July 25, 2012 / 6:09 PM / 5 years ago

TEXT-Fitch: clearing, settlement firms' SIFI designation a plus

 (The following statement was released by the rating agency)
 July 25 - The decision by the U.S. Financial Stability Oversight Council
(FSOC) to designate eight clearing, settlement, and payment firms as
systemically important financial institutions (SIFIs) is a constructive step
that could over time have a positive impact on systemic risk management,
according to Fitch Ratings.

The FSOC, established under the Dodd-Frank Act (DFA) to help identify potential
threats to U.S. financial stability, detailed its approach to the SIFI
designation for critical clearing and settlement firms that DFA defines as
financial market utilities, or FMUs. Among the eight FMUs designated as
systemically important were the Chicago Mercantile Exchange (CME), the Fixed
Income Clearing Corp. (FICC), and the Clearing House Payments Co. (PaymentsCo).
All of these institutions provide essential clearing and settlement functions in
such markets as equity and credit derivatives, foreign exchange, and interbank
payments.

The FSOC relied on analysis of four key factors in evaluating FMUs for possible
SIFI designation. These were:

--The monetary value of transactions processed,
--Aggregate exposure of the FMU to its counterparties,
--Relationships and interdependence with other FMUs, and
--Effects of a failure of the FMU on critical markets, financial institutions,
and systemic stability.

Given the potential for a disruption in clearing, settlement, and payment
systems to quickly affect the liquidity position of major financial
institutions, we regard the SIFI designation as a potentially positive
development for bank credit quality and financial market stability. While
specific regulations regarding forthcoming oversight of the FMUs have yet to be
defined, we see the monitoring of FMU risk management processes and the
establishment of reporting requirements as useful in mitigating the risk of any
future operational disruption in clearing, settlement, and payment systems.

Should major trading market liquidity be impeded by the failure of an FMU, the
consequences for major financial institutions could be significant. While we
recognize that the complete elimination of systemic risk in clearing and
settlement processes is unlikely, we view the FSOC's efforts to better safeguard
the safety and soundness of FMU institutions as an important first step.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

 (New York Ratings Team)
 

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