The decision by U.S. systemic risk regulators to designate eight clearing and settlement firms as “systemically important” is a good move, that could improve systemic risk management, says Fitch Ratings.
In a new report, the rating agency says that the decision by the U.S. Financial Stability Oversight Council (FSOC) to designate eight clearing, settlement, and payment firms as systemically important financial institutions (SIFIs) is a “constructive step” that could, over time, have a positive impact on systemic risk.
The designated firms provide essential clearing and settlement functions in markets such as equities, credit derivatives, foreign exchange, and interbank payments, Fitch notes. “Given the potential for a disruption in clearing, settlement, and payment systems to quickly affect the liquidity position of major financial institutions, we regard the SIFI designation as a potentially positive development for bank credit quality and financial market stability,” it says.
While specific regulations for the oversight of these firms, which represent the plumbing of the financial system, hasn’t been defined yet, Fitch says that it sees the monitoring of their risk management processes, and the establishment of reporting requirements, will be useful in mitigating the risk of any future operational disruption.
“While we recognize that the complete elimination of systemic risk in clearing and settlement processes is unlikely, we view the FSOC’s efforts to better safeguard the safety and soundness of [these institutions] as an important first step,” it says.