United States: "Financial Market Utilities: The Unintended Consequences Of H.R. 10, The Financial CHOICE Act, Or It Is Key To Be A QCCP Under Basel 3"

On June 8, 2017, the House of Representatives passed H.R. 10, the Financial CHOICE Act of 2017 ("H.R. 10").1 Subtitle D, entitled "Eliminating Financial Market Utility Designations," includes a section ("Section 141") which would repeal Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA") "as if such title had never been enacted."2 This repeal is consistent with other sections of H.R. 10, which repeal the provisions of the DFA that give the Financial Stability Oversight Counsel ("FSOC") its ability to make systemic designations of individual non-bank entities or market utilities.3

The ability of FSOC to make designations has been caught up in political battles related to the fate of the DFA.4 However, it is unclear whether such political concerns, which have focused on the ability of FSOC to designate individual non-banks considered systemically important such as GE Capital, AIG, Prudential or MetLife, really have anything to do with the ability of FSOC to designate (and the Board of Governors of the Federal Reserve System (the "Federal Reserve") to regulate and supervise) systemically important financial market utilities such as payment, settlement and clearing systems.

On July 12, 2012, FSOC designated eight financial market utilities ("FMUs") as systemically important.5 Among those FMUs are several central counterparties ("CCPs") that clear derivatives; by virtue of their designation by FSOC, such CCPs are considered to be qualifying CCPs ("QCCPs") for purposes of the Basel 3 capital requirements. All FMUs also gained access to account services from the Federal Reserve.

As noted, H.R. 10 would delete the ability of FSOC to make such designations and repeal any designations made prior to the date of enactment. If these CCPs are no longer "Q"s, banking entities subject to Basel 3 will be required to hold significantly higher additional capital with respect to their trading, margin and collateral exposure to those CCPs. Further, FMUs would lose their ability to transact directly with a Federal Reserve Bank. These potential changes have caught the attention of at least one Governor of the Federal Reserve.6

This article reviews the unintended consequences that would follow for such FMUs and their bank members if H.R. 10 becomes law as it is written.


Title VIII of the DFA was enacted to mitigate systemic risk in the financial system and to promote financial stability through enhanced supervision of FMUs.7 According to the Federal Reserve, a failure of or disruption to the functioning of an FMU could create or increase the risk that financial instability would spread among financial institutions or markets and threaten the stability of the U.S. financial system.8 Under Title VIII, the Federal Reserve may:

  • prescribe risk-management standards for certain designated FMUs;
  • conduct examinations of and take enforcement actions against certain designated FMUs, and consult on other examinations of FMUs
  • receive, review and consult on certain rule notices ("material notices") from designated FMUs;

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1 H.R. 10, the Financial CHOICE Act of 2017, 115th Congress (June 8, 2017).  https://www.congress.gov/115/bills/hr10/BILLS-115hr10rfs.xml.

2 Pub.L. 111-203, H.R. 4173 (July 21, 2010).

3 See Subtitle E of H.R. 10, Section 151.

4 See, e.g., opinion pieces on the fate of FSOC such as https://www.wsj.com/articles/a-choice-for-wall-street-1496964390.

5 See https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20Systemically%20Important%20Market%20Utilities.pdf.

6 See https://www.federalreserve.gov/newsevents/speech/powell20170623a.htm ("Powell Speech").

7 See https://www.federalreserve.gov/paymentsystems/title-viii-dfa.htm.

8 See Federal Reserve Policy on Payment System Risk, available at https://www.federalreserve.gov/paymentsystems/psr_about.htm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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