WASHINGTON — Under a federal rule approved Monday, regulators will use a "two-stage process" to decide whether certain companies that facilitate clearing transactions are systemically important.
The Financial Stability Oversight Council finalized the procedure for determining which so-called "financial-market utilities" should have greater regulatory oversight because their failure could trigger a systemic collapse.
Organizations covered by the rule include central securities depositories and interbank payment systems. Among the largest financial-market utilities are the Depository Trust & Clearing Corp. and the Options Clearing Corp.
The new regulation is separate from the oversight council's broader efforts to designate payment-related companies as well as giant nonbank firms as systemically risky. Still, regulators hailed the final rule Monday as "critical" to ensuring the well-being of the financial markets.
"I believe this procedure of designating financial market utilities as systemically important represents a major step forward in implementing the objectives of the law," said Mary Schapiro, the chairman of the Securities and Exchange Commission.
Under the Dodd-Frank Act, such utilities deemed systemically important will have to face stricter oversight from the SEC, the Federal Reserve Board or the Commodity Futures Trading Commission.
The final rule, required by the new reform law, lays out essentially four criteria to determine if a financial-market utility is systemically important. They include the monetary value of transactions processed by a firm; its exposure to counterparties; its relationship or interdependence with other FMUs; and the effect its failure would have on the broader financial system. The council has discretion to consider other factors as well.
Under the new rule, the first stage of the process involves the council identifying a preliminary set of financial market utilities for the systemic determination through largely a calculation of key data. In the second stagee, those identified in the first round would be subject to a more in-depth, analytical review using qualitative factors.
"If an FMU reached the second stage of the evaluation process, the council would notify the FMU under consideration and provide the FMU with an opportunity to submit written materials to the council in support of or in opposition to" it being labeled systemically important, the rule said.
Once designated, FMUs that are registered derivatives clearing organizations or clearing agencies would be regulated by the CFTC or the SEC, respectively. All other systemically important FMUs would be supervised by the Fed.
Despite some comments that called for a prescriptive approach in making a designation, the council said it had opted for flexibility in the process because of the uniqueness of businesses operated by FMUs.
"The Council believes that a reasonable degree of flexibility is appropriate to permit refinement of its approach to designations as market structure, technology or competition evolve across key markets," the final rule said.