## _cr10123 — Executive Summary and Federal Reserve Oversight of Payment, Clearing and Settlement Systems

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### Executive Summary: purpose and scope
- This technical note reviews the Federal Reserve’s oversight of payment, clearing and settlement systems.
- Focus: payment systems oversight; addresses oversight of clearing and settlement systems due to their impact on financial stability and strong interdependencies with payment systems.
- Framework used: the four Responsibilities of the Central Bank in applying the Core Principles for Systemically Important Payment Systems (CPSIPS) and the Committee on Payment and Settlement Systems (CPSS) Principles for Effective Oversight.
- Roles of the Federal Reserve reviewed:
  - Service provider: operates RTGS (Fedwire Funds), Fedwire Securities, the National Settlement Service, Automated Clearing House (ACH), and check collection services.
  - Supervisor/regulator: supervisory and regulatory responsibility over certain private-sector payment and settlement systems that have bank charters subject to Federal Reserve supervision or fall under relevant supervisory provisions for bank service companies.
  - Catalyst/facilitator: fosters improvements through research, dialogue, leadership and catalyzing private sector practice changes.
- Key conclusion: need to broaden the Federal Reserve’s legal authority and powers to oversee systemically important payment, clearing and settlement systems that extend beyond systems with bank charters that fall within its prudential supervisory authority.
- Legislative context: the Administration’s 2009 legislative proposal (Title VIII) recommends providing the Federal Reserve with the authority, in consultation with other relevant U.S. regulators, to designate systemically important financial market utilities; authority to set risk management standards and oversee such infrastructures irrespective of their charter.

### I. Scope of current Federal Reserve oversight
- Definition: oversight as per CPSS — “a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change.”
- Distinction: oversight is distinct from prudential supervision and regulation focused on individual financial institutions.
- Coverage intended: at least payment and settlement systems, including central counterparties (CCPs) and securities settlement systems (SSSs).
- Current Federal Reserve oversight policy target: systemically important payment and settlement systems, including:
  - Two central bank–operated systems: Fedwire Funds (RTGS) and Fedwire Securities (Securities Settlement System for government securities).
  - Private sector payment and settlement systems organized and chartered as a bank or Edge corporation subject to the prudential supervisory authority of the Federal Reserve.
- Expectation for systems under oversight: adherence to internationally agreed standards and disclosure via self-assessments reviewed by the Federal Reserve.
- Oversight approach: coordinated among several Federal Reserve functional areas and cooperates with external domestic and foreign authorities.

### II. Federal Reserve’s adherence to CPSIPS responsibilities and CPSS General Oversight Principles
- Assessment structured under CPSIPS responsibilities A–D and CPSS General Oversight Principles A–E.

A. Responsibility A and General Oversight Principles A and B: transparency and standards
- Disclosure framework: Federal Reserve Policy on Payment System Risk (“PSR policy”), comprising:
  - Part one: “risk management in payments and settlement systems” — scope, general policy expectations, and standards.
  - Part two: Federal Reserve daylight credit policies.
- High-level objectives: foster safety and efficiency of payment and settlement systems.
- Policy application: Board encourages systems and their primary regulators to consider PSR principles and minimum standards in design, operation, monitoring, and assessment.
- Policy amendment process: formal consultation — Board publishes request for comments in the Federal Register; comments made publicly available on the Federal Reserve Board’s website; final action includes comprehensive explanations of comment consideration.
- Criteria for policy application:
  - Quantitative and qualitative elements.
  - Quantitative threshold: systems that expect to settle a daily aggregate gross value exceeding US$5 billion during the next 12 months fall within the policy’s scope.
  - Applicability to domestic, offshore, cross-border, and multi-currency systems; applies to systems based or operated in the United States that engage in settlement of foreign currency transactions if otherwise subject to the policy.
  - Definition of system: a multilateral arrangement; policy does not apply to bilateral relationships between financial institutions and their customers (e.g., traditional correspondent banking and government securities clearing services).
  - Note: “the two clearing banks are not currently overseen as systems although their role in the clearing and settlement of securities transactions and tri-party repos is of a systemic importance and may be compared to an infrastructure.”
- Qualitative factors that can render a system systemically important even if above the US$5 billion threshold is necessary but not sufficient:
  - the system has the potential to create significant liquidity disruptions or dislocations should it fail to perform or settle as expected;
  - the system has the potential to create large credit or liquidity exposures relative to participants’ financial capacity;
  - the system settles a high proportion of large-value or interbank transactions;
  - the system settles transactions for important financial markets;
  - the system provides settlement for other systems;
  - the system is the only system for settlement of a given financial instrument.
- Monitoring: systems above the US$5 billion threshold not considered systemically important are monitored and their potential systemic importance is periodically reassessed.
- Adoption of international standards: PSR policy expects subject systems to meet as “policy expectations” the Core Principles for Systemically Important Payment Systems, the Recommendations for Securities Settlement Systems and the Recommendations for Central Counterparties, as applicable — these three sets of international standards are explicitly adopted and quoted in the PSR policy statement.
- Operational risk supplement: interagency paper on sound practices to strengthen the operational resilience of the U.S. financial system (issued in 2003 by the Federal Reserve, OCC, and SEC) focuses on restoration of settlement activities after a wide-scale disruption and appropriate back-up for recovery and resumption of clearance and settlement activities in wholesale financial markets.

B. Responsibility B and General Oversight Principle D: consistent implementation to systems operated by the central bank
- Legal authority: The Federal Reserve Act (FRA) provides the authority for the Federal Reserve Board (Board) to exercise general supervision over the Federal Reserve Banks, including their provision of payment and settlement services.
- FRA requirements: Board to order at least once a year an examination of each Reserve Bank and to order an annual independent audit of the financial statements of each Reserve Bank.

### Board oversight of Reserve Bank payment and settlement services (Section 12)
- Under FRA authority, the Board oversees and examines Reserve Banks’ provision of payment and settlement services, and for services of systemic importance, their compliance with PSR Policy principles and minimum standards.
- The Board publishes an assessment against relevant international standards for Fedwire Funds and Securities Services on the same frequency (every two years as a minimum) as self-assessments expected of private-sector systemically-important systems.
- Legal separation: Board responsible for oversight; Reserve Banks responsible for provision of services — ensuring oversight autonomy from governance, management and operational arrangements.

Governance, committees, and organizational roles
- Two internal Board committees:
  - Committee on Federal Reserve Bank Affairs (BAC): general supervision over Reserve Bank operations, including budgets, pricing of payments services and strategic plans.
  - Payments System Policy Advisory Committee: advises the Board on risk management and relationships between wholesale payment systems and financial markets.
- Oversight responsibilities for certain payment and settlement systems, including Fedwire Funds and Securities, are carried out by the Division of Reserve Bank Operations and Payment Systems (RBOPS).
- RBOPS roles: conduct oversight tasks, delegate strategic leadership, oversee, report, and delegate supervision in governance and oversight framework for Fedwire Funds and Securities.

RBOPS oversight activities and pricing/compliance remit
- Typical RBOPS activities:
  - on-site and off-site reviews of Reserve Banks;
  - oversight of major projects and initiatives;
  - assessments of Reserve Banks’ annual budgets and performance;
  - assessments of Fedwire against relevant international standards.
- RBOPS assesses:
  - whether services are provided in a secure, resilient, and well controlled manner;
  - compliance with relevant policies and standards.
- RBOPS monitors Reserve Banks’ expenses and revenues, and reviews compliance with the Board’s pricing policy and the Monetary Control Act (MCA) of 1980.
- MCA requirement: fees for Reserve Bank payment services to depository institutions, over the long run, recover actual and imputed costs incurred to provide the services.
- The Board conducts a competitive impact analysis when Reserve Banks consider operational changes to their priced services.

### Legal powers and scope regarding private-sector systemically important systems
- No single statutory provision grants a general oversight authority to the Federal Reserve or any other regulator over the full range of systemically important payment, clearing and settlement infrastructures in the United States.
- Fed’s oversight of Fedwire Funds and Securities derives from FRA provisions regarding supervision of Reserve Banks operations.
- Federal Reserve oversight of private sector systems derives from a range of statutory responsibilities for banking supervision and depends on whether the system is organized and chartered as a bank or Edge corporation subject to the Federal Reserve.
- Regulation and supervision by the SEC and the CFTC is determined by whether a system clears or settles securities or futures products; some systems are dually regulated depending on charters and markets cleared.

Currently supervised entities (because of legal status)
- Continuous Linked Settlement (CLS) Bank (Edge corporation headquartered in New York);
- Depository Trust Company (DTC) (limited purpose trust company, chartered in New York and member bank of the Federal Reserve System);
- ICE Trust (a CCP for credit derivatives) (limited purpose trust company);
- Warehouse Trust (a trade repository for credit derivatives) (limited purpose trust company).
- DTC, as a securities settlement system, is a clearing agency registered with and regulated by the SEC in conjunction with the Federal Reserve.

Supervision of CHIPS and third-party service providers
- CHIPS, operated by The Clearing House (TCH), is not chartered as a bank, but is supervised by the Federal Reserve and other banking supervisors as a third-party service provider.
- Authority: Federal banking supervisors have authority under the Bank Services Company Act to examine service providers to which banks have outsourced key services to the same extent as if performed by the bank on its premises.
- Agencies contributing to CHIPS examinations include:
  - Office of the Comptroller of the Currency;
  - Federal Deposit Insurance Corporation;
  - Office of Thrift Supervision;
  - New York State Banking Department;
  - Federal Reserve.
- The December 2007 self-assessment of CHIPS against CPSIPS suggests that TCH has voluntarily agreed to some form of supervision; limitations of the Bank Services Company Act and CHIPS “voluntary” view could complicate or limit enforcement of recommendations from Federal Reserve oversight findings over CHIPS.

Limited Federal Reserve authority over certain CCPs and clearing agencies
- Federal Reserve has only limited examination authority over two CCP affiliates of DTC: the National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC).
- No authority over CCPs for exchange-traded derivatives such as the Chicago Mercantile Exchange Clearing House and The Options Clearing Corporation (OCC).
- NSCC, FICC, and OCC are registered with the SEC as clearing agencies under the Exchange Act and are supervised and regulated by the SEC; CCPs for exchange traded futures and options on futures are supervised and regulated by the CFTC.
- The OCC also clears a small volume of transactions in futures and options on futures and is registered with the CFTC as a derivatives clearing organization.

Fragmented oversight and reform recommendation
- No single authority oversees all critical systems from a systemic risk perspective; oversight is fragmented across regulators depending on charter or market.
- Recommendation: as part of financial regulatory reform, clearly entrust the Federal Reserve with oversight authority for all systemically important payment, clearing and settlement systems, irrespective of legal status.
- Entrusting the Federal Reserve with such authority, in cooperation with other agencies and complementary to existing supervisory provisions, would allow:
  - consistent addressing of systemic risk; and
  - strengthened authority to induce change where necessary.

Methodology and resources for Fed oversight of private sector systems
- The Federal Reserve mobilizes and coordinates relevant competencies within the System, involving:
  - banking supervision function and payment policy function of the Federal Reserve Bank of New York;
  - banking supervision function and payments oversight function of the Board of Governors.
- Day-to-day supervision over CLS Bank, ICE Trust, Warehouse Trust and DTC is conducted by the banking supervisory department of the Federal Reserve Bank of New York.
- A unit in charge of “large complex banking organizations” covers these four entities and one of the two major clearing banks.
- Yearly supervisory program based on risk assessments includes:
  - comprehensive review of activities;
  - focused discrete examinations;
  - assessment of new product developments.
- Examinations are performed by joint teams from the Federal Reserve Bank of New York and the Board of Governors, based upon:
  - standards in the Federal Reserve oversight policy;
  - Federal Reserve Commercial Bank Examination Manual;
  - Federal Financial Institutions Examination Council (FFIEC) standards and methodologies.
- Outcomes: comprehensive rating of the operator’s risk management; assessments shared with management and board; action plans with timetables required where gaps exist.
- Federal Reserve supervisors work closely with the SEC in the case of DTC under the framework set forth in the Securities Exchange Act of 1934.

Analysis of the Federal Reserve’s oversight approach and authority
- Strengths:
  - Strong linkage between Fed’s oversight of payment and settlement systems and its bank supervision powers.
  - Statutory powers and tools to obtain sufficient information and induce change are strongly-founded and effective for systems chartered as a state member bank or Edge corporation (CLS Bank, ICE Trust, Warehouse Trust and DTC).
  - Fed overseers can take part in on-site examinations conducted by Federal Reserve banking supervisors.
  - Oversight and supervisory assessments benefit from perspectives and expertise across Federal Reserve functions.
- Resources:
  - Supervisory resources allocated to oversight of private sector payment systems within Federal Reserve authority appear sufficient and adequate.
  - Full time supervisory staff dedicated to each Federal Reserve supervised system; staff can draw on specialized expertise (technology, legal, modeling, risk experts).
- Drawbacks and limitations:
  - Important drawback: limited authority over nonbank, systemically important payment and settlement systems.
  - Oversight ability is strongest for systems chartered as banks; limited for systems without bank charters.
  - This limitation is inconsistent with:
    - tight interdependencies between payment and settlement systems;
    - the rationale for the central bank to have a comprehensive holistic view on all potential sources of systemic risk in settlement infrastructure;
    - the need for the Federal Reserve to have the same authority to enforce oversight policy and induce change irrespective of system charter.
  - CHIPS exemplifies a system with limited Federal Reserve oversight authority (supervised as a “third party service provider” under the Bank Services Company Act).
- Standards alignment:
  - Unclear whether bank supervisory methodology for examining payment and settlement systems fully addresses issues covered by international oversight standards.
  - No procedure or manual providing explicit mapping between examination procedures and PSR policy standards is identified.

Disclosure of assessments and cooperation
- Disclosure:
  - PSR policy expects systemically important systems to publicly complete, disclose and update at a minimum every two years a self-assessment against applicable international standards (the CPSIPS for payment systems).
  - PSR policy does not preclude the Federal Reserve from independently assessing compliance of systemically important systems under its jurisdiction.
  - The Board discloses its assessment of Fedwire Funds and Securities but does not disclose its assessments of other systems due to Board regulations regarding confidentiality of bank supervisory information.
  - Stakeholders have no means to check the extent to which self-assessments disclosed by systems reflect and comply with the Board’s own assessments; consideration could be given to steps to close potential gaps in a transparent manner.
- Cooperation (Responsibility D and General Oversight Principle E):
  - PSR policy acknowledges the criticality of cooperation both domestically and internationally.
  - PSR Policy statement: “where the Board does not have direct or exclusive supervisory or regulatory authority over systems covered by this policy, it will work with other domestic and foreign financial system authorities to promote effective risk management in payments and securities settlement systems. The Board encourages other relevant authorities to consider the principles embodied in this policy when evaluating the payments and securities settlement risks posed by and to the systems and individual system participants that they oversee, supervise, or regulate.”

### Internal, domestic and international cooperation (Section 30)
Internal cooperation and functional contributions
- Payment system experts, bank supervisors, market experts, monetary staff and economic researchers contribute to policymaking and oversight implementation.
- Multidisciplinary involvement ensures appropriate skills for assessing risks and inefficiencies and that different supervisory perspectives are incorporated.

Domestic regulatory cooperation
- Federal Reserve cooperates closely with banking supervisors for TCH/CHIPS:
  - Office of the Comptroller of the Currency;
  - Office of Thrift Supervision;
  - Federal Deposit Insurance Corporation;
  - New York State Banking Department.
- Federal Reserve also cooperates with market regulators:
  - Securities and Exchange Commission (SEC);
  - Commodity Futures Trading Commission (CFTC).
- Securities Exchange Act of 1934 gives joint authority to the SEC and the Federal Reserve with respect to certain SEC registered clearing agencies organized as banks, such as DTC.

International cooperation and principles
- The Board is guided by international principles for cooperative oversight:
  - central bank Responsibilities in applying the CPSIPS;
  - Recommendation 18 of the Recommendations for Securities Settlement Systems;
  - “Principles for Cooperative Central Bank Oversight of Cross-border and Multi-currency Netting and Settlement Schemes”.
- Lamfalussy principles recommend, among other things:
  - informing other central banks with an interest in cross-border/multi-currency systems;
  - assigning primary oversight responsibility to a central bank;
  - periodic system-wide assessments by the central bank with primary responsibility in consultation with other central banks;
  - joint determination of adequacy of settlement and failure-to-settle procedures in a currency; and
  - scope for a central bank to discourage use of an unsound system.

Cooperative oversight arrangements and initiatives
- CLS Bank: Federal Reserve leads a cooperative oversight arrangement composed of G-10 and other central banks of issue; Protocol adopted in 2008 provides an arrangement for central banks of issue to fulfill oversight responsibilities, including exchange of information.
- DTCC Warehouse Trust: Federal Reserve working with relevant foreign and domestic authorities to develop a formal cooperative oversight arrangement for the trade repository for credit derivatives.
- Other activities: Federal Reserve facilitates cooperative regulatory forums on OTC derivatives clearing and participates in a cooperative oversight arrangement, led by the National Bank of Belgium, for SWIFT.

### Legislative reform proposals concerning systemically important systems (paras 34–35) and Overview of Administration’s Title VIII proposal
- Recent legislative proposals (Administration’s 2009 legislative proposals) would:
  - provide the Federal Reserve with the authority, in consultation with the Financial Services Oversight Council, to designate payment, clearing and settlement systems as systemically important;
  - prescribe risk management standards; and
  - oversee such systems from a systemic risk perspective in conjunction with the systems’ primary supervisor.
- Intended improvements:
  - improve the United States’ ability to assess systemic risk arising from market infrastructures;
  - ensure consistent application of international risk management standards across systems; and
  - coordinate policy actions among relevant regulators.
- The enhanced authority would be in addition to existing supervisory and regulatory authority of other agencies and would facilitate cooperation with other relevant agencies (e.g., SEC and CFTC).
- More specifically, strengthened legal authority should enable:
  - (i) strengthened oversight of CHIPS by providing a federal agency with a direct authority over the system;
  - (ii) more consistent oversight, from a systemic risk perspective, of both bank-chartered and nonbank payment, clearing, and settlement systems; and
  - (iii) better alignment of the United States’ oversight framework for all payment, clearing, and settlement systems of a systemic importance, including strengthened coordination among relevant supervisors.

Overview of the Administration’s Proposal (Title VIII) on Payment, Clearing and Settlement Supervision (Box 1)
- Purpose:
  - mitigate systemic risk and promote financial stability by providing the Board with an enhanced role in supervising risk management of systemically important financial market utilities and systemically important payment, clearing, and settlement activities conducted by financial institutions.
- Designation authority:
  - Board authorized to designate a financial market utility or a payment, clearing, or settlement activity as systemically important, with established procedures and criteria for making and withdrawing such a designation.
  - Criteria include the aggregate monetary value of transactions processed and the effect that a failure would have on the financial system.
  - Board must consult with the Financial Services Oversight Council and the relevant supervisory agency before making a designation.
- Risk management standards and supervisory role:
  - In consultation with the Financial Services Oversight Council, the SEC, and the CFTC, the Board could set risk management standards for designated entities and activities.
  - Law would not modify primary responsibilities of other regulatory agencies.
  - Board allowed to participate in examinations by other agencies and would be the supervisory agency for designated financial market utilities not otherwise under an agency.
  - Board granted back-up authority to conduct examinations and take enforcement actions against a designated financial market utility if imminent risk of substantial harm to the financial system exists.
- Information, coordination, and access to services:
  - Board entitled to collect information from financial market utilities and financial institutions engaged in designated activities to assess systemic importance.
  - Sharing of relevant information and coordination among regulators would be facilitated.
  - Federal Reserve Banks entitled to open an account, provide access to the discount window credit and pay interest on balances maintained for a designated financial market utility.
  - Extension of central bank credit facilities to financial market utilities would provide an additional liquidity buffer, linked to adequate oversight and observance of risk management standards.
- Legislative provenance:
  - Summarized on the basis of the Administration’s proposed legislation dated 22 July 2009.
  - Subsequent legislative proposals have revised certain aspects of Title VIII.

*Source: IMF Technical Note — Executive Summary (content unit _cr10123)*

### Executive Summary ......................................................................................................

### _cr10123 - Executive Summary ......................................................................................................

### Executive Summary: purpose and scope
- This technical note reviews the Federal Reserve’s oversight of payment, clearing and settlement systems.
- Focus: payment systems oversight; addresses oversight of clearing and settlement systems due to their impact on financial stability and strong interdependencies with payment systems.
- Framework used: the four Responsibilities of the Central Bank in applying the Core Principles for Systemically Important Payment Systems (CPSIPS) and the Committee on Payment and Settlement Systems (CPSS) Principles for Effective Oversight.
- Roles of the Federal Reserve reviewed:
  - Service provider: operates RTGS (Fedwire Funds), Fedwire Securities, the National Settlement Service, Automated Clearing House (ACH), and check collection services.
  - Supervisor/regulator: supervisory and regulatory responsibility over certain private-sector payment and settlement systems that have bank charters subject to Federal Reserve supervision or fall under relevant supervisory provisions for bank service companies.
  - Catalyst/facilitator: fosters improvements through research, dialogue, leadership and catalyzing private sector practice changes.
- Key conclusion: need to broaden the Federal Reserve’s legal authority and powers to oversee systemically important payment, clearing and settlement systems that extend beyond systems with bank charters that fall within its prudential supervisory authority.
- Legislative context: the Administration’s 2009 legislative proposal (Title VIII) recommends providing the Federal Reserve with the authority, in consultation with other relevant U.S. regulators, to designate systemically important financial market utilities; authority to set risk management standards and oversee such infrastructures irrespective of their charter.

### I. Scope of current Federal Reserve oversight
- Definition used: oversight of payment and settlement systems as per CPSS — “a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change.”
- Distinction: oversight is distinct from prudential supervision and regulation, which focuses on the soundness of individual financial institutions.
- Coverage intended: at least payment and settlement systems, including central counterparties (CCPs) and securities settlement systems (SSSs).
- Current Federal Reserve oversight policy target: systemically important payment and settlement systems, including:
  - Two central bank–operated systems: Fedwire Funds (RTGS) and Fedwire Securities (Securities Settlement System for government securities).
  - Private sector payment and settlement systems organized and chartered as a bank or Edge corporation subject to the prudential supervisory authority of the Federal Reserve.
- Expectation for systems under oversight: adherence to internationally agreed standards and disclosure via self-assessments reviewed by the Federal Reserve.
- Oversight approach: not stand-alone; involves coordination among several Federal Reserve functional areas and cooperation with external domestic and foreign authorities.

### II. Federal Reserve’s adherence to CPSIPS responsibilities and CPSS General Oversight Principles
- Structure: Assessment organized under the CPSIPS responsibilities A–D and CPSS General Oversight Principles A–E.

#### A. Responsibility A and General Oversight Principles A and B: transparency and standards
- Disclosure framework: Federal Reserve Policy on Payment System Risk (“PSR policy”), comprised of:
  - Part one: “risk management in payments and settlement systems” — scope, general policy expectations, and standards.
  - Part two: Federal Reserve daylight credit policies.
- High-level objectives: to foster the safety and efficiency of payment and settlement systems.
- Policy application: Board encourages systems and their primary regulators to consider the PSR principles and minimum standards in design, operation, monitoring, and assessment.
- Policy amendment process: formal consultation — Board publishes request for comments in the Federal Register; comments made publicly available on the Federal Reserve Board’s website; final action includes comprehensive explanations of comment consideration.
- Criteria for policy application:
  - Quantitative and qualitative elements.
  - Quantitative threshold: systems that expect to settle a daily aggregate gross value exceeding US$5 billion during the next 12 months fall within the policy’s scope.
  - Applicability to domestic, offshore, cross-border, and multi-currency systems; applies to systems based or operated in the United States that engage in settlement of foreign currency transactions if otherwise subject to the policy.
  - Definition of system: a multilateral arrangement; policy does not apply to bilateral relationships between financial institutions and their customers (e.g., traditional correspondent banking and government securities clearing services).
  - Note: “the two clearing banks are not currently overseen as systems although their role in the clearing and settlement of securities transactions and tri-party repos is of a systemic importance and may be compared to an infrastructure.”
- Qualitative factors that can render a system systemically important even if above the US$5 billion threshold is necessary but not sufficient:
  - the system has the potential to create significant liquidity disruptions or dislocations should it fail to perform or settle as expected;
  - the system has the potential to create large credit or liquidity exposures relative to participants’ financial capacity;
  - the system settles a high proportion of large-value or interbank transactions;
  - the system settles transactions for important financial markets;
  - the system provides settlement for other systems;
  - the system is the only system for settlement of a given financial instrument.
- Monitoring: systems above the US$5 billion threshold not considered systemically important are monitored and their potential systemic importance is periodically reassessed.
- Adoption of international standards: PSR policy expects subject systems to meet as “policy expectations” the Core Principles for Systemically Important Payment Systems, the Recommendations for Securities Settlement Systems and the Recommendations for Central Counterparties, as applicable — these three sets of international standards are explicitly adopted and quoted in the PSR policy statement.
- Operational risk supplement: interagency paper on sound practices to strengthen the operational resilience of the U.S. financial system (issued in 2003 by the Federal Reserve, OCC, and SEC) focuses on restoration of settlement activities after a wide-scale disruption and appropriate back-up for recovery and resumption of clearance and settlement activities in wholesale financial markets.

#### B. Responsibility B and General Oversight Principle D: consistent implementation to systems operated by the central bank
- Legal authority: The Federal Reserve Act (FRA) provides the authority for the Federal Reserve Board (Board) to exercise general supervision over the Federal Reserve Banks, including their provision of payment and settlement services.
- FRA requirements: Board to order at least once a year an examination of each Reserve Bank and to order an annual independent audit of the financial statements of each Reserve Bank.

### Legislative reform proposals (overview)
- The Administration’s 2009 legislative proposal (Title VIII) recommends:
  - providing the Federal Reserve, in consultation with other relevant U.S. regulators, the authority to designate systemically important financial market utilities;
  - granting the Federal Reserve authority to set risk management standards and oversee infrastructures irrespective of their charter;
  - such authority intended to improve the United States’ ability to assess systemic risk, ensure consistent application of international risk management standards across systems, and coordinate policy actions among relevant regulators domestically and with those abroad.

*Source: IMF Technical Note — Executive Summary (content unit _cr10123)*

### 12. Under the authority provided by the FRA, the Board oversees and examines the

### _cr10123 - 12. Under the authority provided by the FRA, the Board oversees and examines the

### Overview of Board oversight of Reserve Bank payment and settlement services
- Under the authority provided by the FRA, the Board oversees and examines the Reserve Banks’ provision of payment and settlement services, and, for those services of systemic importance, their compliance with the principles and minimum standards incorporated in the PSR Policy.
- The Board publishes an assessment against the relevant international standards for the Fedwire Funds and Securities Services on the same frequency (every two years as a minimum) as that expected of self assessments by private-sector systemically-important systems.
- The Board is responsible for oversight of Federal Reserve payment and settlement services; the Reserve Banks are responsible for provision of these services. This legal separation ensures oversight is autonomous from governance, management and operational arrangements of the systems.

### Governance, committees, and organizational roles
- The Board has established two internal committees to complement oversight and policy responsibilities:
  - Committee on Federal Reserve Bank Affairs (BAC): in charge of general supervision over Reserve Bank operations, including budgets, the pricing of payments services and strategic plans.
  - Payments System Policy Advisory Committee: advises the Board on issues related to risk management and the relationships between wholesale payment systems and financial markets.
- Oversight responsibilities for certain payment and settlement systems, including the operation of Fedwire Funds and Securities, are carried out by the Division of Reserve Bank Operations and Payment Systems (RBOPS).
- RBOPS carries out oversight tasks and informs, delegates strategic leadership, oversees, reports, and delegates supervision in the governance and oversight framework for Fedwire Funds and Securities.

### RBOPS oversight activities and pricing/compliance remit
- Typical RBOPS oversight activities include:
  - conduct of on-site and off-site reviews of Reserve Banks;
  - oversight of major projects and initiatives;
  - assessments of Reserve Banks’ annual budgets and performance;
  - assessments of Fedwire against relevant international standards.
- RBOPS assesses:
  - the extent to which services are provided in a secure, resilient, and well controlled manner;
  - the extent to which services comply with relevant policies and standards.
- RBOPS monitors Reserve Banks’ expenses and revenues, and reviews compliance with the Board’s pricing policy and the Monetary Control Act (MCA) of 1980.
- The MCA requires that fees for Reserve Bank payment services to depository institutions, over the long run, recover actual and imputed costs incurred to provide the services.
- The Board conducts a competitive impact analysis when Reserve Banks consider operational changes to their priced services to determine any potential adverse effect on the ability of other service providers to compete effectively with the Reserve Banks.

### Legal powers and scope regarding private-sector systemically important systems
- There is no single statutory provision granting a general oversight authority to the Federal Reserve or any other regulator over the full range of systemically important payment, clearing and settlement infrastructures in the United States.
- Fed’s oversight of Fedwire Funds and Securities derives from provisions of the Federal Reserve Act regarding supervision of Reserve Banks operations.
- Federal Reserve oversight of private sector systems derives from a range of statutory responsibilities for banking supervision and the provision of payment and settlement services and depends on whether the system is organized and chartered as a bank or Edge corporation subject to the prudential supervisory authority of the Federal Reserve.
- Regulation and supervision by the SEC and the CFTC is determined by whether a system clears or settles securities or futures products; some systems are dually regulated depending on charters and markets cleared.
- Currently supervised entities (because of legal status) include:
  - Continuous Linked Settlement (CLS) Bank (Edge corporation headquartered in New York);
  - Depository Trust Company (DTC) (limited purpose trust company, chartered in New York and member bank of the Federal Reserve System);
  - ICE Trust (a CCP for credit derivatives) (limited purpose trust company);
  - Warehouse Trust (a trade repository for credit derivatives) (limited purpose trust company).
- DTC, as a securities settlement system, is a clearing agency registered with and regulated by the SEC in conjunction with the Federal Reserve.

### Supervision of CHIPS and third-party service providers
- Clearing House Interbank Payment System (CHIPS), operated by The Clearing House (TCH), is not chartered as a bank, but is supervised by the Federal Reserve and other banking supervisors as a third-party service provider.
- Federal banking supervisors have authority under the Bank Services Company Act to examine service providers to which banks have outsourced key services to the same extent as if performed by the bank on its premises.
- Agencies contributing to CHIPS examination include:
  - Office of the Comptroller of the Currency;
  - Federal Deposit Insurance Corporation;
  - Office of Thrift Supervision;
  - New York State Banking Department;
  - Federal Reserve.

### Limited Federal Reserve authority over certain CCPs and clearing agencies
- The Federal Reserve has only limited examination authority over the two CCP affiliates of DTC, the National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC), and no authority over CCPs for exchange-traded derivatives such as the Chicago Mercantile Exchange Clearing House and The Options Clearing Corporation (OCC).
- NSCC, FICC, and OCC clear and settle securities transactions and are registered with the SEC as clearing agencies under the Exchange Act and are supervised and regulated by the SEC; CCPs for exchange traded futures and options on futures are supervised and regulated by the CFTC.
- The OCC also clears a small volume of transactions in futures and options on futures and is registered with the CFTC as a derivatives clearing organization.

### Fragmented oversight and reform recommendation
- No single authority oversees all critical systems from a systemic risk perspective; supervision and oversight are spread across several regulators depending on charter or market.
- It is desirable, as part of financial regulatory reform, to clearly entrust the Federal Reserve with an oversight authority for all systemically important payment, clearing and settlement systems, irrespective of legal status.
- Entrusting the Federal Reserve with such authority, in cooperation with other agencies and complementary to existing supervisory provisions, would allow:
  - consistent addressing of systemic risk; and
  - strengthened authority to induce change where necessary.
- More details are provided in Chapter III.

### Methodology and resources for Fed oversight of private sector systems
- The Federal Reserve conducts oversight by mobilizing and coordinating relevant competencies and functions within the Federal Reserve System, involving:
  - banking supervision function and payment policy function of the Federal Reserve Bank of New York;
  - banking supervision function and payments oversight function of the Board of Governors.
- This cooperative framework is not formalized but operates effectively.
- Day-to-day supervision over CLS Bank, ICE Trust, Warehouse Trust and DTC is conducted by the banking supervisory department of the Federal Reserve Bank of New York.
- A unit in charge of “large complex banking organizations” covers these four entities and one of the two major clearing banks.
- A yearly supervisory program is defined based upon risk assessments and includes:
  - comprehensive review of activities;
  - focused discrete examinations;
  - assessment of new products developments.
- The program is formally submitted for approval each year to a senior Federal Reserve committee that reviews the program and discusses required supervisory resources.
- Examinations are performed by joint teams gathering resources from the Federal Reserve Bank of New York and the Board of Governors and are based upon:
  - standards in the Federal Reserve oversight policy;
  - Federal Reserve Commercial Bank Examination Manual;
  - Federal Financial Institutions Examination Council (FFIEC) standards and methodologies.
- The overall assessment leads to a comprehensive rating of the operator’s risk management; assessments are shared with management and the board of directors and, if gaps exist, an action plan with a timetable is required and implementation is followed up.
- Federal Reserve supervisors work closely with the SEC in the case of DTC under the framework set forth in the Securities Exchange Act of 1934.

### Analysis of the Federal Reserve’s oversight approach and authority
- Strengths:
  - The strong linkage between the Fed’s oversight of payment and settlement systems and its bank supervision powers is a source of strength.
  - Statutory powers and tools to obtain sufficient information and induce change are very strongly-founded and effective for systems chartered as a state member bank or Edge corporation (CLS Bank, ICE Trust, Warehouse Trust and DTC).
  - Fed overseers can take part in on-site examinations conducted by Federal Reserve banking supervisors, a practice not widespread among central banks.
  - Oversight and supervisory assessments benefit from perspectives and expertise across Federal Reserve functions.
- Resources:
  - Supervisory resources allocated to oversight of private sector payment systems within Federal Reserve authority appear sufficient and adequate.
  - Full time supervisory staff is dedicated to each Federal Reserve supervised system; supervisory staff can draw on specialized expertise (technology, legal, modeling, risk experts).
- Benefits:
  - Present approach facilitates close cooperation between payments systems oversight and banking supervision, reflecting the Board’s responsibility as a banking supervisor.
- Drawbacks and limitations:
  - Important drawback: limited authority of the Federal Reserve over nonbank, systemically important payment and settlement systems.
  - Oversight ability is strongest for systems chartered as banks; limited for systems without bank charters.
  - This limitation is inconsistent with:
    - the tight interdependencies between payment and settlement systems;
    - the rationale for the central bank to have a comprehensive holistic view on all potential sources of systemic risk in settlement infrastructure;
    - the need for the Federal Reserve to have the same authority to enforce oversight policy and induce change irrespective of system charter.
  - CHIPS exemplifies a system with somewhat more limited Federal Reserve oversight authority; CHIPS is supervised as a “third party service provider” under the Bank Services Company Act (see paragraph 18).
  - The December 2007 self-assessment of CHIPS against CPSIPS suggests that TCH has voluntarily agreed to some form of supervision. The limitations of the Bank Services Company Act and CHIPS “voluntary” view could complicate or limit enforcement of recommendations from Federal Reserve oversight findings over CHIPS.
- Standards alignment:
  - The extent to which the bank supervisory methodology for examining payment and settlement systems fully addresses issues covered by international oversight standards is unclear.
  - Although the Federal Reserve’s PSR policy explicitly states it will be guided by international standards when exercising supervisory authority, there is no procedure or manual providing explicit mapping between examination procedures and PSR policy standards.

### Disclosure of assessments and cooperation
- Disclosure:
  - PSR policy expects systemically important payment and settlement systems to complete, disclose publicly the results and update at a minimum every two years a self-assessment against the applicable international standards (the CPSIPS for payment systems).
  - PSR policy does not preclude the Federal Reserve from independently assessing compliance of systemically important systems under its jurisdiction.
  - The Board discloses its assessment of the compliance of Fedwire Funds and Securities but does not disclose its assessments of other systems due to Board regulations regarding confidentiality of bank supervisory information.
  - Stakeholders (including systems’ participants) have no means to check to which extent self-assessments disclosed by systems reflect and comply with the Board’s own assessments.
  - Consideration could be given to steps to ensure potential gaps in these assessments are closed in a transparent manner.
- Cooperation (Responsibility D and General Oversight Principle E):
  - The PSR policy acknowledges the criticality of cooperation both domestically and internationally in the Federal Reserve’s oversight process.
  - The PSR Policy states: “where the Board does not have direct or exclusive supervisory or regulatory authority over systems covered by this policy, it will work with other domestic and foreign financial system authorities to promote effective risk management in payments and securities settlement systems. The Board encourages other relevant authorities to consider the principles embodied in this policy when evaluating the payments and securities settlement risks posed by and to the systems and individual system participants that they oversee, supervise, or regulate.”

*Source: _cr10123 - 12. Under the authority provided by the FRA, the Board oversees and examines the (PDF content provided).*

### 30. The Federal Reserve’s oversight process involves close cooperation among

### _cr10123 - 30. The Federal Reserve’s oversight process involves close cooperation among

### Internal cooperation and functional contributions
- Payment system experts, bank supervisors, market experts, and monetary staff as well as economic researchers contribute to policymaking and to the implementation of the oversight of payment and settlement systems.
- This multidisciplinary involvement:
  - brings appropriate skills to bear in assessing the various sources of risks and inefficiencies in the clearing and settlement process; and
  - ensures that different supervisory perspectives are taken into account.

### Domestic regulatory cooperation
- The Federal Reserve cooperates closely with other banking supervisors for TCH/CHIPS, specifically:
  - the Office of the Comptroller of the Currency,
  - the Office of Thrift Supervision,
  - the Federal Deposit Insurance Corporation, and
  - the New York State Banking Department.
- The Federal Reserve also cooperates with market regulators:
  - the SEC and the CFTC.
- The Securities Exchange Act of 1934 gives joint authority to the SEC and the Federal Reserve with respect to certain SEC registered clearing agencies that are organized as banks, such as DTC.

### International cooperation and principles
- The Board is guided by international principles for cooperative oversight when working with foreign financial system authorities, namely:
  - the central bank Responsibilities in applying the CPSIPS,
  - the Recommendation 18 of the Recommendations for Securities Settlement Systems, and
  - the “Principles for Cooperative Central Bank Oversight of Cross-border and Multi-currency Netting and Settlement Schemes” and related documents.10,11
- The Lamfalussy principles (as described) recommend, among other things:
  - informing other central banks that may have an interest in the prudent design and management of the cross-border and multi-currency system;
  - assigning the primary oversight responsibility to a central bank;
  - periodically assessing the design and operation of the system as a whole to be performed by the central bank with the primary responsibility in consultation with the other central banks;
  - leaving the determination of the adequacy of a system’s settlement and failure-to-settle procedures in a currency as a joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system; and
  - leaving scope for a central bank to discourage the use of an unsound system.

### Cooperative oversight arrangements and initiatives
- CLS Bank:
  - The Federal Reserve leads a cooperative oversight arrangement for CLS Bank composed of the G-10 and other central banks of issue for the currencies eligible for settlement in CLS.
  - The Protocol adopted in 2008 for the Cooperative Oversight Arrangement of CLS provides an arrangement for the central banks of issue of currencies eligible for settlement in the CLS system to fulfill their oversight responsibilities, including exchange of information.
- DTCC Warehouse Trust:
  - The Federal Reserve is working with relevant foreign and other domestic authorities to develop a formal cooperative oversight arrangement for the DTCC Warehouse Trust, the trade repository for credit derivatives.
- Other cooperative activities:
  - The Federal Reserve continues to facilitate a number of cooperative regulatory forums on over-the-counter (OTC) derivatives clearing.
  - The Federal Reserve participates in a cooperative oversight arrangement, led by the National Bank of Belgium, for SWIFT.

### Legislative reform proposals concerning systemically important systems (paras 34–35)
- Recent legislative proposals (Administration’s 2009 legislative proposals) would:
  - provide the Federal Reserve with the authority, in consultation with the Financial Services Oversight Council, to designate payment, clearing and settlement systems as systemically important;
  - prescribe risk management standards; and
  - oversee such systems from a systemic risk perspective in conjunction with the systems’ primary supervisor.
- Intended improvements:
  - improve the United States’ ability to assess systemic risk arising from market infrastructures;
  - ensure consistent application of international risk management standards across systems; and
  - coordinate policy actions among relevant and interest regulators.
- The enhanced authority would be in addition to existing supervisory and regulatory authority of other agencies and would facilitate cooperation with other relevant agencies (e.g., SEC and CFTC).
- More specifically, a strengthened legal authority should enable:
  - (i) strengthened oversight of CHIPS by providing a federal agency with a direct authority over the system;
  - (ii) more consistent oversight, from a systemic risk perspective, of both bank-chartered and nonbank payment, clearing, and settlement systems; and
  - (iii) a better alignment of the United States’ oversight framework for all payment, clearing, and settlement systems of a systemic importance, including strengthened coordination among relevant supervisors.
- These proposals would give the Federal Reserve an enhanced role in the oversight of systemically important payment, clearing, and settlement activities, including the payments role of the two, systemically important clearing banks.

### Overview of the Administration’s Proposal (Title VIII) on Payment, Clearing and Settlement Supervision (Box 1)
- Purpose:
  - to mitigate systemic risk in the financial system and promote financial stability by providing the Board of Governors of the Federal Reserve System (Board) with an enhanced role in supervising risk management of systemically important financial market utilities and of systemically important payment, clearing, and settlement activities conducted by financial institutions.
- Designation authority:
  - The Board would be authorized to designate a financial market utility or a payment, clearing, or settlement activity as systemically important, and established procedures and criteria for making and withdrawing such a designation.
  - Criteria for designation and rescission include the aggregate monetary value of transactions processed and the effect that a failure of a financial market utility or payment, clearing, or settlement activity would have on the financial system.
  - The Board would have to consult with the Financial Services Oversight Council and the relevant supervisory agency before making a designation.
- Risk management standards and supervisory role:
  - In consultation with the Financial Services Oversight Council, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, the Board would be able to set risk management standards for the designated financial market utilities and for the designated payment, clearing, and settlement activities of financial institutions.
  - The law would not modify the primary responsibility currently entrusted to the different regulatory and supervisory agencies of the respective payment, clearing and settlement systems.
  - The Board would be allowed to participate in examinations made by other agencies and would be the supervisory agency for designated financial market utilities that do not otherwise fall within the authority of an agency.
  - The Board would be granted back-up authority to conduct examinations and to take enforcement actions against a designated financial market utility if there were an imminent risk of substantial harm to the financial system.
- Information, coordination, and access to services:
  - The Board would be entitled to collect information from financial market utilities and financial institutions engaged in designated payment, clearing, or settlement activities in order to assess systemic importance.
  - Sharing of relevant information and coordination among financial regulators would also be facilitated.
  - Federal Reserve Banks would be entitled to open an account, provide access to the discount window credit and pay interest on balances maintained for a designated financial market utility.
  - The extension of central bank credit facilities to financial market utilities would provide for an additional liquidity buffer in case of abnormal market conditions and link this possibility to their adequate oversight and strict observance of risk management standards.
- Legislative provenance:
  - Summarized on the basis of the Administration’s proposed legislation dated 22 July 2009.
  - Subsequent legislative proposals have revised certain aspects of Title VIII.

*Source: _cr10123 - 30. The Federal Reserve’s oversight process involves close cooperation among (IMF chapter/section).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10123.pdf_