Regulatory Capital Rules, Liquidity Coverage Ratio: Interim Final Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 78287-78296 [2014-30218]
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78287
Rules and Regulations
Federal Register
Vol. 79, No. 249
Tuesday, December 30, 2014
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
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REGISTER issue of each week.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3 and 50
[Docket ID OCC–2014–0028]
RIN 1557–AD91
FEDERAL RESERVE SYSTEM
12 CFR Parts 217 and 249
[Regulations Q and WW; Docket No. R–
1507]
RIN 7100 AE–28
Regulatory Capital Rules, Liquidity
Coverage Ratio: Interim Final
Revisions to the Definition of
Qualifying Master Netting Agreement
and Related Definitions
Office of the Comptroller of the
Currency (OCC) and Board of Governors
of the Federal Reserve System (Board).
ACTION: Interim final rule with request
for comment.
AGENCY:
The OCC and Board
(collectively, the agencies) invite
comment on an interim final rule that
amends the definition of ‘‘qualifying
master netting agreement’’ under the
regulatory capital rules, and the
liquidity coverage ratio rule, as well as
under the lending limits rule applicable
to national banks and Federal savings
associations. The agencies also are
proposing to amend the definitions of
‘‘collateral agreement,’’ ‘‘eligible margin
loan,’’ and ‘‘repo-style transaction’’
under the regulatory capital rules. The
amendments are designed to ensure that
the regulatory capital, liquidity, and
lending limits treatment of certain
financial contracts is not affected by
implementation of special resolution
regimes in foreign jurisdictions or by the
International Swaps and Derivative
Association Resolution Stay Protocol.
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SUMMARY:
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This rule is effective on January
1, 2015. Comments must be received on
or before March 3, 2015.
ADDRESSES: Interested parties are
encouraged to submit written comments
jointly to each of the agencies.
Commenters are encouraged to use the
title ‘‘Regulatory Capital Rules,
Liquidity Coverage Ratio: Interim Final
Revisions to the Definition of Qualifying
Master Netting Agreement and Related
Definitions’’ to facilitate the
organization and distribution of
comments among the Agencies.
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Regulatory
Capital Rules, Liquidity Coverage Ratio:
Interim Final Revisions to the Definition
of Qualifying Master Netting Agreement
and Related Definitions’’ to facilitate the
organization and distribution of the
comments. You may submit comments
by any of the following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to http://
www.regulations.gov. Enter ‘‘Docket ID
OCC–2014–0028’’ in the Search Box and
click ‘‘Search.’’ Results can be filtered
using the filtering tools on the left side
of the screen. Click on ‘‘Comment Now’’
to submit public comments.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period.
• Email: regs.comments@
occ.treas.gov.
• Mail: Legislative and Regulatory
Activities Division, Office of the
Comptroller of the Currency, 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
• Fax: (571) 465–4326.
• Hand Delivery/Courier: 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2014–0028’’ in your comment.
In general, OCC will enter all comments
received into the docket and publish
them on the Regulations.gov Web site
without change, including any business
or personal information that you
DATES:
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provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rulemaking by any of the
following methods:
• Viewing Comments Electronically:
Go to http://www.regulations.gov. Enter
‘‘Docket ID OCC–2014–0028’’ in the
Search box and click ‘‘Search.’’
Comments can be filtered by agency
using the filtering tools on the left side
of the screen.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for viewing
public comments, viewing other
supporting and related materials, and
viewing the docket after the close of the
comment period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th Street
SW., Washington, DC 20219. For
security reasons, the OCC requires that
visitors make an appointment to inspect
comments. You may do so by calling
(202) 649–6700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board: When submitting comments,
please consider submitting your
comments by email or fax because paper
mail in the Washington, DC area and at
the Board may be subject to delay. You
may submit comments, identified by
Docket No. R–1507 and RIN 7100 AE 28,
by any of the following methods:
• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/apps/
foia/proposedregs.aspx .
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
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• Email: regs.comments@
federalreserve.gov. Include the docket
number in the subject line of the
message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Robert deV. Frierson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue NW., Washington,
DC 20551.
All public comments will be made
available on the Board’s Web site at
http://www.federalreserve.gov/apps/
foia/proposedregs.aspx as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Streets NW., Washington, DC 20551)
between 9:00 a.m. and 5:00 p.m. on
weekdays.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk
Expert, (202) 649–6982; or Nicole
Billick, Risk Expert, (202) 649–7932,
Capital Policy; or Valerie Song, Senior
Attorney, (202) 649–5500, Bank
Activities and Structure, or Carl
Kaminski, Counsel, or Ron
Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities
Division, (202) 649–5490, for persons
who are deaf or hard of hearing, TTY,
(202) 649–5597, Office of the
Comptroller of the Currency, 400 7th
Street SW., Washington, DC 20219.
Board: Constance M. Horsley,
Assistant Director, (202) 452–5239,
Thomas Boemio, Manager (202) 452–
2982, or Kevin R. Tran, Supervisory
Financial Analyst, (202) 452–2309,
Capital and Regulatory Policy, Division
of Banking Supervision and Regulation;
or Laurie Schaffer, Associate General
Counsel, (202) 452–2277, Christine
Graham, Counsel, (202) 452–3005, Will
Giles, Counsel, (202) 452–3351, or
Trevor Feigleson, Attorney, (202) 475–
3274, Legal Division, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW.,
Washington DC 20551. For the hearing
impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263–
4869.
SUPPLEMENTARY INFORMATION:
I. Summary
The agencies’ regulatory capital rules
permit a banking organization to
measure exposure from certain types of
financial contracts on a net basis and
recognize the risk-mitigating effect of
financial collateral for other types of
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exposures, provided that the contracts
are subject to a ‘‘qualifying master
netting agreement’’ or agreement that
provides for certain rights upon a
counterparty default.1 The agencies, by
rule, have defined a qualifying master
netting agreement as a netting
agreement that permits a banking
organization to terminate, apply closeout netting, and promptly liquidate or
set-off collateral upon an event of
default of the counterparty (default
rights), thereby reducing its
counterparty exposure and market
risks.2 On the whole, measuring the
amount of exposure of these contracts
on a net basis, rather than a gross basis,
results in a lower measure of exposure,
and thus, a lower capital requirement
under the regulatory capital rules.
The current definition of ‘‘qualifying
master netting agreement’’ recognizes
that default rights may be stayed if the
financial company is in receivership,
conservatorship, or resolution under
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(Dodd-Frank Act),3 or the Federal
Deposit Insurance Act (FDI Act).4
Accordingly, transactions conducted
under netting agreements where default
rights may be stayed under Title II of the
Dodd-Frank Act or the FDI Act may
qualify for the favorable capital
treatment described above. However,
the current definition of ‘‘qualifying
master netting agreement’’ does not
recognize that default rights may be
stayed where a master netting agreement
is subject to limited stays under foreign
special resolution regimes or where
counterparties agree through contract
that a special resolution regime would
apply. When the agencies adopted the
current definition of ‘‘qualifying master
1 See 12 CFR part 3 (OCC) and 12 CFR part 217
(Board). All references to sections in the regulatory
capital rules should be read to mean references to
the corresponding sections to the applicable CFR
part of each agency’s rules. The term ‘‘banking
organization’’ includes national banks, state
member banks, savings associations, and top-tier
bank holding companies domiciled in the United
States not subject to the Board’s Small Bank
Holding Company Policy Statement (12 CFR part
225, appendix C), as well as top-tier savings and
loan holding companies domiciled in the United
States, except for certain savings and loan holding
companies that are substantially engaged in
insurance underwriting or commercial activities.
2 See section 2 of the regulatory capital rules.
3 See 12 U.S.C. 5390(c)(8)–(16).
4 See 12 U.S.C. 1821(e)(8)–(13). The definition
would also recognize that default rights may be
stayed under any similar insolvency law applicable
to government sponsored enterprises (GSEs).
Generally under the agencies’ regulatory capital
rules, GSE means an entity established or chartered
by the U.S. government to serve public purposes
specified by the U.S. Congress but whose debt
obligations are not explicitly guaranteed by the full
faith and credit of the U.S. government. See
regulatory capital rules section 2.
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netting agreement,’’ no other country
had adopted a special resolution regime
relevant to the definition, and no
banking organizations had
communicated to the agencies an intent
to enter into contractual amendments to
clarify that bilateral over-the-counter
(OTC) derivatives transactions are
subject to certain provisions of certain
U.S. and foreign special resolution
regimes.
In recent months, the European Union
(EU) finalized the Bank Recovery and
Resolution Directive (BRRD), which
prescribes aspects of a special resolution
regime that EU member nations should
implement. In addition, several U.S.
banking organizations have opted to
adhere to the International Swaps and
Derivatives Association’s (ISDA)
Resolution Stay Protocol (ISDA
Protocol),5 which provides for
amendments to the terms of ISDA
Master Agreements 6 between
counterparties that adhere to the ISDA
Protocol to stay certain default rights
and other remedies provided under the
agreements. The expected
implementation of the BRRD by EU
member nations and the effective date of
certain provisions of the ISDA Protocol
may be as early as January 1, 2015. This
expected implementation would mirror
steps taken in the United States to
implement a special resolution regime
under Title II of the Dodd-Frank Act.
A master netting agreement under
which default rights may be stayed
under the BRRD or that incorporates the
amendments of the ISDA Protocol
would no longer qualify as a qualifying
master netting agreement under the
regulatory capital, liquidity, and lending
limits rules. This would result in
considerably higher capital and
liquidity requirements that could
discourage both the implementation of
the BRRD and the ISDA Protocol and
the realization of the benefits of these
efforts in improving financial stability.
In addition, affected national banks and
Federal savings associations would be
required to measure their lending limits
on a gross basis, which would increase
the measure of exposure in a manner
not contemplated or intended under the
current lending limits rules. This result
flows from the use of ‘‘qualifying master
5 See ISDA Protocol at http://assets.isda.org/
media/f253b540-25/958e4aed.pdf/.
6 The ISDA Master Agreement is a form of
agreement that governs OTC derivatives
transactions and is used by a significant portion of
the parties to bilateral OTC derivatives transactions,
including large, internationally active banking
organizations. Furthermore, the ISDA Master
Agreement generally creates a single legal
obligation that provides for the netting of all
individual transactions covered by the agreement.
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netting agreement’’ as a cross-reference
in the lending limits rules.
Accordingly, effective January 1,
2015, the interim final rule would
permit an otherwise qualifying master
netting agreement to qualify if (i) default
rights under the agreement may be
stayed under a qualifying foreign special
resolution regime or (ii) the agreement
incorporates a qualifying special
resolution regime by contract. Through
these revisions, the interim final rule
maintains the existing treatment for
these contracts for purposes of the
regulatory capital, liquidity, and for
national banks and Federal savings
associations, lending limits rules, while
recognizing the recent changes
contemplated by the BRRD and the
ISDA Protocol.
The interim final rule also revises
certain other definitions of the
regulatory capital rules to make various
conforming changes designed to ensure
that a banking organization may
continue to recognize the risk mitigating
effects of financial collateral 7 received
in a secured lending transaction, repostyle transaction, or eligible margin loan
for purposes of the regulatory capital,
liquidity, and lending limits rules,
while recognizing the recent changes
contemplated by the BRRD and banking
organizations that have adhered to the
ISDA Protocol. Specifically, the interim
final rule would revise the definition of
‘‘collateral agreement,’’ ‘‘eligible margin
7 Generally, under the agencies’ regulatory capital
rules, financial collateral means collateral in the
form of: (i) Cash on deposit with the banking
organization (including cash held for the banking
organization by a third-party custodian or trustee);
(ii) gold bullion; (iii) long-term debt securities that
are not resecuritization exposures and that are
investment grade; (iv) short-term debt instruments
that are not resecuritization exposures and that are
investment grade; (v) equity securities that are
publicly traded; (vi) convertible bonds that are
publicly traded; or (vii) money market fund shares
and other mutual fund shares if a price for the
shares is publicly quoted daily. In addition, the
regulatory capital rules also require that the banking
organization have a perfected, first-priority security
interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on
deposit and notwithstanding the prior security
interest of any custodial agent). See regulatory
capital rule, section 2.
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loan,’’ 8 and ‘‘repo-style transaction’’ 9 to
provide that a counterparty’s default
rights may be stayed under a foreign
special resolution regime or, if
applicable, under a special resolution
regime incorporated by contract.10 The
agencies request comment on all aspects
of these definitions.
II. Background
A. U.S. Resolution Regime
It is common market practice for
bilateral derivatives and certain other
types of financial contracts entered into
by large banking organizations to permit
a non-defaulting counterparty to
exercise early termination rights and
other contractual remedies upon a
counterparty (or a related entity)
experiencing an event of default. These
contractual provisions are generally
recognized as a credit risk mitigant
because the provisions allow a nondefaulting party the uninterrupted right
to close-out, net, and liquidate any
collateral securing its claim under the
contract upon a counterparty’s default.
However, as the failure of Lehman
Brothers demonstrated, the
uninterrupted exercise of such rights by
counterparties of a globally-active
financial company with a significant
derivatives portfolio could impede the
orderly resolution of the financial
company and pose risks to financial
stability. The United States has enacted
8 Generally under the agencies’ regulatory capital
rules, eligible margin loan means an extension of
credit where: (i) The extension of credit is
collateralized exclusively by liquid and readily
marketable debt or equity securities, or gold; (ii) the
collateral is marked-to-fair value daily, and the
transaction is subject to daily margin maintenance
requirements; and (iii) the extension of credit is
conducted under an agreement that provides the
banking organization with default rights, provided
that any exercise of rights under the agreement will
not be stayed or avoided under applicable law in
the relevant jurisdictions, other than in
receivership, conservatorship, resolution under the
FDI Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs. See
regulatory capital rule, section 2. In addition, in
order to recognize an exposure as an eligible margin
loan a banking organization must comply with the
requirements of section 3(b) of the regulatory
capital rules with respect to that exposure.
9 Generally, under the agencies’ regulatory capital
rules, repo-style transaction means a repurchase or
reverse repurchase transaction, or a securities
borrowing or securities lending transaction,
including a transaction in which the banking
organization acts as agent for a customer and
indemnifies the customer against loss, provided
that: (1) The transaction is based solely on liquid
and readily marketable securities, cash, or gold; (2)
the transaction is marked-to-fair value daily and
subject to daily margin maintenance requirements;
(3) the transaction provides certain default rights.
See regulatory capital rule, section 2. In addition,
in order to recognize an exposure as a repo-style
transaction for purposes of this subpart, a banking
organization must comply with the requirements of
section 3(e) of the regulatory capital rules.
10 See 12 CFR part 32.
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laws that impose a limited stay on the
exercise of early termination rights and
other remedies with regard to qualified
financial contracts (such as OTC
derivatives, securities financing
transactions, and margin loans) with
insured depository institutions in
resolution under the FDI Act and, in
2010, with financial companies in
resolution under Title II of the DoddFrank Act.
B. Foreign Special Resolution
Procedures and the ISDA Protocol
In recognition of the issues faced in
the financial crisis concerning
resolution of globally-active financial
companies, the EU issued the BRRD on
April 15, 2014, which requires EU
member states to implement a
resolution mechanism by December 31,
2014, in order to increase the likelihood
for successful national or cross-border
resolutions of a financial company
organized in the EU.11 The BRRD
contains special resolution powers,
including a limited stay on certain
financial contracts that is similar to the
stays provided under Title II of the
Dodd-Frank Act and the FDI Act.
Therefore, the operations of U.S.
banking organizations located in
jurisdictions that have implemented the
BRRD could become subject to an
orderly resolution under the BRRD,
including the application of a limited
statutory stay of a counterparty’s right to
exercise early termination rights and
other remedies with respect to certain
financial contracts. The BRRD is
generally designed to be consistent with
the Key Attributes of Effective
Resolution Regimes for Financial
Institutions (Key Attributes),12 which
were initially adopted by the Financial
Stability Board (FSB) 13 of the G–20 14
11 On January 1, 2015, most of the provisions of
the BRRD are expected to take effect in a number
of the EU member states.
12 The Key Attributes are available at
www.financialstabilityboard.org/publications/r_
111104cc.pdf. See specifically Key Attributes 4.1–
4.4 regarding set-off, netting, collateralization and
segregation of client assets and Appendix I Annex
5 regarding temporary stays on early termination
rights. In October 2014, the FSB adopted a 2014
version of the Key Attributes that incorporates new
annexes to provide additional guidance with
respect to specific Key Attributes. No changes were
made to the text of the twelve Key Attributes of
October 2011.
13 The FSB is an international body that monitors
and makes recommendations about the global
financial system. The FSB coordinates the
regulatory, supervisory, and other financial sector
policies of national financial authorities and
international standard-setting bodies.
14 The G–20 membership comprises a mix of the
world’s largest advanced and emerging economies.
The G–20 members are Argentina, Australia, Brazil,
Canada, China, France, Germany, India, Indonesia,
Italy, Japan, Republic of Korea, Mexico, Russia,
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member nations in October 2011, and
are designed to provide a standard for
the responsibilities and powers that
national resolution regimes should have
to resolve a failing systemically
important financial institution.
In addition to the issuance of the
BRRD, on November 4, 2014, ISDA
published the ISDA Protocol, which
enables counterparties to amend the
terms of their ISDA Master Agreements
to stay certain early termination rights
and other remedies provided under the
agreement. As of November 12, 2014, 18
global financial institutions, including
several of the largest U.S. banking
organizations,15 have opted to adhere to
the ISDA Protocol and thereby would
modify ISDA Master Agreements among
those adhering parties. Like other
qualified financial contracts, OTC
derivatives transactions executed under
standard ISDA Master Agreements allow
a party to terminate the agreement
immediately upon an event of default of
its counterparty, including if its
counterparty (or a related entity) 16
enters insolvency or similar
proceedings.
The contractual amendments
effectuated pursuant to the ISDA
Protocol would apply the provisions of
Title II of the Dodd-Frank Act and the
FDI Act concerning limited stays of
termination rights and other remedies in
qualified financial contracts to ISDA
Master Agreements between adhering
counterparties, including adhering
counterparties that are not otherwise
subject to U.S. law. The amendments
also would apply substantially similar
provisions of certain non-U.S. laws,
such as the BRRD, to ISDA Master
Agreements between adhering
counterparties that are not otherwise
Saudi Arabia, South Africa, Turkey, the United
Kingdom, the United States, and the European
Union. Following the most recent financial crisis,
leaders of the G–20 member nations recognized that
the orderly cross-border resolution of a globallyactive financial company requires all countries to
have effective national resolution regimes to resolve
failing financial companies in an orderly manner
and that national resolution regimes should be
consistent with one another. Subjecting the same
financial company to conflicting legal rules,
procedures, and mechanisms across jurisdictions
can create uncertainty, instability, possible systemic
contagion, and higher costs of resolution.
15 As of November 12, 2014, the U.S. banking
organizations that have agreed to adhere to the
ISDA Protocol are Bank of America Corporation,
Citigroup Inc., The Goldman Sachs Group, Inc.,
JPMorgan Chase & Co., and Morgan Stanley, and
certain subsidiaries thereof. See current list of
adhering parties to the ISDA Protocol at http://
www2.isda.org/functional-areas/protocolmanagement/protocol-adherence/20.
16 Under the ISDA Resolution Stay Protocol, a
related entity is defined to include (i) each parent
or (ii) an affiliate that is (a) a creditor support
provider or (b) a specified entity.
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subject to such laws.17 The contractual
amendments effectuated pursuant to the
ISDA Protocol would permit a party that
has agreed to adhere to the ISDA
Protocol to exercise early termination
rights and other remedies only to the
extent that it would be entitled to do so
under the special resolution regime
applicable to its adhering counterparties
(or related entities, as applicable).18
C. Description of Relevant Provisions of
the Regulatory Capital and the Liquidity
Coverage Ratio Rules
As noted above, the agencies’
regulatory capital rules permit a banking
organization to measure exposure from
certain types of financial contracts on a
net basis, provided that the contracts are
subject to a qualifying master netting
agreement or other agreement that
contains specific provisions.
Specifically, under the regulatory
capital rules, a banking organization
with multiple OTC derivatives that are
subject to a qualifying master netting
agreement would be able to calculate a
net exposure amount by netting the sum
of all positive and negative fair values
of the individual OTC derivative
contracts subject to the qualifying
master netting agreement and
calculating a risk-weighted asset amount
based on the net exposure amount. For
purposes of the supplementary leverage
ratio (as applied only to advanced
approaches banking organizations), a
banking organization that has one or
more OTC derivatives with the same
counterparty that are subject to a
qualifying master netting agreement
would be permitted to not include in
total leverage exposure cash variation
margin received from such counterparty
that has offset the mark-to-fair value of
the derivative asset or cash collateral
that is posted to such counterparty that
has reduced the banking organization’s
on-balance sheet assets.19
17 The provisions of the ISDA Protocol relating to
the special resolution regimes in these jurisdictions
will become effective on January 1, 2015, for ISDA
Master Agreements between the 18 adhering
financial companies (as of November 21, 2014). The
ISDA Protocol also covers special resolution
regimes in other FSB member jurisdictions so long
as the regimes meet conditions specified in the
ISDA Protocol relating to creditor safeguards, which
are consistent with the Key Attributes.
18 Parties adhering to the ISDA Protocol would
initially be contractually subject to the statutory
special resolution regimes of France, Germany,
Japan, Switzerland, the United Kingdom and the
United States.
19 Under the agencies’ regulatory capital rules, the
general framework consists of two approaches: (1)
The standardized approach, which, beginning on
January 1, 2015, will apply to all banking
organizations regardless of total asset size, and (2)
the advanced approaches, which currently apply to
large internationally active banking organizations
(defined as those banking organizations with $250
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In addition, the agencies’ rules permit
a banking organization to recognize the
risk-mitigating effect of financial
collateral for other types of
collateralized exposures. Specifically,
for risk-based capital purposes, a
banking organization with a securities
financing transaction that meets the
definition of a repo-style transaction
with financial collateral, a margin loan
that meets the definition of an eligible
margin loan with financial collateral, or
an OTC derivative contract
collateralized with financial collateral
may determine a net exposure amount
to its counterparty according to section
37 or section 132 of the regulatory
capital rules. A banking organization
with multiple repo-style transactions or
eligible margin loans with a
counterparty that are subject to a
qualifying master netting agreement
may net the exposure amounts of the
individual transactions under that
agreement. In addition, for purposes of
the supplementary leverage ratio, an
advanced approaches banking
organization with multiple repo-style
transactions with the same counterparty
that are subject to a qualifying master
netting agreement would be permitted
to net for purposes of calculating the
counterparty credit risk component of
its total leverage exposure. In general,
recognition of netting results in a lower
measure of risk-weighted assets and
total leverage exposure than if a banking
organization were to calculate its OTC
derivatives, repo-style transactions, and
eligible margin loans on a gross basis.
This result is consistent with the view
that entering into transactions under a
netting agreement that satisfies certain
criteria reduces a banking organization’s
risk exposure.
billion or more in total consolidated assets or $10
billion or more in total on-balance-sheet foreign
exposure, depository institution subsidiaries of
those banking organizations that use the advanced
approaches rule, and banking organizations that
elect to use the advanced approaches). As a general
matter, the standardized approach sets forth
standardized risk weights for different asset types
for regulatory capital calculations, whereas, for
certain assets, the advanced approaches make use
of risk assessments provided by banking
organizations’ internal systems as inputs for
regulatory capital calculations. Consistent with
section 171 of the Dodd-Frank Act (codified at 12
U.S.C. 5371), a banking organization that is required
to calculate its risk-based capital requirements
under the advanced approaches (i.e., an advanced
approaches banking organization) also must
determine its risk-based capital requirements under
the generally applicable risk-based capital rules,
which will be the standardized approach beginning
on January 1, 2015). The lower—or more binding—
ratio for each risk-based capital requirement is the
ratio that the advanced approaches banking
organization must use to determine its compliance
with minimum regulatory capital requirements. See
generally 12 CFR part 3 (OCC) and 12 CFR part 217
(Board).
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The agencies also use the concept of
a qualifying master netting agreement in
the liquidity coverage ratio (LCR) rule.20
The LCR rule requires a banking
organization to maintain an amount of
high-quality liquid assets (the
numerator) to match at least 100 percent
of its total net cash outflows over a
prospective 30 calendar-day period (the
denominator). For derivative
transactions subject to a qualifying
master netting agreement, a banking
organization would be able to calculate
the net derivative outflow or inflow
amount by netting the contractual
payments and collateral that it would
give to, or receive from, the
counterparty over a prospective 30-day
period.21 If the derivative transactions
are not subject to a qualifying master
netting agreement, then the derivative
cash outflows for that counterparty
would be included in the net derivative
cash outflow amount and the derivative
cash inflows for that counterparty
would be included in the net derivative
cash inflow amount, without any
netting and subject to the LCR rule’s cap
on total inflows. Recognition of netting
may result in lower net cash outflows,
and thus a lower LCR denominator and
liquidity requirement, than if a banking
organization were to calculate its
inflows and outflows on its derivatives
transactions on a gross basis.
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III. The Interim Final Rule
The interim final rule amends the
definitions of ‘‘collateral agreement,’’
‘‘eligible margin loan,’’ ‘‘qualifying
master netting agreement,’’ and ‘‘repostyle transaction’’ in the agencies’
regulatory capital rules and ‘‘qualifying
master netting agreement’’ in the
agencies’ LCR rules to ensure that the
regulatory capital, liquidity, and lending
limits treatment of OTC derivatives,
repo-style transactions, eligible margin
loans, and other collateralized
transactions would be unaffected by the
adoption of various foreign special
resolution regimes and the ISDA
Protocol. In particular, the interim final
rule amends these definitions to provide
that a relevant netting agreement or
collateral agreement may provide for a
limited stay or avoidance of rights
where the agreement is subject by its
terms to, or incorporates, certain
resolution regimes applicable to
20 The agencies’ LCR rules will be codified at 12
CFR part 50 (OCC) and 12 CFR part 249 (Board).
21 See 12 CFR l .32(c) and l .33(b) of the
agencies’ LCR rule. The LCR final rule provides that
foreign currency transactions that meet certain
criteria can be netted regardless of whether those
transactions are covered by a qualified master
netting agreement. 79 FR 61440, 61532–33 (October
10, 2014).
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financial companies, including Title II
of the Dodd-Frank Act, the FDI Act, or
any similar foreign resolution regime
that provides for limited stays
substantially similar to the stay for
qualified financial contracts provided in
Title II of the Dodd-Frank Act or the FDI
Act.
In determining whether the laws of
foreign jurisdictions are ‘‘similar’’ to the
FDI Act and Title II of the Dodd-Frank
Act and provide for limited stays
substantially similar to those provided
for in the FDI Act and Title II of the
Dodd-Frank Act, the agencies intend to
consider all aspects of the stays under
the U.S. laws.22 Relevant factors
include, for instance, the length of stay
and the related creditor safeguards or
protections provided under a foreign
special resolution regime.23 The
agencies expect that the implementation
of special resolution regimes of France,
Germany, Japan, Switzerland, and the
United Kingdom would be substantially
similar to those of the United States and
provide for limited stays substantially
similar to those provided for in the FDI
Act and Title II of the Dodd-Frank Act.24
Without the interim final rule, several
banking organizations would no longer
be permitted to recognize financial
contracts as subject to a qualifying
master netting agreement or satisfying
the criteria necessary for the current
regulatory capital, liquidity, and lending
limits treatment, and would be required
to measure exposure from these
contracts on a gross, rather than net,
basis. This result would undermine the
salutary effects of the BRRD and similar
resolution regimes and the ISDA
Protocol on financial stability. The
interim final rule is necessary to
maintain the existing treatment for these
22 See 12 U.S.C. 1821(e)(8)–(13) and 5390(c)(8)–
(16). As noted above, the ISDA Protocol covers only
resolution regimes that are considered to be
consistent with the principles of the Key Attributes.
Therefore, it is also expected that any limited
statutory stay under foreign law determined for
purposes of this interim final rule to be similar to
the FDI Act and Title II of the Dodd-Frank Act
would also be consistent with the relevant
principles of the Key Attributes.
23 Under Title II of the Dodd-Frank Act,
counterparties are stayed until 5:00 p.m. on the
business day following the date of appointment of
a receiver from exercising termination, liquidation,
or netting rights under the qualified financial
contract. 12 U.S.C. 5390(c)(10)(B)(i)(I). If the
qualified financial contracts are transferred to a
solvent third party before the stay expires, the
counterparty is permanently enjoined from
exercising such rights based upon the appointment
of the receiver, but is not stayed from exercising
such rights based upon other events of default. See
12 U.S.C. 5390(c)(10)(B)(i)(II).
24 Annexes to the ISDA Protocol specify
conditions that the special resolution regimes of the
five countries must meet in order for section 1(a)
of the ISDA Protocol to apply to the ISDA Master
Agreements of adhering parties.
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contracts for purposes of the regulatory
capital, liquidity, and lending limits
rules. The agencies do not believe that
the disqualification of master netting
agreements that would otherwise result
in the absence of the interim final rule
accurately reflects the risk posed by
these OTC derivative transactions.
Implementation of consistent, national
resolution regimes on a global basis
furthers the orderly resolution of
internationally active financial
companies, and enhances financial
stability. Moreover, the development of
the ISDA Protocol furthers the
principles of Title II of the Dodd-Frank
Act and the FDI Act (in instances where
a counterparty is a U.S. entity or its
subsidiary) by applying limited stays of
termination rights to counterparties who
are not otherwise subject to U.S. law.
In addition, the agencies intend to
incorporate the definition of ‘‘qualifying
master netting agreement’’ set forth in
this interim final rule into rules that
establish minimum margin
requirements for registered swap
dealers, major swap participants,
security-based swap dealers, and major
security-based swap participants
(covered swap entities) subject to
agency supervision. On September 24,
2014, the OCC, Board, Federal Deposit
Insurance Corporation, the Farm Credit
Administration, and the Federal
Housing Finance Agency published a
notice of proposed rulemaking that
would establish minimum margin
requirements for covered swap entities
subject to agency supervision (2014
swap margin NPR).25 The proposed rule
would permit a covered swap entity to
calculate variation margin requirements
on an aggregate, net basis under an
eligible master netting agreement
(EMNA) with a counterparty. The
comment period for the 2014 swap
margin NPR closed on November 24,
2014. The OCC, Board, Federal Deposit
Insurance Corporation, Farm Credit
Administration and Federal Housing
Finance Agency are reviewing the
comments received and drafting a final
rule. Ultimately, the Federal banking
agencies intend to align the definitions
of EMNA and qualifying master netting
agreement in their respective
regulations pertaining to swap margin
requirements, regulatory capital
requirements, liquidity requirements,
and lending limits.
IV. Request for Comments
The agencies are interested in
receiving comments on all aspects of the
interim final rule. In particular, do the
amendments to the definitions of
25 79
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‘‘qualifying master netting agreement,’’
‘‘collateral agreement,’’ ‘‘repo-style
transaction,’’ and ‘‘eligible margin loan’’
ensure that the regulatory capital,
liquidity, and lending limits treatment
of OTC derivatives, repo-style
transactions, eligible margin loans and
other collateralized transactions is
unaffected by the ISDA Protocol and the
BRRD? Is there any reason why the
agencies should not revise the above
mentioned definitions?
The ISDA Protocol also provides for
limited stays of termination rights for
cross-defaults resulting from affiliate
insolvency proceedings under a limited
number of U.S. general insolvency
regimes, including the U.S. Bankruptcy
Code.26 The interim final rule does not
address this portion of the ISDA
Protocol because this portion of the
ISDA Protocol does not take effect on
January 1, 2015. Instead, it takes effect
upon the effective date of implementing
regulations in the United States. The
agencies request comment on whether
the definitions of ‘‘qualifying master
netting agreement,’’ ‘‘collateral
agreement,’’ ‘‘repo-style transaction,’’
and ‘‘eligible margin loan’’ should also
be amended to recognize the stay of
default rights in this context.
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V. Effective Date; Solicitation of
Comments
This interim final rule is effective
January 1, 2015. Pursuant to the
Administrative Procedure Act (APA), at
5 U.S.C. 553(b)(B), notice and comment
are not required prior to the issuance of
a final rule if an agency, for good cause,
finds that ‘‘notice and public procedure
thereon are impracticable, unnecessary,
or contrary to the public interest.’’ 27
Similarly, a final rule may be published
with an immediate effective date if an
agency finds good cause and publishes
such with the final rule.28
The ISDA Protocol was published by
ISDA on November 4, 2014, and as of
November 12, 2014, 18 large banking
organizations, including five large U.S.
banking organizations, have voluntarily
adhered to the ISDA Protocol, which
will become effective on January 1,
2015. Upon the effective date of the
ISDA Protocol, the ISDA Master
Agreements entered into between the
adhering banking organizations would
26 Under the ISDA Protocol, upon commencement
of such proceedings, adhering counterparties would
be subject to a limited stay of their termination
rights and other remedies. The limited stay does not
apply if a direct counterparty is subject to general
insolvency proceedings. The stay also does not
apply to payment or delivery defaults or to defaults
that are not directly or indirectly related to the
affiliate insolvency proceedings.
27 5 U.S.C. 553(b)(B).
28 5 U.S.C. 553(d)(3).
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be disqualified from recognition as
transactions subject to a qualifying
master netting agreement.
The BRRD was adopted on April 15,
2014.29 Implementation of the BRRD by
a number of EU member states is
expected to occur by January 1, 2015.
Becoming subject to the limited stays
contemplated by the BRRD also
disqualifies agreements that would
otherwise qualify as a qualifying master
netting agreement or a collateral
agreement, and disqualifies securities
financing transactions or margin loans
from the regulatory capital treatment of
a repo-style transaction or eligible
margin loan, respectively. Adoption of
this interim final rule, in conjunction
with the implementation of the BRRD
and the ISDA Protocol by relevant
foreign jurisdictions is consistent with
steps to facilitate the orderly resolution
of systemically important financial
institutions.
Changes to the definitions of
qualifying master netting agreement,
repo-style transaction, eligible margin
loan and collateral agreement are
needed to ensure that contractually
subjecting netting and collateral
agreements, agreements executing a
repo-style transaction and agreements
executing an eligible margin loan to
domestic and foreign special resolution
regimes does not disrupt current
treatment under the agencies’ regulatory
capital, liquidity, and lending limits
rules. Notice and comment through the
issuance of a notice of proposed
rulemaking for purposes of these
amendments would extend beyond
January 1, 2015, resulting in adverse
financial consequences to some U.S.
banking organizations.
The agencies find that, under these
circumstances, prior notice and
comment through the issuance of a
notice of proposed rulemaking are
impracticable and that the public
interest is best served by making the
rule effective on January 1, 2015.
Otherwise, banking organizations could
be subject to considerably higher capital
and liquidity requirements because the
regulatory capital and liquidity rules
would not recognize netting under the
relevant agreements or the current
treatment of such contracts. Moreover,
under the OCC’s legal lending limits for
national banks and Federal savings
association, which rely on the definition
of qualifying master netting agreement,
the legal lending limits of those
institutions may be significantly
reduced. These outcomes could weaken
29 The United Kingdom published a consultative
paper in July 2014 regarding the implementation of
the BRRD.
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liquidity in OTC derivatives markets,
increase the cost of credit, and reduce
the availability of credit.
National implementation of the BRRD
and adherence to the ISDA Protocol
should facilitate the orderly resolution
of internationally active banking
organizations. Absent capital and
liquidity treatment and legal lending
limits (where applicable) afforded to
counterparties entering into a qualifying
master netting agreement, banking
organizations would be dis-incentivized
to enter into such agreements.
For these reasons, with respect to the
amendments to the definitions of
qualifying master netting agreement,
collateral agreement, repo-style
transaction, and eligible margin loan,
the agencies find good cause to dispense
with the delayed effective date
otherwise required by 5 U.S.C. 553(b)(B)
and 553(d)(3) and under section 302 of
the Riegle Community Development and
Regulatory Improvement Act of 1994
(RCDRIA), 12 U.S.C. 4802.30
VI. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act
(RFA) does not apply to a rulemaking
where a general notice of proposed
rulemaking is not required. 5 U.S.C. 603
and 604. As noted previously, the OCC
has determined that it is unnecessary to
publish a general notice of proposed
rulemaking for this joint rule.
Accordingly, the RFA’s requirements
relating to an initial and final regulatory
flexibility analysis do not apply.
Board: The requirements of the RFA
are not applicable to this interim final
rule.31 Nonetheless, the Board observes
that the interim final rule would not
have a significant economic impact on
a substantial number of small entities.
The Board requests comment on its
conclusion that the new interim final
rule should not have a significant
economic impact on a substantial
number of small entities.
To support the above finding that the
interim final rule would not have a
significant economic impact on a
substantial number of small entities, the
30 The RCDRIA requires that, subject to certain
exceptions, regulations imposing additional
reporting, disclosure, or other requirements on
insured depository institutions take effect on the
first day of the calendar quarter after publication of
the final rule. This effective date requirement does
not apply if the agency finds for good cause that the
regulation should become effective before such
time.
31 The requirements of the RFA are not applicable
to rules adopted under the Administrative
Procedure Act’s ‘‘good cause’’ exception, see 5
U.S.C. 601(2) (defining ‘‘rule’’ and notice
requirements under the Administrative Procedure
Act).
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Board is publishing a final regulatory
flexibility analysis for the interim final
rule. The RFA generally requires an
agency to assess the impact a rule is
expected to have on small entities.32
The RFA requires an agency either to
provide a regulatory flexibility analysis
or to certify that the interim final rule
will not have a significant economic
impact on a substantial number of small
entities. Based on this analysis and for
the reasons stated below, the Board
believes that this interim final rule will
not have a significant economic impact
on a substantial number of small
entities.
Under regulations issued by the U.S.
Small Business Administration, a small
entity includes a depository institution,
bank holding company, or savings and
loan holding company with total assets
of $550 million or less (a small banking
organization).33 As of June 30, 2014,
there were approximately 657 small
state member banks, 3,719 small bank
holding companies, and 254 small
savings and loan holding companies.
The interim final rule is expected
only to apply to banking organizations
that adhere to the ISDA Protocol or
engage in a substantial amount of crossborder derivatives transactions. Small
entities generally will not fall into this
category. To date, the Board is aware of
less than two dozen banking
organizations, all with total
consolidated assets greater than $250
billion, that are likely to adhere to the
ISDA Protocol or engage in a substantial
amount of cross-border derivatives
transactions. The Board is aware of no
other Federal rules that duplicate,
overlap, or conflict with this interim
final rule. The Board believes that this
interim final rule will not have a
significant economic impact on small
banking organizations supervised by the
Board and therefore believes that there
are no significant alternatives to the
interim final rule that would reduce the
economic impact on small banking
organizations supervised by the Board.
32 Under standards the U.S. Small Business
Administration has established, an entity is
considered ‘‘small’’ if it has $175 million or less in
assets for banks and other depository institutions.
U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North
American Industry Classification System Codes,
available at http://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sstd_tablepdf.pdf.
33 See 13 CFR 121.201. Effective July 14, 2014, the
Small Business Administration revised the size
standards for banking organizations to $550 million
in assets from $500 million in assets. 79 FR 33647
(June 12, 2014).
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B. Solicitation of Comments on Use of
Plain Language
Liquidity; Reporting and recordkeeping
requirements.
Section 722 of the Gramm-LeachBliley Act requires the agencies to use
plain language in all proposed and final
rules published after January 1, 2000.
The agencies invite comment on how to
make this interim final rule easier to
understand. For example:
• Have the agencies organized the
material to suit your needs? If not, how
could the rule be more clearly stated?
• Are the requirements in the rule
clearly stated? If not, how could the rule
be more clearly stated?
• Does the rule contain technical
language or jargon that is not clear? If
so, what language requires clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the rule easier to
understand? If so, what changes would
make the rule easier to understand?
• Would more, but shorter, sections
be better? If so, which sections should
be changed?
• What else could the agencies do to
make the rule easier to understand?
Department of the Treasury
C. Paperwork Reduction Act
In accordance with the requirements
of the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3521) (‘‘PRA’’), the
agencies may not conduct or sponsor,
and a respondent is not required to
respond to, an information collection
unless it displays a currently valid
Office of Management and Budget
(‘‘OMB’’) control number. The agencies
reviewed the interim final rule and
determined that it would not produce
any new collection of information
pursuant to the PRA.
List of Subjects
12 CFR Part 3
Administrative practice and
procedure; Capital; National banks,
Reporting and recordkeeping
requirements; Risk.
12 CFR Part 50
Administrative practice and
procedure; Banks, banking; Liquidity;
Reporting and recordkeeping
requirements; Savings associations.
12 CFR Part 217
Administrative practice and
procedure; Banks, banking; Capital;
Federal Reserve System; Holding
companies; Reporting and
recordkeeping requirements; Securities.
12 CFR Part 249
Administrative practice and
procedure; Banks, banking; Federal
Reserve System; Holding companies;
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Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the
supplementary information, the Office
of the Comptroller of the Currency
amends part 3 of chapter I of title 12,
Code of Federal Regulations as follows:
PART 3—CAPITAL ADEQUACY
STANDARDS
1. The authority citation for part 3
continues to read as follows:
■
Authority: 12 U.S.C. 93a, 161, 1462, 1462a,
1463, 1464, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, 3909, and 5412(b)(2)(B).
Part 3
[Amended]
1a. Part 3 is amended by redesignating
footnotes 5 through 29 as footnotes 9
through 33, respectively.
■ 2. Section 3.2 is amended by:
■ a. Revising the definitions of
‘‘collateral agreement’’ and ‘‘qualifying
master netting agreement’’;
■ b. Revising paragraph (1)(iii) of the
definition of ‘‘eligible margin loan’’;
■ c. Republishing the introductory text
of the definition of ‘‘repo-style
transaction’’; and
■ d. Revising paragraph (3)(ii)(A) of the
definition of ‘‘repo-style transaction’’.
The revisions are set forth below:
■
§ 3.2
Definitions.
*
*
*
*
*
Collateral agreement means a legal
contract that specifies the time when,
and circumstances under which, a
counterparty is required to pledge
collateral to a national bank or Federal
savings association for a single financial
contract or for all financial contracts in
a netting set and confers upon the
national bank or Federal savings
association a perfected, first-priority
security interest (notwithstanding the
prior security interest of any custodial
agent), or the legal equivalent thereof, in
the collateral posted by the counterparty
under the agreement. This security
interest must provide the national bank
or Federal savings association with a
right to close-out the financial positions
and liquidate the collateral upon an
event of default of, or failure to perform
by, the counterparty under the collateral
agreement. A contract would not satisfy
this requirement if the national bank’s
or Federal savings association’s exercise
of rights under the agreement may be
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stayed or avoided under applicable law
in the relevant jurisdictions, other than:
(1) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 4 to the U.S. laws
referenced in this paragraph (1) in order
to facilitate the orderly resolution of the
defaulting counterparty; or
(2) Where the agreement is subject by
its terms to any of the laws referenced
in paragraph (1) of this definition.
*
*
*
*
*
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is
conducted under an agreement that
provides the national bank or Federal
savings association the right to
accelerate and terminate the extension
of credit and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, insolvency, liquidation,
conservatorship, or similar proceeding,
of the counterparty, provided that, in
any such case, any exercise of rights
under the agreement will not be stayed
or avoided under applicable law in the
relevant jurisdictions, other than in
receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs,5 or
laws of foreign jurisdictions that are
substantially similar 6 to the U.S. laws
referenced in this paragraph in order to
facilitate the orderly resolution of the
defaulting counterparty; or
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
4 The OCC expects to evaluate jointly with the
Board and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
5 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act, or netting
contracts between or among financial institutions
under sections 401–407 of the Federal Deposit
Insurance Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE (12 CFR part
231).
6 The OCC expects to evaluate jointly with the
Board and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
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receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the
national bank or Federal savings
association the right to accelerate,
terminate, and close-out on a net basis
all transactions under the agreement
and to liquidate or set-off collateral
promptly upon an event of default,
including upon an event of receivership,
conservatorship, insolvency,
liquidation, or similar proceeding, of the
counterparty, provided that, in any such
case, any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 7 to the U.S. laws
referenced in this paragraph (2)(i) in
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, a national
bank or Federal savings association
must comply with the requirements of
§ 3.3(d) with respect to that agreement.
*
*
*
*
*
Repo-style transaction means a
repurchase or reverse repurchase
transaction, or a securities borrowing or
securities lending transaction, including
a transaction in which the national bank
or Federal savings association acts as
agent for a customer and indemnifies
the customer against loss, provided that:
*
*
*
*
*
(3) * * *
(ii) * * *
(A) The transaction is executed under
an agreement that provides the national
bank or Federal savings association the
right to accelerate, terminate, and closeout the transaction on a net basis and to
7 The OCC expects to evaluate jointly with the
Board and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
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liquidate or set-off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs, or laws of foreign jurisdictions
that are substantially similar 8 to the
U.S. laws referenced in this paragraph
(3)(ii)(a) in order to facilitate the orderly
resolution of the defaulting
counterparty; or
*
*
*
*
*
PART 50—LIQUIDITY RISK
MEASUREMENT STANDARDS
3. The authority citation for part 50
continues to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 93a, 481,
1818, and 1462 et seq.
4. Section 50.3 is amended by:
a. Revising the definition of
‘‘qualifying master netting agreement’’;
and
■ b. In paragraph (2) of the definition of
‘‘regulated financial company’’,
redesignating footnote 1 as footnote 2.
The revision is set forth below.
■
■
§ 50.3
Definitions.
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the
national bank or Federal savings
association the right to accelerate,
terminate, and close-out on a net basis
all transactions under the agreement
and to liquidate or set-off collateral
promptly upon an event of default,
including upon an event of receivership,
conservatorship, insolvency,
liquidation, or similar proceeding, of the
counterparty, provided that, in any such
case, any exercise of rights under the
agreement will not be stayed or avoided
8 The OCC expects to evaluate jointly with the
Board and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
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under applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 1 to the U.S. laws
referenced in this paragraph (2)(i) in
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, a national
bank or Federal savings association
must comply with the requirements of
§ 50.4(a) with respect to that agreement.
*
*
*
*
*
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
supplementary information, the Board
amends 12 CFR Chapter II parts 217 and
249 to read as follows:
PART 217—CAPITAL ADEQUACY OF
BANK HOLDING COMPANIES,
SAVINGS AND LOAN HOLDING
COMPANIES, AND STATE MEMBER
BANKS (REGULATION Q)
5. The authority citation for part 217
continues to read as follows:
■
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1462a, 1467a, 1818, 1828, 1831n,
1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,
3904, 3906–3909, 4808, 5365, 5368, 5371.
Part 217
[Amended]
5a. Part 217 is amended by
redesignating footnotes 5 through 29 as
footnotes 9 through 33, respectively.
■ 6. Section 217.2 is amended by:
■ a. Revising the definitions of
‘‘collateral agreement’’ and ‘‘qualifying
master netting agreement’’;
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■
1 The
OCC expects to evaluate jointly with the
Board and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
VerDate Sep<11>2014
17:00 Dec 29, 2014
Jkt 235001
b. Revising paragraph (1)(iii) of the
definition of ‘‘eligible margin loan’’;
■ c. Republishing the introductory text
of the definition of ‘‘repo-style
transaction’’; and
■ d. Revising paragraph (3)(ii)(A) of the
definition of ‘‘repo-style transaction’’.
The revisions are set forth below:
■
§ 217.2
Definitions.
*
*
*
*
*
Collateral agreement means a legal
contract that specifies the time when,
and circumstances under which, a
counterparty is required to pledge
collateral to a Board-regulated
institution for a single financial contract
or for all financial contracts in a netting
set and confers upon the Boardregulated institution a perfected, firstpriority security interest
(notwithstanding the prior security
interest of any custodial agent), or the
legal equivalent thereof, in the collateral
posted by the counterparty under the
agreement. This security interest must
provide the Board-regulated institution
with a right to close-out the financial
positions and liquidate the collateral
upon an event of default of, or failure
to perform by, the counterparty under
the collateral agreement. A contract
would not satisfy this requirement if the
Board-regulated institution’s exercise of
rights under the agreement may be
stayed or avoided under applicable law
in the relevant jurisdictions, other than:
(1) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 4 to the U.S. laws
referenced in this paragraph (1) in order
to facilitate the orderly resolution of the
defaulting counterparty; or
(2) Where the agreement is subject by
its terms to any of the laws referenced
in paragraph (1) of this definition.
*
*
*
*
*
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is
conducted under an agreement that
provides the Board-regulated institution
the right to accelerate and terminate the
extension of credit and to liquidate or
set-off collateral promptly upon an
event of default, including upon an
event of receivership, insolvency,
liquidation, conservatorship, or similar
proceeding, of the counterparty,
provided that, in any such case, any
4 The Board expects to evaluate jointly with the
OCC and Federal Deposit Insurance Corporation
whether foreign special resolution regimes meet the
requirements of this paragraph.
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78295
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs,5 or laws of foreign jurisdictions
that are substantially similar 6 to the
U.S. laws referenced in this paragraph
in order to facilitate the orderly
resolution of the defaulting
counterparty; or
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the Boardregulated institution the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 7 to the U.S. laws
referenced in this paragraph (2)(i) in
5 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act, or netting
contracts between or among financial institutions
under sections 401–407 of the Federal Deposit
Insurance Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE (12 CFR part
231).
6 The Board expects to evaluate jointly with the
OCC and Federal Deposit Insurance Corporation
whether foreign special resolution regimes meet the
requirements of this paragraph.
7 The Board expects to evaluate jointly with the
OCC and Federal Deposit Insurance Corporation
whether foreign special resolution regimes meet the
requirements of this paragraph.
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Federal Register / Vol. 79, No. 249 / Tuesday, December 30, 2014 / Rules and Regulations
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, a Boardregulated institution must comply with
the requirements of § 217.3(d) with
respect to that agreement.
*
*
*
*
*
Repo-style transaction means a
repurchase or reverse repurchase
transaction, or a securities borrowing or
securities lending transaction, including
a transaction in which the Boardregulated institution acts as agent for a
customer and indemnifies the customer
against loss, provided that:
(3) * * *
(ii) * * *
(A) The transaction is executed under
an agreement that provides the Boardregulated institution the right to
accelerate, terminate, and close-out the
transaction on a net basis and to
liquidate or set-off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs, or laws of foreign jurisdictions
that are substantially similar 8 to the
U.S. laws referenced in this paragraph
(3)(ii)(a) in order to facilitate the orderly
resolution of the defaulting
counterparty; or
*
*
*
*
*
8 The Board expects to evaluate jointly with the
OCC and Federal Deposit Insurance Corporation
whether foreign special resolution regimes meet the
requirements of this paragraph.
VerDate Sep<11>2014
17:00 Dec 29, 2014
Jkt 235001
PART 249—LIQUIDITY RISK
MEASUREMENT STANDARDS
(REGULATION WW)
7. The authority citation for part 249
continues to read as follows:
■
Authority: 12 U.S.C. 248(a), 321–338a,
481–486, 1467a(g)(1), 1818, 1828, 1831p–1,
1831o–1, 1844(b), 5365, 5366, 5368.
8. Section 249.3 is amended by:
a. Revising the definition of
‘‘qualifying master netting agreement’’;
and
■ b. In paragraph (2) of the definition of
‘‘regulated financial company’’,
redesignating footnote 1 as footnote 2.
■
■
§ 249.3
Definitions.
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the Boardregulated institution the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 1 to the U.S. laws
referenced in this paragraph (2)(i) in
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
1 The Board expects to evaluate jointly with the
OCC and Federal Deposit Insurance Corporation
whether foreign special resolution regimes meet the
requirements of this paragraph.
PO 00000
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Fmt 4700
Sfmt 4700
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, a Boardregulated institution must comply with
the requirements of § 249.4(a) with
respect to that agreement.
*
*
*
*
*
Dated: December 16, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, December 16, 2014.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2014–30218 Filed 12–29–14; 8:45 am]
BILLING CODE P
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 34
[Docket No. OCC–2014–0027]
RIN 1557–AD90
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Docket No. R–1443]
RIN 7100–AD 90
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1026
RIN 3170–AA11
Appraisals for Higher-Priced Mortgage
Loans Exemption Threshold
Adjustment—Final Rule
Board of Governors of the
Federal Reserve System (Board); Bureau
of Consumer Financial Protection
(Bureau); and Office of the Comptroller
of the Currency, Treasury (OCC).
ACTION: Final rule; official staff
interpretations; technical amendment.
AGENCY:
The OCC, the Board and the
Bureau are publishing final rules
amending the official staff
interpretations for their regulations that
implement section 129H of the Truth in
Lending Act (TILA). Section 129H of
TILA establishes special appraisal
requirements for ‘‘higher-risk
SUMMARY:
E:\FR\FM\30DER1.SGM
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Agencies
[Federal Register Volume 79, Number 249 (Tuesday, December 30, 2014)]
[Rules and Regulations]
[Pages 78287-78296]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-30218]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 79, No. 249 / Tuesday, December 30, 2014 /
Rules and Regulations
[[Page 78287]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 50
[Docket ID OCC-2014-0028]
RIN 1557-AD91
FEDERAL RESERVE SYSTEM
12 CFR Parts 217 and 249
[Regulations Q and WW; Docket No. R-1507]
RIN 7100 AE-28
Regulatory Capital Rules, Liquidity Coverage Ratio: Interim Final
Revisions to the Definition of Qualifying Master Netting Agreement and
Related Definitions
AGENCY: Office of the Comptroller of the Currency (OCC) and Board of
Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for comment.
-----------------------------------------------------------------------
SUMMARY: The OCC and Board (collectively, the agencies) invite comment
on an interim final rule that amends the definition of ``qualifying
master netting agreement'' under the regulatory capital rules, and the
liquidity coverage ratio rule, as well as under the lending limits rule
applicable to national banks and Federal savings associations. The
agencies also are proposing to amend the definitions of ``collateral
agreement,'' ``eligible margin loan,'' and ``repo-style transaction''
under the regulatory capital rules. The amendments are designed to
ensure that the regulatory capital, liquidity, and lending limits
treatment of certain financial contracts is not affected by
implementation of special resolution regimes in foreign jurisdictions
or by the International Swaps and Derivative Association Resolution
Stay Protocol.
DATES: This rule is effective on January 1, 2015. Comments must be
received on or before March 3, 2015.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to each of the agencies. Commenters are encouraged to use the
title ``Regulatory Capital Rules, Liquidity Coverage Ratio: Interim
Final Revisions to the Definition of Qualifying Master Netting
Agreement and Related Definitions'' to facilitate the organization and
distribution of comments among the Agencies.
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules, Liquidity Coverage Ratio: Interim
Final Revisions to the Definition of Qualifying Master Netting
Agreement and Related Definitions'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov. Enter ``Docket ID OCC-2014-0028'' in the
Search Box and click ``Search.'' Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
Email: regs.comments@occ.treas.gov.
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2014-0028'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2014-0028'' in the Search
box and click ``Search.'' Comments can be filtered by agency using the
filtering tools on the left side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
viewing public comments, viewing other supporting and related
materials, and viewing the docket after the close of the comment
period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1507 and RIN 7100 AE 28, by any of the
following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx .
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 78288]]
Email: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/apps/foia/proposedregs.aspx as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets NW., Washington, DC 20551) between 9:00 a.m. and 5:00 p.m. on
weekdays.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk Expert, (202) 649-6982; or
Nicole Billick, Risk Expert, (202) 649-7932, Capital Policy; or Valerie
Song, Senior Attorney, (202) 649-5500, Bank Activities and Structure,
or Carl Kaminski, Counsel, or Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities Division, (202) 649-5490, for
persons who are deaf or hard of hearing, TTY, (202) 649-5597, Office of
the Comptroller of the Currency, 400 7th Street SW., Washington, DC
20219.
Board: Constance M. Horsley, Assistant Director, (202) 452-5239,
Thomas Boemio, Manager (202) 452-2982, or Kevin R. Tran, Supervisory
Financial Analyst, (202) 452-2309, Capital and Regulatory Policy,
Division of Banking Supervision and Regulation; or Laurie Schaffer,
Associate General Counsel, (202) 452-2277, Christine Graham, Counsel,
(202) 452-3005, Will Giles, Counsel, (202) 452-3351, or Trevor
Feigleson, Attorney, (202) 475-3274, Legal Division, Board of Governors
of the Federal Reserve System, 20th and C Streets NW., Washington DC
20551. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Summary
The agencies' regulatory capital rules permit a banking
organization to measure exposure from certain types of financial
contracts on a net basis and recognize the risk-mitigating effect of
financial collateral for other types of exposures, provided that the
contracts are subject to a ``qualifying master netting agreement'' or
agreement that provides for certain rights upon a counterparty
default.\1\ The agencies, by rule, have defined a qualifying master
netting agreement as a netting agreement that permits a banking
organization to terminate, apply close-out netting, and promptly
liquidate or set-off collateral upon an event of default of the
counterparty (default rights), thereby reducing its counterparty
exposure and market risks.\2\ On the whole, measuring the amount of
exposure of these contracts on a net basis, rather than a gross basis,
results in a lower measure of exposure, and thus, a lower capital
requirement under the regulatory capital rules.
---------------------------------------------------------------------------
\1\ See 12 CFR part 3 (OCC) and 12 CFR part 217 (Board). All
references to sections in the regulatory capital rules should be
read to mean references to the corresponding sections to the
applicable CFR part of each agency's rules. The term ``banking
organization'' includes national banks, state member banks, savings
associations, and top-tier bank holding companies domiciled in the
United States not subject to the Board's Small Bank Holding Company
Policy Statement (12 CFR part 225, appendix C), as well as top-tier
savings and loan holding companies domiciled in the United States,
except for certain savings and loan holding companies that are
substantially engaged in insurance underwriting or commercial
activities.
\2\ See section 2 of the regulatory capital rules.
---------------------------------------------------------------------------
The current definition of ``qualifying master netting agreement''
recognizes that default rights may be stayed if the financial company
is in receivership, conservatorship, or resolution under Title II of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\3\ or the Federal Deposit Insurance Act (FDI Act).\4\
Accordingly, transactions conducted under netting agreements where
default rights may be stayed under Title II of the Dodd-Frank Act or
the FDI Act may qualify for the favorable capital treatment described
above. However, the current definition of ``qualifying master netting
agreement'' does not recognize that default rights may be stayed where
a master netting agreement is subject to limited stays under foreign
special resolution regimes or where counterparties agree through
contract that a special resolution regime would apply. When the
agencies adopted the current definition of ``qualifying master netting
agreement,'' no other country had adopted a special resolution regime
relevant to the definition, and no banking organizations had
communicated to the agencies an intent to enter into contractual
amendments to clarify that bilateral over-the-counter (OTC) derivatives
transactions are subject to certain provisions of certain U.S. and
foreign special resolution regimes.
---------------------------------------------------------------------------
\3\ See 12 U.S.C. 5390(c)(8)-(16).
\4\ See 12 U.S.C. 1821(e)(8)-(13). The definition would also
recognize that default rights may be stayed under any similar
insolvency law applicable to government sponsored enterprises
(GSEs). Generally under the agencies' regulatory capital rules, GSE
means an entity established or chartered by the U.S. government to
serve public purposes specified by the U.S. Congress but whose debt
obligations are not explicitly guaranteed by the full faith and
credit of the U.S. government. See regulatory capital rules section
2.
---------------------------------------------------------------------------
In recent months, the European Union (EU) finalized the Bank
Recovery and Resolution Directive (BRRD), which prescribes aspects of a
special resolution regime that EU member nations should implement. In
addition, several U.S. banking organizations have opted to adhere to
the International Swaps and Derivatives Association's (ISDA) Resolution
Stay Protocol (ISDA Protocol),\5\ which provides for amendments to the
terms of ISDA Master Agreements \6\ between counterparties that adhere
to the ISDA Protocol to stay certain default rights and other remedies
provided under the agreements. The expected implementation of the BRRD
by EU member nations and the effective date of certain provisions of
the ISDA Protocol may be as early as January 1, 2015. This expected
implementation would mirror steps taken in the United States to
implement a special resolution regime under Title II of the Dodd-Frank
Act.
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\5\ See ISDA Protocol at http://assets.isda.org/media/f253b540-25/958e4aed.pdf/.
\6\ The ISDA Master Agreement is a form of agreement that
governs OTC derivatives transactions and is used by a significant
portion of the parties to bilateral OTC derivatives transactions,
including large, internationally active banking organizations.
Furthermore, the ISDA Master Agreement generally creates a single
legal obligation that provides for the netting of all individual
transactions covered by the agreement.
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A master netting agreement under which default rights may be stayed
under the BRRD or that incorporates the amendments of the ISDA Protocol
would no longer qualify as a qualifying master netting agreement under
the regulatory capital, liquidity, and lending limits rules. This would
result in considerably higher capital and liquidity requirements that
could discourage both the implementation of the BRRD and the ISDA
Protocol and the realization of the benefits of these efforts in
improving financial stability. In addition, affected national banks and
Federal savings associations would be required to measure their lending
limits on a gross basis, which would increase the measure of exposure
in a manner not contemplated or intended under the current lending
limits rules. This result flows from the use of ``qualifying master
[[Page 78289]]
netting agreement'' as a cross-reference in the lending limits rules.
Accordingly, effective January 1, 2015, the interim final rule
would permit an otherwise qualifying master netting agreement to
qualify if (i) default rights under the agreement may be stayed under a
qualifying foreign special resolution regime or (ii) the agreement
incorporates a qualifying special resolution regime by contract.
Through these revisions, the interim final rule maintains the existing
treatment for these contracts for purposes of the regulatory capital,
liquidity, and for national banks and Federal savings associations,
lending limits rules, while recognizing the recent changes contemplated
by the BRRD and the ISDA Protocol.
The interim final rule also revises certain other definitions of
the regulatory capital rules to make various conforming changes
designed to ensure that a banking organization may continue to
recognize the risk mitigating effects of financial collateral \7\
received in a secured lending transaction, repo-style transaction, or
eligible margin loan for purposes of the regulatory capital, liquidity,
and lending limits rules, while recognizing the recent changes
contemplated by the BRRD and banking organizations that have adhered to
the ISDA Protocol. Specifically, the interim final rule would revise
the definition of ``collateral agreement,'' ``eligible margin loan,''
\8\ and ``repo-style transaction'' \9\ to provide that a counterparty's
default rights may be stayed under a foreign special resolution regime
or, if applicable, under a special resolution regime incorporated by
contract.\10\ The agencies request comment on all aspects of these
definitions.
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\7\ Generally, under the agencies' regulatory capital rules,
financial collateral means collateral in the form of: (i) Cash on
deposit with the banking organization (including cash held for the
banking organization by a third-party custodian or trustee); (ii)
gold bullion; (iii) long-term debt securities that are not
resecuritization exposures and that are investment grade; (iv)
short-term debt instruments that are not resecuritization exposures
and that are investment grade; (v) equity securities that are
publicly traded; (vi) convertible bonds that are publicly traded; or
(vii) money market fund shares and other mutual fund shares if a
price for the shares is publicly quoted daily. In addition, the
regulatory capital rules also require that the banking organization
have a perfected, first-priority security interest or, outside of
the United States, the legal equivalent thereof (with the exception
of cash on deposit and notwithstanding the prior security interest
of any custodial agent). See regulatory capital rule, section 2.
\8\ Generally under the agencies' regulatory capital rules,
eligible margin loan means an extension of credit where: (i) The
extension of credit is collateralized exclusively by liquid and
readily marketable debt or equity securities, or gold; (ii) the
collateral is marked-to-fair value daily, and the transaction is
subject to daily margin maintenance requirements; and (iii) the
extension of credit is conducted under an agreement that provides
the banking organization with default rights, provided that any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, resolution under the FDI Act, Title
II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs. See regulatory capital rule, section 2. In
addition, in order to recognize an exposure as an eligible margin
loan a banking organization must comply with the requirements of
section 3(b) of the regulatory capital rules with respect to that
exposure.
\9\ Generally, under the agencies' regulatory capital rules,
repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the banking
organization acts as agent for a customer and indemnifies the
customer against loss, provided that: (1) The transaction is based
solely on liquid and readily marketable securities, cash, or gold;
(2) the transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements; (3) the transaction provides
certain default rights. See regulatory capital rule, section 2. In
addition, in order to recognize an exposure as a repo-style
transaction for purposes of this subpart, a banking organization
must comply with the requirements of section 3(e) of the regulatory
capital rules.
\10\ See 12 CFR part 32.
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II. Background
A. U.S. Resolution Regime
It is common market practice for bilateral derivatives and certain
other types of financial contracts entered into by large banking
organizations to permit a non-defaulting counterparty to exercise early
termination rights and other contractual remedies upon a counterparty
(or a related entity) experiencing an event of default. These
contractual provisions are generally recognized as a credit risk
mitigant because the provisions allow a non-defaulting party the
uninterrupted right to close-out, net, and liquidate any collateral
securing its claim under the contract upon a counterparty's default.
However, as the failure of Lehman Brothers demonstrated, the
uninterrupted exercise of such rights by counterparties of a globally-
active financial company with a significant derivatives portfolio could
impede the orderly resolution of the financial company and pose risks
to financial stability. The United States has enacted laws that impose
a limited stay on the exercise of early termination rights and other
remedies with regard to qualified financial contracts (such as OTC
derivatives, securities financing transactions, and margin loans) with
insured depository institutions in resolution under the FDI Act and, in
2010, with financial companies in resolution under Title II of the
Dodd-Frank Act.
B. Foreign Special Resolution Procedures and the ISDA Protocol
In recognition of the issues faced in the financial crisis
concerning resolution of globally-active financial companies, the EU
issued the BRRD on April 15, 2014, which requires EU member states to
implement a resolution mechanism by December 31, 2014, in order to
increase the likelihood for successful national or cross-border
resolutions of a financial company organized in the EU.\11\ The BRRD
contains special resolution powers, including a limited stay on certain
financial contracts that is similar to the stays provided under Title
II of the Dodd-Frank Act and the FDI Act. Therefore, the operations of
U.S. banking organizations located in jurisdictions that have
implemented the BRRD could become subject to an orderly resolution
under the BRRD, including the application of a limited statutory stay
of a counterparty's right to exercise early termination rights and
other remedies with respect to certain financial contracts. The BRRD is
generally designed to be consistent with the Key Attributes of
Effective Resolution Regimes for Financial Institutions (Key
Attributes),\12\ which were initially adopted by the Financial
Stability Board (FSB) \13\ of the G-20 \14\
[[Page 78290]]
member nations in October 2011, and are designed to provide a standard
for the responsibilities and powers that national resolution regimes
should have to resolve a failing systemically important financial
institution.
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\11\ On January 1, 2015, most of the provisions of the BRRD are
expected to take effect in a number of the EU member states.
\12\ The Key Attributes are available at
www.financialstabilityboard.org/publications/r_111104cc.pdf. See
specifically Key Attributes 4.1-4.4 regarding set-off, netting,
collateralization and segregation of client assets and Appendix I
Annex 5 regarding temporary stays on early termination rights. In
October 2014, the FSB adopted a 2014 version of the Key Attributes
that incorporates new annexes to provide additional guidance with
respect to specific Key Attributes. No changes were made to the text
of the twelve Key Attributes of October 2011.
\13\ The FSB is an international body that monitors and makes
recommendations about the global financial system. The FSB
coordinates the regulatory, supervisory, and other financial sector
policies of national financial authorities and international
standard-setting bodies.
\14\ The G-20 membership comprises a mix of the world's largest
advanced and emerging economies. The G-20 members are Argentina,
Australia, Brazil, Canada, China, France, Germany, India, Indonesia,
Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South
Africa, Turkey, the United Kingdom, the United States, and the
European Union. Following the most recent financial crisis, leaders
of the G-20 member nations recognized that the orderly cross-border
resolution of a globally-active financial company requires all
countries to have effective national resolution regimes to resolve
failing financial companies in an orderly manner and that national
resolution regimes should be consistent with one another. Subjecting
the same financial company to conflicting legal rules, procedures,
and mechanisms across jurisdictions can create uncertainty,
instability, possible systemic contagion, and higher costs of
resolution.
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In addition to the issuance of the BRRD, on November 4, 2014, ISDA
published the ISDA Protocol, which enables counterparties to amend the
terms of their ISDA Master Agreements to stay certain early termination
rights and other remedies provided under the agreement. As of November
12, 2014, 18 global financial institutions, including several of the
largest U.S. banking organizations,\15\ have opted to adhere to the
ISDA Protocol and thereby would modify ISDA Master Agreements among
those adhering parties. Like other qualified financial contracts, OTC
derivatives transactions executed under standard ISDA Master Agreements
allow a party to terminate the agreement immediately upon an event of
default of its counterparty, including if its counterparty (or a
related entity) \16\ enters insolvency or similar proceedings.
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\15\ As of November 12, 2014, the U.S. banking organizations
that have agreed to adhere to the ISDA Protocol are Bank of America
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., and Morgan Stanley, and certain subsidiaries thereof.
See current list of adhering parties to the ISDA Protocol at http://www2.isda.org/functional-areas/protocol-management/protocol-adherence/20.
\16\ Under the ISDA Resolution Stay Protocol, a related entity
is defined to include (i) each parent or (ii) an affiliate that is
(a) a creditor support provider or (b) a specified entity.
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The contractual amendments effectuated pursuant to the ISDA
Protocol would apply the provisions of Title II of the Dodd-Frank Act
and the FDI Act concerning limited stays of termination rights and
other remedies in qualified financial contracts to ISDA Master
Agreements between adhering counterparties, including adhering
counterparties that are not otherwise subject to U.S. law. The
amendments also would apply substantially similar provisions of certain
non-U.S. laws, such as the BRRD, to ISDA Master Agreements between
adhering counterparties that are not otherwise subject to such
laws.\17\ The contractual amendments effectuated pursuant to the ISDA
Protocol would permit a party that has agreed to adhere to the ISDA
Protocol to exercise early termination rights and other remedies only
to the extent that it would be entitled to do so under the special
resolution regime applicable to its adhering counterparties (or related
entities, as applicable).\18\
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\17\ The provisions of the ISDA Protocol relating to the special
resolution regimes in these jurisdictions will become effective on
January 1, 2015, for ISDA Master Agreements between the 18 adhering
financial companies (as of November 21, 2014). The ISDA Protocol
also covers special resolution regimes in other FSB member
jurisdictions so long as the regimes meet conditions specified in
the ISDA Protocol relating to creditor safeguards, which are
consistent with the Key Attributes.
\18\ Parties adhering to the ISDA Protocol would initially be
contractually subject to the statutory special resolution regimes of
France, Germany, Japan, Switzerland, the United Kingdom and the
United States.
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C. Description of Relevant Provisions of the Regulatory Capital and the
Liquidity Coverage Ratio Rules
As noted above, the agencies' regulatory capital rules permit a
banking organization to measure exposure from certain types of
financial contracts on a net basis, provided that the contracts are
subject to a qualifying master netting agreement or other agreement
that contains specific provisions. Specifically, under the regulatory
capital rules, a banking organization with multiple OTC derivatives
that are subject to a qualifying master netting agreement would be able
to calculate a net exposure amount by netting the sum of all positive
and negative fair values of the individual OTC derivative contracts
subject to the qualifying master netting agreement and calculating a
risk-weighted asset amount based on the net exposure amount. For
purposes of the supplementary leverage ratio (as applied only to
advanced approaches banking organizations), a banking organization that
has one or more OTC derivatives with the same counterparty that are
subject to a qualifying master netting agreement would be permitted to
not include in total leverage exposure cash variation margin received
from such counterparty that has offset the mark-to-fair value of the
derivative asset or cash collateral that is posted to such counterparty
that has reduced the banking organization's on-balance sheet
assets.\19\
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\19\ Under the agencies' regulatory capital rules, the general
framework consists of two approaches: (1) The standardized approach,
which, beginning on January 1, 2015, will apply to all banking
organizations regardless of total asset size, and (2) the advanced
approaches, which currently apply to large internationally active
banking organizations (defined as those banking organizations with
$250 billion or more in total consolidated assets or $10 billion or
more in total on-balance-sheet foreign exposure, depository
institution subsidiaries of those banking organizations that use the
advanced approaches rule, and banking organizations that elect to
use the advanced approaches). As a general matter, the standardized
approach sets forth standardized risk weights for different asset
types for regulatory capital calculations, whereas, for certain
assets, the advanced approaches make use of risk assessments
provided by banking organizations' internal systems as inputs for
regulatory capital calculations. Consistent with section 171 of the
Dodd-Frank Act (codified at 12 U.S.C. 5371), a banking organization
that is required to calculate its risk-based capital requirements
under the advanced approaches (i.e., an advanced approaches banking
organization) also must determine its risk-based capital
requirements under the generally applicable risk-based capital
rules, which will be the standardized approach beginning on January
1, 2015). The lower--or more binding--ratio for each risk-based
capital requirement is the ratio that the advanced approaches
banking organization must use to determine its compliance with
minimum regulatory capital requirements. See generally 12 CFR part 3
(OCC) and 12 CFR part 217 (Board).
---------------------------------------------------------------------------
In addition, the agencies' rules permit a banking organization to
recognize the risk-mitigating effect of financial collateral for other
types of collateralized exposures. Specifically, for risk-based capital
purposes, a banking organization with a securities financing
transaction that meets the definition of a repo-style transaction with
financial collateral, a margin loan that meets the definition of an
eligible margin loan with financial collateral, or an OTC derivative
contract collateralized with financial collateral may determine a net
exposure amount to its counterparty according to section 37 or section
132 of the regulatory capital rules. A banking organization with
multiple repo-style transactions or eligible margin loans with a
counterparty that are subject to a qualifying master netting agreement
may net the exposure amounts of the individual transactions under that
agreement. In addition, for purposes of the supplementary leverage
ratio, an advanced approaches banking organization with multiple repo-
style transactions with the same counterparty that are subject to a
qualifying master netting agreement would be permitted to net for
purposes of calculating the counterparty credit risk component of its
total leverage exposure. In general, recognition of netting results in
a lower measure of risk-weighted assets and total leverage exposure
than if a banking organization were to calculate its OTC derivatives,
repo-style transactions, and eligible margin loans on a gross basis.
This result is consistent with the view that entering into transactions
under a netting agreement that satisfies certain criteria reduces a
banking organization's risk exposure.
[[Page 78291]]
The agencies also use the concept of a qualifying master netting
agreement in the liquidity coverage ratio (LCR) rule.\20\ The LCR rule
requires a banking organization to maintain an amount of high-quality
liquid assets (the numerator) to match at least 100 percent of its
total net cash outflows over a prospective 30 calendar-day period (the
denominator). For derivative transactions subject to a qualifying
master netting agreement, a banking organization would be able to
calculate the net derivative outflow or inflow amount by netting the
contractual payments and collateral that it would give to, or receive
from, the counterparty over a prospective 30-day period.\21\ If the
derivative transactions are not subject to a qualifying master netting
agreement, then the derivative cash outflows for that counterparty
would be included in the net derivative cash outflow amount and the
derivative cash inflows for that counterparty would be included in the
net derivative cash inflow amount, without any netting and subject to
the LCR rule's cap on total inflows. Recognition of netting may result
in lower net cash outflows, and thus a lower LCR denominator and
liquidity requirement, than if a banking organization were to calculate
its inflows and outflows on its derivatives transactions on a gross
basis.
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\20\ The agencies' LCR rules will be codified at 12 CFR part 50
(OCC) and 12 CFR part 249 (Board).
\21\ See 12 CFR _ .32(c) and _ .33(b) of the agencies' LCR rule.
The LCR final rule provides that foreign currency transactions that
meet certain criteria can be netted regardless of whether those
transactions are covered by a qualified master netting agreement. 79
FR 61440, 61532-33 (October 10, 2014).
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III. The Interim Final Rule
The interim final rule amends the definitions of ``collateral
agreement,'' ``eligible margin loan,'' ``qualifying master netting
agreement,'' and ``repo-style transaction'' in the agencies' regulatory
capital rules and ``qualifying master netting agreement'' in the
agencies' LCR rules to ensure that the regulatory capital, liquidity,
and lending limits treatment of OTC derivatives, repo-style
transactions, eligible margin loans, and other collateralized
transactions would be unaffected by the adoption of various foreign
special resolution regimes and the ISDA Protocol. In particular, the
interim final rule amends these definitions to provide that a relevant
netting agreement or collateral agreement may provide for a limited
stay or avoidance of rights where the agreement is subject by its terms
to, or incorporates, certain resolution regimes applicable to financial
companies, including Title II of the Dodd-Frank Act, the FDI Act, or
any similar foreign resolution regime that provides for limited stays
substantially similar to the stay for qualified financial contracts
provided in Title II of the Dodd-Frank Act or the FDI Act.
In determining whether the laws of foreign jurisdictions are
``similar'' to the FDI Act and Title II of the Dodd-Frank Act and
provide for limited stays substantially similar to those provided for
in the FDI Act and Title II of the Dodd-Frank Act, the agencies intend
to consider all aspects of the stays under the U.S. laws.\22\ Relevant
factors include, for instance, the length of stay and the related
creditor safeguards or protections provided under a foreign special
resolution regime.\23\ The agencies expect that the implementation of
special resolution regimes of France, Germany, Japan, Switzerland, and
the United Kingdom would be substantially similar to those of the
United States and provide for limited stays substantially similar to
those provided for in the FDI Act and Title II of the Dodd-Frank
Act.\24\
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\22\ See 12 U.S.C. 1821(e)(8)-(13) and 5390(c)(8)-(16). As noted
above, the ISDA Protocol covers only resolution regimes that are
considered to be consistent with the principles of the Key
Attributes. Therefore, it is also expected that any limited
statutory stay under foreign law determined for purposes of this
interim final rule to be similar to the FDI Act and Title II of the
Dodd-Frank Act would also be consistent with the relevant principles
of the Key Attributes.
\23\ Under Title II of the Dodd-Frank Act, counterparties are
stayed until 5:00 p.m. on the business day following the date of
appointment of a receiver from exercising termination, liquidation,
or netting rights under the qualified financial contract. 12 U.S.C.
5390(c)(10)(B)(i)(I). If the qualified financial contracts are
transferred to a solvent third party before the stay expires, the
counterparty is permanently enjoined from exercising such rights
based upon the appointment of the receiver, but is not stayed from
exercising such rights based upon other events of default. See 12
U.S.C. 5390(c)(10)(B)(i)(II).
\24\ Annexes to the ISDA Protocol specify conditions that the
special resolution regimes of the five countries must meet in order
for section 1(a) of the ISDA Protocol to apply to the ISDA Master
Agreements of adhering parties.
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Without the interim final rule, several banking organizations would
no longer be permitted to recognize financial contracts as subject to a
qualifying master netting agreement or satisfying the criteria
necessary for the current regulatory capital, liquidity, and lending
limits treatment, and would be required to measure exposure from these
contracts on a gross, rather than net, basis. This result would
undermine the salutary effects of the BRRD and similar resolution
regimes and the ISDA Protocol on financial stability. The interim final
rule is necessary to maintain the existing treatment for these
contracts for purposes of the regulatory capital, liquidity, and
lending limits rules. The agencies do not believe that the
disqualification of master netting agreements that would otherwise
result in the absence of the interim final rule accurately reflects the
risk posed by these OTC derivative transactions. Implementation of
consistent, national resolution regimes on a global basis furthers the
orderly resolution of internationally active financial companies, and
enhances financial stability. Moreover, the development of the ISDA
Protocol furthers the principles of Title II of the Dodd-Frank Act and
the FDI Act (in instances where a counterparty is a U.S. entity or its
subsidiary) by applying limited stays of termination rights to
counterparties who are not otherwise subject to U.S. law.
In addition, the agencies intend to incorporate the definition of
``qualifying master netting agreement'' set forth in this interim final
rule into rules that establish minimum margin requirements for
registered swap dealers, major swap participants, security-based swap
dealers, and major security-based swap participants (covered swap
entities) subject to agency supervision. On September 24, 2014, the
OCC, Board, Federal Deposit Insurance Corporation, the Farm Credit
Administration, and the Federal Housing Finance Agency published a
notice of proposed rulemaking that would establish minimum margin
requirements for covered swap entities subject to agency supervision
(2014 swap margin NPR).\25\ The proposed rule would permit a covered
swap entity to calculate variation margin requirements on an aggregate,
net basis under an eligible master netting agreement (EMNA) with a
counterparty. The comment period for the 2014 swap margin NPR closed on
November 24, 2014. The OCC, Board, Federal Deposit Insurance
Corporation, Farm Credit Administration and Federal Housing Finance
Agency are reviewing the comments received and drafting a final rule.
Ultimately, the Federal banking agencies intend to align the
definitions of EMNA and qualifying master netting agreement in their
respective regulations pertaining to swap margin requirements,
regulatory capital requirements, liquidity requirements, and lending
limits.
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\25\ 79 FR 57348 (September 24, 2014).
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IV. Request for Comments
The agencies are interested in receiving comments on all aspects of
the interim final rule. In particular, do the amendments to the
definitions of
[[Page 78292]]
``qualifying master netting agreement,'' ``collateral agreement,''
``repo-style transaction,'' and ``eligible margin loan'' ensure that
the regulatory capital, liquidity, and lending limits treatment of OTC
derivatives, repo-style transactions, eligible margin loans and other
collateralized transactions is unaffected by the ISDA Protocol and the
BRRD? Is there any reason why the agencies should not revise the above
mentioned definitions?
The ISDA Protocol also provides for limited stays of termination
rights for cross-defaults resulting from affiliate insolvency
proceedings under a limited number of U.S. general insolvency regimes,
including the U.S. Bankruptcy Code.\26\ The interim final rule does not
address this portion of the ISDA Protocol because this portion of the
ISDA Protocol does not take effect on January 1, 2015. Instead, it
takes effect upon the effective date of implementing regulations in the
United States. The agencies request comment on whether the definitions
of ``qualifying master netting agreement,'' ``collateral agreement,''
``repo-style transaction,'' and ``eligible margin loan'' should also be
amended to recognize the stay of default rights in this context.
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\26\ Under the ISDA Protocol, upon commencement of such
proceedings, adhering counterparties would be subject to a limited
stay of their termination rights and other remedies. The limited
stay does not apply if a direct counterparty is subject to general
insolvency proceedings. The stay also does not apply to payment or
delivery defaults or to defaults that are not directly or indirectly
related to the affiliate insolvency proceedings.
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V. Effective Date; Solicitation of Comments
This interim final rule is effective January 1, 2015. Pursuant to
the Administrative Procedure Act (APA), at 5 U.S.C. 553(b)(B), notice
and comment are not required prior to the issuance of a final rule if
an agency, for good cause, finds that ``notice and public procedure
thereon are impracticable, unnecessary, or contrary to the public
interest.'' \27\ Similarly, a final rule may be published with an
immediate effective date if an agency finds good cause and publishes
such with the final rule.\28\
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\27\ 5 U.S.C. 553(b)(B).
\28\ 5 U.S.C. 553(d)(3).
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The ISDA Protocol was published by ISDA on November 4, 2014, and as
of November 12, 2014, 18 large banking organizations, including five
large U.S. banking organizations, have voluntarily adhered to the ISDA
Protocol, which will become effective on January 1, 2015. Upon the
effective date of the ISDA Protocol, the ISDA Master Agreements entered
into between the adhering banking organizations would be disqualified
from recognition as transactions subject to a qualifying master netting
agreement.
The BRRD was adopted on April 15, 2014.\29\ Implementation of the
BRRD by a number of EU member states is expected to occur by January 1,
2015. Becoming subject to the limited stays contemplated by the BRRD
also disqualifies agreements that would otherwise qualify as a
qualifying master netting agreement or a collateral agreement, and
disqualifies securities financing transactions or margin loans from the
regulatory capital treatment of a repo-style transaction or eligible
margin loan, respectively. Adoption of this interim final rule, in
conjunction with the implementation of the BRRD and the ISDA Protocol
by relevant foreign jurisdictions is consistent with steps to
facilitate the orderly resolution of systemically important financial
institutions.
---------------------------------------------------------------------------
\29\ The United Kingdom published a consultative paper in July
2014 regarding the implementation of the BRRD.
---------------------------------------------------------------------------
Changes to the definitions of qualifying master netting agreement,
repo-style transaction, eligible margin loan and collateral agreement
are needed to ensure that contractually subjecting netting and
collateral agreements, agreements executing a repo-style transaction
and agreements executing an eligible margin loan to domestic and
foreign special resolution regimes does not disrupt current treatment
under the agencies' regulatory capital, liquidity, and lending limits
rules. Notice and comment through the issuance of a notice of proposed
rulemaking for purposes of these amendments would extend beyond January
1, 2015, resulting in adverse financial consequences to some U.S.
banking organizations.
The agencies find that, under these circumstances, prior notice and
comment through the issuance of a notice of proposed rulemaking are
impracticable and that the public interest is best served by making the
rule effective on January 1, 2015. Otherwise, banking organizations
could be subject to considerably higher capital and liquidity
requirements because the regulatory capital and liquidity rules would
not recognize netting under the relevant agreements or the current
treatment of such contracts. Moreover, under the OCC's legal lending
limits for national banks and Federal savings association, which rely
on the definition of qualifying master netting agreement, the legal
lending limits of those institutions may be significantly reduced.
These outcomes could weaken liquidity in OTC derivatives markets,
increase the cost of credit, and reduce the availability of credit.
National implementation of the BRRD and adherence to the ISDA
Protocol should facilitate the orderly resolution of internationally
active banking organizations. Absent capital and liquidity treatment
and legal lending limits (where applicable) afforded to counterparties
entering into a qualifying master netting agreement, banking
organizations would be dis-incentivized to enter into such agreements.
For these reasons, with respect to the amendments to the
definitions of qualifying master netting agreement, collateral
agreement, repo-style transaction, and eligible margin loan, the
agencies find good cause to dispense with the delayed effective date
otherwise required by 5 U.S.C. 553(b)(B) and 553(d)(3) and under
section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802.\30\
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\30\ The RCDRIA requires that, subject to certain exceptions,
regulations imposing additional reporting, disclosure, or other
requirements on insured depository institutions take effect on the
first day of the calendar quarter after publication of the final
rule. This effective date requirement does not apply if the agency
finds for good cause that the regulation should become effective
before such time.
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VI. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act (RFA) does not apply to a
rulemaking where a general notice of proposed rulemaking is not
required. 5 U.S.C. 603 and 604. As noted previously, the OCC has
determined that it is unnecessary to publish a general notice of
proposed rulemaking for this joint rule. Accordingly, the RFA's
requirements relating to an initial and final regulatory flexibility
analysis do not apply.
Board: The requirements of the RFA are not applicable to this
interim final rule.\31\ Nonetheless, the Board observes that the
interim final rule would not have a significant economic impact on a
substantial number of small entities. The Board requests comment on its
conclusion that the new interim final rule should not have a
significant economic impact on a substantial number of small entities.
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\31\ The requirements of the RFA are not applicable to rules
adopted under the Administrative Procedure Act's ``good cause''
exception, see 5 U.S.C. 601(2) (defining ``rule'' and notice
requirements under the Administrative Procedure Act).
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To support the above finding that the interim final rule would not
have a significant economic impact on a substantial number of small
entities, the
[[Page 78293]]
Board is publishing a final regulatory flexibility analysis for the
interim final rule. The RFA generally requires an agency to assess the
impact a rule is expected to have on small entities.\32\ The RFA
requires an agency either to provide a regulatory flexibility analysis
or to certify that the interim final rule will not have a significant
economic impact on a substantial number of small entities. Based on
this analysis and for the reasons stated below, the Board believes that
this interim final rule will not have a significant economic impact on
a substantial number of small entities.
---------------------------------------------------------------------------
\32\ Under standards the U.S. Small Business Administration has
established, an entity is considered ``small'' if it has $175
million or less in assets for banks and other depository
institutions. U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------
Under regulations issued by the U.S. Small Business Administration,
a small entity includes a depository institution, bank holding company,
or savings and loan holding company with total assets of $550 million
or less (a small banking organization).\33\ As of June 30, 2014, there
were approximately 657 small state member banks, 3,719 small bank
holding companies, and 254 small savings and loan holding companies.
---------------------------------------------------------------------------
\33\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------
The interim final rule is expected only to apply to banking
organizations that adhere to the ISDA Protocol or engage in a
substantial amount of cross-border derivatives transactions. Small
entities generally will not fall into this category. To date, the Board
is aware of less than two dozen banking organizations, all with total
consolidated assets greater than $250 billion, that are likely to
adhere to the ISDA Protocol or engage in a substantial amount of cross-
border derivatives transactions. The Board is aware of no other Federal
rules that duplicate, overlap, or conflict with this interim final
rule. The Board believes that this interim final rule will not have a
significant economic impact on small banking organizations supervised
by the Board and therefore believes that there are no significant
alternatives to the interim final rule that would reduce the economic
impact on small banking organizations supervised by the Board.
B. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the agencies to
use plain language in all proposed and final rules published after
January 1, 2000. The agencies invite comment on how to make this
interim final rule easier to understand. For example:
Have the agencies organized the material to suit your
needs? If not, how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Does the rule contain technical language or jargon that is
not clear? If so, what language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the rule easier to understand? If
so, what changes would make the rule easier to understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could the agencies do to make the rule easier to
understand?
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3521) (``PRA''), the agencies may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (``OMB'') control number. The agencies reviewed
the interim final rule and determined that it would not produce any new
collection of information pursuant to the PRA.
List of Subjects
12 CFR Part 3
Administrative practice and procedure; Capital; National banks,
Reporting and recordkeeping requirements; Risk.
12 CFR Part 50
Administrative practice and procedure; Banks, banking; Liquidity;
Reporting and recordkeeping requirements; Savings associations.
12 CFR Part 217
Administrative practice and procedure; Banks, banking; Capital;
Federal Reserve System; Holding companies; Reporting and recordkeeping
requirements; Securities.
12 CFR Part 249
Administrative practice and procedure; Banks, banking; Federal
Reserve System; Holding companies; Liquidity; Reporting and
recordkeeping requirements.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the supplementary information, the
Office of the Comptroller of the Currency amends part 3 of chapter I of
title 12, Code of Federal Regulations as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
Part 3 [Amended]
0
1a. Part 3 is amended by redesignating footnotes 5 through 29 as
footnotes 9 through 33, respectively.
0
2. Section 3.2 is amended by:
0
a. Revising the definitions of ``collateral agreement'' and
``qualifying master netting agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin
loan'';
0
c. Republishing the introductory text of the definition of ``repo-style
transaction''; and
0
d. Revising paragraph (3)(ii)(A) of the definition of ``repo-style
transaction''.
The revisions are set forth below:
Sec. 3.2 Definitions.
* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a national bank or Federal savings association for
a single financial contract or for all financial contracts in a netting
set and confers upon the national bank or Federal savings association a
perfected, first-priority security interest (notwithstanding the prior
security interest of any custodial agent), or the legal equivalent
thereof, in the collateral posted by the counterparty under the
agreement. This security interest must provide the national bank or
Federal savings association with a right to close-out the financial
positions and liquidate the collateral upon an event of default of, or
failure to perform by, the counterparty under the collateral agreement.
A contract would not satisfy this requirement if the national bank's or
Federal savings association's exercise of rights under the agreement
may be
[[Page 78294]]
stayed or avoided under applicable law in the relevant jurisdictions,
other than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \4\ to the U.S. laws
referenced in this paragraph (1) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\4\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition.
* * * * *
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is conducted under an agreement that
provides the national bank or Federal savings association the right to
accelerate and terminate the extension of credit and to liquidate or
set-off collateral promptly upon an event of default, including upon an
event of receivership, insolvency, liquidation, conservatorship, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions, other than
in receivership, conservatorship, or resolution under the Federal
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any
similar insolvency law applicable to GSEs,\5\ or laws of foreign
jurisdictions that are substantially similar \6\ to the U.S. laws
referenced in this paragraph in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\5\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
\6\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the national bank or Federal savings
association the right to accelerate, terminate, and close-out on a net
basis all transactions under the agreement and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \7\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\7\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a national bank or
Federal savings association must comply with the requirements of Sec.
3.3(d) with respect to that agreement.
* * * * *
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the national bank or
Federal savings association acts as agent for a customer and
indemnifies the customer against loss, provided that:
* * * * *
(3) * * *
(ii) * * *
(A) The transaction is executed under an agreement that provides
the national bank or Federal savings association the right to
accelerate, terminate, and close-out the transaction on a net basis and
to liquidate or set-off collateral promptly upon an event of default,
including upon an event of receivership, insolvency, liquidation, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions, other than
in receivership, conservatorship, or resolution under the Federal
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any
similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \8\ to the U.S. laws
referenced in this paragraph (3)(ii)(a) in order to facilitate the
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\8\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
* * * * *
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
0
3. The authority citation for part 50 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et
seq.
0
4. Section 50.3 is amended by:
0
a. Revising the definition of ``qualifying master netting agreement'';
and
0
b. In paragraph (2) of the definition of ``regulated financial
company'', redesignating footnote 1 as footnote 2.
The revision is set forth below.
Sec. 50.3 Definitions.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the national bank or Federal savings
association the right to accelerate, terminate, and close-out on a net
basis all transactions under the agreement and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
[[Page 78295]]
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \1\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\1\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a national bank or
Federal savings association must comply with the requirements of Sec.
50.4(a) with respect to that agreement.
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the supplementary information, the
Board amends 12 CFR Chapter II parts 217 and 249 to read as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
5. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
Part 217 [Amended]
0
5a. Part 217 is amended by redesignating footnotes 5 through 29 as
footnotes 9 through 33, respectively.
0
6. Section 217.2 is amended by:
0
a. Revising the definitions of ``collateral agreement'' and
``qualifying master netting agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin
loan'';
0
c. Republishing the introductory text of the definition of ``repo-style
transaction''; and
0
d. Revising paragraph (3)(ii)(A) of the definition of ``repo-style
transaction''.
The revisions are set forth below:
Sec. 217.2 Definitions.
* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a Board-regulated institution for a single
financial contract or for all financial contracts in a netting set and
confers upon the Board-regulated institution a perfected, first-
priority security interest (notwithstanding the prior security interest
of any custodial agent), or the legal equivalent thereof, in the
collateral posted by the counterparty under the agreement. This
security interest must provide the Board-regulated institution with a
right to close-out the financial positions and liquidate the collateral
upon an event of default of, or failure to perform by, the counterparty
under the collateral agreement. A contract would not satisfy this
requirement if the Board-regulated institution's exercise of rights
under the agreement may be stayed or avoided under applicable law in
the relevant jurisdictions, other than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \4\ to the U.S. laws
referenced in this paragraph (1) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\4\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition.
* * * * *
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is conducted under an agreement that
provides the Board-regulated institution the right to accelerate and
terminate the extension of credit and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, conservatorship, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, or resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs,\5\ or laws of foreign jurisdictions
that are substantially similar \6\ to the U.S. laws referenced in this
paragraph in order to facilitate the orderly resolution of the
defaulting counterparty; or
---------------------------------------------------------------------------
\5\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
\6\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the Board-regulated institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \7\ to the U.S. laws
referenced in this paragraph (2)(i) in
[[Page 78296]]
order to facilitate the orderly resolution of the defaulting
counterparty; or
---------------------------------------------------------------------------
\7\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a Board-regulated
institution must comply with the requirements of Sec. 217.3(d) with
respect to that agreement.
* * * * *
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the Board-regulated
institution acts as agent for a customer and indemnifies the customer
against loss, provided that:
(3) * * *
(ii) * * *
(A) The transaction is executed under an agreement that provides
the Board-regulated institution the right to accelerate, terminate, and
close-out the transaction on a net basis and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case, any exercise of rights
under the agreement will not be stayed or avoided under applicable law
in the relevant jurisdictions, other than in receivership,
conservatorship, or resolution under the Federal Deposit Insurance Act,
Title II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs, or laws of foreign jurisdictions that are
substantially similar \8\ to the U.S. laws referenced in this paragraph
(3)(ii)(a) in order to facilitate the orderly resolution of the
defaulting counterparty; or
---------------------------------------------------------------------------
\8\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
* * * * *
PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)
0
7. The authority citation for part 249 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1),
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.
0
8. Section 249.3 is amended by:
0
a. Revising the definition of ``qualifying master netting agreement'';
and
0
b. In paragraph (2) of the definition of ``regulated financial
company'', redesignating footnote 1 as footnote 2.
Sec. 249.3 Definitions.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the Board-regulated institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \1\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\1\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a Board-regulated
institution must comply with the requirements of Sec. 249.4(a) with
respect to that agreement.
* * * * *
Dated: December 16, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, December 16, 2014.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2014-30218 Filed 12-29-14; 8:45 am]
BILLING CODE P