Fed Amends Risk Management Standards for Clearing and Settlement Agencies

The U.S. Federal Reserve has issued a final rule revising the risk-management standards on, clearing and settlement for central securities depositories (CSDs) and central counterparties (CCPs).

Under the rule, U.S. institutions deemed systemically important would adopt a common set of risk-management standards, in-line with international criteria and definitions for clearing and settlement agencies, the Fed claims.

These include standards on corporate governance, recovery policies, operational risks, alternative segregation regimes, and credit risk.

The decision from the Fed comes despite concerns that a uniform set of standards could not be applied for all CSDs and CCPs because they do not take into account the material differences that could be found among them.

However, the U.S. central bank believes a uniform set of standards is appropriate because: “all designated FMUs (financial market utilities) potentially face and must manage many of the same types of risk,” the Fed says in a policy statement.

The final rule is to come into force on December 31.

The importance of clearing and settlement has heightened since the financial crisis, placing CCPs and CSDs, such as CME Clearing and DTCC, at the forefront of G20 rules to reform the previously un-regulated over-the-counter (OTC) derivatives market.

Central clearing is designed to reduce risk in the markets by requiring collateral to be placed for each trade, while also guaranteeing both side of the trade.

However, the rules have brought attention on the risks facing clearing houses and CSDs.