Acting Comptroller Discusses Frameworks to Identify Systemic Risk

Regulatory Developments

Acting Comptroller Discusses Frameworks to Identify Systemic Risk
On October 25, Acting Comptroller of the Currency Michael J. Hsu delivered remarks at the CFA Institute Systemic Risk Council, addressing the challenges that regulators face in identifying and remedying systemic risks and how choices that must be made with incomplete information can lead to unpredictable consequences. Hsu categorized these risks into three categories: known knowns (risks that regulators navigated previously – such as interest rate risk and liquidity risk), known unknowns (risks that regulators are aware of but with which regulators are less familiar – such as cyber risk), and unknown unknowns (risks that may not be on regulators’ radar – such as the risk that undersea cables that carry the vast majority of international internet traffic are cut, or the risk that quantum computing renders all pre-quantum encryption algorithms moot). In each of these cases, Hsu noted that a balance of deliberation and action will be critical for regulators seeking to navigate systemic risks.

“Frameworks provide a way to think systematically about risk. A systematic approach is necessary, otherwise we are just chasing whims or making things up as we go.”

— Michael J. Hsu, Acting Comptroller of the Currency

SEC Adopts Rule Changes for CCA Standards
On October 25, the SEC adopted amendments to certain rules in the CCA Standards under the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Policies and Procedures for Risk-Based Margin Systems: The rule amendments to the CCA Standards establish new requirements for the policies and procedures of covered clearing agencies (CCAs) that provide central counterparty services covering the establishment of risk-based margin systems. The amendments require CCAs to have policies and procedures that establish a risk-based margin system that has reliable sources of substantive inputs and procedures that address when those reliable sources are not available, including either an alternate source of substantive inputs or price data, or a different risk-based margin system that does not rely on substantive inputs that are unavailable or unreliable.

Requirements for Recovery and Winddown Plans: The SEC also added a new rule to the CCA Standards that requires specific elements for CCAs recovery and wind down plans, including that the plan have elements related to planning, timing, implementation, testing, and board approval. While existing rules already require CCAs to have a recovery and wind-down plan, the new rule requires CCAs to have those specific elements included.

FDIC Updates RMS Manual
On October 29, the FDIC issued an update to its Risk Management Manual of Examination Policies. The update, based on FDIC staff feedback, revises Section 21.1 of the manual to cover examination planning. Examination planning is necessary to ensure that the FDIC is able to tailor its examination procedures to an institution’s operations and activities.

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New Client Alert: EU Commission Regulations on Digital Operational Resilience: A Reminder That DORA is Less Than Three Months Away and Will Apply to US and UK CTPPs
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New Client Alert: FINRA Publishes Metaverse Report and Requests Industry Comments
On October 24, FINRA’s Office of Financial Innovation published its metaverse report as “an initial step in beginning an important dialogue with market participants about potential use of the metaverse within the securities industry.” FINRA regulates US broker-dealers and provides various related services within the securities industry. The report gives an overview of how developments related to the metaverse may affect brokers’ business models and processes and explores various related issues. To read the full alert, click here.

New Client Alert: SEC Exams Division 2025 Priorities Signal Continued Scrutiny of Broker-Dealers
On October 21, the SEC’s Division of Examinations released its 2025 examination priorities letter. The 2025 priorities letter represents only a sliver of the topics firms can expect the Division to cover over the next year. This alert focuses on a few of the key areas in which broker-dealers will face scrutiny. To read the full alert, click here.

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Upcoming Event: Goodwin & Wells Fargo Host a Tea Party During Boston Fintech Week
Please join Goodwin and Wells Fargo as they “spill the tea” in a discussion about enterprise partnerships and partnership readiness on October 16th from 2:30 - 4:30 PM during Boston Fintech Week. For more information and to RSVP, click here.

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