When Utility is Systemically Significant

The Financial Stability Oversight Council (FINSOB) has proposed a definition of when a financial market “utility” – an entity that runs trading or clearing of assets, payments, or other financial transactions  –  is systemically important.  The document is here.  According to Richard Roth, this is determined based on four factors:  1) the raw volume of transactions processes (in number and in dollars), 2)  counterparty exposure (credit and liquidity), 3) interdependence with other utilities, 4) an estimate of the impact that the utility’s failure would have on the financial system. 

What happens when a utility is deemed systemically important?  First, it is given a chance to change so that it is not systemically important.  This worries me a little in that we could  get a lot of utilities barely missing being labeled systemically important.  Second, if a utility is deemed systemically important by the FSOB, the appropriate regulatory agency is to prescribe risk management standards, such as margin requirements, collateral requirements, default policies and procedures, and levels of capital and liquidity adequacy.

While we (and the politicians) sleep, FINSOB is working away on real problems, increasing expected utility.