## EXECUTIVE SUMMARY — Content unit 1usaea2020009 ## Source details **Canonical URL:** [EXECUTIVE SUMMARY — Content unit 1usaea2020009](https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020009.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1usaea2020009.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1usaea2020009.pdf.json) --- ### INTRODUCTION - Objective: analyze systemic risks related to FMIs in the United States, with a focus on CCPs and new technologies. - Scope and basis: - Analysis based on the regulatory framework and practices in place as of March 10, 2020. - Onsite work supporting findings conducted during October 22-November 8, 2019. - Section D on new innovative technologies based on onsite work during February 18-March 6, 2020. - Sources: discussions with CFTC, FRB, Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, SEC; discussions with U.S. CCPs, FMIs, banks, financial institutions and industry associations; publicly available information, including published self-assessments and CCP quantitative disclosures. - Benchmark and analytical approach: - Uses the CPSS-IOSCO Principles for FMIs (PFMI) as a benchmark. - Analysis of regulation, supervision, and oversight uses the PFMI’s five responsibilities for authorities. - Risk management frameworks of four selected CCPs assessed against PFMI principles and related guidance (no formal assessment against the principles was conducted). ### SYSTEMIC IMPORTANCE AND STRUCTURE - Systemically important FMIs and critical services: - U.S. dollar clearing: Fedwire Funds Service and The Clearing House Interbank Payments System (CHIPS). - U.S. Treasuries clearing and settlement: Fedwire Securities Service and the Fixed Income Clearing Corporation (FICC). - FSOC designation: eight FMUs designated systemically important. - Observations: - Increased concentration of clearing activity and lack of short-run substitutes. - Mandatory clearing for certain OTC derivatives and limited substitutes may reduce CCP incentives to exceed minimum regulatory requirements. ### REGULATION, SUPERVISION, AND OVERSIGHT — OVERALL FINDINGS - Overall assessment: - Regulation, supervision, and oversight of systemically important U.S. FMUs are generally adequate and effective. - The Federal Reserve and SEC have sufficient powers and resources to execute their mandates. - The CFTC’s rule approval process and resources need strengthening. - High-level recommendations: - Address CFTC resource constraints and reconsider CFTC “no-objection” rule approval approach for systemically important CCPs in favor of an affirmative approval process with public consultation. - FRB, CFTC, and SEC should analyze differences in CCP implementation of PFMI and adopt appropriately consistent, conservative implementations where financial stability or market efficiency could be negatively impacted. - Strengthen crisis management communication arrangements for FMIs. - Conduct a more comprehensive supervisory stress test for CCPs. ### SELECTED RECOMMENDATIONS (PHRASING AND TIMING PRESERVED) - Regulation, supervision, and oversight of FMIs: - Strengthen rule approval process CFTC from a no-objection to an affirmative approval (par 22). Timing: ST. Responsibility: CFTC. - Add a public consultation phase into CFR 40.10 (par 22). Timing: ST. Responsibility: CFTC. - Evaluate whether publication of recommendations would help to promote a uniform implementation of risk management standards by designated FMUs (Par 25). Timing: ST. Responsibility: FRB. - Increase resources at the CFTC to strengthen focus on financial stability (par 27). Timing: I. Responsibility: CFTC. - Collaborate to analyze differences in outcomes of CCP risk management practices and adopt an appropriately consistent, conservative implementation of risk management standards across CCPs (par 34). Timing: I-ST. Responsibility: FRB, CFTC, SEC. - Develop and execute a more comprehensive systemwide CCP supervisory stress tests (par 35). Timing: ST. Responsibility: FRB, CFTC, SEC. - Develop crisis management communication framework for FMI primary regulators, FRB and FDIC (par 42). Timing: ST. Responsibility: FRB, CFTC, SEC, FDIC. - Continue steps forward in developing a deference framework for foreign CCPs (par 45). Timing: ST. Responsibility: CFTC, SEC. - CCP risk management frameworks: - Review the governance of the clearing house risk committee and intraday margining thresholds (CME) (par 54). Timing: ST. Responsibility: CFTC, FRB, CME. - Review the MPOR for CME Base (CME) (par 54). Timing: ST. Responsibility: CFTC, FRB, CME. - Provision for large stress exposures, in particular through provisioning for concentration risk as planned (FICC) (par 69). Timing: ST. Responsibility: SEC, FRB, FICC. - Continue working towards the approval and full implementation of the proposed changes to its risk management framework (OCC) (par 83). Timing: I. Responsibility: SEC, CFTC, FRB, OCC. - Timing code definitions: - I Immediate (within 1 year) - ST Short Term (within 1 to 2 years) - MT Medium Term (within 3 to 5 years) ### CCP RISK MANAGEMENT — SCOPE AND GENERAL FINDINGS - Focus CCPs analyzed: ICE Clear Credit (ICC); The Options Clearing Corporation (OCC); Chicago Mercantile Exchange (CME Base and CME IRS); Fixed Income Clearing Corporation (FICC). - General finding: - CCPs’ credit and liquidity risk management frameworks are generally sound, with room for further strengthening of some practices. - FMIs appeared sufficiently robust to manage surges in volumes and volatility during the COVID-19 crisis (mission did not cover COVID-19 impacts; robustness observation based on available information). - Specific implementation outcome concerns: - Independence of the risk management function. - Conservativeness of the margin period of risk (MPOR). - Implementation of intraday margining rules. - Recommended supervisory actions: - FRB, CFTC, SEC collaboration to analyze differences in CCP outcomes and adopt consistent conservative implementations of risk management standards. - Develop and execute a more comprehensive systemwide CCP supervisory stress test. ### CCP RISK PRACTICES — COMMON FEATURES AND HETEROGENEITY - Initial margin methodologies: - Trend toward risk-based portfolio margin models; confidence levels may be 99 percent or higher. - Offsets and netting across positions depend on correlation assumptions that may break down in stress. - Add-on charges: - ICC, OCC, and CME systematically include concentration charges; FICC developing a concentration charge. - Loss waterfalls and allocation: - Derivatives CCPs (ICC, CME, OCC): separate initial margin and mutualized default fund. - Securities CCPs (FICC): single mutualized collateral pool (no separation between initial margin and default fund). - Default fund allocation rules vary across CCPs. - Stress testing: - All major CCPs periodically evaluate exposure net of initial margin across “extreme but plausible” scenarios; severity and choice of scenarios vary. - CCP “skin-in-the-game”: - Current CCP capital is generally small relative to collateral pools (less than 1 percent); examples: - CME contributes US$150 million to CME IRS and US$100 million to CME Base (0.5 percent and 0.1 percent of total default resources respectively). - ICC contributes US$50 million (2.2 percent of default fund; 0.2 percent of total default resources). - Transparency: - CPMI-IOSCO Public Quantitative Disclosures useful but sometimes insufficient; some CCPs provide detailed model descriptions and tools, others could increase transparency. ### SPECIFIC DIFFERENCES WITH POTENTIAL STABILITY OR EFFICIENCY IMPACTS - Risk committee independence: - CME: chair of Clearing House Risk Committee is a trading member of CME exchanges. - FICC, ICC, OCC: chairs are independent board members. - Recommendation: review CME chair independence. - MPOR (examples): - OCC: minimum MPOR of two days for equity options, index options, and futures. - FICC: MPOR of three days. - Two OTC derivatives CCPs: minimum MPOR of five days. - CME: uses one-day, two-day, and three-day MPOR for futures; five-day MPOR for OTC derivatives. - Concern: CME one-day MPOR for some contracts seems low; recommend review to avoid insufficient protection and negative procyclical margin calls. - Intraday margin thresholds: - Implementation differs across CCPs; absence of clear intraday thresholds can affect participants’ liquidity and cause procyclical effects. - Recommendation: specify thresholds to help clearing members plan and avoid intraday margin depletion. ### SELECTED CCP-SPECIFIC FINDINGS - CME (Base and IRS): - CME Base margin uses SPAN targeting 99 percentage coverage; minimum MPOR: one day. - Margin pool currently above US$90 billion, 70 percent customer margin. - Default fund (CME Base): current size US$3.5 billion; largest uncollateralized exposure to any single clearing member US$1.8 billion. - CME transitioning to SPAN2 based on a 99 percent portfolio historical VaR. - CME IRS margin: 5-day 99.7 percent portfolio HVaR; concentration charge based on member bids. - CME skin-in-the-game: US$150 million (IRS) and US$100 million (Base). - FICC: - GSD and MBSD operate with a single mutualized collateral pool; initial margin based on 99 percent HVaR over a 3-day horizon with a 10-year lookback including a one year stress period. - Prefunded liquid resources around US$20 billion in 2018–2019. - Largest liquidity exposure to a single participant around US$80 billion over 2018–2019. - Capped contingency liquidity facility (CCLF): for GSD US$105 billion and for MBSD US$52 billion at end of June 2019. - Recommendation: consider addressing large stress test exposures via additional collateral requirements, including provisioning for concentration risk. - Back testing: 124 margin breaches observed in GSD over the 12-month period Q2: 2018–Q1: 2019. - Largest uncollateralized stress exposure to a single participant and affiliates: GSD US$649 million; MBSD US$1,618 million (12-month period preceding report). - ICC: - ICC is sole U.S. CCP for CDS; 29 participants in 2018 (16 bank groups). - In Q2 2019 the 5 largest clearing members accounted for more than 40 percent of open interest, 55 percent of margin, and 38 percent of the default fund. - Margin: 99.5 percent portfolio VaR plus jump-to-default, liquidity, and concentration charges; add-ons average 20 percent of total margin and can reach 50 percent for large positions. - Skin-in-the-game: US$50 million (2.2 percent of default fund; 0.2 percent of total default resources). - Default fund sizing: Cover 2 (two largest uncollateralized exposures); allocation proportional to stress loss net of initial margin with US$20 million minimum contribution. - Auction process open to vetted non-members with US$10 million pledge to participate. - OCC: - Sole U.S. CCP for exchange-traded equity options; approximately 105 clearing members. - Enhancements since 2013 include inclusion of volatility risk factors, liquidation charge introduced in 2019, new default fund and stress testing methodology. - Initial margin: 99 percent portfolio expected shortfall with econometric scenarios; liquidation charge increased aggregate margin requirements by more than US$1 billion. - Default fund size (Q2 2019): US$10 billion. - Largest exposure in excess of initial margin to a single member over previous 12 months: US$4.6 billion; sum of two largest exposures peaked at US$7.1 billion. - Recommendation: align default fund contribution allocation more closely with members’ stress exposures in excess of margin to increase defaulter-pay resources. ### RECOVERY AND RESOLUTION — PROGRESS AND RECOMMENDATIONS - Recovery: - CCPs have developed recovery plans as required by regulations and guidance. - Recovery plans should include scenarios leading to uncovered credit losses or liquidity shortfalls; review frequency requirements: CFTC annual; FRB every two years or earlier if material changes. - CME and ICC completed recovery plans in 2016 and are further developing them. - Recovery plans for FICC and OCC approved in 2018. - Resolution: - FDIC developing resolution strategies for CCPs in cooperation with domestic and foreign supervisors; FDIC is co-hosting CMGs for CME and ICC since 2017. - Under DFA Title II, FDIC would be resolution authority for systemically important FMUs; FDIC powers include setting up a bridge CCP, transferring assets and liabilities, and providing temporary backstop funding under certain terms. - Further steps recommended: - Continue coordination of FDIC with domestic regulators to broaden resolution planning to other CCPs. - Further develop policy on interaction between recovery and resolution, trigger to resolution, and process of “turning the key.” - FDIC participation in CCP supervisory stress tests. - Set up CMGs for other CCPs determined systemically important in more than one jurisdiction and develop cooperation agreements. ### PAYMENT ECOSYSTEM AND NEW TECHNOLOGIES — RISKS AND REGULATORY GAPS - Emerging concerns: - New non-bank players (card payment schemes, electronic wallet providers, payment gateways, aggregators, platform providers) may pose systemic and operational risks. - Current regulatory framework for payments is complex and largely state-based for money transmitters; inconsistency and overlapping examinations exist. - Banks are expected to manage third-party risks, but risks from other providers of potentially critical payment services may fall outside direct supervision or be only partially supervised. - Current frameworks may not be “future proof” to ensure risk sensitivity, comprehensiveness, and consistency for new payment service providers irrespective of legal status. - FSOC view: - FSOC recognizes need to evaluate potential risks to payment system integrity and operational risk and to consider approaches to reduce regulatory fragmentation while supporting innovation. ### PAYMENT SERVICE REGULATION — KEY OBSERVATIONS AND RECOMMENDATIONS - Licensing and perimeter: - Electronic wallet providers, payment gateways and aggregators that perform money transmission services are required to hold money transmitter licenses in all states except Montana. - Payment systems and card payment schemes do not require a bespoke license and are not subject to mandatory license requirements. - State-based money transmitter framework issues: - Licensing may take up to 6 years to obtain a full set of state licenses. - Supervisory resources vary by state (example: California has 28 FTE supervising more than 100 money transmitters). - No optional Federal license regime available for non-bank payment service providers offering nationwide services. - Gaps and risks: - Card schemes process values of trillions of dollars but are not designated systemically important by FSOC and lack a dedicated retail payment infrastructure regulatory regime. - Network-based application providers and certain DLT platforms may operate without activity-specific regulation. - Absence of clear data acquisition, use, and sharing regime cited as impediment to new services. - Policy recommendation: - Consider a dedicated regulatory regime suited for certain new or existing payment services to prevent risk buildup and clarify circumstances under which a payment service or activity could be considered systemically important under DFA Title VIII. ### DISTRIBUTED LEDGER TECHNOLOGY (DLT) AND SUPTECH - DLT adoption and constraints: - Limited adoption in U.S. FMIs; mainly used in non-core functions (DTCC Trade Information Warehouse; CLSNet). - Constraints: lack of maturity, scale and latency issues, insufficient smart contracts for complex processes, cyber resilience concerns, reluctance to replace legacy systems, lack of critical mass. - Permissioned DLTs facilitate AML/CFT and KYC compliance; interoperability is critical for delivery-versus-payment arrangements. - Regulatory approach largely technology neutral; particular supervisory attention may be required for governance, cyber resilience, data transparency, outsourcing. - SupTech: - Deployment early and limited but potential significant for data reporting and monitoring. - SEC requires security-based swap data repositories to file financial reports in XBRL. - Leveraging industry standard message formats (e.g., FIX, FpML) could lower implementation burdens and facilitate cross-agency sharing. ### SUPERVISORY STRESS TESTING, INTERDEPENDENCIES, AND COOPERATION - Supervisory stress testing: - CFTC conducted CCP stress tests in 2016, 2017, and 2019 covering different CCPs, products and risks. - Recommendation: conduct U.S. supervisory stress tests including all systemically important CCPs and knock-on effects on clearing members, liquidity providers, and other FMIs. - Exercise requires data sharing among SEC, CFTC, and FRB; FRB well positioned to oversee exercise and could leverage FSOC OFR capabilities; FDIC involvement recommended for resolution planning considerations. - Interdependencies: - High dependency on a few G-SIBs and on banks that are members of multiple FMIs (example: 5 large dealer banks clear 80 percent of client transactions in OTC derivatives). - Continued work on interdependencies and multi-CCP drills recommended. - Cooperation among authorities: - FRB, CFTC, SEC cooperation generally works well with bilateral MOUs and the FMU-SC internal coordinating body. - Administrative burdens exist for CCPs supervised by both CFTC and SEC due to parallel rule filings and differing procedures. ### SELECTED FMI STATISTICS (AS REPORTED) - FSOC-designated systemically important FMIs (selected figures, 2018 unless indicated): - CHIPS: 44 participants (May 2019); 2018 settled value US$418 trillion. - CLS Bank International: 73 participants (end-2018); 2018 settlement value US$1,481 trillion. - CME Clearing: 61 participants in Base (end-2017); 27 participants in IRS; 2018 value of contracts processed US$33 trillion; total size of prefunded financial resources US$136 billion (September 2018). - DTC: 309 participants (end-2018); 2018 settled value US$123 trillion. - FICC: 275 participants (end-2018); 2018 annual cleared value US$1,247 billion; total size of prefunded resources US$24.5 billion (September 2018). - ICC: 29 participants in 2018 (16 bank groups); 2018 annual cleared value US$14 trillion; total size of prefunded financial resources US$33.6 billion (September 2018). - NSCC: 146 participants (end-2018); 2018 value cleared US$320 trillion. - OCC: 105 participants (end-2018); 2018 cleared activity 5.2 million contracts; total size of prefunded financial resources US$16.4 billion (September 2018). - Other Fed-operated systems (2018): - Fedwire Funds Service: 5,199 participants; 2018 cleared value US$716 trillion. - Fedwire Securities Service: 1,759 participants (end-2018); 2018 total cleared value US$296 trillion. - Selected CCP resource and activity snapshots (Appendix Table excerpts): - CME Total liquid IM 115.7 (US$ billion); Total actual IM held 127.7. - DTCC GSD Total liquid IM 31.1; Total actual IM held 31.1. - DTCC MBSD Total liquid IM 5.3; Total actual IM held 6.0. - ICE Total GF held 2.5; OCC Total GF held 10.4. - Noncash payment statistics (selected figures): - Debit cards 2018 Number (billions) 86.5; Value ($trillions) 3.10. - Credit cards 2018 Number (billions) 44.7; Value ($trillions) 3.98. - ACH Credit transfers 2018 Number (billions) 11.9; Value ($trillions) 40.87. - FedACH 2018 Value ($trillions) 27 (Number transactions (million) 13,226). - Mobile and digital wallets 2015 Number (billions) 1.3; Value ($trillions) 0.05. *Source: EXECUTIVE SUMMARY (United States Financial Sector Assessment Program), content unit 1usaea2020009.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### INTRODUCTION - Objective: analyze systemic risks related to FMIs in the United States, with a focus on CCPs and new technologies. - Scope and basis: - Analysis based on the regulatory framework and practices in place as of March 10, 2020. - Onsite work supporting findings conducted during October 22-November 8, 2019. - Section D on new innovative technologies based on onsite work during February 18-March 6, 2020. - Sources: discussions with CFTC, FRB, Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, SEC; discussions with U.S. CCPs, FMIs, banks, financial institutions and industry associations; publicly available information, including published self-assessments and CCP quantitative disclosures. - Benchmark and analytical approach: - Uses the CPSS-IOSCO Principles for FMIs (PFMI) as a benchmark. - Analysis of regulation, supervision, and oversight uses the PFMI’s five responsibilities for authorities. - Risk management frameworks of four selected CCPs assessed against PFMI principles and related guidance (no formal assessment against the principles was conducted). ### SYSTEMIC IMPORTANCE AND STRUCTURE - The U.S. financial system includes several systemically important FMIs essential for: - U.S. dollar clearing: Fedwire Funds Service and The Clearing House Interbank Payments System (CHIPS). - Clearing and settlement of U.S. Treasuries: Fedwire Securities Service and the Fixed Income Clearing Corporation (FICC). - Central counterparties (CCPs) that clear exchange-traded or over-the-counter (OTC) corporate securities or derivatives are of key importance to safe and efficient market functioning. - The Financial Stability Oversight Council (FSOC) designated eight financial market utilities (FMUs) to be systemically important. - Increased concentration of clearing activity and lack of short-run substitutes heighten the imperative for sound regulation, supervision, and oversight. - Mandatory clearing for certain OTC derivatives and limited substitutes may reduce CCP incentives to exceed minimum regulatory requirements, increasing the importance of regulatory oversight and internal risk governance. ### REGULATION, SUPERVISION, AND OVERSIGHT — FINDINGS - Overall assessment: - Regulation, supervision, and oversight of systemically important U.S. FMUs are generally adequate and effective. - The Federal Reserve and SEC have sufficient powers and resources to execute their mandates. - The CFTC’s rule approval process and resources need strengthening. - Specific concerns and recommendations (high-level): - CFTC effectiveness is impacted by resource constraints that need to be addressed. - Reconsider the CFTC “no-objection” rule approval approach for systemically important CCPs; an affirmative approval process (as at the SEC) combined with public consultation would be more appropriate given CCPs’ systemic profile. - FRB, CFTC, and SEC should collaborate to analyze differences in outcomes of CCP implementation of PFMI and adopt appropriately consistent, conservative implementations where financial stability or market efficiency could be negatively impacted. - Crisis management communication arrangements for FMIs could be strengthened. - Authorities implemented PFMI through dedicated regulations, but there is room to strengthen consistency of outcomes of implementation across FMIs. - A more comprehensive supervisory stress test for CCPs is recommended to better understand where risks could materialize during a stress event. ### CCP RISK MANAGEMENT — ANALYSIS SUMMARY - Focus CCPs analyzed: ICE Clear Credit (ICC) for credit default swaps (CDS); The Options Clearing Corporation (OCC) for U.S. equity and index options; Chicago Mercantile Exchange for futures and commodity derivatives (CME Base) and interest rate swaps (CME IRS); Fixed Income Clearing Corporation (FICC) for U.S. government securities and agency mortgage backed securities (MBS). - General finding: - CCPs’ credit and liquidity risk management frameworks are generally sound, with room for further strengthening of some risk management practices. - FMIs appeared sufficiently robust to manage surges in volumes and volatility during the COVID-19 crisis (note: the mission did not cover COVID-19 impacts; robustness observation based on available information). - Specific areas of concern identified in CCP implementation outcomes: - Independence of the risk management function. - Conservativeness of the margin period of risk (MPOR). - Implementation of intraday margining rules. - Recommended supervisory actions: - FRB, CFTC, SEC collaboration to analyze differences in CCP outcomes and to adopt appropriately consistent, conservative implementations of risk management standards. - Develop and execute a more comprehensive systemwide CCP supervisory stress test. ### RECOVERY AND RESOLUTION - Progress since 2015: - CCPs have developed recovery plans as required by new and dedicated requirements and guidance from primary regulators. - FDIC is developing resolution strategies for CCPs in cooperation with domestic and foreign supervisors, including through CCP crisis management groups (CMGs) for CME and ICC. - Further steps recommended: - Continue coordination of FDIC with domestic regulators to broaden resolution planning to other CCPs. - Further develop a policy approach on the interaction between recovery and resolution. - FDIC participation in CCP supervisory stress tests. ### PAYMENT ECOSYSTEM AND NEW TECHNOLOGIES - Emerging concerns: - New non-bank players entering payments space (card payment schemes, electronic wallet providers, payment gateways, aggregators or platform providers) may pose potential systemic and operational risks. - Current regulatory framework for payments is complex; money transmitters may face partly diverging rules and overlapping examinations depending on location and activities. - Banks are expected to manage risks from third-party relationships, including payments-related risks. - Risks posed by other providers of potentially critical payment services may fall outside direct supervision or are supervised only partially via third-party service provider regimes. - The current regulatory frameworks may not be “future proof” to ensure risk sensitivity, comprehensiveness, and consistency for potential new payment service providers irrespective of their status as bank, money transmitter, or non-bank. - FSOC view: - FSOC has recognized the need for authorities to evaluate potential risks to payment system integrity and operational risk and to consider approaches to reduce regulatory fragmentation while supporting innovation benefits. ### RECOMMENDATIONS (SELECTED — FROM Table 1) - Recommendations for regulation, supervision, and oversight of FMIs (recommendation phrasing and timing preserved): - Strengthen rule approval process CFTC from a no-objection to an affirmative approval (par 22). Timing: ST. Responsibility: CFTC. - Add a public consultation phase into CFR 40.10 (par 22). Timing: ST. Responsibility: CFTC. - Evaluate whether publication of recommendations would help to promote a uniform implementation of risk management standards by designated FMUs (Par 25). Timing: ST. Responsibility: FRB. - Increase resources at the CFTC to strengthen focus on financial stability (par 27). Timing: I. Responsibility: CFTC. - Collaborate to analyze differences in outcomes of CCP risk management practices and adopt an appropriately consistent, conservative implementation of risk management standards across CCPs (par 34). Timing: I-ST. Responsibility: FRB, CFTC, SEC. - Develop and execute a more comprehensive systemwide CCP supervisory stress tests (par 35). Timing: ST. Responsibility: FRB, CFTC, SEC. - Develop crisis management communication framework for FMI primary regulators, FRB and FDIC (par 42). Timing: ST. Responsibility: FRB, CFTC, SEC, FDIC. - Continue steps forward in developing a deference framework for foreign CCPs (par 45). Timing: ST. Responsibility: CFTC, SEC. - Recommendations for CCP risk management frameworks (recommendation phrasing and timing preserved): - Review the governance of the clearing house risk committee and intraday margining thresholds (CME) (par 54). Timing: ST. Responsibility: CFTC, FRB, CME. - Review the MPOR for CME Base (CME) (par 54). Timing: ST. Responsibility: CFTC, FRB, CME. - Provision for large stress exposures, in particular through provisioning for concentration risk as planned (FICC) (par 69). Timing: ST. Responsibility: SEC, FRB, FICC. - Continue working towards the approval and full implementation of the proposed changes to its risk management framework (OCC) (par 83). Timing: I. Responsibility: SEC, CFTC, FRB, OCC. - Timing code definitions (preserved): - I Immediate (within 1 year) - ST Short Term (within 1 to 2 years) - MT Medium Term (within 3 to 5 years) *Source: EXECUTIVE SUMMARY (United States Financial Sector Assessment Program), as provided.* ### 5. Third, the note takes stock of the recovery and resolution of CCPs and the governing ### 1usaea2020009 - 5. Third, the note takes stock of the recovery and resolution of CCPs and the governing ### Scope and objectives - The note takes stock of recovery and resolution of CCPs and the governing framework. - On recovery: takes stock of regulatory and supervisory efforts in the area of CCP recovery. - On resolution: analyzes the FDIC’s activities in developing and testing resolution plans. - The stock take of new innovative financial technologies covers: - i) new payment service providers that may (potentially) be systemically important; - ii) the adoption of distributed ledger technology (DLT) by systemically important FMIs; - iii) the use of SupTech by the Federal Reserve, CFTC and SEC. - Objective: analyze potential implications for financial stability, in particular whether the regulatory perimeter is appropriately defined to capture shifts in systemic importance of FMIs and payment services. - Findings of CPMI-IOSCO implementation monitoring reports are taken into account; a summary of main findings is provided in Appendix II. ### FMI landscape in the United States (designated systemically important FMIs and key statistics) - The FSOC-designated systemically important FMIs number eight: - CHIPS - Feature: private payment system; nets payments bilaterally and multilaterally. - Participants: 44 participants as of May 2019. - 2018 settled value: US$418 trillion. - CLS Bank International (CLS) - Charter: chartered by the FRB under the Federal Reserve Act as an Edge corporation. - Participants: 73 participants at the end of 2018. - 2018 settlement value: US$1,481 trillion. - CME Clearing - Organization: part of CME Inc. within the CME Group. - Participants: 61 participants in its Base segment at end-2017; 27 participants in its IRS segment. - 2018 value of contracts processed: US$33 trillion. - Total size of prefunded financial resources (initial margin and clearing fund): US$136 billion in September 2018. - DTC (Depository Trust Company) - Role: sole securities settlement system (SSS) and central securities depository (CSD) for corporate bonds, municipal bonds, and equities in the U.S. - Participants: 309 participants at end-2018. - 2018 settled value: US$123 trillion. - FICC (Fixed Income Clearing Corporation) - Role: sole CCP for U.S. Treasury bonds and bills, GCF repos and MBS. - Participants: 275 at end-2018. - 2018 annual cleared value: US$1,247 billion. - Total size of prefunded resources: US$24.5 billion in September 2018. - ICC (ICE Clear Credit L.L.C.) - Role: U.S.-based global clearing facility for index, single name and sovereign CDS; sole U.S. CCP for CDS. - Participants: 29 participants in 2018, belonging to 16 bank groups. - 2018 annual cleared value: US$14 trillion. - Total size of prefunded financial resources: US$33.6 billion in September 2018. - NSCC (National Securities Clearing Corporation) - Role: only CCP in the U.S. for corporate bonds, municipal bonds and equities. - Participants: 146 at the end of 2018. - 2018 value cleared: US$320 trillion. - OCC (Options Clearing Corporation) - Role: only CCP for exchange traded equity options in the U.S. - Participants: 105 at the end of 2018. - 2018 cleared activity: 5.2 million contracts (no value available). - Total size of prefunded financial resources: US$16.4 billion in September 2018. ### Other Federal Reserve-operated FMIs and concentrations - Fed-operated systems and 2018 statistics: - Fedwire Funds Service - Participants: 5,199 participants. - 2018 cleared value: US$716 trillion. - Fedwire Securities Service - Participants: 1,759 at end-2018. - 2018 total cleared value: US$296 trillion. - The Federal Reserve also operates an ACH for interbank clearing of retail transactions and a check clearing service. - Change in clearing bank landscape: - 2016 withdrawal of JP Morgan Chase as clearing bank for government securities left Bank of New York Mellon (BNYM) as sole clearing bank. - BNYM: sole provider of U.S. government securities settlement and triparty repo services (outstanding of around US$2.5 trillion). - BNYM is one of eight U.S.-based global systemically important banks and thus subject to heightened capital and liquidity requirements and a resolution process. - Interdependencies and concentration: - High interdependencies exist among FMIs, banks, and the Federal Reserve Banks for settlement of retail and large value interbank payments. - CCPs are quasi-monopolies for clearing certain assets; CCPs depend on banks for custody, payment and liquidity arrangements. - Concentration example: 5 large dealer banks clear 80 percent of client transactions in OTC derivatives. - Several systemically important CCPs are linked through cross-margining arrangements. ### Regulatory and supervisory framework (authorities, legal basis, and scope) - Authorities responsible for regulation, supervision and oversight of FMIs: - FRB (Federal Reserve Board) - Regulatory authority for payment systems and CSDs/SSSs operated by the Federal Reserve Banks and for payment systems designated as systemically important by the FSOC. - Supervises FMIs that are members of the Federal Reserve System or chartered by the Federal Reserve. - CFTC (Commodity Futures Trading Commission) - Supervises CCPs that clear products within CFTC legal responsibility (e.g., exchange-traded futures, commodity derivatives and OTC derivatives). - SEC (Securities and Exchange Commission) - Supervises CCPs and CSDs/SSSs that clear and settle products within SEC legal responsibility (e.g., government securities, corporate bonds, municipal bonds, equities, equity derivatives, security‑based swaps). - CCPs can be subject to both CFTC and SEC supervision if they clear products in both mandates (examples: ICC and OCC). - A CCP subject to both has one primary regulatory authority for Title VIII of the DFA: CFTC is primary regulator for ICC and SEC is primary regulator for OCC. - Legal basis: - DFA (Dodd-Frank Act Title VIII), Federal Reserve Act, Commodity Exchange Act (CEA), Securities Exchange Act of 1934 (EA). - These acts provide criteria and authority for designation, regulation, supervision, and oversight; designated FMUs are subject to additional risk management standards in line with the PFMI. - FRB enhanced role under DFA: - FRB must be consulted by CFTC and SEC on scope and methodology of DFA-related examinations; FRB may participate in examinations and reviews of rule changes of SIDCOs and systemically important CAs that could materially affect risk. - FRB guided by its PSR policy when providing input to CFTC and SEC. - DFA provides FRB with certain escalation powers to FSOC and crisis management tools. - Federal Reserve account and emergency liquidity authority under DFA and Regulation HH: - FRB authorized to permit Federal Reserve Banks to establish and maintain deposit accounts and provide services to designated FMUs and, in unusual and exigent circumstances, emergency liquidity under certain conditions. - Conditions for FMU accounts include: (i) be in a sound financial condition; (ii) meet supervisory agency requirements; (iii) be in compliance with FRB policies; and (iv) meet account obligations. - All CCPs designated as systemically important by the FSOC have an account at the Federal Reserve for deposit of their U.S. dollar cash collateral. - The CCPs for which the CFTC is the primary regulator were able to open house and client accounts after the CFTC issued an order to exempt Federal Reserve Banks from certain CEA requirements. - The Treasury has recommended FRB “review what risks may be posed to U.S. financial stability by the lack of Federal Reserve Bank deposit account access for certain FMUs with significant shares of U.S. clearing business, and an appropriate way to address any such risks.” - Non-designated FMIs: - Some non-designated FMIs comply with the same risk management requirements as designated FMUs by opting in to enhanced requirements consistent with the PFMI (examples in CFTC regime: ICE U.S., Minneapolis Grain Exchange, Nodal Clear; in SEC regime: LCH SA). - Foreign CCPs that trigger U.S. registration requirements must comply with applicable legal requirements. ### Supervision and oversight assessment (PFMI responsibilities and specific issues) - Objective: benchmark U.S. regulatory, supervisory and oversight framework against PFMI’s five responsibilities; identify gaps or issues that could enable systemic risk buildup. - Regulation, Supervision, Oversight and Transparency (Responsibilities A and C) - U.S. legal framework defines and publicly discloses criteria to identify FMIs subject to regulation, supervision and oversight. - DFA criteria for designation include: (i) the value of transactions processed or carried out; (ii) the FMU’s exposure to its counterparties; (iii) the relationship, interdependencies or other interactions of the FMU with other FMUs; (iv) the effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions or the broader financial system. - The legal framework publicly discloses division of responsibilities among authorities. - Powers and Resources (Responsibility B) - FRB, CFTC and SEC have sufficient supervisory powers to regulate and supervise designated FMUs. - Authorities possess standard setting powers, approval of rule changes, annual examinations, powers to obtain information, and conduct onsite and offsite examinations. - DFA requires a designated FMU to provide 60 days’ advance notice to its primary regulator of any proposed change to rules, procedures, or operations that could materially affect the nature or level of risks presented by the FMU. ### Key recommendation on CFTC rule approval process for SIDCOs - Issue identified: - SIDCO rule approval under CFR § 40.10 follows a no-objection approach: proposed rule changes submitted with at least 60 days’ notice may take effect if the CFTC does not object. - Recommendation: - Reconsider the CFTC rule approval process for SIDCOs and introduce an affirmative approval process and a public consultation. - Rationale: - The no-objection approach could be strengthened given the systemic importance of SIDCOs to limit the chance that important changes are overlooked due to resource or other constraints. - For systemically important CCPs such as ICC and CME, replace the ‘automatic unless an objection’ approval after 60 days by an affirmative approval for all proposed rule changes (comparable to the SEC’s approach). - Include a public comment period for CFR § 40.10 rule changes to allow stakeholders to formally express their opinion (SEC’s approval process includes a public comment period, which CFR § 40.10 currently does not). *Source: IMF staff summary of the content unit provided.* ### 23. The legal framework provides primary regulators with a sufficient range of powers to ### 1usaea2020009 - 23. The legal framework provides primary regulators with a sufficient range of powers to ### Legal powers and enforcement tools - The CFTC can: - escalate examination-identified issues to a DCO’s management and Board of Directors; - sue the DCO in a federal court for civil monetary penalties; - issue a cease and desist order; - suspend or revoke a DCO’s registration. - The SEC may: - initiate and conduct investigations of CAs; - suspend or revoke a CA’s registration; - impose limitations on a CA’s activities, functions or operations; - impose financial sanctions. - The FRB, CFTC, and SEC have authority under subsections (b) through (n) of section 8 of the Federal Deposit Insurance Act in the same manner and to the same extent as if the systemically important CCP were an insured depository institution and the FRB, CFTC or SEC were the appropriate Federal banking agency for such insured depository institution. ### FRB powers and DFA Title VIII implementation - FRB powers include: - escalation to the FSOC and undertaking direct action towards a designated FMU for which it is not the primary regulator with FSOC approval; - discretionary participation in DFA-related examinations led by the CFTC or SEC; - consultation rights with CFTC and SEC regarding review of certain/material rule changes proposed by designated FMUs; - determination that CFTC/SEC regulations are insufficient to prevent or mitigate risks and escalation to the FSOC; - recommendation, after consultation with the FSOC, that the primary regulator undertake enforcement action; and if the primary regulator does not act, further escalation to the FSOC; - under certain conditions (including a finding of imminent risk of substantial harm), direct enforcement action against a designated FMU after consultation with the primary regulator and an affirmative vote of a majority of the FSOC; - requiring data directly from a designated FMU in whatever form and frequency needed for financial stability purposes; and, after an affirmative vote of a majority of the FSOC, prescribing recordkeeping or reporting requirements on a designated FMU for which the CFTC or SEC is the primary regulator. - Observations: - The DFA Title VIII sets a high hurdle for FRB formal powers that require escalation to the FSOC. - The high hurdle is useful for imminent systemic risk cases but may be less suitable for ongoing execution of FRB responsibilities under Title VIII and could result in underuse of powers aimed at preventing or mitigating liquidity, credit, operational or other risks when not facing imminent substantial harm. - The FRB may evaluate whether publication of recommendations (e.g., in Financial Stability Reports) would promote uniform implementation of risk management standards by designated FMUs, while weighing potential effects of making public certain CCP-related information. ### Resources and supervisory capacity - FRB: - staff increased to around 100 full-time equivalents (FTEs), shared by the FRB, the Federal Reserve Bank of New York, and the Federal Reserve Bank of Chicago; - dedicated department with an oversight team for all systemically important domestic FMIs, a quantitative risk analysis team, and an FMI risk and policy team; - dedicated local teams at Federal Reserve Banks of New York and Chicago for oversight of designated FMUs in New York and Chicago, respectively. - SEC: - Office of Clearance and Settlement consists of lawyers, economists, and quantitative analysts; - staff increased from approximately 15 to approximately 40 since the introduction of the DFA, with additional economists and quantitative analysts; - Office of Compliance Inspections and Examinations has a subgroup of approximately 20 staff dedicated to conducting examinations and inspections of CAs. - CFTC: - allocates 70 staff members to the Division of Clearing and Risk which supervises 16 domestic and foreign CCPs through examinations, risk surveillance, and development of policies and regulations; - these 16 include CME, ICC and LCH Ltd; - resources are under pressure due to new registrants and regulatory and supervisory challenges related to new technologies (examples: Eris Clearing and Ledger X). ### Adoption of the Principles for Financial Market Infrastructures (PFMI) - CFTC and FRB adoption: - CFTC Part 39 Regulations incorporate the PFMI for SIDCOs (Subpart C) (2013 regulation adoption mentioned); - FRB implemented the PFMI through Regulation HH (2014). - SEC adoption: - 2012 and 2014 rules partly reflected PFMI (Rule 17Ad-22(a)-(d) and Regulation SCI); - 2016 adoption of Rule 17Ad-22(e) for covered clearing agencies (CCAs) completed formal PFMI adoption in SEC regulations. - January 2020 CFTC rule changes for DCOs and SIDCOs: - require cross-margining provisions and address shortcomings identified in the CPMI IOSCO 2015 implementation monitoring report; - require an enterprise risk management program for a DCO that is explicitly not allowed to include excess margin in calculations of the largest financial exposure; - require margin model validations at least annually; - require default management tests to include participants; - tighten rules around CCPs’ public quantitative disclosures. ### Consistency of PFMI implementation and supervisory outcomes - Findings: - FRB’s enhanced role under DFA Title VIII is essential to promote uniform implementation of PFMI by systemically important FMUs across multiple primary regulators. - The FRB’s rigorous supervisory approach does not necessarily result in consistent outcomes from PFMI application across CCPs. - Observed uneven outcomes may impact financial stability or market efficiency, specifically regarding: - independence of the risk management function; - conservativeness of the MPOR; - implementation of intraday margining rules. - Recommendation: - The FRB, CFTC, and SEC should collaborate to analyze differences in CCP outcomes and adopt an appropriately consistent, conservative implementation of the PFMI where financial stability or market efficiency could be negatively impacted. - Authorities may adopt more demanding requirements based on specific FMI risks or as a general policy (PFMI paragraph 1.19). ### Supervisory stress testing, interdependencies, and default management drills - CCP supervisory stress tests: - CFTC conducted CCP stress tests in 2016, 2017, and 2019 that covered different CCPs, products and risks. - Recommendation to start conducting U.S. supervisory stress tests that include all systemically important CCPs and knock-on effects on clearing members, liquidity providers, and other FMIs where relevant. - Such macroprudential supervisory stress tests would not supersede CCP internal stress tests and should use a standard set of stress scenarios to evaluate collective responses from credit and liquidity perspectives. - The exercise requires data sharing among SEC, CFTC, and FRB; the FRB is well positioned to oversee the exercise and could leverage FSOC Office of Financial Research (OFR) capabilities. - If current information sharing arrangements are insufficient, new arrangements will be needed. - Involvement of the FDIC is recommended to account for elements relevant for CCP resolution planning. - Interdependencies: - Continued work on interdependencies between CCPs and clearing members is warranted; dependencies have increased due to a reduction in clearing members providing client clearing and liquidity services. - International work on interdependencies could inform regular reviews of CCP dependencies on liquidity providers, custodians, settlement banks, and other service providers. - Multi-CCP drills: - Multi-CCP drills help identify operational risks in default management for large members active in more than one CCP. - U.S. CCPs periodically conduct default management drills supplemented by traders seconded from member firms; a cross-CCP, cross-border drill example: exercise by CME, LCH SwapClear and Eurex Clearing in 2017. - Authorities may encourage domestic and cross-border drills to proactively address potential default execution problems. ### Cooperation among authorities - Coordination framework and practice: - Distribution of responsibilities among multiple authorities requires intense and effective cooperation. - As requested by DFA 813, the CFTC, SEC, and FRB jointly developed a risk management supervision program for designated CCPs and CSDs/SSSs to improve consistency and promote robust risk management supporting financial stability. - Cooperation and coordination among FRB, CFTC, and SEC generally work well: - FMUs submit proposed changes that could materially affect risk for approval to their primary regulators; - CFTC and SEC consult with the FRB before acting on such rule changes and regarding the scope and methodology of annual DFA-related examinations; - FRB actively engages in approval of proposed rule changes and participates in examination processes; - information is shared under bilateral MOUs and information sharing barriers have been removed; - within the Federal Reserve System, the FMU-SC meets at least quarterly as an internal coordinating body for designated FMU supervision. - Administrative burdens: - CCPs supervised by both the CFTC and SEC face differences in rule filing processes that contribute to administrative costs. - Parallel rule filings generally do not result in contradictory requirements but create substantial overlap in administrative requirements (notably for ICC and OCC) because rule changes must be filed with both agencies and filing procedures differ. *Source: 1usaea2020009 - 23. The legal framework provides primary regulators with a sufficient range of powers to* ### 42. It is recommended to develop a dedicated communication plan to prepare for an FMI ### 1usaea2020009 - 42. It is recommended to develop a dedicated communication plan to prepare for an FMI ### Crisis communication and cooperative arrangements - Recommendation: develop a dedicated communication plan to prepare for an FMI related crisis. - Existing framework: A Crisis Communication Framework (CCF) has been established under the FMU-SC and is regularly tested within the Federal Reserve. - Institutional cooperation: Important that the FRB, FDIC, CFTC, and SEC strengthen cooperation arrangements at all levels to manage financial and operational crisis events related to FMIs. - Leverage existing arrangements: Existing infrastructure crisis management arrangements can be leveraged to facilitate effective and timely communication and potentially avoid losses or reduce the size of financial losses following crisis events. - Testing: Routine tabletop exercises enhance the probability of effective implementation of the plan when a crisis occurs. ### International cooperation, Crisis Management Groups (CMGs), and deference frameworks - CMGs: - International cooperation among CCP authorities has increased through Crisis Management Groups (CMGs) for CCPs. - The FDIC and CFTC have co-hosted CMGs on an annual basis for CME and ICC since 2017. - CMG membership includes domestic and foreign supervisors and resolution authorities. - Discussion points have focused on CCP recovery and resolution (default management, recovery tools, recovery and wind-down plans, U.S. resolution framework, potential resolution tools, resolution strategy development, tools/resources to support resolution). - The CFTC, FDIC, SEC and FRB participate in CMGs of foreign CCPs (e.g., LCH Ltd., ICE Clear Europe) with crisis communication protocols. - Bilateral dialogues and MOUs: - FRB, CFTC, and SEC participate in bilateral dialogues with authorities of Eurex Clearing AG, ICE Clear Europe, LCH Ltd., and LCH SA. - The SEC has an MOU with Belgian authorities in relation to Euroclear Bank (exempted under the EA). - Rationale: large foreign FMIs are highly interconnected with U.S. banks, clients, and markets and through interdependencies relevant for U.S. financial stability. - Deference frameworks: - The CFTC’s efforts to contribute to a global deference and cooperation framework are important to address market fragmentation. - Recommendation: The SEC should consider further developing its deference framework. - Characterization of a global deference framework includes strong cooperation and information sharing; application of comparable rules (e.g., based on the PFMI); safeguards ensuring home authority fulfills responsibilities and host authorities have sufficient comfort that regulatory requirements are met. - Recommendation: The SEC consider steps to further develop a deference and cooperation framework for foreign CCPs through its exemption powers under the EA. ### Resilience of selected CCPs — scope and benchmarking - Objective: analyze key elements of credit and liquidity risk management frameworks of CME, FICC, ICC, and OCC relevant to financial stability. - Benchmarking: CCPs’ rules and practices assessed against PFMI principles 4–7 and 13, focusing on margining, stress testing, sufficiency of loss-absorbing resources, and default management procedures. - Data limitation: In absence of access to non-public data, findings could not be verified by data on real positions and exposures. - High-level conclusion: CCPs are generally sound, with room for further strengthening of some risk management practices as appropriate. ### General findings on CCP risk management - Initial margin methodologies: - Trend: widespread adoption of risk-based portfolio margin models across U.S. CCPs. - Approach: “portfolio margin” uses Value at Risk (loss quantile) of a clearing member’s portfolio over the MPOR at some confidence level which may be 99 percent or higher. - Estimation methods: historical or simulated scenarios or parametric Value at Risk. - Offsets across positions: calculation allows for “offsets” and netting, reducing initial margin versus separate margination; this depends on correlation assumptions which may break down during stress. - Mitigation: ongoing monitoring, back-testing, and stress-testing scenarios address correlation dependence. - Add-on charges: - U.S. CCPs include add-on charges in initial margin such as “concentration charges” and/or “liquidity charges.” - Systematic inclusion: ICC (for CDS), OCC (for listed equity options, index options, and futures), and CME systematically include concentration charges. - FICC: in process of developing and implementing a concentration charge. - Purpose: supplement statistical models and address concentration of exposures across a few large clearing members and liquidity variation across instruments. - Implementation heterogeneity: - Outcome of risk management standard implementation differs across U.S. CCPs; further joint analysis recommended by CFTC, FRB and SEC. - Disclosures show different magnitudes and frequencies of margin breaches across CCPs. - Loss waterfalls and allocation: - Variation: derivatives CCPs (ICC, CME, OCC) separate initial margin from a mutualized default fund; securities CCPs (FICC) have a single mutualized collateral pool exposing clearing members more to each other. - Default fund allocation rules vary: some CCPs (ICC and CME IRS) allocate proportionally to stress exposure net of margin; others (OCC and CME Base) allocate based on a combination of initial margin, open interest and volume. - Stress testing: - Practice: all major U.S. CCPs periodically evaluate exposure net of initial margin across “extreme but plausible” stress scenarios. - Default fund sizing: magnitude of largest exposures determines size via Cover 1 (or Cover 2) principle. - Variation: choice and severity of scenarios vary across CCPs; ICC and CME IRS use stress test outcomes to allocate default fund contributions; FICC uses stress tests as monitoring with no automatic impact on collateral requirements. - CCP “skin-in-the-game”: - Guidance: CCP should expose an amount of its own financial resources to absorb losses resulting from participant default. - Observation: current level of capital of most CCPs is small compared to collateral pool (less than 1 percent). - Consequence: even contributing 100 percent of CCP capital would be negligible in loss waterfall. - Differences: for member-owned or utility CCPs (FICC, OCC), increasing CCP capital would effectively request higher member contributions to mutualized pool; issue mainly concerns non-utility CCPs. - Practice: ICC and CME provide a contribution of their own capital before losses are affected to non-defaulting members’ default fund contributions. - Transparency: - Clearing members need visibility into CCP margin methodology to estimate collateral requirements under scenarios. - Concern: transparency of CCP risk management remains a concern for clearing members. - Tools: SEC and CFTC rule change processes can be used to obtain greater transparency, but not all rule changes require public consultation. - CPMI-IOSCO Public Quantitative Disclosures since 2016 useful but sometimes insufficiently detailed for quantitative assessment by clearing members. - Voluntary disclosures: some CCPs provide detailed model descriptions and margin analytic tools; others could benefit from further transparency on methodology underlying collateral requirements, rule changes and clearing of new instruments. - Note: presence of clearing members’ personnel on CCP boards, risk committees and advisory councils is useful for engagement but may not be appropriate channel for confidential disclosures. ### Specific differences with potential financial stability or market efficiency impacts - Risk committee independence: - All four CCPs have separate risk committees. - Chair rules differ: - CME: appointed a trading member of CME exchanges as chair of the Clearing House Risk Committee. - FICC, ICC, OCC: committee chairs are independent board members of the CCP (with CCP being different legal entity). - Recommendation: review independence of the chair of the CME CCP risk committee to ensure risk judgments are not influenced by business considerations. - Margin period of risk (MPOR): - MPORs differ across CCPs based on product, market liquidity, history, idiosyncrasies. - Examples: - OCC: minimum MPOR of two days for equity options, index options, and futures. - FICC: MPOR of three days. - Two OTC derivatives CCPs: minimum MPOR of five days. - CME: uses one-day, two-day, and three-day MPOR for futures; five-day MPOR for OTC derivatives. - Concern: minimum MPOR of one day for contracts at CME seems low compared to other CCPs; recommended to review for all accounts to ensure sufficient protection in case large positions need liquidation and to avoid negative procyclical margin calls. - Note: uneven implementation may negatively impact level playing field between competing CCPs. - Intraday margin thresholds: - Implementation of intraday margin calls differs; different thresholds for depletion of margin before an unscheduled call is triggered. - Concern: absence of clear intraday margin thresholds may impact participants’ liquidity positions with procyclical effects and potential propagation of losses where interdependencies exist. - Recommendation: specify thresholds to help clearing members plan and avoid margin depletion during the day. - Risk: margin depletion combined with a participant default could draw on surviving members’ default fund contributions and propagate losses. ### Chicago Mercantile Exchange Inc. (CME) — specific findings and figures - Margin methodology: - CME Base margin for futures and options calculated using SPAN, a scenario-based approach calibrated to target 99 percentage coverage with rules for netting across sub-portfolios with “stable structural correlations.” - Minimum MPOR: one day (with margin levels adjustable based on product risk characteristics). - Customer accounts and margin pool: - Customer accounts are margined on a gross basis. - Margin pool: currently above US$90 billion, 70 percent of which consists of customer margin. - Intraday margin practice: - CME Base schedules a regular intraday margin call in the middle of the trading day. - Unscheduled intraday margin calls triggered by CME risk management decisions rather than automatic triggers based on member margin depletion. - Recommendation: review practices and introduce clear risk-based criteria to support unscheduled intraday margin calls to reduce reliance on manual procedures and operational risk given account volumes (more than 60 accounts) and high intraday turnover. - Skin-in-the-game contribution: - CME contributes US$150 million of ‘skin in the game’ to the loss waterfall of CME IRS and US$100 million to the loss waterfall of CME Base. - These contributions correspond to 0.5 percent of total default resources of the CCP for CME IRS and 0.1 percent for CME Base. - Positioning in waterfall: default losses are borne by this layer after the defaulter’s default fund contributions are applied and before any surviving members’ default fund contributions, as recommended in Further Guidance to the PFMI. *International Monetary Fund — assessment and recommendations contained in the source content.* ### 58. CME Base and CME IRS operate default funds whose size is determined by the two ### CME Base, CME IRS, FICC, ICC, and OCC: margin, default funds, and default/liquidity management (paragraphs 58–78) ### CME Base and CME IRS: default funds, margin models, and allocation - CME Base and CME IRS operate default funds whose size is determined by the two largest uncollateralized exposures to clearing members. - CME Base: - Operates daily stress tests based on historical scenarios including the October 1987 crash. - Default fund is sized according to the magnitude of two largest stress losses over initial margin (Cover 2), plus a minimum 10 percent additional buffer in order to avoid frequent resizing. - The buffer may be adjusted as necessary based on members’ portfolios and market conditions and is generally above 10 percent. - Current size of the default fund is US$3.5 billion. - The largest uncollateralized exposure to any single clearing member is US$1.8 billion. - Allocation of default fund contributions across members is not based on stress loss net of initial margin, but proportional to a weighted average of initial margin and trading volume. - Currently transitioning to a new portfolio margin system, SPAN 2: - SPAN2 is based on a 99 percent portfolio historical VaR (HVaR). - SPAN2 is more transparent than SPAN. - Margin for a given portfolio using SPAN 2 may be higher or lower than SPAN based on characteristics of the portfolio. - SPAN 2 accounts for potential breakdown in correlations across products. - CME has conducted tests including with member and hypothetical portfolios and assessed robustness through back testing under various market conditions, including scenarios addressing possible breakdown of correlations. - CME IRS: - Margin requirements for interest rate swaps are based on 5-day 99.7 percent portfolio HVaR. - Combined with an additional concentration charge for large positions to account for potential additional cost of liquidating positions large relative to average daily volume. - The concentration charge is computed based on periodic bids by members on hypothetical large portfolios. - Performs daily stress testing of member positions and maintains a default fund whose size covers the two largest uncollateralized stress exposures of members. - Allocates default fund contributions across clearing members proportionally to their uncollateralized exposure in stress tests (stress loss net of margin): members who bring more tail risk contribute more to the default fund. ### Default management procedures (CME Base and IRS) - CME Base and IRS have dedicated default management teams. - IRS has a default management committee including participation of traders seconded by clearing members. - Default management includes procedures for hedging the defaulted members’ portfolio. - For IRS, an auction designed to avoid bad bidding by exposing the lowest bidders to the first losses in the Default Fund (“juniorization”) is in place. ### FICC: structure, margining, stress testing, liquidity facilities, and recommendations - Structure and services: - FICC operates the Government Securities Division (GSD) and the Mortgage Backed Securities Divisions (MBSD). - GSD provides netting, settlement and CCP services for the U.S. Government securities market and for General Collateral Financing (GCF) repo transactions. - MBSD provides netting, settlement and CCP services for eligible pass-through mortgage-backed securities issued or guaranteed by three U.S. agencies. - Settlement occurs on the Federal Reserve’s Securities Service System or on the books of FICC’s designated clearing bank, The Bank of New York Mellon. - Each division has its own rules and members, and separate loss waterfalls. - Mutualized collateral pool: - GSD and MBSD each have a single mutualized collateral pool (“Clearing Fund”) to which all members contribute; there is no separation between initial margin and default fund. - In a default, FICC first uses the margin provided by the defaulting clearing member inclusive of available cross-guaranty arrangements. - If loss exceeds defaulter’s margin and FICC exhausts its corporate contribution (skin in the game), FICC could receive funds from cross-margining and cross-guaranty arrangements, then use contributions of surviving clearing members. - Pooling all collateral leads to a large “Clearing Fund” which provides FICC with more than sufficient financial resources to withstand the default of any two clearing members under extreme but plausible scenarios, while exposing higher amounts of members’ collateral to potential losses arising from default of other members. - Initial margin methodology: - Initial margin calculation is based upon the total unsettled (fails) and pending (future settling) transactions of each clearing participant. - Collateral requirements are based on the 99 percent historical Value-at-Risk (HVaR) of the member's portfolio over a 3-day horizon, estimated based on data from a 10-year lookback window including a one year’s ‘stress period’ (e.g., 2008). - An additional haircut is applied to securities with insufficient requisite data. - Collateral may be deposited in cash or government securities, to which a constant but conservative haircut level is applied (haircuts do vary per e.g., maturity and asset class). - FICC's members include the largest U.S. financial institutions; the default of such members may result in extreme market moves not covered by the 99 percent HVaR and generate non-negligible close-out costs. - Back testing and margin breaches: - FICC monitors adequacy of margin requirements through daily back testing and addresses deficiency by an ex-post “back testing charge”. - Daily back testing monitors whether collateral requirements fail to reach a 99 percent coverage ratio across a 12-month lookback period; failing members must post additional collateral (“back testing charge”). - Based on FICC’s Public Quantitative Disclosures for Q1 2019, 124 margin breaches were observed in GSD in the 12-month period covering Q2: 2018–Q1: 2019, with coverage for some members dropping below 99 percent. - Margin breaches may reflect situations where margin levels do not adjust to intraday turnover or intraday market moves. - Stress testing and uncollateralized exposures: - Stress testing is performed for monitoring purposes but does not automatically result in further collateral requirements. - GSD and MBSD perform stress testing by looking at the maximum uncollateralized loss (rather than the 99 percent quantile) over historical and hypothetical scenarios. - In the 12-month period preceding the largest uncollateralized stress exposure to a single participant and its affiliates reached US$649 million for the GSD and US$1,618 million for the MBSD. - FICC monitors stress test results and has available methods for seeking additional financial resources, but shortfalls do not automatically result in higher collateral requirements for members. - Liquidity risk and contingency facility: - Liquidity needs for securities CCPs may be significantly higher than for derivatives CCPs because of the magnitude of settlement obligations. - Over 2018–2019, the GSD's largest liquidity exposure to a single participant and its affiliates was around US$80 billion. - Prefunded liquid resources amounted to around US$20 billion in 2018–2019 (cash collateral of the clearing fund and repos of securities in the clearing fund and securities deliveries that the defaulting clearing member family did not pay for). - If prefunded resources are insufficient, FICC could use a rules-based capped contingency liquidity facility (CCLF): for GSD US$105 billion and for MBSD US$52 billion at the end of June 2019. - CCLF arrangements support the uncommitted repo agreement for FICC to comply with the Cover-1 requirement of Principle 7. - Once FICC declares a CCLF event, clearing members will be required to hold and fund their deliveries to the insolvent member up to a predetermined cap by entering into repo transactions with FICC until close-out is completed. - Members receive regular overviews of their individual liquidity exposure to FICC. - Default management and drills: - FICC has detailed rules and procedures for default management and liquidity risk management. - Quarterly default drills are conducted; annual exercises involve FICC Board members, an external advisor, and relevant authorities (the SEC, FRB, Federal Reserve Bank New York, FDIC, Securities Investor Protection Corporation, and New York Department of Financial Services). - Clearing members are involved in liquidity testing drills. - Recommendation: - It is recommended that FICC consider addressing large stress test exposures through additional collateral requirements; in particular by provisioning for concentration risk. - FICC is developing and implementing a concentration risk charge to address large, uncollateralized stress exposures. - Consideration could be given to requiring members with the largest uncollateralized stress exposures to post additional collateral, resulting in higher 'defaulter-pay' resources and a lower risk of contagion, compatible with FICC's mutualized clearing fund. ### ICC (ICE Clear Credit): margins, default fund, and auction procedure - Market concentration: - ICC is the main global clearing facility for index, single-name and sovereign credit default swaps (CDS), with 16 banks as clearing members. - The 5 largest clearing members accounted for more than 40 percent of open interest, 55 percent of margin, and 38 percent of the default fund in Q2 2019. - Margin framework and add-ons: - Since 2015 ICC has streamlined its initial margin requirements. - In addition to the 99.5 percent portfolio Value at Risk requirement, margin includes a jump-to-default charge, a liquidity charge and a concentration charge for large positions. - These add-ons are in line with PFMI Principle 6, to increase defaulter-pay resources rather than mutualized resources. - All cleared portfolios are subject to jump-to-default, liquidity, and concentration charges, which account on average for 20 percent of total margin and can reach 50 percent for large positions. - Transparency and member communication: - ICC communicates detailed information regarding its risk management methodology to clearing members. - Documentation includes breakdown of margin requirements into components and is sufficiently detailed for members to understand and forecast collateral requirements. - Skin in the game and insurance: - Intercontinental Exchange contributes US$50 million as “skin in the game” to the ICC default waterfall. - This amount corresponds to 2.2 percent of the default fund and 0.2 percent of total default resources of the CCP. - Default losses are affected to this layer after the defaulter's default fund and before any surviving member's default fund. - ICC added an insurance policy covering losses resulting from a member default up to $50 million after consumption of ICC’s skin in the game and before the mutualized default fund of any non-defaulting clearing members. - Default fund sizing and allocation: - ICC maintains a default fund sized by the two largest uncollateralized exposures to clearing members; operates daily stress tests based on historical and hypothetical scenarios, including Lehman Brothers and Brexit scenarios. - Default fund is sized according to magnitude of the two largest stress losses over initial margin (Cover 2). - Allocation of default fund contributions across members is proportional to stress loss net of initial margin; if allocated amount is less than US$20 million, the member contributes a minimum amount of US$20 million. - In the last 2 years, between 7 to 10 clearing members contributed this minimum amount, indicating for these members stress loss does not significantly exceed initial margin. - ICC’s approach indicates a preference towards a defaulter-pay model with conservative initial margins and a low degree of loss mutualization. - Default management and auction: - In 2019 ICC implemented a well-defined default management procedure with an auction process open to non-members. - Auction process includes initial hedging followed by a CDS auction open to clearing members and non-members capable of bidding on the defaulted portfolio. - Auction is blind and designed to avoid bad bidding by risking lowest bidders with first losses in the default fund (“juniorization”). - Non-members are vetted and asked to pledge US$10 million to the default fund before entering the auction; the pledged US$10 million is returned if their submitted auction bids are competitive. ### OCC: clearing scope, reforms, and margin enhancements - Role and structure: - OCC is the sole U.S. CCP for exchange-traded U.S. equity and index options and clears volatility derivatives. - OCC is owned by five exchanges (representing three exchange groups) and clears for 16 U.S. exchanges. - Operates as a utility, with approximately 105 clearing members. - Governance involves clearing members through the Financial Risk Advisory Council and the Operations Roundtable. - Reforms since 2013: - OCC overhauled its risk management procedures addressing previous deficiencies identified by internal audits, independent assessments and coordinated examinations by the SEC, CFTC and FRB, and subject to a settlement agreement with the SEC and the CFTC in 2019. - Changes include: - Adoption of a sound and transparent enhanced margin methodology. - Inclusion of volatility risk factors in margin requirements. - Introduction of a liquidation charge in 2019. - A new default fund and stress testing methodology. - Appointment of additional staff with risk management expertise. - Margin methodology and liquidation charge: - OCC's initial margin requirements are based on a 99 percent portfolio expected shortfall estimated using scenarios simulated with an econometric model. - Model was enhanced in 2016 by including volatility risk factors and updated estimation methodology. - In 2019 OCC added a risk-based liquidation charge that accounts for potential cost of liquidating a defaulting clearing member's portfolio, including a concentration charge for positions large compared to average daily trading volume. - Inclusion of the liquidation charge has increased aggregate margin requirements by more than US$1 billion. - These add-ons are consistent with PFMI guidance that “other margin add-on charges may be explicitly designed to increase the amount of defaulter-pay resources rather than increasing mutualized resources." - Back-testing results indicate OCC margin requirements adequately provision for the risk of member portfolios. *Source: IMF staff report text (paragraphs 58–78).* ### 79. OCC's portfolio margin approach is enhanced by explicitly modeling stressed ### 1usaea2020009 - 79. OCC's portfolio margin approach is enhanced by explicitly modeling stressed ### Portfolio margin framework and enhancements - OCC margin framework allows netting across all instruments, including options, futures and equity holdings, and relies on correlation assumptions, in particular a one-factor model for equity returns. - OCC margin requirements additionally include: - a “dependence charge” based on estimated losses under a “high correlation” and a “decorrelation” scenario; and - a charge for idiosyncratic risk. - The inclusion of these additional components reflects best practices in risk management and enhances the robustness of the portfolio margin with respect to deviations from model assumptions. ### Stress testing, default fund sizing, and methodology changes - OCC operates daily stress tests and estimates exposures of clearing members in excess of required initial margin to stress scenarios representing extreme equity market moves. - Following large fluctuations in default fund levels in 2017–2018, OCC implemented: - a more stable stress test methodology; - dropping the use of excess margin on deposit from stress exposure calculations; - increasing the coverage from Cover 1 to Cover 2; and - limitations on decreases in the default fund. - Default fund size is determined by the two largest stress exposures in excess of margin. ### Default fund allocation and tail-risk mismatches (findings and concerns) - Allocations of default fund contributions are based on initial margin, volume, and open interest, not on stress exposure over margin. - Initial margin does not represent the risk exposure of the CCP to a member in a stress scenario; that exposure equals stress exposure minus the member's initial margin. - For non-directional portfolios, initial margin and stress exposure in excess of margin are not necessarily proportional. - Key statistics (Q2 2019): - OCC default fund size: US$10 billion - Largest exposure in excess of initial margin to a single member over the previous 12 months: US$4.6 billion - Sum of two largest exposures in excess of initial margin peaked at: US$7.1 billion - Implication: under the current allocation scheme, members do not necessarily contribute to the default fund proportionally to the “tail risk” they bring to the CCP, meaning the risk of members with largest stress exposures over margin may be borne by other members. ### Communication and member engagement - OCC has been communicating detailed information to clearing members and buy-side participants on its risk management methodology and recent changes. - Documentation includes breakdowns of margin requirements into various components and is sufficiently detailed to enable members to understand collateral requirements. - Updates to the risk management methodology have been communicated to members regularly. ### Policy recommendation (OCC) - OCC should continue working with its members and the regulators towards the approval and full implementation of the proposed changes to its risk management framework. - Aligning allocation of OCC’s default fund contributions with members’ stress exposures in excess of margin, rather than initial margin, may: - increase “defaulter-pay” resources; and - provide better risk management incentives to members. ### Recovery and resolution of CCPs — institutional arrangements and status - Recovery planning: - Primary regulators have rules for recovery and wind down plans: FRB’s Regulation HH §234.3, CFTC regulation 39.39, and SEC Rule 17Ad-22(e). - Recovery plans should include scenarios that could lead to uncovered credit losses or liquidity shortfalls. - CCPs must review plans annually (CFTC) or every two years (FRB) or earlier if material changes occur. - Examples: CME and ICC completed recovery plans in 2016 and are further developing them via rule changes (partial tear up and variation margin gain haircutting); ICC proposed rules allocating non-default losses to clearing members. Recovery plans for FICC and OCC were approved in 2018. - Resolution framework: - If a systemically important FMU is resolved under DFA Title II, the FDIC would be the resolution authority. - Under Title II, FDIC powers include enforcing CCP contracts (recovery tools under CCP rules), setting up a bridge CCP, transferring assets and liabilities, retaining assets and liabilities in receivership, using CCP rule tools and resources, selling receivership assets, and providing temporary backstop funding under certain terms and conditions. - FDIC approach focuses on developing understanding of scenarios, factors and options rather than a defined resolution plan per CCP. ### FDIC workstreams and coordination (findings) - FDIC has a dedicated group developing resolution planning for U.S. CCPs in close cooperation with CCP supervisors. - Possible scenarios considered by FDIC include: - default of one or more clearing members, possibly combined with market and/or operational stresses resulting in default losses; and - operational, custodial, settlement or investment losses resulting in non-default losses. - Relevant factors for resolution include legal and governance structure, possible substitutes for products/managers/clients, availability and type of financial resources, and access to central bank accounts. - Communication and coordination: - FDIC actively engages with CFTC, SEC and FRB to understand recovery plans, legal and governance structures, and risk management frameworks. - FDIC cooperates with CFTC on planning for CCPs where CFTC is primary regulator (CME, ICC), and expanded engagement with SEC for FICC and OCC. - FDIC participates in CMGs for non-domestic CCPs relevant to the U.S. and is signatory in CMG cooperation agreements. - International role: - FDIC is co-chair of the FSB Cross-Border Crisis Management group for FMIs (fmiCBCM) and is striving for international consensus on issues under discussion, including prefunded resources in resolution and treatment of CCP equity. ### Remaining work on CCP resolution (tasks identified) - Continued coordination with domestic primary regulators and foreign regulators (e.g., on recovery plans and CCP supervisory stress testing). - Continue resolution planning for other CCPs. - Set up CMGs for other CCPs determined to be systemically important in more than one jurisdiction and put cooperation agreements in place. - Develop policies on appropriate use of resolution tools for default and non-default scenarios. - Develop policies on interaction between recovery and resolution plans, the trigger to resolution, and the process of “turning the key” in coordination with FRB and U.S. Treasury. - Address specific CCP features in resolution plans and through coordination with primary regulator, notably legal structure (e.g., CME Inc combines the CCP and exchanges in one entity) and dependencies on internal and external service providers (FICC’s dependencies on BNYM; ICC’s dependencies on services provided by other Intercontinental Exchange entities). ### Liquidity assistance - Under DFA Title VIII the FRB may provide emergency liquidity assistance to a designated FMU in unusual or exigent circumstances, subject to statutory conditions and any FRB-imposed additional conditions. - Emergency credit can be provided upon majority vote of the FRB after consultation with the Treasury (section 806b). - A designated FMU must show it is unable to secure adequate credit accommodations from other banking institutions. ### Regulation and supervision of non-bank payment service providers — landscape and trends - U.S. non-cash retail payments are dominated by depository institutions, card payment schemes, and money transmitters; common payment types include debit cards, credit cards, prepaid debit cards, private label prepaid cards, credit and debit transfers through ACH operators, and checks. - Trends and infrastructure: - Number and value of checks declining; number and value of card payments and ACH debit and credit transfers increasing. - Real-time payment developments: The Clearing House launched RTP in November 2017; the FRB announced development of FedNow, expected to be operational by 2023 or 2024. - New entrants and business models: - New (fintech and BigTech) entrants offer services competing with or complementing existing money transfer providers (examples in source) and often act as user interfaces, payment aggregators, or IT service providers layered between banks/money transmitters and customers/merchants. - Very few new players aim to challenge established payment infrastructures accessible only by banks; some platforms (example in source) may offer transfer mechanisms outside traditional U.S. payments system and may use DLT. - Effects: - New payment services have produced consumer and merchant benefits (ease of use, integration with accounting/inventory); cross-border costs have decreased. - Increasing distribution and fragmentation could decrease single-point-of-failure risk but complicate identification of vulnerabilities and undetected exposures. ### Regulation, supervision, and cooperation for payments - Existing regulatory focus is on banks and money transmitters; license regimes for money transmitters are state-issued; banks have federal or state-issued charters. - Activity-based regulation applies in some cases: federal consumer protection regimes, financial integrity, U.S. privacy laws, cyber resilience, AML/CFT and suspicious activity reporting. - Money transmitters are subject to federal cyber resilience requirements; some states (e.g., New York) have more stringent cyber regimes; others (e.g., California) are working towards stronger regimes. - Federal and state banking authorities can supervise third-party service providers under the Banking Services Company Act (BSCA). - Cooperation arrangements: - The FFIEC prescribes uniform principles, standards, and reporting forms for federal and state examinations; it has a State Liaison Committee with five state representatives. - FSOC serves as a formal cooperation arrangement for interactions between state and federal levels. - State and federal day-to-day supervision includes joint or alternating exams with FDIC, Federal Reserve, CFPB, and NCUA; states share examinations with FinCEN and selected exams with CFPB; states share data with the Federal Reserve for systemic monitoring. *Source: Excerpt from IMF chapter/section 1usaea2020009* ### 101. Payment systems, card payment schemes, electronic wallet providers, payment ### 1usaea2020009 - 101. Payment systems, card payment schemes, electronic wallet providers, payment ### Licensing and regulatory perimeter - Payment systems and card payment schemes do not require a bespoke license and are not subject to any mandatory license requirements. - Electronic wallet providers, payment gateways and aggregators that perform money transmission services are required to hold money transmitter licenses in all states except Montana. - Money transmission definitions (selling or issuing payment instruments, selling or issuing stored value, receiving money for transmission) vary by state; Massachusetts excludes selling or issuing stored value from its money transmission definition and does not require licensing for that activity. - Bank license requirements apply only where a provider engages in deposit taking. - Card payment schemes and payment gateways/aggregators that do not take custody of consumers’ or merchants’ funds are generally outside a specific regulatory regime but may be subject to indirect regulation via the financial institutions that use their services. ### Supervision via third-party relationships and its limitations - Banks are expected to manage risks from third party relationships, including payments, through contractual relations and supervisory examination under the Bank Service Company Act. - Indirect supervision via banks cannot substitute for holistic oversight covering the full range of payment services or infrastructure risks (e.g., PFMI for systemically important payment systems (SIPS)). - Banks and money remitters may have limited ability to identify or manage risks posed by non-regulated non-bank service providers, particularly where concentration or dominant market roles emerge. ### Gaps in dedicated regulation for payment service providers - State-level money transmission acts date back to the 1970ies and were designed to protect consumer remittances, not payment infrastructure-like activities (card schemes, certain DLT platforms). - Card schemes process payments with annual values of trillions of dollars but are not designated as systemically important by the FSOC and are not subject to a dedicated retail payment infrastructure regulatory regime. - RippleNet and similar network-based application providers operate services similar to traditional payment messaging systems without activity-specific regulation; oversight is limited primarily to requirements imposed on banks and some scrutiny by FinCEN and the Federal Reserve. - No dedicated regulatory regime exists for new digital services (gateway services, APIs, NFC, digital wallets); authorities often provide opinion letters or guidance to clarify existing rules, leading to variation in practice across states. - Reporting and administrative requirements may be mismatched to digital services (e.g., information fields, physical posting of license, form requirements for receipts). - Absence of a clear regime for acquisition, use, and sharing of data has been cited as an impediment to new service development. ### Risks from networked providers and interdependencies - Network or network-based application service providers (e.g., RippleNet) are not subject to specific licensing; DLT platforms and ready-to-use platforms for stablecoin settlement (e.g., Centre-like offerings) may operate without system-risk specific requirements. - Interdependencies and combinations of services offered by different third-party providers can create concentration and substitutability risks that need clear allocation of identification responsibilities among state and federal authorities. - Federal banking agencies undertake service provider examination programs (e.g., under the BCSA), but broader identification of interdependency or concentration risks across the tiered payment ecosystem requires clearer allocation within regulatory remit. ### State-based money transmitter framework: inefficiencies and protections - Money transmitter supervision is mainly state based and distributed over 49 states and 5 territories; 1 state (Montana) lacks specific money transmitter regulation. - Obtaining a complete set of state licenses can be cumbersome and time consuming (and may take up to 6 years). - Supervisory resources vary by state: California has 28 FTE supervising more than 100 money transmitters; New York is roughly similar. - Some states conduct off-site examinations only; many conduct on-site examinations; money remitters can face multiple inspections per year. - Deadlines, reporting and financial risk requirements differ across states; in practice money remitters aim to comply with the most stringent standards (seen to be California and New York). - There is no optional Federal license regime available for non-bank payment service providers offering nationwide services. - State-level money transmitter requirements cover five core elements: management, governance, financial risk, liquidity and capitalization; proportionality is not usually codified and may be addressed via examinations. - Stored value, sale of payment instruments, and money transmission activities are subject to a combination of requirements: (i) segregation and at least 1:1 cover; (ii) additional buffers (surety bonds, minimum net worth requirements); and (iii) permissible investments — these may not be sufficiently risk sensitive and could, in extreme cases, result in loss of consumer funds. - Suggested improvements include diversification requirements for the holding/investment of funds and FDIC-type insurance for stored value cards. ### State coordination efforts (voluntary) and progress metrics - Coordination initiatives are voluntary and include: - CSBS Vision 2020 to modernize and harmonize state regulation of non-bank financial companies. - Multistate MSB Licensing Agreement and enhancements to NMLS functionality. - NMLS is used by 46 states for money transmission licensing, with a 47th expected in April 2020. - Information sharing has enabled hundreds of multistate exams, including 82 in 2019; multistate exam teams have a lead state serving as Examiner in Charge. - CSBS has developed a Model Data Security Law, Model Data Security Guidance, and a cybersecurity exam program and training; model laws and standardization efforts remain voluntary and non-binding, and passporting of state licenses does not exist. ### Current systemic assessment and forward-looking concerns - Despite regulatory gaps, current risks are not assessed as systemic: apart from ACHs and card scheme providers, payment service providers are relatively small and customers have many alternatives. - The current setup may not be future-proof: new entrants could acquire significant market share rapidly and build systemic risk without bespoke regimes for activities with particular risk profiles. - For large existing players (card schemes) that process considerable values and volumes, concentration and system risk may remain undetected under indirect supervision. ### Policy recommendation: dedicated regimes and clarification - A dedicated regulatory regime suited for certain new or existing payment services could help prevent risk buildup inside and outside the regulatory perimeter. - FSOC has recognized the need to evaluate risks to payment system integrity and operational risk and to consider approaches to reduce regulatory fragmentation while supporting innovation. - Clarify circumstances under which a payment service provider or its payments, clearing and settlement activities could be considered systemically important under the DFA Title VIII. ### Distributed Ledger Technology (DLT): capabilities, adoption, and risks - DLT can be used for clearing and settlement of fiat currency, stable coins, virtual assets, derivatives, and securities; potential long-term efficiency gains through digitization, integration, and automatization. - DLT platforms used by FMIs or payments service providers are generally permissioned, facilitating AML/CFT and KYC compliance; implementations may be proprietary or open source. - Adoption in U.S. FMIs has been limited and mainly in non-core functions: DTCC Trade Information Warehouse (record retention and asset servicing for OTC derivatives) and CLSNet (netting calculator using smart contracts for non-CLS currencies without offering settlement). - DLT deployments have tended to be on premise; FMI participants currently link through APIs. - Constraints on wider adoption include lack of maturity, scale and latency issues, insufficiently developed smart contracts for complex processes (e.g., CCP default handling), unproven cyber resilience in practice, reluctance to replace legacy systems, and lack of critical mass. - Lack of standardization across DLT variants risks fragmentation and closed-loop solutions; interoperability (via APIs and protocols) is critical for delivery versus payment arrangements. - Regulatory framework is largely technology neutral: DLT platforms are covered through operational FMI requirements (in-house/on premise) or third party supervision (outsourcing); vendor management can be vetted against NIST and ISO best practices. - Particular supervisory attention may be required for governance models, cyber resilience, transparency of data, and control/risk management in DLT outsourcing or cloud deployments. - Authorities are monitoring via entity-based supervision and interagency coordination; designated FMI regulators (CFTC, FRB, SEC) have innovation labs to monitor and scale expertise. - Sandbox-like solutions and staff-level no-action letters have been used (example: SEC staff advice to Paxos Trust Company, LLC for a pilot DLT securities settlement system), though not all authorities are comfortable granting special regulatory treatment to new entrants/technologies. - Attention is needed for concentration/substitutability risks if particular platforms or network services reach critical thresholds and for data handling and data protection. ### SupTech developments - Deployment of SupTech by authorities is at an early and limited stage but has significant potential for automatization of data reporting, monitoring processes, and pattern detection. - The SEC requires security-based swap data repositories (SDRs) to file financial reports in XBRL, enabling more effective review and analysis. - Leveraging industry standard message formats (e.g., FIX, FpML) could lower implementation burdens on supervised institutions and facilitate cross-agency sharing and aggregation. *International Monetary Fund — Content unit 1usaea2020009* ### 120. Authorities cooperate through the Global Financial Innovation Network (GFIN) and ### 120. Authorities cooperate through the Global Financial Innovation Network (GFIN) and ### GFIN membership and objectives - Over the past six months, the CFTC, the FRB, the FDIC, the Office of the Comptroller of the Currency, the SEC, the New York Department of Financial Services, the State of Wyoming, and the Arizona Attorney General announced joining the GFIN. - By joining over 50 other financial authorities, central banks, and international organizations from around the globe that are members of the GFIN, U.S. authorities may contribute to: - knowledge-sharing on innovation in financial services; - advance financial and market integrity; - consumer and investor protection; - financial inclusion; - competition; - financial stability. ### FSAP 2015 recommendations and follow-up for FMIs — key findings and status - Recommendation: More robust disclosure of the applicable regulatory and supervisory framework for different FMIs, including explanation for different determinations. - Current status: Completed. The US framework has been explained in a range of documents, including the CPMI-IOSCO implementation monitoring documents. - Recommendation: Promptly finalize implementing the PFMI standards, through completion of rules by the SEC and implementation of these rules by the relevant FMIs. - Current status: Completed. The SEC issues CCA rules in 2016. - Recommendation: Ensure sufficient number of qualified staffs for adequate enforcement of enhanced rules. - Current status: Number of staffs increased at all agencies; still need for additional resources at the CFTC. - Recommendation: Continue discussions with relevant foreign authorities to address conflicts of law and level-playing-field concerns. - Current status: Ongoing; the CFTC has proposed new rules for deference to supervision of non-domestic CCPs providing services in the U.S. - Systemic risk identification and interdependencies — observations: - FMIs’ dependency on banking services of only a few G-SIBs: U.S. FMIs are highly dependent on services of a few commercial banks and the failure of such a service provider would pose severe distress on all or a large majority of the FMIs in the United States. - Membership of banks in multiple FMIs: Various financial entities participate in several or all FMIs. The default of such a participant may cause severe distress at one or more FMIs and exacerbate stressed market conditions. - Pro-cyclicality of margin calls: Collateral requirements imposed on clearing members can increase abruptly in times of sudden market volatility and exacerbate market pressures. - Cross-margining arrangements: U.S. CCPs manage risks related to cross-margining arrangements as part of regular credit and liquidity risk management frameworks. Although exposures are currently modest, risks may build up and be a channel for distribution of credit and liquidity shocks. - Actions and progress: - Important progress: FSB Study Group on Central Clearing Interdependencies. - CFTC Stress testing of CCPs in 2016, 2017 and 2019. - Resolution plans of banks providing services to CCPs should explicitly address these interdependencies. - Further work needed given the concentration in clearing member services at most CCPs. No changes in policy or regulations on procyclicality. - Proposed new rules for DCOs and SIDCOs include requirements for cross-margining arrangements. - In 2017, CME, LCH Ltd and Eurex Clearing conducted a default management drill. - Recommendation: Develop a systematic approach for identifying and responding to systemwide risks related to interdependencies and interconnections among FMIs, within individual supervisory authorities and the FSOC structure. - Current status: In progress: the FRB, CFTC, and SEC are considering a supervisory stress test for CCPs. - Recommendation: Central bank services be offered to designated FMUs (access to Federal Reserve accounts and settlement in central bank money), consistent with avoiding undue credit, settlement or other risk to the Fed. - Current status: All designated CCPs have access to a deposit account for at least cash collateral for house positions. - Recommendation: Continue efforts toward and monitoring of CCP robustness, through enhanced risk management standards and robust supervision. - Current status: Ongoing. The CFTC proposed enhanced rules for DCOs. - Recommendation: Formalize and test crisis management arrangements for designated FMUs, domestically and internationally where appropriate. - Current status: In progress. FBIIC includes crisis management arrangements for operational incidents. CMGs allow for international coordination. Dedicated crisis communication frameworks needed which are dedicated to financial or operational incidents at designated FMIs. - Recommendation: Recovery and resolution planning for FMIs should be further developed in line with international guidance. - Current status: Ongoing. Important progress; more is needed. ### CPMI-IOSCO Level 2 implementation monitoring — assessment results for the United States - CPMI-IOSCO, U.S. Level 2 assessment Report on CSDs/SSSs and PSs (May 2019): - The Assessment Team (AT) concluded that the United States has adopted measures applicable to systemically important PSs and CSDs/SSSs that are complete and consistent with the PFMI (highest rating for all). - CPMI-IOSCO, U.S. Level 2 Assessment Report on CCPs and TRs (February 2015): - CFTC CCPs: measures to adopt PFMI are complete and consistent, except for Principles 7, 16 and 20 (broadly consistent) and Principle 12 (partly consistent). - SEC CCPs: measures to adopt PFMI are complete and consistent, except for Principles 2,3,7,8,14,16,20 and 21 (broadly observed) and Principles 9 and 17 (partly observed). - FRB CCPs: measures to adopt PFMI are complete and consistent, except for Principles 14 and 20 (broadly consistent). FRB addressed the technical gap identified regarding Principle 20 in its final amendments to Regulation HH. - CPMI-IOSCO, Assessment and review of application of Responsibilities for Authorities (November 2015): - For PS: The FRB is assessed to observe all Responsibilities. - For CCPs: The CFTC and the FRB are assessed to observe all Responsibilities; the SEC is assessed to observe Responsibilities A, B, C, and E; and broadly observe Responsibility D. At the time of the Responsibilities assessment, the SEC’s CCA rules were in proposal stage. These rules have since been adopted. - For CSDs/SSS: The FRB is assessed to observe all Responsibilities; the SEC is assessed to observe Responsibilities A, B, C, and E; and broadly observe Responsibility D. At the time of the Responsibilities assessment, the SEC’s CCA rules were in proposal stage. These rules have since been adopted and were assessed as part of the 2019 Level 2 assessment. - Note: Level 2 assesses whether, and to what degree, the content of the legal and regulatory or oversight framework, including rules and regulations, any relevant policy statements, and other forms of implementation, is complete and consistent with the principles and responsibilities. ### FMI statistics (selected figures as reported) - Appendix Table 1. United States: Statistics on FMIs (2018, unless indicated otherwise) - CHIPS: Number transactions (million) 115; Value of transactions (US$ trillion) 418; Number of participants 44 (2019) - CLS: Number transactions (million) 224; Value of transactions (US$ trillion) 1,481; Number of participants 73 - Fedwire Funds: Number transactions (million) 158; Value of transactions (US$ trillion) 716; Number of participants 5,999 - NSS: Number transactions (million) 1; Value of transactions (US$ trillion) 21; Number of participants 1,100 - Federal Reserve check clearing: Number transactions (million) 4,876; Value of transactions (US$ trillion) 9; Number of participants N/A - Check clearing private: Number transactions (million) 6,150; Value of transactions (US$ trillion) 10 - EPN (credit transfers, direct debit): Number transactions (million) 9,744; Value of transactions (US$ trillion) 25; Number of participants N/A - FedACH (credit transfers, direct debit): Number transactions (million) 13,226; Value of transactions (US$ trillion) 27; Number of participants N/A - DTC (2017): Number transactions (million) 368; Value of transactions (US$ trillion) 114; Number of participants 298, of which 27 foreign - Fedwire Securities Service (2017): Number transactions (million) 16; Value of transactions (US$ trillion) 299; Number of participants 1,813 - Selected CCP-related statistics (Appendix Table 1 continued) - FICC: Number of contracts/transactions (million) 50; Value of transactions (US$ trillion) 1,247; Number of participants 275, of which 31 foreign - NSCC: Number of contracts/transactions (million) 26,741; Value of transactions (US$ trillion) 320; Number of participants 146, of which 3 foreign - OCC: Number of contracts/transactions (million) 5,242; Value of transactions (US$ trillion) N/A; Number of participants 105 - CME: Number of contracts/transactions (million) 33,863; Value of transactions (US$ trillion) 33 (OTC derivatives only); Base: 61; IRS: 27 - ICE Clear Credit: Number of contracts/transactions (million) 13,939; Value of transactions (US$ trillion) 13; Number of participants 29, which are 16 bank groups - Appendix Table 2. United States—CCP Size of Financial Resources (September 2018, US$ billion) — selected rows and totals (as presented) - CME Total liquid IM 115.7; Total actual IM held 127.7 - DTCC GSD Total liquid IM 31.1; Total actual IM held 31.1 - DTCC MBSD Total liquid IM 5.3; Total actual IM held 6.0 - Total IM + GF held (columns aggregated as reported): 135.6 17.6 6.9 33.6 16.4 - Total liquid GF and Total GF held examples: CME GF held in cash and cash equivalents 4.1; DTCC GSD Total liquid GF 17.6; ICE Total GF held 2.5; OCC Total GF held 10.4 - Source reported: Disclosure frameworks of individual CCPs available on their websites. - Noncash payment statistics (selected figures) - Debit cards: 2015 Number (billions) 67.8; Value ($trillions) 2.47. 2018 Number (billions) 86.5; Value ($trillions) 3.10; Number of cards (billion) 0.3 - Visa 2018 Number (billions) 45.0; Value ($trillions) 1.73 - Mastercard 2018 Number (billions) 20.0; Value ($trillions) 0.73 - Credit cards: 2015 Number (billions) 33.7; Value ($trillions) 3.05. 2018 Number (billions) 44.7; Value ($trillions) 3.98; Number of cards (billion) 1.1 - Visa 2018 Number (billions) 25.0; Value ($trillions) 1.96 - Mastercard 2018 Number (billions) 10.0; Value ($trillions) 0.81 - Amex 2018 Value ($trillions) 0.77 - Discovery 2018 Value ($trillions) 0.14 - ACH Credit transfers: 2015 Number (billions) 10.0; Value ($trillions) 32.48. 2018 Number (billions) 11.9; Value ($trillions) 40.87 - ACH Debit transfers: 2015 Number (billions) 13.9; Value ($trillions) 19.60. 2018 Number (billions) 16.6; Value ($trillions) 23.28 - Checks: 2015 Number (billions) 18.1; Value ($trillions) 29.18. 2018 Number (billions) 14.5; Value ($trillions) 25.80 - Mobile and digital wallets: 2015 Number (billions) 1.3; Value ($trillions) 0.05; 2018 data: na na - Domestic money transfers: 2015 Number (billions) 0.3; Value ($trillions) 0.10; 2018 data: na na - International money transfers: 2015 Number (billions) 0.1; Value ($trillions) 0.03; 2018 data: na na - DLT platforms and other 2018 entries: na na - Note: The mobile wallet data (as reported in FRPS) are not mutually exclusive of card payments, or in some cases, ACH or Check payments. - Sources: Aggregated data is from the 2019 Federal Reserve Payments Study and the 2016 Networks, Processors, and Issuers Payments Surveys (NPIPS). The statistics on individual debit and credit cards are from The Nilson Report. ### Non-cash payment service landscape and designated FMUs - Noncash payment types, clearing systems, cash settlement systems, and user interfaces cited include: - Clearing systems: NSS, CLS, EPN, TCH, CHIPS. - Cash settlement systems and platforms (examples): DLT platforms (e.g. RippleNet, IBM World Wire, Centre Stablecoin Network), Fed accounts, Fedwire Funds, Fed ACH, Federal Reserve check clearing, FedNow (planned). - Card payments: Card Networks (Visa, Mastercard, American Express), Commercial Banks, Payment Aggregators (e.g. Amazon payments, Facebook payments, Google payments, Paypal, Square, Stripe, Venmo, Zelle). - Retail and wholesale payments, real time payments, money remittances, money transmitters (e.g. WesternUnion). - Designated FMUs operated in the U.S. are referenced within the landscape mapping. *Source: IMF Staff (content unit as provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020009.pdf_