Two key global bodies have begun work on recovery and resolution standards to cover financial-market infrastructure (FMI) organizations, entities called financial-market utilities (FMUs) in the U.S. framework established in the Dodd-Frank Act. Based on overall systemic-resolution standards released late last year by the Financial Stability Board (FSB), the proposed framework for FMI treats some counterparties in FMI-handled transactions similarly to banking-organization counterparties – essentially requiring them to assume some risk of loss – even though doing so may run counter to the systemic purpose global regulators anticipate from greater reliance on payment-and-settlement clearing houses and entities like central counterparties (CCPs), which seek to alleviate risk in the over-the-counter derivatives arena frequently cited by the Group of Twenty as a top priority. These loss-allocation schemes would vary for different types of FMIs but could significantly restructure them and pose risks not only for FMI participants/members, but also for their clients. However, the overall recovery-and-resolution procedures would create a system to address FMI weakness or failure, buttressing a vital part of the financial system.
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