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September 1, 2012

Clearinghouses and Others Pose Systemic Risk

By Gregory Bresiger

The Depository Trust & Clearing Corp. is one of a small group of critical financial institutions that has been designated a federal market utility (FMU) and that must have strict oversight, a federal regulator recently said. That's because the failures of any one of these eight could be felt throughout the economy.

The DTCC is one of eight exchanges and clearinghouses that potentially could pose a systemic risk.

The federal regulatory group, emphasizing the importance of these financial institutions, recently said that these eight require "strict" oversight.

DTCC officials said they were assessing the implications of the FMU designation. "We do not anticipate these designations will either significantly change our day-to-day business or how we work with our clients," Michael Bodson, DTCC's president and CEO, said in a statement.

The institutions include the DTCC and its National Securities Clearing Corp., clearing industry utilities, and the Chicago Mercantile Exchange and the Options Clearing Corp., among others.

These eight were designated by the Federal Stability Oversight Council. The council was set up as the result of the reforms that came out of the Dodd-Frank Act of 2010. It is charged with monitoring excessive risks to the U.S. financial system. The council is required to eliminate expectations that any American financial firm is "too big to fail."

What constitutes an FMU? The federal regulator named four factors:

"1) The aggregate monetary value of transactions. 2) The aggregate exposure of the FMU to its counterparties. 3) The relationship interdependencies, or other interactions of the FMU with other FMUs or payment clearing, or settlement activities. 4) The effect that the failure or a disruption to the FMU would have on critical markets, financial institutions or the broader financial system." DTCC provides custody and asset servicing for securities issues in 122 countries and territories.

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