaid as planned. In addition,
measures taken by Reserve Banks to
limit their intraday credit exposures
206) directs insured depository institutions to
establish policies and procedures to avoid excessive
exposures to any other depository institution,
including exposures that may be generated through
the clearing and settlement of payments.

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may shift some or all of the associated
risks to financial institutions and FMIs.
In addition, mitigating the risks that
arise in certain FMIs is critical to the
areas of monetary policy and banking
supervision. The effective
implementation of monetary policy, for
example, depends on both the orderly
settlement of open market operations
and the efficient movement of funds
throughout the financial system via the
financial markets and the FMIs that
support those markets. Likewise,
supervisory objectives regarding the
safety and soundness of financial
institutions must take into account the
risks FMIs, both in the United States
and abroad, pose to financial
institutions that participate directly or
indirectly in, or provide settlement,
custody, or credit services to, such
systems.
Part I. Risk Management for Financial
Market Infrastructures
This part sets out the Board’s views,
and related standards, regarding the
management of risks in FMIs, including
those operated by the Reserve Banks.
The Board will be guided by this part,
in conjunction with relevant laws,
regulations, and other Federal Reserve
policies, when exercising its authority
in (1) supervising the Reserve Banks
under the Federal Reserve Act; (2)
supervising state member banks, Edge
and agreement corporations, and bank
holding companies, including the
exercise of authority under the Bank
Service Company Act, where applicable;
(3) carrying out certain of its
responsibilities under Title VIII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank
Act); (4) setting or reviewing the terms
and conditions for the use of Reserve
Bank accounts and services; and (5)
developing and applying policies for the
provision of intraday liquidity to
eligible Reserve Bank account holders.
This part will also guide the Board, as
appropriate, in its interactions and
cooperative efforts with other domestic
and foreign authorities that have
responsibilities for regulating,
supervising, or overseeing FMIs within
the scope of this part. The Board’s
adoption of this policy is not intended
to exert or create supervisory or
regulatory authority over any particular
class of institutions or arrangements
where the Board does not have such
authority.
A. Scope
FMIs within the scope of part I
include public- and private-sector
payment systems that expect to settle a
daily aggregate gross value of U.S.

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dollar-denominated transactions
exceeding $5 billion on any day during
the next 12 months.10 11 FMIs within the
scope of this part also include central
securities depositories, securities
settlement systems, central
counterparties, and trade repositories
irrespective of the value or nature of the
transactions processed by the system.12
These FMIs may be organized, located,
or operated within the United States
(domestic systems), outside the United
States (offshore systems), or both (crossborder systems) and may involve
currencies other than the U.S. dollar
(non-U.S. dollar systems and multicurrency systems).13 The scope of the
policy also includes any payment
system based or operated in the United
States that engages in the settlement of
non-U.S. dollar transactions if that
payment system would be otherwise
subject to the policy.14
Part I does not apply to market
infrastructures such as trading
exchanges, trade-execution facilities, or
multilateral trade-compression systems.
This part is also not intended to apply
to bilateral payment, clearing, or
settlement relationships, where an FMI
is not involved, between financial
institutions and their customers, such as
traditional correspondent banking and
government securities clearing services.
The Board believes that these market
infrastructures and relationships do not
constitute FMIs for purposes of this
policy and that risk-management issues
10 A ‘‘payment system’’ is a set of instruments,
procedures, and rules for the transfer of funds
between or among participants. Payment systems
include, but are not limited to, large-value funds
transfer systems, automated clearinghouse systems,
check clearinghouses, and credit and debit card
settlement systems. The scope of this policy also
includes payment-versus-payment settlement
systems for foreign exchange transactions.
11 In determining whether it is included in the
scope of this policy, a payment system should look
at its projected ‘‘next’’ twelve-month period.
‘‘Aggregate gross value of U.S. dollar-denominated
transactions’’ refers to the total dollar value of
individual U.S. dollar transactions settled in the
payment system, which also represents the sum of
total U.S. dollar debits (or credits) to all participants
before or in absence of any netting of transactions.
12 A ‘‘central securities depository’’ is an entity
that provides securities accounts and central
safekeeping services. A ‘‘securities settlement
system’’ is an entity that enables securities to be
transferred and settled by book entry and allows
transfers of securities free of or against payment. A
‘‘central counterparty’’ is 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. A
‘‘trade repository’’ is an entity that maintains a
centralized electronic record of transaction data.
These definitions are based on those in the PFMI.
13 Non-U.S. dollar systems may be of interest to
the Board if they are used by U.S. financial
institutions or may have the ability to affect
financial stability, more broadly.
14 The daily gross value threshold will be
calculated on a U.S. dollar equivalent basis.

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associated with these market
infrastructures and relationships are
more appropriately addressed through
other relevant supervisory and
regulatory processes.
B. Policy Expectations for Certain
Financial Market Infrastructures
This section sets out the Board’s
views, and related standards, with
respect to risk-management and
transparency for the subset of FMIs
described below in section B.1,
including the Reserve Banks’ Fedwire
Funds Service and Fedwire Securities
Service (collectively, Fedwire Services).
The Board believes these FMIs should
have comprehensive risk management
as well as a high degree of transparency.
1. Risk Management
Authorities, including central banks,
have promoted sound risk-management
practices by developing internationally
accepted minimum standards that
promote the safety and efficiency of
FMIs. Specifically, the Committee on
Payment and Settlement Systems
(CPSS) and Technical Committee of the
International Organization of Securities
Commissions (IOSCO) report on
Principles for Financial Market
Infrastructures (PFMI) establishes
minimum standards for payment
systems that are systemically important,
central securities depositories, securities
settlement systems, central
counterparties, and trade repositories
for addressing areas such as legal risk,
governance, credit and liquidity risks,
general business risk, operational risk,
and other types of risk.15 The PFMI
reflects broad market input and has
been widely recognized, supported, and
endorsed by U.S. authorities, including
the Federal Reserve, U.S. Securities and
Exchange Commission (SEC), and U.S.
Commodity Futures Trading
Commission (CFTC). These standards
are also part of the Financial Stability
Board’s (FSB’s) Key Standards for
Sound Financial Systems.16
The Board believes that the
implementation of the PFMI by the
FMIs within the scope of this section
will help promote their safety and
15 In addition to these risk-management
standards, the PFMI sets out responsibilities for
authorities for FMIs, including central banks, in
order to provide for effective regulation,
supervision, and oversight of FMIs.
16 The FSB’s Key Standards for Sound Financial
Systems are available at http://
www.financialstabilityboard.org/cos/key_
standards.htm. The FSB is an international forum
that was established to develop and promote the
implementation of effective regulatory, supervisory
and other financial sector policies. The FSB
includes the U.S. Department of the Treasury, the
Board, and the SEC.

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efficiency in the financial system and
foster greater financial stability in the
domestic and global economy.
Accordingly, the Board has incorporated
into the PSR policy principles 1 through
24 from the PFMI, as set forth in the
appendix.17 In applying part I of this
policy, the Board will be guided by the
key considerations and explanatory
notes from the PFMI as well as its
interpretation of the corresponding
provisions of Regulation HH.18

on the PFMI. As required under Title
VIII of the Dodd-Frank Act, the riskmanagement standards seek to promote
robust risk management, promote safety
and soundness, reduce systemic risks,
and support the stability of the broader
financial system. Designated financial
market utilities for which the Board is
the Supervisory Agency are required to
comply with the risk-management
standards in Regulation HH and are not
subject to the standards in the appendix.

a. Fedwire Services

c. Other Financial Market
Infrastructures That are Subject to the
Board’s Supervisory Authority Under
the Federal Reserve Act
The Board expects all other FMIs that
are subject to its supervisory authority
under the Federal Reserve Act,
including FMIs that are members of the
Federal Reserve System, to meet or
exceed the risk-management standards
in the appendix.

The Board recognizes the critical role
the Reserve Banks’ Fedwire Services
play in the financial system and
requires them to meet or exceed the
standards set forth in the appendix to
this policy, consistent with the guidance
on central bank-operated systems
provided in the PFMI and with the
requirements in the Monetary Control
Act.19
b. Designated Financial Market Utilities
for Which the Board is the Supervisory
Agency Under Title VIII of the DoddFrank Act

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The Board’s Regulation HH imposes
risk-management standards applicable
to a designated financial market utility
for which the Board is the Supervisory
Agency.20 The risk-management
standards in Regulation HH are based
17 The Board’s Regulation HH contains riskmanagement standards that are based on the PFMI
for certain designated financial market utilities.
Regulation HH (12 CFR part 234) is available at
http://www.federalreserve.gov/bankinforeg/
reglisting.htm#HH.
18 The Board will also look to the CPSS–IOSCO
Principles for Financial Market Infrastructures:
Disclosure Framework and Assessment
Methodology, which is available at http://
www.bis.org/cpmi/publ/d106.pdf, and other related
documents.
19 Certain standards may require flexibility in the
way they are applied to central bank-operated
systems because of central banks’ unique role in the
financial markets and their public responsibilities.
These principles 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. For instance, the Reserve Banks
should refer to part II of this policy for managing
their credit risk arising from the provision of
intraday credit to users of the Fedwire Services.
20 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)).
Under Title VIII, the Board must prescribe riskmanagement standards for designated financial
market utilities for which the Board or another
Federal banking agency is the appropriate
Supervisory Agency (12 U.S.C. 5464(a)). There are
currently no designated financial market utilities
for which another federal banking agency is the
Supervisory Agency.

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d. All Other Central Securities
Depositories, Securities Settlement
Systems, Central Counterparties, and
Trade Repositories
The Board encourages all other
central securities depositories, securities
settlement systems, central
counterparties, and trade repositories,
whether they are located within or
outside the United States, to meet or
exceed the risk-management standards
in the appendix to this policy. Where
the Board does not have authority over
a central securities depository,
securities settlement system, central
counterparty, or trade repository, the
Board will be guided by this policy in
its cooperative efforts with other FMI
authorities.
e. Other Systemically Important
Offshore and Cross-Border Payment
Systems
The Board encourages systemically
important offshore and cross-border
payment systems that are not included
in any of the categories above to meet
or exceed the risk-management
standards in the appendix to this
policy.21 The Board will be guided by
this policy in its cooperative efforts with
other payment system authorities.
2. Transparency
Transparency helps ensure that
relevant information is provided to an
FMI’s participants, authorities, and the
public to inform sound decisionmaking,
improve risk management, enable
market discipline, and foster confidence
in markets more broadly. In particular,
21 These systems may be used by U.S. financial
institutions, clear or settle U.S. dollars, or have the
ability to affect financial stability, more broadly.

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public disclosures play a critical role in
allowing current and prospective
participants, as well as other
stakeholders, to understand an FMI’s
operations and the risks associated with
using its services and to manage more
effectively their risks with respect to the
FMI. The Board believes that FMIs are
well-positioned to provide the
information necessary to support greater
market transparency and to maintain
financial stability.
The Board expects an FMI that is
subject to its supervisory authority, but
not subject to Regulation HH, to disclose
to its participants information about the
risks and costs that they incur by
participating in the FMI, consistent with
the requirements in principle 23 in the
appendix.22 At a minimum, the FMI
should disclose to its participants
overviews of the FMI’s system design
and operations, rules and key
procedures, key highlights of business
continuity arrangements, fees and other
material costs, aggregate transaction
volumes and values, levels of financial
resources that can be used to cover
participant defaults, and other
information that would facilitate its
participants’ understanding of the FMI
and its operations and their evaluation
of the risks associated with using that
FMI.
In addition, the Board expects such an
FMI to complete the disclosure
framework set forth in the CPSS–IOSCO
Principles for Financial Market
Infrastructures: Disclosure Framework
and Assessment Methodology
(‘‘disclosure framework’’ and
‘‘assessment methodology’’).23 The
disclosure framework establishes the
international baseline set of information
that all FMIs are expected to disclose
publicly and review regularly.24 An FMI
is encouraged to use the guiding
questions in the assessment
methodology to guide the content and
level of detail in their disclosures. The
Board expects each FMI to make its
disclosure readily available to the
public, such as by posting it on the
FMI’s public Web site, to achieve
maximum transparency.
To ensure each FMI’s accountability
for the accuracy and completeness of its
disclosure, the Board expects the FMI’s
22 The Board’s Regulation HH imposes an
equivalent public disclosure requirement.
23 See CPSS–IOSCO, Principles for Financial
Market Infrastructures: Disclosure Framework and
Assessment Methodology, December 2012, available
at http://www.bis.org/cpmi/publ/d106.pdf.
24 Although the Board expects disclosures to be
robust, it does not expect FMIs to disclose to the
public sensitive information that could expose
system vulnerabilities or otherwise put the FMI at
risk (for example, specific business continuity
plans).

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Federal Register / Vol. 79, No. 219 / Thursday, November 13, 2014 / Rules and Regulations
senior management and board of
directors to review and approve each
disclosure upon completion. Further, in
order for an FMI’s disclosure to reflect
its current rules, procedures, and
operations, the Board expects the FMI to
update the relevant parts of its
disclosure following changes to the FMI
or the environment in which it operates,
which would significantly change the
accuracy of the statements in its
disclosure. At a minimum, the FMI is
expected to review and update as
warranted its disclosure every two
years.
As part of its ongoing oversight of
FMIs, the Board will review public
disclosures by FMIs subject to its
supervisory authority to ensure that the
Board’s policy objectives and
expectations are being met.25 Where
necessary, the Board will provide
feedback to the FMIs regarding the
content of these disclosures and their
effectiveness in achieving the policy
objectives discussed above.26 The Board
acknowledges that FMIs vary in terms of
the scope of instruments they settle and
markets they serve. It also recognizes
that FMIs may operate under different
legal and regulatory constraints,
charters, and corporate structures. The
Board will consider these factors when
reviewing the disclosures and in
evaluating how an FMI addresses a
particular standard. Where the Board
does not have statutory or exclusive
authority over an FMI, it will be guided
by this policy in cooperative efforts with
other domestic or foreign authorities to
promote comprehensive disclosures by
FMIs as a means to achieve greater
safety and efficiency in the financial
system.
C. General Policy Expectations for Other
Payment Systems Within the Scope of
the Policy

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The Board encourages payment
systems within the scope of this policy,
but that are not included in any of the
categories in section B above, to
implement a general risk-management
framework appropriate for the risks the
payment system poses to the system
operator, system participants, and other
25 Any review of a disclosure by the Board should
not be viewed as an approval or guarantee of the
accuracy of an FMI’s disclosure. Without the
express approval of the Board, an FMI may not state
that its disclosure has been reviewed, endorsed,
approved, or otherwise not objected to by the
Board.
26 If the Board materially disagrees with the
content of an FMI’s disclosure, it will communicate
its concerns to the FMI’s senior management and
possibly to its board of directors, as appropriate.
The Board may also discuss its concerns with other
relevant authorities, as appropriate.

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relevant parties as well as the financial
system more broadly.
1. Establishment of a Risk-Management
Framework
A risk-management framework is the
set of objectives, policies, arrangements,
procedures, and resources that a system
employs to limit and manage risk.
Although there are a number of ways to
structure a sound risk-management
framework, all frameworks should
a. identify risks clearly and set sound
risk-management objectives;
b. establish sound governance
arrangements to oversee the riskmanagement framework;
c. establish clear and appropriate
rules and procedures to carry out the
risk-management objectives; and
d. employ the resources necessary to
achieve the system’s risk-management
objectives and implement effectively its
rules and procedures.
a. Identify Risks Clearly and Set Sound
Risk-Management Objectives
The first element of a sound riskmanagement framework is the clear
identification of all risks that have the
potential to arise in or result from the
system’s settlement process and the
development of clear and transparent
objectives regarding the system’s
tolerance for and management of such
risks. System operators should identify
the forms of risk present in their
system’s settlement process as well as
the parties posing and bearing each risk.
In particular, system operators should
identify the risks posed to and borne by
them, the system participants, and other
key parties such as a system’s settlement
banks, custody banks, and third-party
service providers. System operators
should also analyze whether risks might
be imposed on other external parties
and the financial system more broadly.
In addition, system operators should
analyze how risk is transformed or
concentrated by the settlement process.
System operators should also consider
the possibility that attempts to limit one
type of risk could lead to an increase in
another type of risk. Moreover, system
operators should be aware of risks that
might be unique to certain instruments,
participants, or market practices. Where
payment systems have interrelationships with or dependencies on
other FMIs, system operators should
also analyze whether and to what extent
any cross-system risks exist and who
bears them.
Using their clear identification of
risks, system operators should establish
the risk tolerance of the system,
including the levels of risk exposure
that are acceptable to the system

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operator, system participants, and other
relevant parties. System operators
should then set risk-management
objectives that clearly allocate
acceptable risks among the relevant
parties and set out strategies to manage
this risk. Risk-management objectives
should be consistent with the objectives
of this policy, the system’s business
purposes, and the type of payment
instruments and markets for which the
system clears and settles. Riskmanagement objectives should also be
communicated to and understood by
both the system operator’s staff and
system participants.
System operators should reevaluate
their risks in conjunction with any
major changes in the settlement process
or operations, the transactions settled,
the system’s rules or procedures, or the
relevant legal and market environments.
System operators should review the
risk-management objectives regularly to
ensure that they are appropriate for the
risks posed by the system, continue to
be aligned with the system’s purposes,
remain consistent with this policy, and
are being effectively adhered to by the
system operator and participants.
b. Establish Sound Governance
Arrangements To Oversee the RiskManagement Framework
Systems should have sound
governance arrangements to implement
and oversee their risk-management
frameworks. The responsibility for
sound governance rests with a system
operator’s board of directors or similar
body and with the system operator’s
senior management. Governance
structures and processes should be
transparent; enable the establishment of
clear risk-management objectives; set
and enforce clear lines of responsibility
and accountability for achieving these
objectives; ensure that there is
appropriate oversight of the riskmanagement process; and enable the
effective use of information reported by
the system operator’s management,
internal auditors, and external auditors
to monitor the performance of the riskmanagement process.27 Individuals
responsible for governance should be
qualified for their positions, understand
their responsibilities, and understand
their system’s risk-management
framework. Governance arrangements
should also ensure that riskmanagement information is shared in
forms, and at times, that allow
27 The risk-management and internal audit
functions should also be independent of those
responsible for day-to-day functions.

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individuals responsible for governance
to fulfill their duties effectively.
c. Establish Clear and Appropriate Rules
and Procedures To Carry out the RiskManagement Objectives
Systems should have rules and
procedures that are appropriate and
sufficient to carry out the system’s riskmanagement objectives and that are
consistent with its legal framework.
Such rules and procedures should
specify the respective responsibilities of
the system operator, system
participants, and other relevant parties.
Rules and procedures should establish
the key features of a system’s settlement
and risk-management design and
specify clear and transparent crisis
management procedures and settlement
failure procedures, if applicable.28
d. Employ the Resources Necessary To
Achieve the System’s Risk-Management
Objectives and Implement Effectively its
Rules and Procedures
System operators should ensure that
the appropriate resources and processes
are in place to allow the system to
achieve its risk-management objectives
and implement effectively its rules and
procedures. In particular, the system
operator’s staff should have the
appropriate skills, information, and
tools to apply the system’s rules and
procedures and achieve the system’s
risk-management objectives. System
operators should also ensure that their
facilities and contingency arrangements,
including any information system
resources, are sufficient to meet their
risk-management objectives.

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2. Other Considerations for a RiskManagement Framework
Payment systems differ widely in
form, function, scale, and scope of
activities, and these characteristics
result in differing combinations and
levels of risks. Thus, the exact features
of a system’s risk-management
framework should be tailored to the
risks of that system. The specific
features of a risk-management
framework may entail tradeoffs between
efficiency and risk reduction, and
payment systems will need to consider
these tradeoffs when designing
appropriate rules and procedures. In
considering such tradeoffs, however, it
is critically important that system
28 Examples of key features that might be
specified in a system’s rules and procedures are
controls to limit participant-based risks, such as
membership criteria based on participants’ financial
and operational health; limits on credit exposures;
and the procedures and resources to liquidate
collateral. Other examples of key features might be
business continuity requirements and lossallocation procedures.

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operators take into account the costs
and risks that may be imposed on all
relevant parties, including parties with
no direct role in the system.
Furthermore, in light of rapidly evolving
technologies and risk-management
practices, the Board encourages all
system operators to consider making
risk-management improvements when
cost-effective.
The Board may seek to understand
how a system achieves the four
elements of a sound risk-management
framework set out above. In this context,
the Board may seek to obtain
information from system operators
regarding their risk-management
framework, risk-management objectives,
rules and procedures, significant legal
analyses, general risk analyses, analyses
of the credit and liquidity effects of
settlement disruptions, business
continuity plans, crisis management
procedures, and other relevant
documentation.29 The Board also may
seek to obtain data or statistics on
system activity on an ad hoc or ongoing
basis. All information provided to the
Federal Reserve for the purposes of this
policy will be handled in accordance
with all applicable Federal Reserve
policies on information security,
confidentiality, and conflicts of interest.
D. Cooperation With Other Authorities
in Regulating, Supervising, and
Overseeing Financial Market
Infrastructures
When the Board does not have
statutory or exclusive authority over an
FMI covered by this policy, this section
will guide the Board, as appropriate, in
its interactions with other domestic and
foreign authorities to promote effective
risk management in and transparency by
FMIs. For example, the Federal Reserve
may have an interest in the safety and
efficiency of FMIs outside the United
States that are subject to regulation,
supervision, or oversight by another
authority but that provide services to
financial institutions supervised by the
Board or conduct activity that involves
the U.S. dollar.30 In its interactions with
29 To facilitate analysis of settlement disruptions,
systems may need to develop the capability to
simulate credit and liquidity effects on participants
and on the system resulting from one or more
participant defaults, or other possible sources of
settlement disruption. Such simulations may need
to include, if appropriate, the effects of changes in
market prices, volatilities, or other factors.
30 An FMI may be subject to supervision or
oversight by the Board and other authorities, as a
result of its legal framework, operating structure (for
example, multi-currency or cross-border systems),
or participant base. In such cases, the Board will be
sensitive to the potential for duplicative or
conflicting requirements, oversight gaps, or
unnecessary costs and burdens imposed on the
FMI.

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other domestic and foreign authorities,
the Board will encourage these
authorities to adopt and to apply the
internationally accepted principles set
forth in the appendix when evaluating
the risks posed by and to FMIs and
individual system participants that
these authorities regulate, supervise, or
oversee.
In working with other authorities, the
Board will seek to establish
arrangements for effective and practical
cooperation that promote sound riskmanagement outcomes. The Board
believes that cooperative arrangements
among relevant authorities can be an
effective mechanism for, among other
things, (1) sharing relevant information
concerning the policies, procedures, and
operations of an FMI; (2) sharing
supervisory views regarding an FMI; (3)
discussing and promoting the
application of robust risk-management
standards; and (4) serving as a forum for
effective communication, coordination,
and consultation during normal
circumstances, as well as periods of
market stress.
When establishing such cooperative
arrangements, the Board will be guided,
as appropriate, by international
principles on cooperative arrangements
for the regulation, supervision, and
oversight of FMIs. In particular,
responsibility E in the PFMI addresses
domestic and international cooperation
among central banks, market regulators,
and other relevant authorities and
provides guidance to these entities for
supporting each other in fulfilling their
respective mandates with respect to
FMIs. The CPSS report on Central Bank
Oversight of Payment and Settlement
Systems also provides important
guidance on international cooperation
among central banks.31 The Board
believes this international guidance
provides important frameworks for
cooperating and coordinating with other
authorities to address risks in domestic,
cross-border, multi-currency, and,
where appropriate, offshore FMIs.
Part II. Federal Reserve Intraday Credit
Policies
[No change to existing part II of the
policy.]
Appendix—CPSS–IOSCO Principles for
Financial Market Infrastructures
Principle 1: Legal basis
An FMI should have a well-founded,
clear, transparent, and enforceable legal
31 See Central Bank Oversight of Payment and
Settlement Systems, part B on ‘‘Principles for
international cooperative oversight,’’ May 2005,
available at http://www.bis.org/cpmi/publ/d68.pdf.

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Principle 7: Liquidity Risk

basis for each material aspect of its
activities in all relevant jurisdictions.
Principle 2: Governance
An FMI should have governance
arrangements that are clear and
transparent, promote the safety and
efficiency of the FMI, and support the
stability of the broader financial system,
other relevant public interest
considerations, and the objectives of
relevant stakeholders.
Principle 3: Framework for the
Comprehensive Management of Risks
An FMI should have a sound riskmanagement framework for
comprehensively managing legal, credit,
liquidity, operational, and other risks.

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Principle 4: Credit Risk
An FMI should effectively measure,
monitor, and manage its credit
exposures to participants and those
arising from its payment, clearing, and
settlement processes. An FMI should
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence. In addition, a central
counterparty that is involved in
activities with a more-complex risk
profile or that is systemically important
in multiple jurisdictions should
maintain additional financial resources
sufficient to cover a wide range of
potential stress scenarios that should
include, but not be limited to, the
default of the two participants and their
affiliates that would potentially cause
the largest aggregate credit exposure to
the central counterparty in extreme but
plausible market conditions. All other
central counterparties should maintain
additional financial resources sufficient
to cover a wide range of potential stress
scenarios that should include, but not
be limited to, the default of the
participant and its affiliates that would
potentially cause the largest aggregate
credit exposure to the central
counterparty in extreme but plausible
market conditions.
Principle 5: Collateral
An FMI that requires collateral to
manage its or its participants’ credit
exposure should accept collateral with
low credit, liquidity, and market risks.
An FMI should also set and enforce
appropriately conservative haircuts and
concentration limits.
Principle 6: Margin
A central counterparty should cover
its credit exposures to its participants
for all products through an effective
margin system that is risk-based and
regularly reviewed.

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An FMI should effectively measure,
monitor, and manage its liquidity risk.
An FMI should maintain sufficient
liquid resources in all relevant
currencies to effect same-day and,
where appropriate, intraday and
multiday settlement of payment
obligations with a high degree of
confidence under a wide range of
potential stress scenarios that should
include, but not be limited to, the
default of the participant and its
affiliates that would generate the largest
aggregate liquidity obligation for the
FMI in extreme but plausible market
conditions.
Principle 8: Settlement Ginality
An FMI should provide clear and
certain final settlement, at a minimum
by the end of the value date. Where
necessary or preferable, an FMI should
provide final settlement intraday or in
real time.
Principle 9: Money Settlements
An FMI should conduct its money
settlements in central bank money
where practical and available. If central
bank money is not used, an FMI should
minimize and strictly control the credit
and liquidity risk arising from the use
of commercial bank money.
Principle 10: Physical Deliveries
An FMI should clearly state its
obligations with respect to the delivery
of physical instruments or commodities
and should identify, monitor, and
manage the risks associated with such
physical deliveries.
Principle 11: Central Securities
Depositories
A central securities depository should
have appropriate rules and procedures
to help ensure the integrity of securities
issues and minimize and manage the
risks associated with the safekeeping
and transfer of securities. A central
securities depository should maintain
securities in an immobilized or
dematerialized form for their transfer by
book entry.
Principle 12: Exchange-of-Value
Settlement Systems
If an FMI settles transactions that
involve the settlement of two linked
obligations (for example, securities or
foreign exchange transactions), it should
eliminate principal risk by conditioning
the final settlement of one obligation
upon the final settlement of the other.

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Principle 13: Participant-Default Rules
and Procedures
An FMI should have effective and
clearly defined rules and procedures to
manage a participant default. These
rules and procedures should be
designed to ensure that the FMI can take
timely action to contain losses and
liquidity pressures and continue to meet
its obligations.
Principle 14: Segregation and Portability
A central counterparty should have
rules and procedures that enable the
segregation and portability of positions
of a participant’s customers and the
collateral provided to the central
counterparty with respect to those
positions.
Principle 15: General Business Risk
An FMI should identify, monitor, and
manage its general business risk and
hold sufficient liquid net assets funded
by equity to cover potential general
business losses so that it can continue
operations and services as a going
concern if those losses materialize.
Further, liquid net assets should at all
times be sufficient to ensure a recovery
or orderly wind-down of critical
operations and services.
Principle 16: Custody and Investment
Risks
An FMI should safeguard its own and
its participants’ assets and minimize the
risk of loss on and delay in access to
these assets. An FMI’s investments
should be in instruments with minimal
credit, market, and liquidity risks.
Principle 17: Operational Risk
An FMI should identify the plausible
sources of operational risk, both internal
and external, and mitigate their impact
through the use of appropriate systems,
policies, procedures, and controls.
Systems should be designed to ensure a
high degree of security and operational
reliability and should have adequate,
scalable capacity. Business continuity
management should aim for timely
recovery of operations and fulfilment of
the FMI’s obligations, including in the
event of a wide-scale or major
disruption.
Principle 18: Access and Participation
Requirements
An FMI should have objective, riskbased, and publicly disclosed criteria
for participation, which permit fair and
open access.
Principle 19: Tiered Participation
Arrangements
An FMI should identify, monitor, and
manage the material risks to the FMI

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arising from tiered participation
arrangements.

ACTION:

An FMI that establishes a link with
one or more FMIs should identify,
monitor, and manage link-related risks.
Principle 21: Efficiency and
Effectiveness
An FMI should be efficient and
effective in meeting the requirements of
its participants and the markets it
serves.
Principle 22: Communication
Procedures and Standards
An FMI should use, or at a minimum
accommodate, relevant internationally
accepted communication procedures
and standards in order to facilitate
efficient payment, clearing, settlement,
and recording.
Principle 23: Disclosure of Rules, Key
Procedures, and Market Data
An FMI should have clear and
comprehensive rules and procedures
and should 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 FMI. All
relevant rules and key procedures
should be publicly disclosed.
Principle 24: Disclosure of Market Data
by Trade Repositories
A trade repository should provide
timely and accurate data to relevant
authorities and the public in line with
their respective needs.
By order of the Board of Governors of the
Federal Reserve System, November 6, 2014.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2014–26791 Filed 11–12–14; 8:45 am]
BILLING CODE P

DEPARTMENT OF TRANSPORTATION

14 CFR Part 39
[Docket No. FAA–2014–0437; Directorate
Identifier 2012–CE–036–AD; Amendment
39–18019; AD 2014–23–03]

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RIN 2120–AA64

Airworthiness Directives; Piper
Aircraft, Inc.
Federal Aviation
Administration (FAA), DOT.

AGENCY:

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We are superseding
Airworthiness Directive (AD) 76–06–09
for certain Piper Aircraft, Inc. Model
PA–31P airplanes. AD 76–06–09
required repetitive inspection of certain
exhaust system parts with replacement
of parts mating with the turbocharger, as
necessary, and allowed installation of a
certain tailpipe v-band coupling as
terminating action. This new AD
requires the use of new service
information and expands the scope of
the inspections of the turbocharger
exhaust system. This AD was prompted
by reports of exhaust system failures,
new service information, and the
tailpipe v-band coupling used for
terminating action is obsolete. We are
issuing this AD to correct the unsafe
condition on these products.
DATES: This AD is effective December
18, 2014.
The Director of the Federal Register
approved the incorporation by reference
of certain publications listed in this AD
as of December 18, 2014.
The Director of the Federal Register
approved the incorporation by reference
of certain other publications listed in
this AD as of July 17, 2013 (78 FR
35110, June 12, 2013).
ADDRESSES: For service information
identified in this AD, contact Piper
Aircraft, Inc., 2926 Piper Drive, Vero
Beach, Florida 32960; telephone: (772)
567–4361; fax: (772) 978–6573; Internet:
www.piper.com/home/pages/
Publications.cfm; or Lycoming Engines,
652 Oliver Street, Williamsport,
Pennsylvania 17701; telephone: (570)
323–6181; Internet: http://
www.lycoming.textron.com/support/
publications/index.html; as applicable.
You may review copies of the
referenced service information at the
FAA, Small Airplane Directorate, 901
Locust, Kansas City, Missouri 64106.
For information on the availability of
this material at the FAA, call (816) 329–
4148.
SUMMARY:

Principle 20: FMI Links

Federal Aviation Administration

Final rule.

Examining the AD Docket
You may examine the AD docket on
the Internet at http://
www.regulations.govby searching for
and locating Docket No. FAA–2014–
0437; or in person at the Docket
Management Facility between 9 a.m.
and 5 p.m., Monday through Friday,
except Federal holidays. The AD docket
contains this AD, the regulatory
evaluation, any comments received, and
other information. The address for the
Docket Office (phone: 800–647–5527) is

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Document Management Facility, U.S.
Department of Transportation, Docket
Operations, M–30, West Building
Ground Floor, Room W12–140, 1200
New Jersey Avenue SE., Washington,
DC 20590.
FOR FURTHER INFORMATION CONTACT: Gary
Wechsler, Aerospace Engineer, Atlanta
Aircraft Certification Office, FAA, 1701
Columbia Avenue, College Park, Georgia
30337; telephone: (404) 474–5575; fax:
(404) 474–5606; email:
gary.wechsler@faa.gov.
SUPPLEMENTARY INFORMATION:

Discussion
We issued a notice of proposed
rulemaking (NPRM) to amend 14 CFR
part 39 to supersede AD 76–06–09,
Amendment 39–3325 (43 FR 50417,
October 30, 1978), (‘‘AD 76–06–09’’).
AD 76–06–09 applied to certain Piper
Aircraft, Inc. Model PA–31P airplanes.
The NPRM published in the Federal
Register on July 9, 2014 (79 FR 38806).
The NPRM was prompted by reports of
exhaust system failure. The NPRM
proposed to retain certain requirements
of AD 76–06–09. The NPRM also
proposed to require the use of the new
service information and expand the
scope of the inspections of the
turbocharger exhaust system. We are
issuing this AD to correct the unsafe
condition on these products.
Comments
We gave the public the opportunity to
participate in developing this AD. We
received no comments on the NPRM (79
FR 38806, July 9, 2014) or on the
determination of the cost to the public.
Conclusion
We reviewed the relevant data and
determined that air safety and the
public interest require adopting this AD
as proposed except for minor editorial
changes. We have determined that these
minor changes:
• Are consistent with the intent that
was proposed in the NPRM (79 FR
38806, July 9, 2014) for correcting the
unsafe condition; and
• Do not add any additional burden
upon the public than was already
proposed in the NPRM (79 FR 38806,
July 9, 2014).
Costs of Compliance
We estimate that this AD affects 85
airplanes of U.S. registry.
We estimate the following costs to
comply with this AD:

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