The Clearing House (TCH) submitted a comment letter to the Federal Reserve Board in response to its proposed guidance establishing core principles of effective senior management, the management of business lines, and independent risk management and controls for large financial institutions (“LFIs”). The proposed guidance is part of a broader initiative by the Federal Reserve to enhance its consolidated supervisory framework for LFIs, which includes the proposed risk management guidance, the proposed new rating system for LFIs, and the proposed guidance establishing principles on board effectiveness. TCH submitted comments previously on the latter two proposals. TCH praised the proposed risk management guidance for reflecting a focus on safety and soundness and materiality, and a principles-based approach to risk management. In the letter, TCH recommends several changes to the guidance to further those principles, including that the final guidance (i) provide firms with flexibility to define and identify business lines subject to the guidance, (ii) clarify the role of the business lines to understand and own their risks and the role of IRM to review and challenge the business lines, (iii) eliminate overly prescriptive risk identification, risk measurement and risk limit expectations, and (iv) clarify that individuals and functions are not expected to “ensure” outcomes but to develop processes or take steps “reasonably designed to ensure” particular outcomes. TCH also recommended that the Federal issue a risk management proposal specific to FBOs.
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