The Federal Reserve Board finalized a rule on Friday that
The new rule updates Regulation HH, which governs the Fed's oversight of designated systemically important financial market utilities, or FMUs. It changes the requirements for how entities should plan for and respond to operational risks to reflect contemporary challenges.
The
In total, eight entities have been designated FMUs by the Financial Stability Oversight Council. The Fed supervises two of them: The Clearing House Payments Co. — a payments network owned by the largest banks in the country — and CLS Bank International — a settlement network focused on foreign-exchange transactions.
The Fed proposed the change in October 2022 and collected comments on it from the public. It received a total of six comments and made modest adjustments in response to them.
The new rule requires those two groups to alert the Fed immediately about operational issues that arise and calls for them to establish criteria for how and when related parties are notified about issues. This provision was largely unchanged from the proposal.
It mandates a business continuity plan, which would spell out how FMUs would reestablish service should the operation of their critical services be disrupted. The final version adds a set of minimum standards for how continuity plans will be tested.
The rule adds a provision for dealing with operational issues related to third-party affiliates. Monitoring for risks in these types of relationships has been a focal point for bank regulators in recent years. The final rule clarifies the definition of "third-party" relationship, limits the scope of information-sharing requirements and allows for more direct participation from partner groups in business continuity planning.
The final component of the rule is a review and testing component. The update adds additional standards for identifying risks and testing processes. This part of the final rule was amended to make clear that entities would not be required to handle all issues in a uniform fashion.
In a memo released alongside the final rule, the Fed acknowledged concerns about the rule's competitive impact. One commenter called for changes to the requirements applied to the Fed's own Fedwire Services systems to ensure the government did have an unfair advantage over the private sector. But, Fed staffers concluded that such amendments would not be necessary.
"Staff expects that the Board will continue to hold the Fedwire Services to the same requirements as those in Regulation HH, and therefore staff does not believe the final rule will have any direct and material adverse effect on the ability of private-sector FMUs to compete with the [Federal] Reserve banks," the memo notes.
The designated FMUs affected by the rule must comply with certain components of it within 90 days and the entire package within 180 days.
