Title VIII - Payment, Clearing and Settlement Supervision
Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) provides for oversight of financial market utilities and those engaged in settlement, clearing, or payment activities. More specifically, the Act authorizes the Financial Stability Oversight Council (the Council), the Board of Governors of the Federal Reserve (the Board), and the applicable regulating agencies (for example, the Securities and Exchange Commission and the Commodity Futures Trading Commission) to implement regulations aimed at overseeing and reducing systemic risk in the financial system relating to the payment, settlement, and clearing activities.1
This Title applies to: (1) financial market utilities; and (2) financial institutions engaged in payment, clearing, or settlement activity.
(a) A financial market utility is a person that “manages or operates a multilateral system for the purpose of transferring, clearing or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person.”2
(b) A financial institution is engaged in payment, clearing, or settlement activity if it is engaged in activity to facilitate the completion of financial transactions (excluding a security under the Securities Act of 19333).
As it pertains to payment activities, however, “financial institution” is broadly defined to include: (1) a depository institution; (2) a branch or agency of a foreign bank; (3) an organization operating under Section 25 or 25A of the Federal Reserve Act; (4) a credit union; (5) a broker or dealer; (6) an investment company; (7) an insurance company; (8) an investment adviser; (9) a futures commission merchant; and finally (10) any company “engaged in activities that are financial in nature or incidental to a financial activity” (emphasis added).4 If construed broadly in the regulations proposed by the supervising agencies, Title VIII could reach industries that have traditionally held themselves out as not being financial institutions.
Title VIII mandates the Council to designate financial market utilities or payment activities that the Council deems to be systemically important (or, as necessary, to deem activities as no longer systemically important). If the Council has reasonable cause to believe that the financial market utility meets the standard for systemic importance (or the payment, settlement, and clearing activities conducted by a financial institution meet the systemic importance standard), then the Council may request any information that it may require in making that determination.5 The designation procedure provides for an appeal of such designation and a hearing regarding the designation. Moreover, financial regulators may examine (or request the Council to examine) a financial institution to determine the degree of systemic risk posed by its payment, settlement, and clearing activities.6
With regard to those activities that have been designated as systemically important, Title VIII mandates the Board (and the Commodity Futures Trading Commission for commodity activities) to prescribe risk management standards governing operations related to the payment, clearing, and settlement activities of financial market utilities and the conduct of such designated activities by financial institutions.7
The regulating supervisory agency is required to conduct examinations of the financial market utility to determine the nature of the operations and the risks borne by the entity, the financial and operational risks presented, the resources of the entity to monitor and control such risks, the safety and soundness of the entity, and compliance with this Title and the regulations authorized by it. In addition, the supervisory agency may examine service providers that provide designated activities for the financial market utility to determine whether that service provider is in compliance with applicable laws as if the designated financial market utility were providing the activity on its own.8 In an emergency situation, the Board and the supervising agency may take enforcement action in the case of imminent risk of substantial financial harm to financial institutions, critical markets, or the financial system.9
The Council, Board, and supervising agencies are each authorized to prescribe rules as necessary to carry out Title VIII; however, no time frame for proposing any such rules or regulations has been set forth in this Title. Because most of this Title involves supervision and risk-reduction measures to be defined by the supervising agencies, Title VIII’s impact on the financial markets will remain unclear until, for example, thresholds for systemic importance and procedures to reduce risk and ensure compliance have been proposed.
In sum, Title VIII provides for oversight of systemically important activities related to payment and settlement and authorizes the agencies responsible for monitoring and stabilizing systemic risk to implement regulations to that end. Until regulations implementing Title VIII are released, the impact of Title VIII will remain speculative.
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[1] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 802, 124 Stat. 1376 (2010).
[2] § 803(6)
[3] 15 U.S.C.A. § 77 et seq. (2010).
[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 803(5), 124 Stat. 1376 (2010).
[5] § 809.
[6] § 808.
[7] § 805.
[8] § 807.
[9] § 807.
If you have questions regarding anything you have read on Title VIII, please contact any of the attorneys listed below or your regular Sutherland contact.
| Robert J. Pile |
404.853.8487 |
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| Peter C. Quittmeyer |
404.853.8186 |
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| Holly H. Smith |
202.383.0245 |
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Roadmaps
Title VIII - Key Provisions and Regulatory Rulemakings
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