Mandatory Contractual Stay Requirements for Qualified Financial Contracts, 55381-55402 [2016-19671]
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55381
Proposed Rules
Federal Register
Vol. 81, No. 161
Friday, August 19, 2016
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3, 47 and 50
[Docket ID OCC–2016–0009]
RIN 1557–AE05
Mandatory Contractual Stay
Requirements for Qualified Financial
Contracts
Office of the Comptroller of the
Currency, Treasury (OCC).
ACTION: Notice of proposed rulemaking.
AGENCY:
The OCC is proposing to add
a new part to its rules to enhance the
resilience and the safety and soundness
of federally chartered and licensed
financial institutions by addressing
concerns relating to the exercise of
default rights of certain financial
contracts that could interfere with the
orderly resolution of certain
systemically important financial firms.
Under this proposed rule, a covered
bank would be required to ensure that
a covered qualified financial contract (1)
contains a contractual stay-and-transfer
provision analogous to the statutory
stay-and-transfer provision imposed
under Title II of the Dodd-Frank Act and
in the Federal Deposit Insurance Act,
and (2) limits the exercise of default
rights based on the insolvency of an
affiliate of the covered bank. In
addition, this proposed rule would
make conforming amendments to the
OCC’s Capital Adequacy Standards and
the Liquidity Risk Measurement
Standards in its regulations. The
requirements of this proposed rule are
substantively identical to those
contained in a notice of proposed
rulemaking issued by the Board of
Governors of the Federal Reserve
System on May 3, 2016.
DATES: Comments must be received by
October 18, 2016.
ADDRESSES: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
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SUMMARY:
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encouraged to submit comments
through the Federal eRulemaking Portal
or email, if possible. Please use the title
‘‘Mandatory Contractual Stay
Requirements for Qualified Financial
Contracts’’ 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
www.regulations.gov. Enter ‘‘Docket ID
OCC–2016–0009’’ in the Search Box and
click ‘‘Search.’’ 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
public comments.
• 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.
• Hand Delivery/Courier: 400 7th
Street SW., Suite 3E–218, Mail Stop
9W–11, Washington, DC 20219.
• Fax: (571) 465–4326.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2016–0009’’ 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
include 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
rulemaking action by any of the
following methods:
• Viewing Comments Electronically:
Go to www.regulations.gov. Enter
‘‘Docket ID OCC–2016–0009’’ in the
Search box and click ‘‘Search.’’ Click on
‘‘Open Docket Folder’’ on the right side
of the screen and then ‘‘Comments.’’
Comments can be filtered by clicking on
‘‘View All’’ and then using the filtering
tools on the left side of the screen.
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• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov.
Supporting materials may be viewed by
clicking on ‘‘Open Docket Folder’’ and
then clicking on ‘‘Supporting
Documents.’’ The docket may be viewed
after the close of the comment period in
the same manner as during the comment
period.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 400 7th Street
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 649–6700 or, for persons who are
deaf or hard of hearing, TTY, (202) 649–
5597. Upon arrival, visitors will be
required to present valid governmentissued photo identification and submit
to security screening in order to inspect
and photocopy comments.
FOR FURTHER INFORMATION CONTACT:
Valerie Song, Assistant Director, or
Scott Burnett, Attorney, Bank Activities
and Structure Division, (202) 649–5500;
Rima Kundnani, Attorney, or Ron
Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities
Division, (202) 649–6282, 400 7th Street
SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Qualified Financial Contracts, Default
Rights, and Financial Stability
B. QFC Default Rights and GSIB Resolution
Strategies
C. Default Rights and Relevant Resolution
Laws
III. Description of the Proposal
A. Overview, Purpose, and Authority
B. Covered Banks
C. Covered QFCs
D. Definition of ‘‘Default Right’’
E. Required Contractual Provisions Related
to U.S. Special Resolution Regimes
F. Prohibited Cross-Default Rights
G. Process for Approval of Enhanced
Creditor Protections
H. Transition Periods
I. Amendments to Capital Rules
IV. Request for Comments
V. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Unfunded Mandates Reform Act of 1995
D. Riegle Community Development and
Regulatory Improvement Act of 1994
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I. Introduction
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In the wake of the financial crisis of
2007–08, U.S. and international
financial regulators have placed
increased focus on improving the
resolvability of large, complex financial
institutions that operate in multiple
jurisdictions, often called global
systemically important banking
organizations (GSIBs).
In connection with these ongoing
efforts, on May 3, 2016, the Board of
Governors of the Federal Reserve
System (FRB or Board) issued a notice
of proposed rulemaking (NPRM)
pursuant to section 165 of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) as part
of its ongoing efforts to improve the
resolvability of U.S. GSIBs and foreign
GSIBs that operate in the United States
(collectively, ‘‘covered entities’’ 1).2 The
OCC is issuing this parallel proposed
rule applicable to OCC-regulated
institutions that are part of a covered
entity under the FRB NPRM. The OCC
intends this proposed rule to
complement and work in tandem with
the FRB NPRM.
The purpose of the Board’s NPRM is
to improve the resolvability of covered
entities by ‘‘limiting disruptions to a
failed GSIB through its financial
contracts with other companies.’’ 3
Specifically, the Board’s NPRM
addresses a threat to financial stability
posed by the potential disorderly
exercise of default rights contained in
several important categories of financial
contracts collectively known as
‘‘qualified financial contracts’’ (QFCs).4
1 The FRB NPRM applies to ‘‘covered entities.’’
The term ‘‘covered entity’’ includes: any U.S. toptier bank holding company identified as a GSIB
under the Board’s NPRM establishing risk-based
capital surcharges for GSIBs, set forth at 12 CFR
217.402; any subsidiary of such bank holding
company (other than a ‘‘covered bank’’); and any
U.S. subsidiary, U.S. branch, or U.S. agency of a
foreign GSIB (other than a ‘‘covered bank’’). See
FRB NPRM § 252.82. The term ‘‘covered entity’’
does not include ‘‘covered banks,’’ which are
instead covered by the provisions of this proposed
rule.
2 ‘‘Restrictions on Qualified Financial Contracts
of Systemically Important U.S. Banking
Organizations and the U.S. Operations of
Systemically Important Foreign Banking
Organizations; Revisions to the Definition of
Qualifying Master Netting Agreement and Related
Definitions,’’ 81 FR 29691, 29170 (May 11, 2016)
(FRB Proposal, FRB NPRM, Board’s Proposal, or
Board’s NPRM).
3 Id. at 29170.
4 Id. The Board’s Proposal adopts the definition
of ‘‘qualified financial contract’’ set out in section
210(c)(8)(D) of the Dodd-Frank Act, 12 U.S.C.
5390(c)(8)(D). See Board’s Proposal § 252.81. This
definition includes, among other things,
derivatives, repurchase agreements (also known as
‘‘repos’’) and reverse repos, and securities lending
and borrowing agreements.
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As described more fully in the Board’s
NPRM and in the Background section of
this preamble, this threat to financial
stability arises because GSIBs are
interconnected with other financial
firms, including other GSIBs, through
large volumes of QFCs. The failure of
one entity within a GSIB can trigger
disruptive terminations of these
contracts if the counterparties of both
the failed entity and its affiliates
exercise their contractual rights to
terminate the contracts and liquidate
collateral.5 These terminations,
especially if counterparties lose
confidence in the GSIB quickly, and in
large numbers, can destabilize the
financial system and potentially spark a
financial crisis through several
channels. For example, they can
destabilize the failed entity’s otherwise
solvent affiliates, causing them to
weaken or fail with adverse
consequences to their counterparties
that can result in a chain reaction that
ripples through the financial system.
They also may result in ‘‘fire sales’’ of
large volumes of financial assets, in
particular, the collateral that secures the
contracts, which can in turn weaken
and cause stress for other firms by
depressing the value of similar assets
that they hold.
As discussed in detail in the Section
I.B., the OCC, as the primary regulator
for national banks, Federal savings
associations (FSAs), and Federal
branches and agencies, has a strong
safety and soundness interest in
preventing such a disorderly
termination of QFCs upon a GSIB’s
entry into resolution proceedings. QFCs
are typically entered into by various
operating entities in the GSIB group,
which will often include a large
depository institution that is subject to
the OCC’s supervision. These OCCsupervised entities are some of the
largest entities by asset size in the GSIB
group, and often a party to large
volumes of QFCs, making these entities
highly interconnected with other large
financial firms.6 The exercise of default
rights against an otherwise healthy
national bank, FSA, or Federal branch
or agency resulting from the failure of
its affiliate, for example its top-tier U.S.
holding company, may cause it to
weaken or fail, and in turn spread
5 As used in this proposed rule, the term ‘‘GSIB’’
can refer to any entity in the GSIB group, including
the top-tier parent entity or any subsidiary thereof.
The term ‘‘GSIB entity’’ is sometimes used to refer
to an individual component of the GSIB group.
6 81 FR 29619, 29172 (‘‘From the standpoint of
financial stability, the most important of these
operating subsidiaries are generally a U.S. insured
depository institution, a U.S. broker-dealer, and
similar entities organized in other countries.’’).
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contagion throughout the financial
system, including among the system of
federally chartered and licensed
institutions that the OCC supervises, by
causing a chain of failures by other
financial institutions—including other
national banks, FSAs, or Federal
branches or agencies—that are its QFC
counterparties. Furthermore, if an OCCsupervised entity itself were to fail, it is
imperative that the default rights
triggered by such an event are exercised
in an orderly manner, both by domestic
and foreign counterparties, to ensure
that contagion does not spread to other
federally chartered and licensed
institutions and beyond throughout the
Federal banking system.7
Accordingly, OCC-supervised
affiliates or branches of U.S. or foreign
GSIBs are exposed, through the
interconnectedness of their QFCs and
their affiliates’ QFCs, to destabilizing
effects if their counterparties or the
counterparties of their affiliates exercise
default rights upon the entry into
resolution of the covered bank itself or
its GSIB affiliate. These potential
destabilizing effects are best addressed
by requiring all GSIB entities to amend
their QFCs to include contractual
provisions aimed at avoiding such
destabilization. As the primary
supervisor of covered banks, the OCC
has a significant interest in preventing
or mitigating these destabilizing effects;
otherwise, the result will be adverse to
safety and soundness of covered banks
individually and collectively, with the
potential for spill-over beyond GSIBaffiliated banks and Federal branches
and agencies to the Federal banking
system.
As described in the Board’s NPRM,
measures aimed at improving financial
stability and the probability of a
successful resolution of GSIBs likely
will affect the operations of GSIB
subsidiaries. In most cases, the largest
GSIB subsidiary by asset size is a
national bank supervised by the OCC.
While the ultimate aim of the Board’s
NPRM and this proposed rule is focused
on the resolution of a GSIB, the
proposed preventative measures would
be required to be implemented by GSIBs
while they are going concerns. The OCC
has an inherent supervisory interest in
ensuring that measures aimed at
improving resolvability in the event of
a GSIB’s failure are also consistent with
7 As used in this proposed rule, the term ‘‘Federal
banking system’’ refers to all OCC-supervised
entities, including national banks, Federal savings
associations, and Federal branches and agencies.
Accordingly, references to impacts on the Federal
banking system refer to how destabilization can
adversely affect all such entities, not just covered
banks.
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the safe and sound operation of the
OCC-supervised subsidiary as a going
concern. Accordingly, to ensure that the
QFCs entered into by such entities do
not threaten the stability or safety and
soundness of covered banks
individually or collectively, the OCC is
issuing this proposed rule, which
imposes substantively identical
requirements contained in the FRB
NPRM on national banks, FSAs, and
Federal branches and agencies (covered
banks). The OCC worked closely with
the FRB to develop this proposed rule.8
In addition, the OCC plans to work with
the FRB to coordinate the development
of the final rule and may share
comments received in response to the
proposed rule, as appropriate.
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II. Background
The following background discussion
describes in detail the financial
contracts that are the subject of this
proposed rule, the default rights often
contained in such contracts, and
impacts on financial stability resulting
from the exercise of such default rights.
This section also provides background
information on the resolution strategies
for GSIBs and how they fit within the
resolution frameworks in the United
States.9
A. Qualified Financial Contracts,
Default Rights, and Financial Stability
The proposed rule covers QFCs,
which include swaps, other derivative
contracts, repurchase agreements (repos)
and reverse repos, and securities
lending and borrowing agreements.
GSIB entities enter into QFCs to borrow
money to finance their investments, to
lend money, to manage risk, to attempt
to profit from market movements, and to
enable their clients and counterparties
to perform these financial activities.
QFCs play a role in economically
valuable financial intermediation when
markets are functioning normally. But
they are also a major source of financial
interconnectedness, which may pose a
threat to financial stability in times of
stress. This proposed rule, along with
the FRB NPRM, focuses on one of the
most serious threats to both a global
systemically important bank holding
company (BHC) and its covered banks
subsidiaries—the failure of a GSIB that
is party to large volumes of QFCs, which
are likely to involve QFCs with
8 12 U.S.C. 5365(b)(4) (requiring the Board to
consult with each Financial Stability Oversight
Council (FSOC) member that primarily supervises
any subsidiary when any prudential standard is
likely to have a ‘‘significant impact’’ on such
subsidiary).
9 See 81 FR 29169, 29170–73 (May 11, 2016),
from which this discussion is adapted.
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counterparties that are themselves
systemically important.
By contract, a party to a QFC
generally has the right to take certain
actions if its counterparty defaults on
the QFC (that is, if it fails to meet certain
contractual obligations). Common
default rights include the right to
suspend performance of the nondefaulting party’s obligations, the right
to terminate or accelerate the contract,
the right to set off amounts owed
between the parties, the right to seize
and liquidate the defaulting party’s
collateral. In general, default rights
allow a party to a QFC to reduce the
credit risk associated with the QFC by
granting it the right to exit the QFC and
thereby reduce its exposure to its
counterparty upon the occurrence of a
specified condition, such as its
counterparty’s entry into resolution
proceedings.
This proposed rule focuses on two
distinct scenarios in which a nondefaulting party to a QFC is commonly
able to exercise default rights. These
two scenarios involve a default that
occurs when either the defaulting party
to the QFC or an affiliate of that party
enters a resolution proceeding.10
The first scenario occurs when a legal
entity that is itself a party to the QFC
enters a resolution proceeding. This
proposed rule refers to such a scenario
as a ‘‘direct default’’ and refers to the
contractual default rights that arise from
a direct default as ‘‘direct default
rights.’’ 11
The second scenario occurs when an
affiliate of the legal entity that is a direct
party to the QFC (such as the direct
party’s parent holding company) enters
a resolution proceeding. This proposed
rule refers to such a scenario as a ‘‘crossdefault’’ and refers to contractual
10 This preamble uses phrases such as ‘‘entering
a resolution proceeding’’ and ‘‘going into
resolution’’ to refer to the concept of ‘‘becoming
subject to a receivership, insolvency, liquidation,
resolution, or similar proceeding.’’ These phrases
refer to proceedings established by law to deal with
a failed legal entity. In the context of the failure of
a global systemically important bank holding
company, the most relevant types of resolution
proceeding include: (1) For most U.S.-based legal
entities, the bankruptcy process established by the
U.S. Bankruptcy Code (Title 11, United States
Code); (2) for U.S. insured depository institutions,
a receivership administered by the Federal Deposit
Insurance Corporation (FDIC) under the Federal
Deposit Insurance Act (12 U.S.C. 1821); (3) for
companies whose ‘‘resolution under otherwise
applicable Federal or State law would have serious
adverse effects on the financial stability of the
United States,’’ the Dodd-Frank Act’s Orderly
Liquidation Authority (12 U.S.C. 5383(b)(2)); and,
(4) for entities based outside the United States,
resolution proceedings created by foreign law.
11 For convenience, this preamble uses the
general term ‘‘default’’ to refer specifically to a
default that occurs when a QFC party or its affiliate
enters a resolution proceeding.
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default rights that arise from a crossdefault as ‘‘cross-default rights.’’ For
example, a GSIB parent entity might
guarantee the derivatives transactions of
its subsidiaries and those derivatives
contracts could contain cross-default
rights against a subsidiary of the GSIB
that would be triggered by the
bankruptcy filing of the GSIB parent
entity even though the subsidiary
continues to meet all of its financial
obligations.
Direct default rights and cross-default
rights are referred to collectively in this
proposed rule as ‘‘default rights.’’
As noted in the FRB NPRM, if a
significant number of QFC
counterparties exercise their default
rights precipitously and in a manner
that would impede an orderly resolution
of a GSIB, all QFC counterparties and
the broader financial system, including
institutions supervised by the OCC, may
potentially be worse off and less stable.
The destabilization can occur in
several ways. First, counterparties’
exercise of default rights may drain
liquidity from the troubled GSIB,
forcing it to sell off assets at depressed
prices, both because the sales must be
done on a short timeframe and because
the elevated supply will push prices
down. These asset ‘‘fire sales’’ may
cause or deepen balance-sheet
insolvency at the GSIB, reducing the
amount that its other creditors can
recover and thereby imposing losses on
those creditors and threatening their
solvency (and, indirectly, the solvency
of their own creditors, and so on). The
GSIB may also respond by withdrawing
liquidity that it had offered to other
firms, forcing them to engage in asset
fire sales. Alternatively, if the GSIB’s
QFC counterparty itself liquidates the
QFC collateral at fire sale prices, the
effect will again be to weaken the GSIB’s
balance sheet, because the debt satisfied
by the liquidation would be less than
what the value of the collateral would
have been outside the fire sale context.
The counterparty’s setoff rights may
allow it to further drain the GSIB’s
capital and liquidity by withholding
payments owed to the GSIB. The GSIB
may also have rehypothecated collateral
that it received from QFC
counterparties, for instance in back-toback repo or securities lending
transactions, in which case demands
from those counterparties for the early
return of their rehypothecated collateral
could be especially disruptive.
The asset fire sales can also spread
contagion throughout the financial
system by increasing volatility and by
lowering the value of similar assets held
by other financial institutions,
potentially causing them to suffer
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diminished market confidence in their
own solvency, mark-to-market losses,
margin calls, and creditor runs (which
could lead to further fire sales,
worsening the contagion). Finally, the
early terminations of derivatives that the
defaulting GSIB relied on to hedge its
risks could leave major risks unhedged,
increasing the GSIB’s probable losses
going forward.
Where there are significant
simultaneous terminations and these
effects occur contemporaneously, such
as upon the failure of a GSIB that is
party to a large volume of QFCs, they
may pose a substantial risk to financial
stability. In short, QFC continuity is
important for the orderly resolution of a
GSIB so that the instability caused by
asset fire sales can be avoided.12
As will be discussed further, the
proposed rule is primarily concerned
only with default rights that run against
a GSIB—that is, direct default rights and
cross-default rights that arise from the
entry into resolution of a GSIB. The
proposed rule would not affect
contractual default rights that a GSIB (or
any other entity) may have against a
counterparty that is not a GSIB. The
OCC believes that this limited scope is
appropriate because the risk posed to
financial stability by the exercise of QFC
default rights is greatest when the
defaulting counterparty is a GSIB.
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B. QFC Default Rights and GSIB
Resolution Strategies
Under the Dodd-Frank Act, many
complex GSIBs are required to submit
resolution plans to the Board and the
Federal Deposit Insurance Corporation
(FDIC), detailing how the company can
be resolved in a rapid and orderly
manner in the event of material
financial distress or failure of the
company. In response to these
requirements, these firms have
12 The Board and the FDIC identified the exercise
of default rights in financial contracts as a potential
obstacle to orderly resolution in the context of
resolution plans filed pursuant to section 165(d) of
the Dodd-Frank Act and, accordingly, instructed the
most systemically important firms to demonstrate
that they are ‘‘amending, on an industry-wide and
firm-specific basis, financial contracts to provide for
a stay of certain early termination rights of external
counterparties triggered by insolvency
proceedings.’’ FRB and FDIC, ‘‘Agencies Provide
Feedback on Second Round Resolution Plans of
‘First-Wave’ Filers’’ (August 5, 2014), available at
http://www.federalreserve.gov/newsevents/press/
bcreg/20140805a.htm. See also FRB and FDIC,
‘‘Agencies Provide Feedback on Resolution Plans of
Three Foreign Banking Organizations’’ (March 23,
2015), available at http://www.federalreserve.gov/
newsevents/press/bcreg/20150323a.htm; FRB and
FDIC, ‘‘Guidance for 2013 165(d) Annual
Resolution Plan Submissions by Domestic Covered
Companies that Submitted Initial Resolution Plans
in 2012’’ 5–6 (April 15, 2013), available at http://
www.federalreserve.gov/newsevents/press/bcreg/
bcreg20130415c2.pdf.
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developed resolution strategies that,
broadly speaking, fall into two
categories: The single-point-of-entry
(SPOE) strategy and the multiple-pointof-entry (MPOE) strategy. As noted in
the Board’s Proposal, cross-default
rights in QFCs pose a potential obstacle
to the implementation of either of these
strategies.
In an SPOE resolution, only a single
legal entity—the GSIB’s top-tier BHC—
would enter a resolution proceeding.
The losses that led to the GSIB’s failure
would be passed up from the operating
subsidiaries that incurred the losses to
the holding company and would then be
imposed on the equity holders and
unsecured creditors of the holding
company through the resolution
process. This strategy is designed to
help ensure that the GSIB’s subsidiaries
remain adequately capitalized. An SPOE
resolution could thereby prevent those
operating subsidiaries from failing or
entering resolution themselves and
allow them to instead continue normal
operations. The expectation that the
holding company’s equity holders and
unsecured creditors would absorb the
GSIB’s losses in the event of failure
would help to maintain the confidence
of the operating subsidiaries’ creditors
and counterparties (including QFC
counterparties), reducing their incentive
to engage in potentially destabilizing
funding runs or margin calls and thus
lowering the risk of asset fire sales.
An SPOE proceeding can avoid the
need for covered banks to be placed into
receivership or similar proceedings, as
they would continue to operate as going
concerns, only if the parent’s entry into
resolution proceedings does not trigger
the exercise of cross-default rights.
Accordingly, this proposed rule, by
limiting such cross-default rights based
on an affiliate’s entry into resolution
proceedings, enables the SPOE strategy,
and in turn, would assist in stabilizing
both the covered bank and the Federal
banking system.
This proposed rule would also yield
benefits for resolution under the MPOE
strategy. Unlike the SPOE strategy, an
MPOE strategy involves several entities
in the GSIB group entering proceedings.
For example, an MPOE strategy might
involve a foreign GSIB’s U.S.
intermediate holding company going
into resolution or a GSIB’s U.S. insured
depository institution entering
resolution under the Federal Deposit
Insurance Act. Similar to the benefits
associated with the SPOE strategy, this
proposed rule would help support the
continued operation of affiliates of an
entity experiencing resolution to the
extent the affiliate continues to perform
on its QFCs.
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C. Default Rights and Relevant
Resolution Laws
In order to understand the connection
between direct defaults, cross-defaults,
the SPOE and MPOE resolution
strategies, and the threats to financial
stability discussed previously, it is
necessary to understand how QFCs, and
the default rights contained therein, are
treated when an entity enters resolution.
The following sections discuss the
treatment of QFCs in greater detail
under three U.S. resolution laws: the
Bankruptcy Code, the Orderly
Liquidation Authority, and the Federal
Deposit Insurance Act. As discussed in
these sections, each of these resolution
laws has special provisions detailing the
treatment of QFCs upon an entity’s
entry into such proceedings.
U.S. Bankruptcy Code. While covered
banks themselves are not subject to
resolution under the Bankruptcy Code,
in general, if a BHC were to fail, it
would be resolved under the
Bankruptcy Code. When an entity goes
into resolution under the Bankruptcy
Code, attempts by the creditors of the
debtor to enforce their debts through
any means other than participation in
the bankruptcy proceeding (for instance,
by suing in another court, seeking
enforcement of a preexisting judgment,
or seizing and liquidating collateral) are
generally blocked by the imposition of
an automatic stay, which generally
persists throughout the bankruptcy
proceeding.13 A key purpose of the
automatic stay, and of bankruptcy law
in general, is to maximize the value of
the bankruptcy estate and the creditors’
ultimate recoveries by facilitating an
orderly liquidation or restructuring of
the debtor. As a result, the automatic
stay addresses the collective action
problem, in which the creditors’
individual incentives to race to recover
as much from the debtor as possible,
before other creditors can do so,
collectively cause a value-destroying
disorderly liquidation of the debtor.14
The Bankruptcy Code, however,
largely exempts QFC counterparties
from the automatic stay through special
‘‘safe harbor’’ provisions.15 Under these
provisions, any contractual rights that a
QFC counterparty has to terminate the
contract, set off obligations, and
liquidate collateral in response to a
direct default or cross-default are not
13 See
11 U.S.C. 362.
e.g., Aiello v. Providian Financial Corp.,
239 F.3d 876, 879 (7th Cir. 2001).
15 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555,
556, 559, 560, 561.
14 See,
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subject to the stay and may be exercised
at any time.16
Where the failed firm is a GSIB’s
holding company with covered banks
that are going concerns and are party to
large volumes of QFCs, the mass
exercise of default rights under the
QFCs based on the affiliate default
represents a significant impediment to
the SPOE resolution strategy.17 This is
because the failure of a covered bank’s
affiliate will trigger the mass exercise of
cross-default rights against the covered
bank, which will not be stayed by the
affiliate’s entry into bankruptcy
proceedings. This will in turn lead to
fire sales that will threaten the ongoing
viability of the covered bank and the
successful resolution of the particular
GSIB—and thus will also pose a threat
to the federal banking system and
broader financial system.
Special Resolution Regimes Under
U.S. Law. For purposes of this proposed
rule, there are two special resolution
regimes under U.S. law: Title II of the
Dodd-Frank Act and the Orderly
Liquidation Authority (OLA); and the
Federal Deposit Insurance Act (FDIA).
While these regimes both impose certain
limitations on the ability of
counterparties to exercise default
rights—thus mitigating the potential for
disorderly resolution due to the exercise
by counterparties of such default
rights—these limitations may not be
applicable or clearly enforceable in
certain contexts.
Title II of the Dodd-Frank Act and the
Orderly Resolution Authority. Title II of
the Dodd-Frank Act establishes an
alternative resolution framework
intended ‘‘to provide the necessary
authority to liquidate failing financial
companies that pose a significant risk to
the financial stability of the United
States in a manner that mitigates such
risk and minimizes moral hazard.’’ 18
As noted, although a failed BHC
would generally be resolved under the
Bankruptcy Code, Congress recognized
that a U.S. financial company might fail
under extraordinary circumstances, in
which an attempt to resolve it through
the bankruptcy process would have
16 The Bankruptcy Code does not itself confer any
default rights upon QFC counterparties; it merely
permits QFC counterparties to exercise certain
contractual rights that they have under the terms of
the QFC. This proposed rule does not propose to
restrict the exercise of any default rights that fall
within the Bankruptcy Code’s safe harbor
provisions, which are described here to provide
context.
17 As noted previously, the MPOE strategy will
similarly benefit from the override of cross-defaults.
The SPOE strategy is used here for illustrative
purposes only.
18 12 U.S.C. 5384(a) (Section 204(a) of the DoddFrank Act).
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serious adverse effects on financial
stability in the United States. Title II
therefore authorizes the Secretary of the
Treasury, upon the recommendation of
other government agencies and a
determination that several
preconditions are met, to place a U.S.
financial company into a receivership
conducted by the FDIC as an alternative
to bankruptcy.
Title II empowers the FDIC, when it
acts as receiver in an OLA resolution, to
protect financial stability against the
QFC-related threats discussed
previously. Title II addresses direct
default rights in a number of ways. First,
Title II empowers the FDIC to transfer
the QFCs to some other financial
company that is not in a resolution
proceeding.19 To give the FDIC time to
effect this transfer, Title II temporarily
stays QFC counterparties of the failed
entity from exercising termination,
netting, and collateral liquidation rights
‘‘solely by reason of or incidental to’’
the failed entity’s entry into OLA
resolution, its insolvency, or its
financial condition.20 Second, once the
QFCs are transferred in accord with the
statute, Title II permanently stays the
exercise of those direct default rights
based on the prior event of default and
receivership.21
Title II addresses cross-default rights
through a similar procedure. It
empowers the FDIC ‘‘to enforce
contracts of subsidiaries or affiliates’’ of
the failed company that are guaranteed
or otherwise supported by or linked to
the covered financial company,
notwithstanding any contractual right to
cause the termination, liquidation, or
acceleration of such contracts based
solely on the insolvency, financial
condition, or receivership of the failed
company, so long as the FDIC takes
certain steps to protect the QFC
counterparty’s interests by the end of
the business day following the
company’s entry into OLA resolution.22
These stay-and-transfer provisions of
the Dodd-Frank Act go far to mitigate
the threat posed by QFC default rights
by preventing mass closeouts against the
entity that has entered into OLA
19 12
U.S.C. 5390(c)(9).
U.S.C. 5390(c)(10)(B)(i)(I). This temporary
stay generally lasts until 5:00 p.m. eastern time on
the business day following the appointment of the
FDIC as receiver.
21 If the QFCs 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 FDIC as receiver
of the financial company (or the insolvency or
financial condition of the financial company), but
is not stayed from exercising such rights based
upon other events of default. 12 U.S.C.
5390(c)(10)(B)(i)(II).
22 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
20 12
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55385
proceedings or its going concern
affiliates. At the same time, they allow
for appropriate protections for QFC
counterparties of the failed financial
company. They only stay the exercise of
default rights based on the failed
company’s entry into resolution, the fact
of its insolvency, or its financial
condition. And the stay period is brief,
unless the FDIC transfers the QFCs to
another financial company that is not in
resolution and should therefore be
capable of performing under the QFCs.
Federal Deposit Insurance Act. Under
the FDIA, a failing insured depository
institution would generally enter a
receivership administered by the
FDIC.23 The FDIA addresses direct
default rights in the failed bank’s QFCs
with stay-and-transfer provisions that
are substantially similar to the
provisions of Title II of the Dodd-Frank
Act as discussed.24 However, the FDIA
does not address cross-default rights,
leaving the QFC counterparties of the
failed depository institution’s affiliates
free to exercise any contractual rights
they may have to terminate, net, and
liquidate collateral based on the
depository institution’s entry into
resolution.
III. Description of the Proposal
A. Overview, Purpose, and Authority
As discussed previously, and in the
Board’s Proposal, the exercise of default
rights by counterparties of a failed GSIB
can have a significant impact on
financial stability. This financial
stability concern is necessarily
intertwined with the safety and
soundness of covered banks and the
federal banking system—the disorderly
exercise of default rights can produce a
sudden, contemporaneous threat to the
safety and soundness of individual
institutions throughout the system,
which in turn threatens the system as a
whole.A Accordingly, national banks,
FSAs, and Federal branches and
agencies are affected by financial
instability—even if such instability is
precipitated outside the Federal banking
system—and can themselves also be
sources of financial destabilization due
to the interconnectedness of these
institutions to each other and to other
entities within the financial system.
Thus, safety and soundness of
individual national banks, FSAs, and
Federal branches and agencies, the
federal banking system, and financial
stability of the system as a whole are
interconnected.
23 12
U.S.C. 1821(c).
12 U.S.C. 1821(e)(8)–(10).
24 See
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The purpose of this proposed rule is
to enhance the safety and soundness of
covered banks and the federal banking
system, thereby also bolstering financial
stability generally, by addressing the
two main issues raised by covered QFCs
with the orderly resolution of these
covered banks as generally described in
the Board’s Proposal.
While Title II and the FDIA empower
the use of the QFC stay-and-transfer
provisions, a court in a foreign
jurisdiction may decline to enforce
these important provisions. The
proposed rule directly improves the
safety and soundness of covered banks
by clarifying the applicability of U.S.
special resolution regimes to all
counterparties, whether they are foreign
or domestic. Although domestic entities
are clearly subject to the temporary stay
provisions of OLA and the FDIA, these
stays may be difficult to enforce in a
cross-border context. As a result,
domestic counterparties of a failed U.S.
financial institution may be
disadvantaged relative to foreign
counterparties, as the domestic
counterparties would be subject to the
stay, and accompanying potential
market volatility, while if the stay was
not enforced by foreign authorities,
foreign counterparties could close out
immediately. Furthermore, a mass close
out by such foreign counterparties
would likely exacerbate market
volatility, which in turn would likely
magnify harm to the stayed U.S.
counterparties’ positions, which are
likely to include other national banks
and FSAs. This proposed rule would
eliminate the potential for these adverse
consequences by requiring covered
banks to condition the exercise of
default rights in covered contracts on
the stay provisions of OLA and the
FDIA.
In spite of the QFC stay-and-transfer
provisions in Title II and the FDIA, the
affiliates of a global systemically
important BHC that goes into resolution
under the Bankruptcy Code may face
disruptions to their QFCs as their
counterparties exercise cross-default
rights. Thus, a healthy covered bank
whose parent BHC entered resolution
proceedings could fail due to its
counterparties exercising cross-default
rights. This is clearly both a safety and
soundness concern for the otherwise
healthy covered bank, but it also has the
additional negative effect of defeating
the orderly resolution of the GSIB, since
a key element of SPOE resolution in the
United States is ensuring that critical
operating subsidiaries—such as covered
banks—continue to operate on a going
concern basis. This proposed rule
would address this issue by generally
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restricting the exercise of cross-default
rights by counterparties against a
covered bank.
Moreover, a disorderly resolution like
that described previously could
jeopardize not just the covered bank and
the orderly resolution of its failed parent
BHC, but all surviving counterparties,
many of which are likely to be other
national banks and other FSAs,
regardless of size or interconnectedness,
by harming the overall condition of the
Federal banking system and the
financial system as a whole. A
disorderly resolution could result in
additional defaults, fire sales of
collateral, and other consequences
likely to amplify the systemic fallout of
the resolution of a covered bank.
The proposed rule is designed to
minimize such disorder, and therefore
enhance the safety and soundness of all
individual national banks, FSAs, and
Federal branches and agencies, the
Federal banking system, and the broader
financial system. This is particularly
important because financial institutions
are more sensitive than other firms to
the overall health of the financial
system.25
The proposed rule covers the OCCsupervised operations of foreign
banking organizations (FBOs)
designated as systemically important,
including national bank and FSA
subsidiaries, as well as Federal branches
and agencies, of these FBOs. As with a
national bank or FSA subsidiary of a
U.S. global systemically important BHC,
the OCC believes that this proposed rule
should apply to a national bank or FSA
subsidiary of a global systematically
important FBO for essentially the same
reasons. While the national bank or FSA
may not be considered systemically
important itself, as part of a GSIB, the
disorderly resolution of the covered
national banks and FSAs could have a
significant negative impact on the
Federal banking system and on the U.S.
financial system, in general.
Specifically, the proposed rule is
designed to prevent the failure of a
global systemically important FBO from
disrupting the ongoing operations or
orderly resolution of the covered bank
by protecting the healthy national bank
or FSA from the mass triggering of
25 The OCC, along with the FDIC and FRB,
recently made this point in the swap margin NPRM.
79 FR 57348, 57361 (September 24, 2014)
(‘‘Financial firms present a higher level of risk than
other types of counterparties because the
profitability and viability of financial firms is more
tightly linked to the health of the financial system
than other types of counterparties. Because
financial counterparties are more likely to default
during a period of financial stress, they pose greater
systemic risk and risk to the safety and soundness
of the covered swap entity.’’).
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default rights by the QFC
counterparties. Additionally, the
application of this proposed rule to the
QFCs of these national bank and FSA
subsidiaries should avoid creating what
may otherwise be an incentive for
counterparties to concentrate QFCs in
these firms because they are subject to
fewer counterparty restrictions.
Similarly, it is important to cover any
Federal branch or agency of a global
systemically important FBO in order to
ensure the orderly resolution of these
entities if the parent FBO were to be
placed into resolution in its home
jurisdiction. However, to avoid unduly
broad application of the proposed rule
and imposing unnecessary restrictions
on the QFCs of global systemically
important FBOs, the proposed rule
would exclude certain QFCs that do not
have a clear nexus to its U.S. operations.
Specifically, the proposed rule would
exclude covered QFCs under multibranch arrangements that either are not
booked at the Federal branch or agency
or do not provide for payment or
delivery at the Federal branch or
agency. The OCC believes that this
provides a reasonable limitation on the
scope of the proposed rule to those
QFCs of covered Federal branches and
agencies that have a direct effect on the
Federal banking system and the general
financial stability of the United States.
The OCC is issuing this proposed rule
under its authorities under the National
Bank Act (12 U.S.C. 1 et seq.), the Home
Owners’ Loan Act (12 U.S.C. 1461 et
seq.), and the International Banking Act
of 1978 (12 U.S.C. 3101 et seq.),
including its general rulemaking
authorities.26 As discussed in detail in
Section I. B., the OCC views the
proposed rule as consistent with its
overall statutory mandate of assuring
the safety and soundness of entities
subject to its supervision, including
national banks, FSAs, and Federal
branches and agencies.27
B. Covered Banks (Section 47.3(a), (b),
(c))
The proposed rule would apply to all
‘‘covered banks.’’ The term ‘‘covered
bank’’ would be defined to include (i)
any national bank or FSA that is a
subsidiary of a global systemically
important BHC that has been designated
pursuant to subpart I of 12 CFR part 252
of this title (FRB Regulation YY); or (ii)
is a national bank or FSA subsidiary, or
Federal branch or agency of a global
systemically important FBO that has
26 See
12 U.S.C. 93a, 1463(a)(2), and 3108(a).
12 U.S.C. 1. This primary responsibility is
also defined in various provisions throughout the
OCC’s express statutory authorities with respect to
each institution type under their respective statutes.
27 See
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been designated pursuant to FRB
Regulation YY.
The proposed rule defines global
systemically important BHC and global
systemically important FBO by crossreference to newly added subpart I of 12
CFR part 252 of the Board’s Proposal.
The list of banking organizations that
meet the methodology proposed in the
FRB NPRM is currently the same set of
banking organizations that meet the
Basel Committee on Banking
Supervision (BCBS) definition of a
GSIB.28
This proposed rule covers national
bank and FSA subsidiaries of global
systemically important BHCs and FBOs,
and Federal branches and agencies of
global systemically important FBOs. In
the United States, covered QFCs
typically are entered into at the
subsidiary level, which would include
through the national bank, FSA or
Federal branch or agency, rather than
through the U.S. intermediate holding
company.29
The OCC believes if the orderly
resolution of a covered entity as defined
under the FRB’s Proposal is to be
successful, then it is necessary that all
national banks, FSAs, and Federal
branches and agencies of systemically
important global systemically important
BHCs and FBOs be subject to the
mandatory contractual requirements in
this proposed rule. Moreover, this
proposed rule would make clear that the
mandatory contractual stay
requirements apply to the subsidiaries
of any national bank, FSA, or Federal
branch or agency that is a covered bank.
Under the proposed rule, the term
covered bank also includes any
subsidiary of a national bank, FSA, or
Federal branch or agency. The
definition of ‘‘subsidiary of covered
bank’’ in the proposed rule mirrors the
definition of subsidiary in the FRB’s
Regulation YY (12 CFR 252.2), and it is
intended to be substantially the same as
the FRB’s definition with respect to a
28 In November 2015, the Financial Stability
Board and BCBS published a list of banks that meet
the BCBS definition of a global systemically
important bank (BCBS G–SIB) based on year-end
2014 data. A list based on year-end 2014 data was
published November 3, 2015 (available at http://
www.fsb.org/wp-content/uploads/2015-update-oflist-of-global-systemically-important-banks-GSIBs.pdf). The U.S. top-tier BHCs that are currently
identified as a BCBS G–SIBs are Bank of America
Corporation, Bank of New York Mellon
Corporation, Citigroup Inc., Goldman Sachs Group,
Inc., JP Morgan Chase & Co., Morgan Stanley, State
Street Corporation, and Wells Fargo & Company.
29 Under the clean holding company component
of the FRB’s recent Total Loss-Absorbing Capacity
(TLAC) proposal, the U.S. intermediate holding
companies of foreign GSIB entities would be
prohibited from entering into QFCs with third
parties. See 80 FR 74926 (November 30, 2015).
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subsidiary of a covered bank.
Essentially, for the same reasons that it
is necessary to cover all national banks,
FSAs, and Federal branches and
agencies of global systemically
important BHCs and FBOs under the
proposed rule, the OCC believes that it
is necessary that all subsidiaries of those
covered banks also be subject to the
mandatory contractual stay
requirements. As mentioned, unless all
entities that are part of a GSIB are
covered, counterparties might have
incentives to migrate their covered
QFCs to uncovered entities.
Question 1: While the exercise of
mass closeout rights against any
individual national bank, FSA or
Federal branch or agency would raise
concerns, the OCC is especially
concerned about the potential spill-over
effect such mass closeouts would have,
either individually or collectively, on
the Federal banking system if the entity
itself is systemically important or part of
a larger banking group that is
systemically important. Are there
alternative approaches for determining
which national banks, FSAs and Federal
branches and agencies should be
considered systemically important?
Question 2: While the primary focus
of this rule is on, covered banks—i.e.,
those that are subsidiaries or branches
of U.S. or foreign GSIBS—there is some
concern that given the interconnected
nature of QFCs, a market disruption
could significantly impact all national
banks, FSAs and Federal branches and
agencies. Should this proposed rule be
expanded to cover more OCC-regulated
entities, for example, those national
banks, FSAs or Federal branches and
agencies with material levels of QFC
activities? How could material levels of
QFC activities be defined and
measured?
Question 3: Conversely, is the scope
of this proposed rule too broad? The
proposed rule would apply to all
covered QFCs of covered banks as well
as all of their subsidiaries, regardless of
size or volume of transactions. A key
policy concern is that unless all
subsidiaries of a covered bank are
subject to the direct and cross-default
restrictions of the proposed rule,
covered banks and their counterparties
would have the incentive to transfer
their QFCs to unprotected subsidiaries
of the covered bank. Could the scope of
entities covered by the proposed rule be
narrowed while still achieving its policy
objectives? If so, what criteria could be
used? For example, should a subsidiary
of covered banks that only engages in
some de minimis level of covered QFCs
be safely excluded from the scope of
this proposed rule? Are there alternative
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55387
ways to define what will be considered
subsidiaries for purposes of this rule?
Question 4: Some of the subsidiaries
of covered banks under the proposed
rule could be subject to additional
supervision by another U.S. agency,
such as the case of a broker-dealer
subsidiary of a national bank. Does the
issue of potentially conflicting
jurisdiction need to be addressed? If so,
how? For example, should the rule
provide a carve out for a subsidiary of
a covered bank that is subject to
comparable requirements under the
regulations of another agency?
Question 5: The scope of this
proposed rule is designed to cover any
national bank or FSA that is a
subsidiary of a global systemically
important BHC or FBO under the FRB
NPRM. While this scope of coverage
ensures that all national banks or FSAs
under a global systemically important
BHC or FBO would be subject to the
same substantive contractual mandatory
stay under the FRB NPRM, the proposed
rule does not take into account the
potential situation of a standalone
national bank or FSA, not under a BHC,
that might itself be considered
systemically important. Although no
such entity exists currently, the OCC is
considering whether to amend the
definition of covered bank to include
any national bank or FSB that meets a
certain asset threshold test. In this case,
the OCC is considering using the $700
billion in total consolidated assets that
is used in the Enhanced Supplementary
Leverage Ratio.30 Should the OCC
decide to address standalone national
banks and FSBs, what methodology and
factors should the OCC consider in
deciding which institutions to include?
C. Covered QFCs (Sections 47.4(a),
47.5(a), 47.7, 47.8)
General requirement. The proposed
rule would require covered banks to
ensure that each ‘‘covered QFC’’
conforms to the requirements of sections
47.4 and 47.5. These sections require
that a covered QFC (1) contain
contractual stay-and-transfer provisions
similar to those imposed under Title II
of the Dodd-Frank Act and the FDIA,
and (2) limit the exercise of default
rights based on the insolvency of an
affiliate of the covered bank. A ‘‘covered
QFC’’ is generally defined as any QFC
that a covered bank enters, executes, or
otherwise becomes party to. A party to
a QFC includes a party acting as agent
under the QFC. ‘‘Qualified financial
contract’’ or ‘‘QFC’’ would be defined to
have the same meaning as in section
210(c)(8)(D) of Title II of the Dodd-Frank
30 See
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Act and would include derivatives,
swaps, repurchase, reverse repurchase,
and securities lending and borrowing
transactions.
Except for certain QFCs under multibranch master agreements, the
definition of QFC would include a
single QFC, but also all QFCs under a
master agreement. Master agreements
are contracts that contain general terms
that the parties wish to apply to
multiple transactions between them;
having executed the master agreement,
the parties can then include those terms
in future contracts through reference to
the master agreement. The proposed
rule defines master agreement as
defined by Title II of the Dodd-Frank
Act or any master agreement designated
by regulation by the FDIC. Under the
definition, master agreements for QFCs,
together with all supplements to the
master agreement (including underlying
transactions), would be treated as a
single QFC.31
The proposed definition of ‘‘QFC’’ is
intended to cover those financial
transactions whose disorderly unwind
has substantial potential to frustrate,
directly or indirectly, the orderly
resolution of the covered bank or any
affiliate of such covered bank. The
Dodd-Frank Act uses its definition of
‘‘qualified financial contract’’ to
determine the scope of the stay-andtransfer provisions that it applies to
direct default and cross-default rights in
an OLA resolution. By adopting the
Dodd-Frank Act’s definition, the
proposed rule would track Congress’s
judgment as to which financial
transactions could, if not subject to
appropriate restrictions, pose an
obstacle to the orderly resolution of a
systemically important financial
company.
Question 6: With regard to the
proposed definitions of ‘‘QFC’’ and
‘‘covered QFC’’ are there other types of
financial contracts or transactions that
should be included in the definition of
a ‘‘covered QFC’’ in the proposed rule
because they could pose a similar risk
to the safety and soundness of the
covered national banks, FSAs, and
Federal branches and agencies and to
the Federal banking system? Conversely,
is the definition of covered QFC too
broad? Are there types of financial
contracts that fall within the definition
of covered QFC that could be excluded
31 12 U.S.C. 5390(c)(8)(D)(viii); see also 12 U.S.C.
1821(e)(8)(D)(vii); 109 H. Rpt. 31, Part 1 (April 8,
2005) (explaining that a ‘‘master agreement for one
or more securities contracts, commodity contracts,
forward contracts, repurchase agreements or swap
agreements will be treated as a single QFC under
the FDIA or the FCUA (but only with respect to the
underlying agreements are themselves QFCs)’’).
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without compromising the policy
objectives of the proposed rule?
Question 7: Should this proposed rule
include a reservation of authority
provision that would maintain OCC’s
supervisory flexibility, on a case-by-case
basis, to include or exclude from the
proposed rule (1) specific OCCsupervised entities (and their
subsidiaries) and (2) financial contracts
or transactions, if consistent with the
purposes of the proposed rule?
Exclusion of cleared QFCs. The
proposed rule would exclude from the
definition of ‘‘covered QFC’’ all QFCs
that are cleared through a central
counterparty (CCP). The OCC continues
to consider the appropriate treatment of
centrally cleared QFCs, in light of
differences between cleared and
uncleared QFCs with respect to
contractual arrangements, counterparty
credit risk, default management, and
supervision.
Question 8: Should the QFCs between
a CCP (or other financial market utility)
and a member covered bank be subject
to the requirements of this proposed
rule? What additional risks do such
cleared QFCs pose to the orderly
resolution of covered banks and the
Federal banking system? What other
factors should be considered?
Exclusion of certain QFCs under
foreign bank multi-branch master
agreements. Under the proposed rule,
the definition of a ‘‘QFC’’ would include
a master agreement that covers other
QFCs. In addition, under this definition
those QFCs covered by the master
agreement would be treated as a single
QFC. By design, this definition of QFC
is intended to ensure that the proposed
rule would apply to all of the relevant
QFCs entered into by a covered bank.
However, as applied to the QFCs of
Federal branches and agencies under a
multi-branch master agreement, this
definition may be too broad in its scope.
Foreign banks have multi-branch
master agreements that permit
transactions to be entered into both at a
U.S. branch or agency of the foreign
bank and at a foreign branch (located
outside of the United States) of the
foreign bank. Under this proposed rule,
a QFC of a Federal branch or agency, as
well as all of the QFCs entered into by
foreign branches under the same multibranch master agreement would be
treated as a single QFC of the Federal
branch or agency, and would therefore
be subject to the requirements of this
proposed rule. Where the QFC of the
foreign branch has some U.S. nexus,
such as permitting payment or delivery
in the United States, the OCC believes
that subjecting those QFCs to this
proposed rule is reasonable and
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consistent with protecting the safety and
soundness of the Federal banking
system. However, where the QFC of the
foreign branch does not permit any
payment or delivery in the United
States, the OCC believes that applying
this proposed rule to such QFCs lacks
a sufficient connection to the U.S.
operations of the Federal branch or
agency and may be unduly broad.
Absent the possibility under the QFC
of payment or delivery in the United
States, the OCC believes that the impact
of such QFCs on the Federal branch or
agency covered by this proposed rule, or
on the Federal banking system and the
United States as a whole, is indirect and
relatively immaterial. For this reason,
the proposed rule would exclude QFCs
under such a ‘‘multi-branch master
agreement’’ that are not booked at a
Federal branch or agency covered by
this proposed rule, and for which no
payment or delivery may be made at the
Federal branch or agency. Conversely,
the multi-branch master agreement
would be a covered QFC with respect to
QFC transactions that are booked and
permits payment and delivery at a
Federal branch or agency covered by
this proposed rule.
Question 9: Should the scope of the
proposed rule be limited to only those
transactions that are booked, or provide
for payment and delivery, at the Federal
branch or agency?
D. Definition of ‘‘Default Right’’
As discussed previously, a party to a
QFC generally has a number of rights
that it can exercise if its counterparty
defaults on the QFC by failing to meet
certain contractual obligations. These
rights are generally, but not always,
contractual in nature. One common
default right is a setoff right which is the
right to reduce the total amount that the
non-defaulting party must pay by the
amount that its defaulting counterparty
owes. A second common default right is
the right to liquidate pledged collateral
and use the proceeds to pay the
defaulting party’s net obligation to the
non-defaulting party. Other common
rights include the ability to suspend or
delay the non-defaulting party’s
performance under the contract or to
accelerate the obligations of the
defaulting party.
Finally, the non-defaulting party
typically has the right to terminate the
QFC, meaning that the parties would
not make payments that would have
been required under the QFC in the
future. The phrase ‘‘default right’’ in the
proposed rule text at § 47.2 is broadly
defined to include these common rights
as well as ‘‘any similar rights.’’
Additionally, the definition includes all
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such rights regardless of source,
including rights existing under contract,
statute, or common law.
However, the proposed definition
excludes two rights that are typically
associated with the business-as-usual
functioning of a QFC. First, same-day
netting that occurs during the life of the
QFC in order to reduce the number and
amount of payments each party owes
the other is excluded from the definition
of ‘‘default right.’’ 32 Second, contractual
margin requirements that arise solely
from the change in the value of the
collateral or the amount of an economic
exposure are also excluded from the
definition.33 The effect of these
exclusions is to leave such rights
unaffected by the proposed rule. The
exclusions are appropriate because the
proposed rule is intended to improve
resolvability by addressing default
rights that could disrupt an orderly
resolution, and not to interrupt the
parties’ business-as-usual dealings
under a QFC.
However, certain QFCs are also
commonly subject to rights that would
increase the amount of collateral or
margin that the defaulting party (or a
guarantor) must provide upon an event
of default. The financial impact of such
default rights on a covered bank could
be similar to the impact of the
liquidation and acceleration rights
discussed previously. Therefore, the
proposed definition of ‘‘default right’’
includes such rights (with the exception
discussed in the previous paragraph for
margin requirements that depend solely
on the value of collateral or the amount
of an economic exposure).34
Finally, contractual rights to
terminate without the need to show
cause, including rights to terminate on
demand and rights to terminate at
contractually specified intervals, are
excluded from the definition of ‘‘default
right’’ for purposes the proposed rule’s
restrictions on cross-default rights
(section 47.5 of the proposed rule).35
This is consistent with the proposed
rule’s objective of restricting only
default rights that are related, directly or
indirectly, to the entry into resolution of
an affiliate of the covered bank, while
leaving other default rights unrestricted.
Question 10: The OCC invites
comment on all aspects of the proposed
definition of ‘‘default right’’ In
particular, are the proposed exclusions
appropriate in light of the objectives of
the proposal? To what extent does the
exclusion of rights that allow a party to
32 See
Proposed Rule § 47.2.
33 See id.
34 See id.
35 See Proposed Rule §§ 47.2 and 47.5.
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terminate the contract ‘‘on demand or at
its option at a specified time, or from
time to time, without the need to show
cause’’ create an incentive for firms to
include these rights in future contracts
to evade the proposed restrictions? To
what extent should other regulatory
requirements (e.g., liquidity coverage
ratio or the short-term wholesale
funding components of the GSIB
surcharge rule) be revised to create a
counterincentive? Would additional
exclusions be appropriate? To what
extent should it be clarified that the
‘‘need to show cause’’ includes the need
to negotiate alternative terms with the
other party prior to termination or
similar requirements (e.g., Master
Securities Loan Agreement, Annex III—
Term Loans)?
E. Required Contractual Provisions
Related to U.S. Special Resolution
Regimes (Section 47.4)
Under the proposed rule, a covered
QFC would be required to explicitly
provide both (a) that the transfer of the
QFC (and any interest or obligation in
or under it and any property
collateralizing it) from the covered bank
to a transferee would be effective to the
same extent as it would be under the
U.S. special resolution regimes if the
covered QFC were governed by the laws
of the United States or of a state of the
United States and (b) that default rights
with respect to the covered QFC that
could be exercised against a covered
bank could be exercised to no greater
extent than they could be exercised
under the U.S. special resolution
regimes if the covered QFC were
governed by the laws of the United
States or of a state of the United
States.36 The proposed rule would
define the term ‘‘U.S. Special Resolution
Regimes’’ to mean the FDIA 37 and Title
II of the Dodd-Frank Act,38 along with
regulations issued under those
statutes.39
The proposed requirements are not
intended to imply that a given covered
QFC is not governed by the laws of the
United States or of a state of the United
States, or that the statutory stay-andtransfer provisions would not in fact
apply to a given covered QFC. This
section of the proposed rule would not
have any substantive impact on those
covered QFCs that are already subject to
the U.S. special resolution regimes.
Rather, the requirements are intended to
provide certainty that all covered QFCs
would be treated the same way in the
36 See
Proposed Rule § 47.4.
37 12 U.S.C. 1811–1835a.
38 12 U.S.C. 5381–5394.
39 See Proposed Rule § 47.2.
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context of a receivership of a covered
bank under the Dodd-Frank Act or the
FDIA. Thus, the purpose of this
provision is to ensure that if a national
bank or FSA covered by this proposed
rule is placed into receivership under
any U.S. special resolution regime, the
stay-and-transfer provisions would
extend to all foreign counterparties as a
matter of contract law.
The stay-and-transfer provisions of
the U.S. special resolution regimes
should be enforced with respect to all
contracts of any U.S. GSIB entity that
enters resolution under a U.S. special
resolution regime as well as all
transactions of the subsidiaries of such
an entity. Nonetheless, it is possible that
a court in a foreign jurisdiction would
decline to enforce those provisions in
cases brought before it (such as a case
regarding a covered QFC between a
covered bank and a non-U.S. entity that
is governed by non-U.S. law and
secured by collateral located outside the
United States). By requiring that the
effect of the statutory stay-and-transfer
provisions be incorporated directly into
the QFC contractually, the proposed
requirement would help ensure that a
court in a foreign jurisdiction would
enforce the effect of those provisions,
regardless of whether the court would
otherwise have decided to enforce the
U.S. statutory provisions themselves.40
For example, the proposed provisions
should prevent a U.K. counterparty of a
U.S. GSIB from persuading a U.K. court
that it should be permitted to seize and
liquidate collateral located in the United
Kingdom in response to the U.S. GSIB’s
entry into OLA resolution. And the
knowledge that a court in a foreign
jurisdiction would reject the purported
exercise of default rights in violation of
the required provisions would deter
covered banks’ counterparties from
attempting to exercise such rights.
The OCC believes that this proposed
rule directly addresses a major QFCrelated obstacle to the orderly resolution
of covered banks. As discussed
previously, restrictions on the exercise
of QFC default rights are an important
prerequisite for an orderly GSIB
resolution. Congress recognized the
importance of such restrictions when it
enacted the stay-and-transfer provisions
of the U.S. special resolution regimes.
As demonstrated by the 2007–2009
financial crisis, the modern financial
system is global in scope, and covered
banks are party to large volumes of
40 See generally Financial Stability Board,
‘‘Principles for Cross-border Effectiveness of
Resolution Actions’’ (November 3, 2015), available
at http://www.fsb.org/wp-content/uploads/
Principles-for-Cross-border-Effectiveness-ofResolution-Actions.pdf.
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QFCs with connections to foreign
jurisdictions. The stay-and-transfer
provisions of the U.S. special resolution
regimes would not achieve their
purpose of facilitating orderly resolution
in the context of the failure of a GSIB
with large volumes of such QFCs if
QFCs could escape the effect of those
provisions. As discussed in detail in
Section I of this proposed rule, the OCC
has a supervisory interest in preventing
or mitigating the destabilizing effects of
a disorderly GSIB resolution; otherwise,
the result will be adverse to safety and
soundness of covered banks
individually and collectively, as well as
the broader Federal banking system. To
remove any doubt about the scope of
coverage of these provisions, the
proposed requirement would ensure
that the stay-and-transfer provisions
apply as a matter of contract to all
covered QFCs, wherever the transaction.
This will advance the resolvability goals
of the Dodd-Frank Act and the FDIA.41
Question 11: While the direct default
requirements are proposed to apply
broadly to all covered QFCs of covered
banks, the primary focus of this
requirements is with QFCs with foreign
counterparties not directly subject to the
U.S. special resolution regimes. U.S.
counterparties are less of a concern
because these counterparties would
already be subject to the stay-andtransfer requirements under statutory
requirements of the U.S. special
resolution regimes. With respect to the
direct default requirements, the
proposed rule does not distinguish
between U.S. and foreign counterparties
because the OCC believes that the broad
application of this proposed rule would
be simpler to implement and less
burdensome given the standardized
nature of QFCs and their associated
master netting agreements. Should the
direct default requirements of the
proposed rule apply only to covered
QFCs with foreign counterparties not
subject to U.S. special resolution
regimes? What would be the costs and
regulatory burden associated with
identifying and maintaining separate
versions of covered QFCs for U.S. and
foreign counterparties?
41 As noted in the Board’s Proposal, this proposed
rule is consistent with efforts by regulators in other
jurisdictions to address similar risks by requiring
that financial firms within their jurisdictions ensure
that the effect of the similar provisions under these
foreign jurisdictions’ respective special resolution
regimes would be enforced by courts in other
jurisdictions, including the United States. See e.g.,
PRA Rulebook: CRR Firms and Non-Authorised
Persons: Stay in Resolution Instrument 2015,
available at http://www.bankofengland.co.uk/pra/
Documents/publications/ps/2015/ps2515app1.pdf;
see also Bank of England, Prudential Regulation
Authority, ‘‘Contractual stays in financial contracts
governed by third-country law’’ (PS25/15).
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F. Prohibited Cross-Default Rights
(Section 47.5)
Definitions. Section 47.5 of the
proposed rule pertains to cross-default
rights in QFCs between covered banks
and their counterparties, many of which
are subject to credit enhancements (such
as guarantees) provided by an affiliate of
the covered bank. Because credit
enhancements on QFCs are themselves
‘‘qualified financial contracts’’ under
the Dodd-Frank Act’s definition of that
term (which this proposed rule would
adopt), the proposed rule includes the
following additional definitions in order
to precisely describe the relationships to
which this section applies.
First, the proposed rule distinguishes
between a credit enhancement and a
‘‘direct QFC,’’ which is defined as any
QFC that is not a credit enhancement.
The proposed rule also defines ‘‘direct
party’’ to mean a covered bank that itself
is a party to the direct QFC, as distinct
from an entity that provide a credit
enhancement. In addition, the proposed
rule defines ‘‘affiliate credit
enhancement’’ to mean ‘‘a credit
enhancement that is provided by an
affiliate of the party to the direct QFC
that the credit enhancement supports,’’
as distinct from a credit enhancement
provided by either the direct party itself
or by an unaffiliated party. Moreover,
the proposed rule defines ‘‘covered
affiliate credit enhancement’’ to mean
an affiliate credit enhancement
provided by a covered bank, or a
covered entity under the Board’s
proposal, and defines ‘‘covered affiliate
support provider to mean the covered
bank that provides the covered affiliate
credit enhancement. Finally, the
proposed rule defines the term
‘‘supported party’’ to mean any party
that is the beneficiary of a covered
affiliate credit enhancement (that is, the
QFC counterparty of a direct party,
assuming that the direct QFC is subject
to a covered affiliate credit
enhancement).
General Prohibition. Subject to the
substantial exceptions to be discussed,
the proposed rule would prohibit a
covered bank from being a party to a
covered QFC that allows for the exercise
of any default right that is related,
directly or indirectly, to the entry into
resolution of an affiliate of the covered
bank. The proposed rule also would
generally prohibit a covered bank from
being party to a covered QFC that would
prohibit the transfer of any credit
enhancement applicable to the QFC
(such as another entity’s guarantee of
the covered bank’s obligations under the
QFC), along with associated obligations
or collateral, upon the entry into
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resolution of an affiliate of the covered
bank.42
A primary purpose of the proposed
restrictions is to facilitate the resolution
of a GSIB outside of Title II, including
under the Bankruptcy Code. As
discussed in the background section, the
potential for the mass exercise of QFC
default rights is a major reason why the
failure of a global systemically
important BHC could have a severe
negative impact on financial stability
and on the Federal banking system. In
the context of an SPOE resolution, if the
global systemically important BHC’s
entry into resolution triggers the mass
exercise of cross-default rights by the
subsidiaries’ QFC counterparties of the
covered QFCs against the national bank
or FSA subsidiary, then the national
bank or FSA could themselves
experience financial distress or failure.
Moreover, the mass exercise of covered
QFC default rights would entail asset
fire sales, which could affect other U.S.
financial companies and undermine
financial stability of the U.S. financial
system. Similar disruptive results can
occur with an MPOE resolution of an
affiliate of an otherwise performing
entity triggers default rights on QFCs
involving the performing covered bank.
In an SPOE resolution, this damage
can be avoided if actions of the
following two types are prevented: The
exercise of direct default rights against
the top-tier holding company that has
entered resolution, and the exercise of
cross-default rights against the national
bank and FSA subsidiaries and other
operating subsidiaries based on their
parent’s entry into resolution. Direct
default rights against the national bank
or FSA subsidiary would not be
exercisable, because that subsidiary
would continue normal operations and
would not enter resolution. In an MPOE
resolution, this damage occurs from the
exercise of default rights against a
performing entity based on the failure of
an affiliate.
Under the OLA, the Dodd-Frank Act’s
stay-and-transfer provisions would
address both direct default rights and
cross-default rights. But, as explained in
the Background section, no similar
42 This prohibition would be subject to an
exception that would allow supported parties to
exercise default rights with respect to a QFC if the
supported party would be prohibited from being the
beneficiary of a credit enhancement provided by the
transferee under any applicable law, including the
Employee Retirement Income Security Act of 1974
and the Investment Company Act of 1940. This
exception is substantially similar to an exception to
the transfer restrictions in section 2(f) of the ISDA
2014 Resolution Stay Protocol (2014 Protocol) and
the ISDA 2015 Universal Resolution Stay Protocol,
which was added to address the concerns expressed
by asset managers during the drafting of the 2014
Protocol.
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statutory provisions would apply to a
resolution under the Bankruptcy Code.
This proposed rule attempts to address
these obstacles to orderly resolution
under the Bankruptcy Code by
extending the stay-and transferprovisions to any type of resolution.
Similarly, the proposed rule would
facilitate a transfer of the GSIB parent’s
interests in its subsidiaries, along with
any credit enhancements it provides for
those subsidiaries, to a solvent financial
company by prohibiting covered banks
from having QFCs that would allow the
QFC counterparty to prevent such a
transfer or to use it as a ground for
exercising default rights. Accordingly,
the proposed rule would broadly
prevent the unanticipated failure of any
one GSIB entity from bringing about the
disorderly failures of its affiliates by
preventing the affiliates’ QFC
counterparties from using the first
entity’s failure as a ground for
exercising default rights against those
affiliates that continue meet to their
obligations.43
The proposed rule is intended to
enhance the potential for orderly
resolution of a GSIB under the
Bankruptcy Code, the FDIA, or similar
resolution proceedings. In doing so, the
proposed rule would advance the DoddFrank Act’s goal of making orderly
resolution of a workable covered bank
under the Bankruptcy Code.44
The proposed rule could also prevent
the disorderly failure of the national
bank or FSA subsidiary and allow it to
continue normal operations. In addition,
while it may be in the individual
interest of any given counterparty to
exercise any available contractual rights
to run on the national bank or FSA
subsidiary, the mass exercise of such
rights could harm the collective interest
of all the counterparties by causing the
subsidiary to fail. Therefore, like the
automatic stay in bankruptcy, which
also serves to maximize creditors’
ultimate recoveries by preventing a
disorderly liquidation of the debtor, the
proposed rule would mitigate this
collective action problem to the benefit
of the creditors and counterparties of
covered banks by preventing a
disorderly resolution. And because
many of these counterparties and
creditors are themselves covered banks,
or other systemically important
financial firms, improving outcomes for
these creditors and counterparties
would further protect the safety and
43 As noted in the Board’s Proposal, this proposed
rule will also facilitate many approaches to GSIB
resolution, including where the U.S. intermediate
holding company of a foreign GSIB enters
proceedings as part of a broader MPOE resolution.
44 See 12 U.S.C. 5365(d).
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soundness of the Federal banking
system and financial stability of the
United States.
General creditor protections. While
the proposed restrictions would
facilitate orderly resolution, they would
also have the effect of diminishing the
ability of the counterparties of the
covered banks to include protections for
themselves in covered QFCs. In order to
reduce this effect, the proposed rule
includes several significant exceptions
to the proposed restrictions. These
permitted creditor protections are
intended to allow creditors to exercise
cross-default rights outside of an orderly
resolution of a GSIB (as described
previously and in the Board’s Proposal)
and therefore would not be expected to
undermine such a resolution.
First, to ensure that the proposed
prohibitions would apply only to crossdefault rights (and not direct default
rights), the proposed rule would provide
that a covered QFC may permit the
exercise of default rights based on the
direct party’s entry into a resolution
proceeding, other than a proceeding
under a U.S. or foreign special
resolution regime.45 This provision
would help ensure that, if the direct
party to a QFC were to enter
bankruptcy, its QFC counterparties
could exercise any relevant direct
default rights. Thus, a covered bank’s
direct QFC counterparties would not
risk the delay and expense associated
with becoming involved in a bankruptcy
proceeding, and would be able to take
advantage of default rights that would
fall within the Bankruptcy Code’s safe
harbor provisions.
The proposed rule would also allow
covered QFCs to permit the exercise of
default rights based on the failure of (1)
the direct party, (2) a covered affiliate
support provider, or (3) a transferee that
assumes a credit enhancement to satisfy
its payment or delivery obligations
under the direct QFC or credit
enhancement. Moreover, the proposed
rule would allow covered QFCs to
permit the exercise of a default right in
one QFC that is triggered by the direct
party’s failure to satisfy its payment or
delivery obligations under another
contract between the same parties. This
exception takes appropriate account of
the interdependence that exists among
the contracts in effect between the same
counterparties.
The proposed exceptions for the
creditor protections described are
intended to help ensure that the
proposed rule permits a covered bank’s
QFC counterparties to protect
themselves from imminent financial
loss and does not create a risk of
delivery gridlocks or daisy-chain effects,
in which a covered bank’s failure to
make a payment or delivery when due
leaves its counterparty unable to meet
its own payment and delivery
obligations (the daisy-chain effect
would be prevented because the covered
bank’s counterparty would be permitted
to exercise its default rights, such as by
liquidating collateral). These exceptions
are generally consistent with the
treatment of payment and delivery
obligations under the U.S. special
resolution regimes.46
These exceptions also help to ensure
that a covered entity’s QFC counterparty
would not risk the delay and expense
associated with becoming involved in a
bankruptcy proceeding, since, unlike a
typical creditor of an entity that enters
bankruptcy, the QFC counterparty
would retain its ability under the
Bankruptcy Code’s safe harbors to
exercise direct default rights. This
should further reduce the counterparty’s
incentive to run. Reducing incentives to
run in the lead up to resolution
promotes orderly resolution because a
QFC creditor run (such as a mass
withdrawal of repo funding) could lead
to a disorderly resolution and pose a
threat to financial stability.
Additional creditor protections for
supported QFCs. The proposed rule
would allow additional creditor
protections for a non-defaulting
counterparty that is the beneficiary of a
credit enhancement from an affiliate of
the covered bank that is also a covered
bank under the proposed rule. The
proposed rule would allow these
creditor protections in recognition of the
supported party’s interest in receiving
the benefit of its credit enhancement.
The Board has concluded that these
creditor protections would not
undermine an SPOE resolution of a
GSIB.47
Where a covered QFC is supported by
a covered affiliate credit
enhancement,48 the covered QFC and
45 Special resolution regimes typically stay direct
default rights, but may not stay cross-default rights.
For example, as discussed previously, the FDIA
stays direct default rights, see 12 U.S.C.
1821(e)(10)(B), but does not stay cross-default
rights, whereas the Dodd-Frank Act’s OLA stays
direct default rights and cross-defaults arising from
a parent’s receivership, see 12 U.S.C. 5390(c)(10)(B),
5390(c)(16).
46 See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii)
(suspending payment and delivery obligations for
one business day or less).
47 See 81 FR 29169 (May 11, 2016).
48 Note that the proposed rule would not apply
with respect to credit enhancements that are not
covered affiliate credit enhancements. In particular,
it would not apply with respect to a credit
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the credit enhancement would be
permitted to allow the exercise of
default rights under the circumstances
after the expiration of a stay period.
Under the proposed rule, the applicable
stay period would begin when the credit
support provider enters resolution and
would end at the later of 5:00 p.m.
(eastern time) on the next business day
and 48 hours after the entry into
resolution. This portion of the proposed
rule is similar to the stay treatment
provided in a resolution under the OLA
or the FDIA.49
Under the proposed rule, default
rights could be exercised at the end of
the stay period if the covered affiliate
credit enhancement has not been
transferred away from the covered
affiliate support provider and that
support provider becomes subject to a
resolution proceeding other than a
proceeding under Chapter 11 of the
Bankruptcy Code.50 Default rights could
also be exercised at the end of the stay
period if the transferee (if any) of the
credit enhancement enters a resolution
proceeding, protecting the supported
party from a transfer of the credit
enhancement to a transferee that is
unable to meet its financial obligations.
Default rights could also be exercised
at the end of the stay period if the
original credit support provider does
not remain, and no transferee becomes,
obligated to the same (or substantially
similar) extent as the original credit
support provider was obligated
immediately prior to entering a
resolution proceeding (including a
Chapter 11 proceeding) with respect to
(a) the credit enhancement applicable to
the covered QFC, (b) all other credit
enhancements provided by the credit
support provider on any other QFCs
between the same parties, and (c) all
credit enhancements provided by the
credit support provider between the
direct party and affiliates of the direct
party’s QFC counterparty. Such creditor
protections would be permitted to
prevent the support provider or the
transferee from ‘‘cherry picking’’ by
assuming only those QFCs of a given
counterparty that are favorable to the
enhancement provided by a non-U.S. entity of a
foreign GSIB, which would not be a covered bank
under the proposed rule.
49 See U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i),
5390(c)(16)(A). While the proposed stay period is
similar to the stay periods that would be imposed
by the U.S. special resolution regimes, it could run
longer than those stay periods under some
circumstances.
50 Chapter 11 (11 U.S.C. 1101–1174) is the portion
of the Bankruptcy Code that provides for the
reorganization of the failed company, as opposed to
its liquidation, and, relative to special resolution
regimes, is generally well-understood by market
participants.
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support provider or transferee. Title II of
the Dodd-Frank Act and the FDIA
contain similar provisions to prevent
cherry picking.
Finally, if the covered affiliate credit
enhancement is transferred to a
transferee, then the non-defaulting
counterparty could exercise default
rights at the end of the stay period
unless either (a) all of the support
provider’s ownership interests in the
direct party are also transferred to the
transferee or (b) reasonable assurance is
provided that substantially all of the
support provider’s assets (or the net
proceeds from the sale of those assets)
will be transferred to the transferee in a
timely manner. These conditions would
help to assure the supported party that
the transferee would be at least roughly
as financially capable of providing the
credit enhancement as the covered
affiliate support provider.
Creditor protections related to FDIA
proceedings. Moreover, in the case of a
covered QFC that is supported by a
covered affiliate credit enhancement,
both the covered QFC and the credit
enhancement would be permitted to
allow the exercise of default rights
related to the credit support provider’s
entry into resolution proceedings under
the FDIA 51 under the following
circumstances: (a) After the FDIA stay
period,52 if the credit enhancement is
not transferred under the relevant
provisions of the FDIA 53 and associated
regulations, and (b) during the FDIA
stay period, to the extent that the default
right permits the supported party to
suspend performance under the covered
QFC to the same extent as that party
would be entitled to do if the covered
QFC were with the credit support
provider itself and were treated in the
same manner as the credit
enhancement. This provision is
intended to ensure that a QFC
counterparty of a subsidiary of a
covered bank that goes into FDIA
receivership can receive the same level
of protection that the FDIA provides to
QFC counterparties of the covered bank
itself.
Prohibited terminations. In case of a
legal dispute as to a party’s right to
exercise a default right under a covered
QFC, the proposed rule would require
that a covered QFC must provide that,
after an affiliate of the direct party has
51 As discussed, the FDIA stays direct default
rights against the failed depository institution but
does not stay the exercise of cross-default rights
against its affiliates.
52 Under the FDIA, the relevant stay period runs
until 5:00 p.m. (eastern time) on the business day
following the appointment of the FDIC as receiver.
12 U.S.C. 1821(e)(10)(B)(I).
53 12 U.S.C. 1821(e)(9)–(10).
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entered a resolution proceeding, (a) the
party seeking to exercise the default
right shall bear the burden of proof that
the exercise of that right is indeed
permitted by the covered QFC and (b)
the party seeking to exercise the default
right must meet a ‘‘clear and convincing
evidence’’ standard,54 a similar
standard, or a more demanding
standard.
The purpose of this proposed
requirement is to prevent QFC
counterparties from circumventing the
limitations on resolution-related default
rights in this proposal by exercising
other contractual default rights in
instances where such QFC counterparty
cannot demonstrate that the exercise of
such other contractual default rights is
unrelated to the affiliate’s entry into
resolution.
Agency transactions. In addition to
entering into QFCs as principal, GSIBs
may engage in QFCs as agent for other
principals. For example, a GSIB
subsidiary may enter into a master
securities lending arrangement with a
foreign bank as agent for a U.S.-based
pension fund. The GSIB would
document its role as agent for the
pension fund, often through an annex to
the master agreement, and would
generally provide to its customer (the
principal party) a securities replacement
guarantee or indemnification for any
shortfall in collateral in the event of the
default of the foreign bank.55 A covered
bank may also enter into a QFC as
principal where there is an agent acting
on its behalf or on behalf of its
counterparty.
This proposed rule would apply to a
covered QFC regardless of whether the
covered bank or the covered bank’s
direct counterparty is acting as a
principal or as an agent. This proposed
rule does not distinguish between
agents and principals with respect to
default rights or transfer restrictions
applicable to covered QFCs. The
proposed rule would limit default rights
and transfer restrictions that the
principal and its agent may have against
a covered bank consistent with the U.S.
special resolution regimes. This
proposed rule would ensure that,
subject to the enumerated creditor
protections, neither the agent nor the
54 The reference to a ‘‘similar’’ burden of proof is
intended to allow covered QFCs to provide for the
application of a standard that is analogous to clear
and convincing evidence in jurisdictions that do
not recognize that particular standard. A covered
QFC would not be permitted to provide for a lower
standard.
55 The definition of QFC under Title II of the
Dodd-Frank Act includes security agreements and
other credit enhancements as well as master
agreements (including supplements). 12 U.S.C.
5390(c)(8)(D).
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principal could exercise cross-default
rights under the covered QFC against
the covered bank based on the
resolution of an affiliate of the covered
bank.56
Question 12: With respect to the
proposed restrictions on cross-default
rights in covered banks’ QFCs, is the
proposed rule sufficiently clear, such
that parties to a conforming QFC will
understand what default rights are, and
are not exercisable, in the context of a
GSIB resolution? How could the
proposed restrictions be further
clarified?
Question 13: Section 47.5(e)(2) of the
proposed rule, addressing general
creditor protections, would permit the
exercise of default rights based on the
failure of the direct party to satisfy its
payment or delivery obligations under
the covered QFC or ‘‘another contract
between the same parties’’ that give rise
to a default right in the covered QFC.
This exception is not limited to covered
QFCs but is intended to reflect the
interdependence among all contracts
between the same counterparties. Does
the scope of the terms ‘‘contract’’ and
‘‘same parties’’ need to be clarified?
Should the term ‘‘same parties’’ be
clarified to include affiliate credit
support providers as well as
counterparties?
Question 14: Are the proposed
restrictions on cross-default rights
under-inclusive, such that the proposed
terms would permit default rights that
would have the same or similar
potential to undermine an orderly SPOE
resolution and should therefore be
subjected to similar restrictions?
Question 15: Would it be appropriate
for the prohibition to explicitly cover
default rights that are based on or
related to the ‘‘financial condition’’ of
an affiliate of the direct party (for
example, rights based on an affiliate’s
credit rating, stock price, or regulatory
capital levels)?
Question 16: Should the proposed
restrictions be expanded to cover
contractual rights that a QFC
counterparty may have to exit the
termination at will or without cause,
including rights that arise on a periodic
basis? Could such rights be used to
circumvent the proposed restrictions on
cross-default rights? If so, how, if at all,
should the proposed rule regulate such
contractual rights?
56 If a covered bank (acting as agent) is a direct
party to a covered QFC, then the general
prohibitions of section 47.5(d) would only affect the
substantive rights of the agent’s principal(s) to the
extent that the covered QFC provides default rights
based directly or indirectly on the entry into
resolution of an affiliate of the covered bank (acting
as agent).
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Question 17: With respect to the
proposed provisions permitting specific
creditor protections in a covered QFC,
does the proposed rule draw an
appropriate balance between protecting
financial stability from risks associated
with QFC unwinds and maintaining
important creditor protections? Should
the proposed set of permitted creditor
protections be expanded to allow for
other creditor protections that would
fall within the proposed restrictions? Is
the proposed set of permitted creditor
protections sufficiently clear?
Question 18: With respect to the
proposed requirement for burden-ofproof provisions in a covered QFC, is
the standard clear? Would the proposed
requirement advance the goals of this
proposed rule? Would those goals be
better advanced by alternative or
complementary provisions?
Question 19: Should the proposed
rule require periodic legal review of the
legal enforceability of the required
provisions in relevant jurisdictions? If
periodic legal review is not required,
should covered banks be required to
monitor the applicable law in the
relevant jurisdiction for material
changes in law?
Question 20: The OCC invites
comment on all aspects of the proposed
treatment of agency transactions,
including whether credit protections
should apply to QFCs where the direct
party is acting as agent under the QFC.
G. Process for Approval of Enhanced
Creditor Protections (Section 47.6)
As discussed previously, the
proposed restrictions would leave many
creditor protections that are commonly
included in QFCs unaffected. The
proposed rule would also allow any
covered bank to submit to the OCC a
request to approve as compliant with
the proposed rule one or more QFCs
that contain additional creditor
protections—that is, creditor protections
that would be impermissible under the
proposed restrictions set forth
previously. A covered bank making
such a request would be required to
explain how its request is consistent
with the purposes of this proposed rule,
including an analysis of the contractual
terms for which approval is requested in
light of a range of factors that are laid
out by the proposed rule and intended
to facilitate the OCC’s consideration of
whether permitting the contractual
terms would be consistent with the
proposed restrictions. The OCC expects
to consult with the FDIC and Board
during its consideration of a request
under this section.
The first two factors concern the
potential impact of the requested
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creditor protections on GSIB resilience
and resolvability. The next four concern
the potential scope of the covered
bank’s request: Adoption on an
industry-wide basis, coverage of existing
and future transactions, coverage of one
or multiple QFCs, and coverage of some
or all covered banks. Creditor
protections that may be applied on an
industry-wide basis may help to ensure
that impediments to resolution are
addressed on a uniform basis, which
could increase market certainty,
transparency, and equitable treatment.
Creditor protections that apply broadly
to a range of QFCs and covered banks
would increase the chance that all of a
GSIB’s QFC counterparties would be
treated the same way during a
resolution of that GSIB and may
improve the prospects for an orderly
resolution of that GSIB. By contrast,
covered bank requests that would
expand counterparties’ rights beyond
those afforded under existing QFCs
would conflict with the proposed rule’s
goal of reducing the risk of mass
unwinds of GSIB QFCs. The proposed
rule also includes three factors that
focus on the creditor protections
specific to supported parties. The OCC
may weigh the appropriateness of
additional protections for supported
QFCs against the potential impact of
such provisions on the orderly
resolution of a GSIB.
In addition to analyzing the request
under the enumerated factors, a covered
bank requesting that the OCC approve
enhanced creditor protections would be
required to submit a legal opinion
stating that the requested terms would
be valid and enforceable under the
applicable law of the relevant
jurisdictions, along with any additional
relevant information requested by the
OCC.
Under the proposed rule, the OCC
could approve a request for an
alternative set of creditor protections if
the terms of that QFC, as compared to
a covered QFC containing only the
limited exceptions discussed
previously, would promote the orderly
resolution of federally chartered or
licensed institutions or their affiliates,
prevent or mitigate risks to the financial
stability of the United States or the
Federal banking system that could arise
from the failure of a global systemically
important BHC or global systemically
important FBO, and protect the safety
and soundness of covered banks to at
least the same extent. The proposed
request-and-approval process would
improve flexibility by allowing for an
industry-proposed alternative to the set
of creditor protections permitted by the
proposed rule while ensuring that any
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approved alternative would serve the
proposed rule’s policy goals to at least
the same extent.
Compliance with the International
Swaps and Derivatives Association
(ISDA) 2015 Universal Resolution Stay
Protocol. In lieu of the process for the
approval of enhanced creditor
protections that are described
previously, a covered bank would be
permitted to comply with the proposed
rule by amending a covered QFC
through adherence to the ISDA 2015
Universal Resolution Stay Protocol
(including immaterial amendments to
the Protocol).57 The Protocol ‘‘enables
parties to amend the terms of their
financial contracts to contractually
recognize the cross-border application
of special resolution regimes applicable
to certain financial companies and
support the resolution of certain
financial companies under the U.S.
Bankruptcy Code.’’ 58 The Protocol
amends ISDA Master Agreements,
which are used for derivatives
transactions. Market participants also
may amend their master agreements for
securities financing transactions by
adhering to the Securities Financing
Transaction Annex 59 to the Protocol
and may amend all other QFCs by
adhering to the Other Agreements
Annex. Thus, a covered bank would be
able to comply with the proposed rule
with respect to all of its covered QFCs
through adherence to the Protocol and
the annexes.
The Protocol has the same general
objective as the proposed rule, which is
to make GSIB entities more resolvable
by amending their contracts to, in effect,
contractually recognize the applicability
of special resolution regimes (including
the OLA and the FDIA) and to restrict
cross-default provisions to facilitate
orderly resolution under the U.S.
Bankruptcy Code. The provisions of the
Protocol largely track the requirements
57 International Swaps and Derivatives
Association, Inc., ‘‘ISDA 2015 Universal Resolution
Stay Protocol’’ (November 4, 2015), available at
http://assets.isda.org/media/ac6b533f-3/5a7c32f8pdf/. The Protocol was developed by a working
group of member institutions of the ISDA, in
coordination with the FRB, the FDIC, the OCC, and
foreign financial supervisory agencies. ISDA is
expected to supplement the Protocol with ISDA
Resolution Stay Jurisdictional Modular Protocols
for the United States and other jurisdictions. A U.S.
module that is the same in all respects to the
Protocol aside from exempting QFCs between
adherents that are not covered banks would be
consistent with the current proposed rule.
58 Protocol Press Release at http://www2.isda.org/
functional-areas/protocol-management/protocol/22.
59 The Securities Financing Transaction Annex
was developed by the International Capital Markets
Association, the International Securities Lending
Association, and the Securities Industry and
Financial Markets Association, in coordination with
the ISDA.
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of the proposed rule.60 However, the
Protocol does have a narrower scope
than the proposed rule,61 and it allows
for somewhat stronger creditor
protections than would otherwise be
permitted under the proposed rule.62
The Protocol also includes a feature,
not included in the proposed rule, that
compensates for the Protocol’s narrower
scope and allowance for stronger
creditor protections: When an entity
(whether or not it is a covered bank)
adheres to the Protocol, it necessarily
adheres to the Protocol with respect to
all covered entities that have also
adhered to the Protocol.63 Thus, if all
60 For example, sections 2(a) and 2(b) of the
Protocol impose general prohibitions on crossdefault rights based on the entry of an affiliate of
the direct party into the most common U.S.
resolution proceedings, including resolution under
the Bankruptcy Code. By allowing the exercise of
‘‘Performance Default Rights’’ and ‘‘Unrelated
Default Rights,’’ as those terms are defined in
section 6 of the Protocol, sections 2(a) and 2(b) also
generally permit the creditor protections that would
be allowed under the proposed rule. Section 2(f) of
the Protocol overrides certain contractual
provisions that would block the transfer of a credit
enhancement to a transferee entity. Section 2(i),
complemented by the Protocol’s definition of the
term ‘‘Unrelated Default Rights,’’ provides that a
party seeking to exercise permitted default rights
must bear the burden of establishing by clear and
convincing evidence that those rights may indeed
be exercised.
61 The restrictions on default rights imposed by
section 2 of the Protocol apply only when an
affiliate of the direct party enters ‘‘U.S. Insolvency
Proceedings,’’ which is defined to include
proceedings under Chapters 7 and 11 of the
Bankruptcy Code, the FDIA, and the Securities
Investor Protection Act. By contrast, section 47.4 of
the proposed rule would apply broadly to default
rights related to affiliates of the direct party
‘‘becoming subject to a receivership, insolvency,
liquidation, resolution, or similar proceeding,’’
which encompasses proceedings under State and
foreign law.
62 For example, the Protocol allows a nondefaulting party to exercise cross-default rights
based on the entry of an affiliate of the direct party
into certain resolution proceedings if the direct
party’s U.S. parent has not gone into resolution. See
paragraph (b) of the Protocol’s definition of
‘‘Unrelated Default Rights’’; see also sections 1 and
3(b) of the Protocol. As another example, if the
affiliate credit support provider that has entered
bankruptcy remains obligated under the credit
enhancement, rather than transferring it to a
transferee, then the Protocol’s restrictions on the
exercise of default rights continue to apply beyond
the stay period only if the Bankruptcy Court issues
a ‘‘Creditor Protection Order.’’ Such an order
would, among other things, grant administrative
expense status to the non-defaulting party’s claims
under the credit enhancement. See sections
2(b)(i)(B) and 2(b)(iii)(B) of the Protocol and the
Protocol’s definitions of ‘‘Creditor Protection
Order’’ and ‘‘DIP Stay Conditions.’’
63 Under section 4(a) of the Protocol, the Protocol
is generally effective as between any two adhering
parties, once the relevant effective date has arrived.
Under section 4(b)(ii), an adhering party that is not
a covered bank may choose to opt out of section 2
of the Protocol with respect to its contracts with any
other adhering party that is also not a covered bank.
However, the Protocol will apply to relationships
between any covered bank that adheres and any
other adhering party.
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covered banks adhere to the Protocol,
any other entity that chooses to adhere
will simultaneously adhere with respect
to all covered entities and covered
banks. By allowing for all covered QFCs
to be modified by the same contractual
terms, this ‘‘all-or-none’’ feature would
promote transparency, predictability,
and equal treatment with respect to
counterparties’ default rights during the
resolution of a GSIB entity and thereby
advance the proposed rule’s objective of
increasing the likelihood that such a
resolution could be carried out in an
orderly manner.
Like section 47.5 of the proposed rule,
section 2 of the Protocol was developed
to increase GSIB resolvability under the
Bankruptcy Code and other U.S.
insolvency regimes. The Protocol does
allow for somewhat broader creditor
protections than would otherwise be
permitted under the proposed rule, but,
consistent with the Protocol’s purpose,
those additional creditor protections
would not materially diminish the
prospects for the orderly resolution of a
GSIB. And the Protocol carries the
desirable all-or-none feature, which
would further increase a GSIB entity’s
resolvability and which the proposed
rule otherwise lacks. For these reasons,
and consistent with the broad policy
objective of enhancing the stability of
the U.S. financial system by increasing
the resolvability of systemically
important financial companies in the
United States, the proposed rule would
allow a covered bank to bring its
covered QFCs into compliance by
amending them through adherence to
the Protocol (and, as relevant, the
annexes to the Protocol).
Question 21: Are the proposed
considerations for the approval of
enhanced credit protections the
appropriate factors for the OCC to take
into account in deciding whether to
grant a request for approval? What other
considerations are potentially relevant
to such a decision?
Question 22: Should the OCC provide
greater specificity for the process and
procedures for the submission and
approval of requests for alternative
enhanced credit protections? If so, what
processes and procedures could be
adopted without imposing undue
regulatory burden?
Question 23: The OCC invites
comment on its proposal to treat as
compliant with section 47.6 of the
proposal any covered QFC that has been
amended by the Protocol. Does
adherence to the Protocol suffice to
meet the goals of this proposed rule,
appropriately protect the Federal
banking system and safeguard U.S.
financial stability? Should additional
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guidance be provided that would clarify
the consultation process with the FRB or
any other relevant supervisory agency?
H. Transition Periods (Sections 47.4 and
47.5)
Under this proposed rule, the final
rule would take effect on the first day
of the first calendar quarter that begins
at least one year after the issuance of the
final rule (effective date).64 National
banks, FSAs, and Federal branches and
agencies that are covered banks when
the final rule is issued would be
required to comply with the proposed
requirements beginning on the effective
date. Thus, a covered bank would be
required to ensure that covered QFCs
entered into on or after the effective date
comply with the rule’s requirements.
Moreover, a covered bank would be
required to bring preexisting covered
QFCs entered into prior to the effective
date into compliance with the rule no
later than the first date on or after the
effective date on which the covered
bank enters into a new covered QFC
with the counterparty to the preexisting
covered QFC or with an affiliate of that
counterparty. Thus, a covered bank
would not be required to conform a
preexisting QFC if that covered bank
does not enter into any new QFCs with
the same counterparty or an affiliate of
that counterparty on or after the
effective date. Finally, a national bank,
FSA, or Federal branch or agency that
becomes a covered bank after the final
rule is issued would be required to
comply by the first day of the first
calendar quarter that begins at least one
year after it becomes a covered bank.
By permitting a covered bank to
remain party to nonconforming QFCs
entered into before the effective date
unless the covered bank enters into new
QFCs with the same counterparty or its
affiliate, the proposed rule draws a
balance between ensuring QFC
continuity if a global systemically
important BHC or FBO were to fail and
ensuring that covered banks and their
existing counterparties can avoid any
compliance costs associated with
conforming existing QFCs by refraining
from entering into new QFCs and
avoiding unnecessary disruption to
existing QFCs. The requirement that a
covered bank ensure that all existing
QFCs are compliant before entering into
a new QFC with the same counterparty
or its affiliate will provide covered
64 Under section 302(b) of the Riegle Community
Development and Regulatory Improvement Act of
1994, new regulations that impose requirements on
insured depository institutions generally must ‘‘take
effect on the first day of a calendar quarter which
begins on or after the date on which the regulations
are published in final form.’’ 12 U.S.C. 4802(b).
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banks with an incentive to seek the
modifications necessary to ensure that
their QFCs with the most significant
counterparties are compliant.
A covered bank would be required to
bring a preexisting covered QFC entered
into prior to the effective date into
compliance with the rule no later than
the first date on or after the effective
date on which the covered bank or an
affiliate (that is also a covered entity or
covered bank) enters into a new covered
QFC with the counterparty to the
preexisting covered QFC or an affiliate
of the counterparty. The OCC believes
such an approach is warranted to ensure
that adoption of the contractual
provisions required by the proposed
rule are consistent between a given
counterparty, any affiliate of the
counterparty, and the covered bank and
all of the affiliates of the covered bank
(which would essentially be all of the
entities under a global systemically
important BHC or FBO). The OCC is
concerned that to allow counterparties
to adopt the required contractual
provisions with affiliated covered
entities, but not the covered bank, poses
a risk to the safety and soundness of the
covered bank and would frustrate the
goal of facilitating the orderly resolution
of the covered bank (and its affiliate
covered entities). Furthermore, the OCC
expects that, as a practical matter, the
decision of how to comply with this
proposed rule and the FRB Proposal
with respect to a given counterparty,
and its affiliates, will be made in close
coordination between the covered bank
and its affiliated covered entities.
The OCC believes that adoption of the
modifications required by the proposed
rule should be consistent between a
given counterparty and all entities
under a global systemically important
BHC or FBO, which necessitates
allowing a trade by either a covered
bank or a covered entity to trigger
adoption of the required provisions.
Moreover, the volume of nonconforming
covered QFCs outstanding can be
expected to decrease over time and
eventually to reach zero. In light of
these considerations, and to avoid
creating potentially inappropriate
compliance costs with respect to
existing QFCs (which a covered bank
would generally be unable to modify
without its counterparty’s consent), it
may be appropriate to permit a limited
number of nonconforming QFCs to
remain outstanding, in keeping with the
terms described previously. The OCC
will monitor covered banks’ levels of
nonconforming QFCs and evaluate the
risk, if any, that they pose to the safety
and soundness of the covered banks or
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to the Federal banking system and to
U.S. financial stability.
Question 24: With respect to the
proposed transaction periods, would
there be a reasonable basis for adopting
different compliance deadlines with
respect to different classes of QFCs? If
so, how should those classes be
distinguished, and what would be a
reasonable time frame for compliance?
Question 25: Is it necessary for a
covered bank to bring preexisting
covered QFCs entered into prior to the
effective date into compliance with the
rule based on a covered bank’s
affiliate’s (that is also a covered entity
or covered bank) transaction with a
counterparty or its affiliates? Is it
appropriate to ensure consistent
treatment across all affiliated covered
banks, covered entities, and affiliated
counterparties?
I. Amendments to Capital Rules
The Basel III Capital Framework, as
implemented by the OCC and the other
banking agencies, permits a bank 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,’’ a collateral
agreement, eligible margin loan, or repostyle transaction (collectively referred to
as netting agreements) that provides for
certain rights upon a counterparty
default. With limited exception, to
qualify for netting treatment, a
qualifying netting agreement must
permit a bank 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.65 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.
An exception to the immediate closeout requirement is made for the stay of
default rights if the financial company
is in receivership, conservatorship, or
resolution under Title II of the DoddFrank Act,66 or the FDIA.67
Accordingly, transactions conducted
under netting agreements where default
rights may be stayed under Title II of the
65 See 12 CFR 3.2 definition of collateral
agreement, eligible margin loan, repo-style
transaction, and qualifying master netting
agreement.
66 See 12 U.S.C. 5390(c)(8)–(16).
67 See 12 U.S.C. 1821(e)(8)–(13).
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Dodd-Frank Act or the FDIA would not
be disqualified from netting treatment.
On December 30, 2014, the OCC and
the FRB issued an interim final rule
(effective January 1, 2015) that amended
the definitions of ‘‘qualifying master
netting agreement,’’ ‘‘collateral
agreement,’’ ‘‘eligible margin loan,’’ and
‘‘repo-style transaction,’’ in the OCC and
FRB regulatory capital rules, and
‘‘qualifying master netting agreement’’
in the OCC and FRB liquidity coverage
ratio (LCR) rules to expand the
exception to the immediate close-out
requirement to ensure that the current
netting treatment under the regulatory
capital, liquidity, and lending limits
rules for over-the-counter (OTC)
derivatives, repo-style transactions,
eligible margin loans, and other
collateralized transactions would be
unaffected by the adoption of various
foreign special resolution regimes
through the ISDA Protocol.68 In
particular, the interim final rule
amended 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 FDIA, 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 FDIA.
Section 47.4 of the proposed rule
essentially limits the default rights
exercisable against a covered bank to the
same stay and transfer restrictions
imposed under the U.S. special
resolution regime against a direct
counterparty. Section 47.4 of the
proposed rule mirrors the contractual
stay and transfer restrictions reflected in
the ISDA Protocol with one notable
difference. While adoption of the ISDA
Protocol is voluntary, covered banks
subject to the proposed rule must
conform their covered QFCs to the stay
and transfer restrictions in section 47.4.
With respect to limitations on crossdefault rights in proposed section 47.5,
the OCC is proposing amendments in
order to maintain the existing netting
treatment for covered QFCs for purposes
of the regulatory capital, liquidity, and
lending limits rules. Specifically, the
OCC is proposing to amend the
definition of ‘‘qualifying master netting
agreement,’’ as well as to make
conforming amendments to ‘‘collateral
68 The FDIC issued a NPRM on January 30, 2015
to propose these conforming amendments. See 80
FR 5063 (January 30, 2015).
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agreement, ‘‘eligible margin loan,’’ and
‘‘repo-style transaction,’’ in the
regulatory capital rules in part 3, and
‘‘qualifying master netting agreement’’
in the LCR rules in part 50 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 proposed
section 47.5. Without these proposed
amendments, covered banks that amend
their covered QFCs to comply with this
proposed rule would no longer be
permitted to recognize covered QFCs 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 proposed
requirements in section 47.5. The OCC
does not believe that the
disqualification of covered QFCs from
master netting agreements would
accurately reflect the risk posed by these
OTC derivative transactions.
Although the proposed rule reformats
some of the definitions in parts 3 and 50
to include the text from the interim final
rule, the proposed amendments do not
alter the substance or effect of the prior
amendment adopted by the interim final
rule.
The rule establishing margin and
capital requirements for covered swap
entities (swap margin rule) defines the
term ‘‘eligible master netting
agreement’’ in a manner similar to the
definition of ‘‘qualifying master netting
agreement.’’ 69 Thus, it may also be
appropriate to amend the definition of
‘‘eligible master netting agreement’’ to
account for the proposed restrictions on
covered entities’ QFCs.
Question 26: As noted, the
requirements of this proposed rule are
mandatory for all covered banks with
respect to their covered QFCs. Under the
proposed rule failure by a covered bank
to conform its covered QFCs to the
mandatory requirements would be a
violation of the rule. In light of the
important policy objectives of this
proposed rule, should the regulatory
capital and LCR rules require that
nonconforming covered QFCs that
violate the requirements of the proposed
rule be disqualified from netting
treatment?
Question 27. In order to qualify for
netting treatment under the regulatory
capital rules, eligible margin loans,
69 80 FR 74840, 74861–74862 (November 30,
2015).
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qualifying master netting agreements,
and repo-style transactions require
national banks and FSAs to conduct
sufficient legal review to ensure that the
provisions of these financial contracts
would be enforceable in all relevant
jurisdictions. Should the scope of the
legal review requirement be expanded to
explicitly include the enforceability of
the direct default and cross-default
provisions required by the proposed
rule?
IV. Request for Comments
In addition to the specifically
enumerated questions in the preamble,
the OCC requests comment on all
aspects of this proposed rule. The OCC
requests that, for the specifically
enumerated questions, commenters
include the number of the question in
their response to make review of the
comments more efficient.
V. Regulatory Analysis
A. Paperwork Reduction Act
In accordance with section 3512 of
the Paperwork Reduction Act (PRA) of
1995 (44 U.S.C. 3501–3521) (as
amended), the OCC 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.
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
PRA. In accordance with the
requirements of the PRA, the OCC may
not conduct or sponsor, and the
respondent is not required to respond
to, an information collection unless it
displays a currently-valid OMB control
number. The information collection
requirements contained in this proposed
rulemaking have been submitted to
OMB for review and approval under
section 3507(d) of the PRA (44 U.S.C.
3507(d)) and section 1320.11 of the
OMB’s implementing regulations (5 CFR
1320).
Comments are invited on:
(a) Whether the collections of
information are necessary for the proper
performance of the OCC’s functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collections, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
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of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start-up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Comments on aspects of
this notice that may affect reporting,
recordkeeping, or disclosure
requirements and burden estimates
should be sent to the addresses listed in
the ADDRESSES section of this document.
A copy of the comments may also be
submitted to the OMB desk officer for
the agencies: by mail to U.S. Office of
Management and Budget, 725 17th
Street NW., #10235, Washington, DC
20503; by facsimile to (202) 395–5806;
or by email to: oira_submission@
omb.eop.gov, Attention, Federal
Banking Agency Desk Officer.
Title of Information Collection:
Mandatory Contractual Stay
Requirements for Qualified Financial
Contracts.
Affected Public: Businesses or other
for-profit.
Respondents: Banks or FSAs
(including any subsidiary of a bank or
FSA) that are subsidiaries of a global
systemically important BHC that has
been designated pursuant to 252.82(a)(1)
of the Federal Reserve Board’s
Regulation YY; Banks or FSAs
(including any subsidiary of a bank or
FSA) that are subsidiaries of a global
systemically important FBO designated
pursuant to section 252.87 of the
Federal Reserve Board’s Regulation YY;
and Federal branches and agencies
(including any U.S. subsidiary of a
Federal branch or agency), of a global
systemically important FBO that has
been designated pursuant to section
252.87 of the Federal Reserve Board’s
Regulation YY.
Abstract: Section 47.6 provides that a
covered bank may request that the OCC
approve as compliant with the
requirements of section 47.5, regarding
insolvency proceedings, provisions of
one or more forms of covered QFCs, or
amendments to one or more forms of
covered QFCs, with enhanced creditor
protection conditions. The request must
include: (1) an analysis of the proposal
under each consideration of the
relevance of creditor protection
provisions; (2) a written legal opinion
verifying that proposed provisions or
amendments would be valid and
enforceable under applicable law of the
relevant jurisdictions, including, in the
case of proposed amendments, the
validity and enforceability of the
proposal to amend the covered QFCs;
and (3) any additional information
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relevant to its approval that the OCC
requests.
Burden Estimates:
Estimated Number of Respondents:
42.
Estimated Burden per Respondent:
Reporting (§ 47.7): 40 hours.
Total Estimated Burden: 1,680 hours.
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (‘‘RFA’’), generally
requires that, in connection with a
NPRM, an agency prepare and make
available for public comment an initial
regulatory flexibility analysis that
describes the impact of a proposed rule
on small entities.70 The Small Business
Administration has defined ‘‘small
entities’’ for banking purposes to
include a bank or savings association
with $175 million or less in assets.71
The OCC currently supervises
approximately 1,032 small entities. The
scope of the proposal is limited to large
banks and their affiliates. Therefore, the
proposed rule will not impact any OCCsupervised small entities. Accordingly,
the proposal will not have a significant
economic impact on a substantial
number of small entities.
C. Unfunded Mandates Reform Act of
1995
The OCC has analyzed the proposed
rule under the factors in the Unfunded
Mandates Reform Act of 1995
(UMRA).72 Under this analysis, the OCC
considered whether the proposed rule
includes a Federal mandate that may
result in the expenditure by State, local,
and tribal governments, in the aggregate,
or by the private sector, of $100 million
or more in any one year (adjusted
annually for inflation). The UMRA does
not apply to regulations that incorporate
requirements specifically set forth in
law.
The OCC’s estimated UMRA cost is
less than $2 million. Therefore, the OCC
finds that the proposed rule does not
trigger the UMRA cost threshold.
Accordingly, the OCC has not prepared
the written statement described in
section 202 of the UMRA.
D. Riegle Community Development and
Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the
Riegle Community Development and
Regulatory Improvement Act of 1994
(RCDRI Act),73 in determining the
effective date and administrative
compliance requirements for new
70 See
5 U.S.C. 603(a).
13 CFR 121.201.
72 2 U.S.C. 1531 et seq.
73 12 U.S.C. 4802(a).
71 See
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55397
regulations that impose additional
reporting, disclosure, or other
requirements on insured depository
institutions, the OCC will consider,
consistent with the principles of safety
and soundness and the public interest:
(1) Any administrative burdens that the
proposed rule would place on
depository institutions, including small
depository institutions and customers of
depository institutions, and (2) the
benefits of the proposed rule. The OCC
requests comment on any administrative
burdens that the proposed rule would
place on depository institutions,
including small depository institutions,
and their customers, and the benefits of
the proposed rule that the OCC should
consider in determining the effective
date and administrative compliance
requirements for a final rule.
List of Subjects
12 CFR Part 3
Administrative practice and
procedure; Capital; Federal savings
associations; National banks; Reporting
and recordkeeping requirements; Risk.
12 CFR Part 47
Administrative practice and
procedure; Banks and banking; Bank
resolution; Default rights; Federal
savings associations, National banks,
Qualified financial contracts; Reporting
and recordkeeping requirements;
Securities.
12 CFR Part 50
Administrative practice and
procedure; Banks and banking;
Liquidity; Reporting and recordkeeping
requirements; Savings associations.
Authority and Issuance
For the reasons stated in the
Supplementary Information, the Office
of the Comptroller of the Currency
proposes to amend part 3, add a new
part 47, and amend part 50 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).
2. Section 3.2 is amended by:
a. Revising the definition of
‘‘collateral agreement’’ by:
■ i. Removing the word ‘‘or’’ at the end
of paragraph (1);
■ ii. Removing the period at the end of
paragraph (2) and adding in its place ‘‘;
or’’; and
■ iii. Adding a new paragraph (3).
■
■
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■ b. Revising paragraph (1)(iii) of the
definition of ‘‘eligible margin loan’’; and
■ c. Revising the definition of
‘‘qualifying master netting agreement’’
by:
■ i. Removing the word ‘‘or’’ at the end
of paragraph (2)(i);
■ ii. Removing the ’’;’’ at the end of
paragraph (2)(ii) and adding in its place
‘‘; or’’; and
■ iii. Adding a new paragraph (2)(iii).
■ 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 * * *
*
*
*
*
*
(3) Where 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 of the
counterparty is limited only to the
extent necessary to comply with the
requirements of part 47 of this title 12
or any similar requirements of another
U.S. Federal banking agency, as
applicable.
*
*
*
*
*
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:
(A) 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
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*
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
FRB’s Regulation EE (12 CFR part 231).
6 The OCC expects to evaluate jointly with the
FRB and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
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facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where 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 of the
counterparty is limited only to the
extent necessary to comply with the
requirements of part 47 of this title 12
or any similar requirements of another
U.S. Federal banking agency, as
applicable;
or
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
*
*
*
*
*
(2) * * *
*
*
*
*
*
(iii) Where 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 of the
counterparty is limited only to the
extent necessary to comply with the
requirements of part 47 of this title 12
or any similar requirements of another
U.S. Federal banking agency, as
applicable.
*
*
*
*
*
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
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:
(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
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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
(2) Where 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 of the
counterparty is limited only to the
extent necessary to comply with the
requirements of part 47 of this title 12
or any similar requirements of another
U.S. Federal banking agency, as
applicable; or
*
*
*
*
*
PART 47—MANDATORY
CONTRACTUAL STAY
REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
3. The authority citation for Part 47
shall read as follows:
■
Authority: 12 U.S.C. 1, 93a, 481, 1462a,
1463, 1464, 1467a, 1818, 1828, 1831n, 1831o,
1831p–1, 1831w, 1835, 3102(b), 3108(a),
5412(b)(2)(B), (D)–(F).
■
4. Add new Part 47 to read as follows:
PART 47—MANDATORY
CONTRACTUAL STAY
REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
Sec.
47.1
47.2
47.3
47.4
47.5
47.6
Authority and Purpose.
Definitions.
Applicability.
U.S. Special Resolution Regimes.
Insolvency Proceedings.
Approval of Enhanced Creditor
Protection Conditions.
47.7 Exclusion of Certain QFCs.
47.8 Foreign Bank Multi-Branch Master
Agreements.
PART 47—MANDATORY
CONTRACTUAL STAY
REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
§ 47.1
Authority and Purpose.
(a) Authority. 12 U.S.C. 1, 93a, 1462a,
1463, 1464, 1467a, 1818, 1828, 1831n,
1831p-1, 1831w, 1835, 3102(b), 3108(a),
5412(b)(2)(B), (D)–(F).
(b) Purpose. The purpose of this part
is to promote the safety and soundness
of federally chartered or licensed
institutions by mitigating the potential
destabilizing effects of the resolution of
a global significantly important banking
entity on an affiliate that is a covered
bank (as defined by this part) by
requiring covered banks to include in
financial contracts covered by this part
certain mandatory contractual
8 The OCC expects to evaluate jointly with the
FRB and FDIC whether foreign special resolution
regimes meet the requirements of this paragraph.
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provisions relating to stays on
acceleration and close out rights and
transfer rights.
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§ 47.2
Definitions.
Central counterparty or CCP has the
same meaning as in section 252.81 of
the Federal Reserve Board’s Regulation
YY (12 CFR 252.81).
Chapter 11 proceeding means a
proceeding under the provisions of
Chapter 11 of the bankruptcy laws of the
United States at 11 U.S.C. 1101–74
(Chapter 11 of Title 11, United States
Code).
Covered entity has the same meaning
as in section 252.82(a) of the Federal
Reserve Board’s Regulation YY (12 CFR
252.82).
Covered QFC means a QFC as defined
in sections 47.4(a) and 47.5(a) of this
part.
Credit enhancement means a QFC of
the type set forth in Title II of the DoddFrank Act at section 210(c)(8)(D)(ii)(XII),
(iii)(X), (iv)(V), (v)(VI), or (vi)(VI), 12
U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X),
(iv)(V), (v)(VI), or (vi)(VI); or a credit
enhancement that the Federal Deposit
Insurance Corporation determines by
regulation is a QFC pursuant to section
210(c)(8)(D)(i), 12 U.S.C.
5390(c)(8)(D)(i), of the Dodd-Frank Act.
Default right (1) Means, with respect
to a QFC, any:
(i) Right of a party, whether
contractual or otherwise (including,
without limitation, rights incorporated
by reference to any other contract,
agreement, or document, and rights
afforded by statute, civil code,
regulation, and common law), to
liquidate, terminate, cancel, rescind, or
accelerate such agreement or
transactions thereunder, set off or net
amounts owing in respect thereto
(except rights related to same-day
payment netting), exercise remedies in
respect of collateral or other credit
support or property related thereto
(including the purchase and sale of
property), demand payment or delivery
thereunder or in respect thereof (other
than a right or operation of a contractual
provision arising solely from a change
in the value of collateral or margin or a
change in the amount of an economic
exposure), suspend, delay, or defer
payment or performance thereunder, or
modify the obligations of a party
thereunder, or any similar rights; and
(ii) Right or contractual provision that
alters the amount of collateral or margin
that must be provided with respect to an
exposure thereunder, including by
altering any initial amount, threshold
amount, variation margin, minimum
transfer amount, the margin value of
collateral, or any similar amount, that
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entitles a party to demand the return of
any collateral or margin transferred by
it to the other party or a custodian or
that modifies a transferee’s right to reuse
collateral or margin (if such right
previously existed), or any similar
rights, in each case, other than a right
or operation of a contractual provision
arising solely from a change in the value
of collateral or margin or a change in the
amount of an economic exposure;
(2) With respect to section 47.5 of this
part, does not include any right under
a contract that allows a party to
terminate the contract on demand, or at
its option at a specified time, or from
time to time, without the need to show
cause.
Dodd-Frank Act means the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124
Stat. 1376 (July 21, 2010).
FDIA proceeding means a proceeding
in which the Federal Deposit Insurance
Corporation is appointed as conservator
or receiver under section 11 of the
Federal Deposit Insurance Act, 12
U.S.C. 1821.
FDIA stay period means, in
connection with an FDIA proceeding,
the period of time during which a party
to a QFC whose counterparty is subject
to an FDIA proceeding may not exercise
any right that the counterparty has to
terminate, liquidate, or net such QFC, in
accordance with section 11(e) of the
Federal Deposit Insurance Act, 12
U.S.C. 1821(e), and any implementing
regulations.
Master agreement means a QFC of the
type set forth in Title II of the DoddFrank Act at section 210(c)(8)(D)(ii)(XI),
(iii)(IX), (iv)(IV), (v)(V), or (vi)(V), 12
U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX),
(iv)(IV), (v)(V), or (vi)(V); or a master
agreement that the Federal Deposit
Insurance Corporation determines by
regulation is a QFC pursuant to section
210(c)(8)(D)(i) of the Dodd-Frank Act, 12
U.S.C. 5390(c)(8)(D)(i).
QFC or qualified financial contract
has the same meaning as in section
210(c)(8)(D) of Title II of the Dodd-Frank
Act, 12 U.S.C. 5390(c)(8)(D).
Subsidiary of covered bank means any
operating subsidiary of a national bank,
Federal savings association, or Federal
branch or agency as defined in 12 CFR
5.34 (national banks) or 12 CFR 5.38
(FSAs), or any other subsidiary of a
covered bank as defined in section
252.82(a)(2) and (3) of the Federal
Reserve Board’s Regulation YY (12 CFR
252.82(a)(2) and (3)).
U.S. special resolution regimes means
the Federal Deposit Insurance Act at 12
U.S.C. 1811–1835a and regulations
promulgated thereunder and Title II of
the Dodd-Frank Act, 12 U.S.C. 5381–
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5394, and regulations promulgated
thereunder.
§ 47.3
Applicability.
(a) Scope of applicability. This part
applies to a ‘‘covered bank,’’ which
includes:
(i) A national bank or Federal savings
association (including any subsidiary of
a national bank or a Federal savings
association) that is a subsidiary of a
global systemically important bank
holding company that has been
designated pursuant to section
252.82(a)(1) of the Federal Reserve
Board’s Regulation YY (12 CFR
252.82(a)(1)); or
(ii) A national bank or Federal savings
association (including any subsidiary of
a national bank or a Federal savings
association) that is a subsidiary of a
global systemically important foreign
banking organization that has been
designated pursuant to section 252.87 of
the Federal Reserve Board’s Regulation
YY (12 CFR 252.87); or
(iii) A Federal branch or agency, as
defined in the Subpart B of Part 28 of
this Chapter (governing Federal
branches and agencies), and any U.S.
subsidiary of the Federal branch or
agency, of a global systemically
important foreign banking organization
that has been designated pursuant to
section 252.87 of the Federal Reserve
Board’s Regulation YY (12 CFR 252.87).
(b) Subsidiary of a covered bank. This
part generally applies to the subsidiary
of any national bank, Federal savings
association, or Federal branch or agency
that is a covered bank under paragraph
(a)(1) of this section. Specifically, the
covered bank is required to ensure that
a covered QFC to which the subsidiary
is a party (as a direct counterparty or a
support provider) satisfies the
requirements of sections 47.4 and 47.5
of this part in the same manner and to
the same extent applicable to the
covered bank.
(c) Initial applicability of
requirements for covered QFCs. A
covered bank must comply with the
requirements of sections 47.4 and 47.5
beginning on the later of
(1) The first day of the calendar
quarter immediately following 365 days
(1 year) after becoming a covered bank;
or
(2) The date this subpart first becomes
effective.
(d) Rule of construction. For purposes
of this subpart, the exercise of a default
right with respect to a covered QFC
includes the automatic or deemed
exercise of the default right pursuant to
the terms of the QFC or other
arrangement.
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(a) QFCs required to be conformed. (1)
A covered bank must ensure that each
of its covered QFCs conforms to the
requirements of this section 47.4.
(2) For purposes of this section 47.4,
a covered QFC means a QFC that the
covered bank:
(i) Enters, executes, or otherwise
becomes a party to; or
(ii) Entered, executed, or otherwise
became a party to before the date this
subpart first becomes effective, if the
covered bank or any affiliate that is a
covered bank or covered entity also
enters, executes, or otherwise becomes a
party to a QFC with the same person or
affiliate of the same person on or after
the date this subpart first becomes
effective.
(3) To the extent that the covered
bank is acting as agent with respect to
a QFC, the requirements of this section
apply to the extent the transfer of the
QFC relates to the covered bank or the
default rights relate to the covered bank
or an affiliate of the covered bank.
(b) Provisions required. A covered
QFC must explicitly provide that:
(1) The transfer of the covered QFC
(and any interest and obligation in or
under, and any property securing, the
covered QFC) from the covered bank
will be effective to the same extent as
the transfer would be effective under the
U.S. special resolution regimes if the
covered QFC (and any interest and
obligation in or under, and any property
securing, the covered QFC) were
governed by the laws of the United
States or a state of the United States and
the covered bank were under the U.S.
special resolution regime; and
(2) Default rights with respect to the
covered QFC that may be exercised
against the covered bank are permitted
to be exercised to no greater extent than
the default rights could be exercised
under the U.S. special resolution
regimes if the covered QFC was
governed by the laws of the United
States or a state of the United States and
the covered bank were under the U.S.
special resolution regime.
(c) Relevance of creditor protection
provisions. The requirements of this
section apply notwithstanding
paragraphs (e), (g), and (i) of section
47.5.
§ 47.5
Insolvency Proceedings.
(a) QFCs required to be conformed. (1)
A covered bank must ensure that each
covered QFC conforms to the
requirements of this section 47.5.
(2) For purposes of this section 47.5,
a covered QFC has the same definition
as in paragraph (a)(2) of section 47.4.
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(3) To the extent that the covered
bank is acting as agent with respect to
a QFC, the requirements of this section
apply to the extent the transfer of the
QFC relates to the covered bank or the
default rights relate to an affiliate of the
covered bank.
(b) General Prohibitions. (1) A
covered QFC may not permit the
exercise of any default right with
respect to the covered QFC that is
related, directly or indirectly, to an
affiliate of the direct party becoming
subject to a receivership, insolvency,
liquidation, resolution, or similar
proceeding.
(2) A covered QFC may not prohibit
the transfer of a covered affiliate credit
enhancement, any interest or obligation
in or under the covered affiliate credit
enhancement, or any property securing
the covered affiliate credit enhancement
to a transferee upon an affiliate of the
direct party becoming subject to a
receivership, insolvency, liquidation,
resolution, or similar proceeding unless
the transfer would result in the
supported party being the beneficiary of
the credit enhancement in violation of
any law applicable to the supported
party.
(c) Definitions relevant to the general
prohibitions and this part. (1) Direct
party. Direct party means covered bank,
or covered entity referenced in section
47.2, that is a party to the direct QFC.
(2) Direct QFC. Direct QFC means a
QFC that is not a credit enhancement,
provided that, for a QFC that is a master
agreement that includes an affiliate
credit enhancement as a supplement to
the master agreement, the direct QFC
does not include the affiliate credit
enhancement.
(3) Affiliate credit enhancement.
Affiliate credit enhancement means a
credit enhancement that is provided by
an affiliate of a party to the direct QFC
that the credit enhancement supports.
(d) Treatment of agent transactions.
With respect to a QFC that is a covered
QFC for a covered bank solely because
the covered bank is acting as agent
under the QFC, the covered bank is the
direct party.
(e) General creditor protections.
Notwithstanding paragraph (b) of this
section, a covered direct QFC and
covered affiliate credit enhancement
that supports the covered direct QFC
may permit the exercise of a default
right with respect to the covered QFC
that arises as a result of:
(1) The direct party becoming subject
to a receivership, insolvency,
liquidation, resolution, or similar
proceeding other than a receivership,
conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II
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of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or laws of
foreign jurisdictions that are
substantially similar to the U.S. laws
referenced in this paragraph (e)(1) in
order to facilitate the orderly resolution
of the direct party;
(2) The direct party not satisfying a
payment or delivery obligation pursuant
to the covered QFC or another contract
between the same parties that gives rise
to a default right in the covered QFC; or
(3) The covered affiliate support
provider or transferee not satisfying a
payment or delivery obligation pursuant
to a covered affiliate credit
enhancement that supports the covered
direct QFC.
(f) Definitions relevant to the general
creditor protections and this part. (1)
Covered direct QFC. Covered direct QFC
means a direct QFC to which a covered
bank, or a covered entity referenced in
section 47.2, is a party.
(2) Covered affiliate credit
enhancement. Covered affiliate credit
enhancement means an affiliate credit
enhancement in which a covered bank,
or a covered entity referenced in section
47.2, is the obligor of the credit
enhancement.
(3) Covered affiliate support provider.
Covered affiliate support provider
means, with respect to a covered
affiliate credit enhancement, the affiliate
of the direct party that is obligated
under the covered affiliate credit
enhancement and is not a transferee.
(4) Supported party. Supported party
means, with respect to a covered
affiliate credit enhancement and the
direct QFC that the covered affiliate
credit enhancement supports, a party
that is a beneficiary of the covered
affiliate support provider’s obligation
under the covered affiliate credit
enhancement.
(g) Additional creditor protections for
supported QFCs. Notwithstanding
paragraph (b) of this section, with
respect to a covered direct QFC that is
supported by a covered affiliate credit
enhancement, the covered direct QFC
and the covered affiliate credit
enhancement may permit the exercise of
a default right that is related, directly or
indirectly, to the covered affiliate
support provider after the stay period if:
(1) The covered affiliate support
provider that remains obligated under
the covered affiliate credit enhancement
becomes subject to a receivership,
insolvency, liquidation, resolution, or
similar proceeding other than a Chapter
11 proceeding;
(2) Subject to paragraph (i) of this
section, the transferee, if any, becomes
subject to a receivership, insolvency,
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liquidation, resolution, or similar
proceeding;
(3) The covered affiliate support
provider does not remain, and a
transferee does not become, obligated to
the same, or substantially similar, extent
as the covered affiliate support provider
was obligated immediately prior to
entering the receivership, insolvency,
liquidation, resolution, or similar
proceeding with respect to:
(i) The covered affiliate credit
enhancement,
(ii) All other covered affiliate credit
enhancements provided by the covered
affiliate support provider in support of
other covered direct QFCs between the
direct party and the supported party
under the covered affiliate credit
enhancement referenced in paragraph
47(g)(3)(i), and
(iii) All covered affiliate credit
enhancements provided by the covered
affiliate support provider in support of
covered direct QFCs between the direct
party and affiliates of the supported
party referenced in paragraph
47.5(g)(3)(ii); or
(4) In the case of a transfer of the
covered affiliate credit enhancement to
a transferee:
(i) All of the ownership interests of
the direct party directly or indirectly
held by the covered affiliate support
provider are not transferred to the
transferee; or
(ii) Reasonable assurance has not been
provided that all or substantially all of
the assets of the covered affiliate
support provider (or net proceeds
therefrom), excluding any assets
reserved for the payment of costs and
expenses of administration in the
receivership, insolvency, liquidation,
resolution, or similar proceeding, will
be transferred or sold to the transferee
in a timely manner.
(h) Definitions relevant to the
additional creditor protections for
supported QFCs and this part. (1) Stay
period. Stay period means, with respect
to a receivership, insolvency,
liquidation, resolution, or similar
proceeding, the period of time
beginning on the commencement of the
proceeding and ending at the later of
5:00 p.m. (eastern time) on the business
day following the date of the
commencement of the proceeding and
48 hours after the commencement of the
proceeding.
(2) Business day. Business day means
a day on which commercial banks in the
jurisdiction the proceeding is
commenced are open for general
business (including dealings in foreign
exchange and foreign currency
deposits).
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(3) Transferee. Transferee means a
person to whom a covered affiliate
credit enhancement is transferred upon
the covered affiliate support provider
entering a receivership, insolvency,
liquidation, resolution, or similar
proceeding or thereafter as part of the
restructuring or reorganization
involving the covered affiliate support
provider.
(i) Creditor protections related to
FDIA proceedings. Notwithstanding
paragraph (b) of this section, with
respect to a covered direct QFC that is
supported by a covered affiliate credit
enhancement, the covered direct QFC
and the covered affiliate credit
enhancement may permit the exercise of
a default right that is related, directly or
indirectly, to the covered affiliate
support provider becoming subject to
FDIA proceedings:
(1) After the FDIA stay period, if the
covered affiliate credit enhancement is
not transferred pursuant to 12 U.S.C.
1821(e)(9)–(e)(10) and any regulations
promulgated thereunder; or
(2) During the FDIA stay period, if the
default right may only be exercised so
as to permit the supported party under
the covered affiliate credit enhancement
to suspend performance with respect to
the supported party’s obligations under
the covered direct QFC to the same
extent as the supported party would be
entitled to do if the covered direct QFC
were with the covered affiliate support
provider and were treated in the same
manner as the covered affiliate credit
enhancement.
(j) Prohibited terminations. A covered
QFC must require, after an affiliate of
the direct party has become subject to a
receivership, insolvency, liquidation,
resolution, or similar proceeding:
(1) The party seeking to exercise a
default right to bear the burden of proof
that the exercise is permitted under the
covered QFC; and
(2) Clear and convincing evidence or
a similar or higher burden of proof to
exercise a default right.
§ 47.6 Approval of Enhanced Creditor
Protection Conditions.
(a) Protocol compliance. A covered
QFC may permit the exercise of a
default right with respect to the covered
QFC if the covered QFC has been
amended by the ISDA 2015 Universal
Resolution Stay Protocol, including the
Securities Financing Transaction Annex
and Other Agreements Annex published
by the International Swaps and
Derivatives Association, Inc., as of May
3, 2016, and minor or technical
amendments thereto.
(b) Proposal of enhanced creditor
protection conditions. (1) A covered
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55401
bank may request that the OCC approve
as compliant with the requirements of
section 47.5 of this part provisions of
one or more forms of covered QFCs, or
amendments to one or more forms of
covered QFCs, with enhanced creditor
protection conditions.
(2) Enhanced creditor protection
conditions means a set of limited
exemptions to the requirements of
section 47.5(b) of this part that are
different than that of paragraphs (e), (g),
and (i) of section 46.5 of this part.
(3) A covered bank making a request
under paragraph (b)(1) of this section
must provide:
(i) An analysis of the proposal that
addresses each consideration in
paragraph (d) of this section;
(ii) A written legal opinion verifying
that proposed provisions or
amendments would be valid and
enforceable under applicable law of the
relevant jurisdictions, including, in the
case of proposed amendments, the
validity and enforceability of the
proposal to amend the covered QFCs;
and
(iii) Any other relevant information
that the OCC requests.
(c) OCC approval. The OCC may
approve, subject to any conditions or
commitments the OCC may impose, a
proposal by a covered bank under
paragraph (b) of this section if the
proposal, as compared to a covered QFC
that contains only the limited
exemptions in paragraphs of (e), (g), and
(i) of section 47.5 of this part, would
promote the safety and soundness of
federally chartered or licensed
institutions by mitigating the potential
destabilizing effects of the resolution of
a global significantly important banking
entity that is an affiliate of the covered
bank, at least to the same extent.
(d) Considerations. In reviewing a
proposal under this section, the OCC
may consider all facts and
circumstances related to the proposal,
including:
(1) Whether, and the extent to which,
the proposal would reduce the
resiliency of such covered banks during
distress or increase the impact of the
failure of one or more of the covered
banks;
(2) Whether, and the extent to which,
the proposal would materially decrease
the ability of a covered bank, or an
affiliate of a covered bank, to be
resolved in a rapid and orderly manner
in the event of the financial distress or
failure of the entity that is required to
submit a resolution plan pursuant to
Section 165(d) of the Dodd-Frank Act,
12 U.S.C. 5635(d), and the
implementing regulations in 12 CFR
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part 243 (FRB) and 12 CFR part 381
(FDIC);
(3) Whether, and the extent to which,
the set of conditions or the mechanism
in which they are applied facilitates, on
an industry-wide basis, contractual
modifications to remove impediments to
resolution and increase market
certainty, transparency, and equitable
treatment with respect to the default
rights of non-defaulting parties to a
covered QFC;
(4) Whether, and the extent to which,
the proposal applies to existing and
future transactions;
(5) Whether, and the extent to which,
the proposal would apply to multiple
forms of QFCs or multiple covered
banks;
(6) Whether the proposal would
permit a party to a covered QFC that is
within the scope of the proposal to
adhere to the proposal with respect to
only one or a subset of covered banks;
(7) With respect to a supported party,
the degree of assurance the proposal
provides to the supported party that the
material payment and delivery
obligations of the covered affiliate credit
enhancement and the covered direct
QFC it supports will continue to be
performed after the covered affiliate
support provider enters a receivership,
insolvency, liquidation, resolution, or
similar proceeding;
(8) The presence, nature, and extent of
any provisions that require a covered
affiliate support provider or transferee
to meet conditions other than material
payment or delivery obligations to its
creditors;
(9) The extent to which the supported
party’s overall credit risk to the direct
party may increase if the enhanced
creditor protection conditions are not
met and the likelihood that the
supported party’s credit risk to the
direct party would decrease or remain
the same if the enhanced creditor
protection conditions are met; and
(10) Whether the proposal provides
the counterparty with additional default
rights or other rights.
jstallworth on DSK7TPTVN1PROD with PROPOSALS
§ 47.7
Exclusion of Certain QFCs.
(a) Exclusion of CCP-cleared QFCs. A
covered bank is not required to conform
a covered QFC to which a CCP is a party
to the requirements of sections 47.4 and
47.5.
(b) Exclusion of covered entity QFCs.
A covered bank is not required to
conform a covered QFC to the
requirements of sections 47.4 and 47.5
to the extent that a covered entity is
required to conform the covered QFC to
similar requirements of the Federal
Reserve Board if the QFC is either a
direct QFC to which a covered entity is
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a direct party or an affiliate credit
enhancement to which a covered entity
is the obligor.
U.S. Federal banking agency, as
applicable.
*
*
*
*
*
§ 47.8 Foreign Bank Multi-branch Master
Agreements.
Dated: August 10, 2016.
Thomas J. Curry,
Comptroller of the Currency.
(a) Treatment of foreign bank multibranch master agreements. With respect
to a Federal branch or agency of a
globally significant foreign banking
organization, a foreign bank multibranch master agreement that is a
covered QFC solely because the master
agreement permits agreements or
transactions that are QFCs to be entered
into at one or more Federal branches or
agencies of the globally significant
foreign banking organization will be
considered a covered QFC for purposes
of this subpart only with respect to such
agreements or transactions booked at
such Federal branches or agencies or for
which a payment or delivery may be
made at such Federal branches or
agencies.
(b) Definition of foreign bank multibranch master agreements. A foreign
bank multi-branch master agreement
means a master agreement that permits
a Federal branch or agency and another
place of business of a foreign bank that
is outside the United States to enter
transactions under the agreement.
PART 50—LIQUIDITY RISK
MEASUREMENT STANDARDS
5. 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.
6. Section 50.3 is amended by revising
the definition of ‘‘qualifying master
netting agreement’’ by:
■ i. Removing the word ‘‘or’’ at the end
of paragraph (2)(i);
■ ii. Removing the ’’;’’ at the end of
paragraph (2)(ii) and adding in its place
‘‘; or’’; and
■ iii. Adding a new paragraph (2)(iii).
The revisions are set forth below:
■
§ 50.3
Definitions.
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
*
*
*
*
*
(2) * * *
*
*
*
*
*
(iii) Where 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 of the
counterparty is limited only to the
extent necessary to comply with the
requirements of part 47 of this title 12
or any similar requirements of another
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[FR Doc. 2016–19671 Filed 8–18–16; 8:45 am]
BILLING CODE 4810–33–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–R09–OAR–2016–0322; FRL–9950–95–
Region 9]
Approval and Limited Approval and
Limited Disapproval of California State
Implementation Plan Revisions; Butte
County Air Quality Management
District; Stationary Source Permits
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:
The Environmental Protection
Agency (EPA) is proposing a limited
approval and limited disapproval of
revisions to the Butte County Air
Quality Management District
(BCAQMD) portion of the California
State Implementation Plan (SIP). These
revisions concern the District’s New
Source Review (NSR) permitting
program for new and modified sources
of air pollution. We are proposing action
on these local rules under the Clean Air
Act as amended in 1990 (CAA or the
Act). We are taking comments on this
proposal and plan to follow with a final
action.
DATES: Any comments must arrive by
September 19, 2016.
ADDRESSES: Submit your comments,
identified by Docket ID No. [EPA–R09–
OAR–2016–0332] at http://
www.regulations.gov, or via email to
R9AirPermits@epa.gov. For comments
submitted at Regulations.gov, follow the
online instructions for submitting
comments. Once submitted, comments
cannot be removed or edited from
Regulations.gov. For either manner of
submission, the EPA may publish any
comment received to its public docket.
Do not submit electronically any
information you consider to be
Confidential Business Information (CBI)
or other information whose disclosure is
restricted by statute. Multimedia
submissions (audio, video, etc.) must be
accompanied by a written comment.
The written comment is considered the
official comment and should include
discussion of all points you wish to
make. The EPA will generally not
SUMMARY:
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Agencies
[Federal Register Volume 81, Number 161 (Friday, August 19, 2016)]
[Proposed Rules]
[Pages 55381-55402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19671]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 81, No. 161 / Friday, August 19, 2016 /
Proposed Rules
[[Page 55381]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3, 47 and 50
[Docket ID OCC-2016-0009]
RIN 1557-AE05
Mandatory Contractual Stay Requirements for Qualified Financial
Contracts
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The OCC is proposing to add a new part to its rules to enhance
the resilience and the safety and soundness of federally chartered and
licensed financial institutions by addressing concerns relating to the
exercise of default rights of certain financial contracts that could
interfere with the orderly resolution of certain systemically important
financial firms. Under this proposed rule, a covered bank would be
required to ensure that a covered qualified financial contract (1)
contains a contractual stay-and-transfer provision analogous to the
statutory stay-and-transfer provision imposed under Title II of the
Dodd-Frank Act and in the Federal Deposit Insurance Act, and (2) limits
the exercise of default rights based on the insolvency of an affiliate
of the covered bank. In addition, this proposed rule would make
conforming amendments to the OCC's Capital Adequacy Standards and the
Liquidity Risk Measurement Standards in its regulations. The
requirements of this proposed rule are substantively identical to those
contained in a notice of proposed rulemaking issued by the Board of
Governors of the Federal Reserve System on May 3, 2016.
DATES: Comments must be received by October 18, 2016.
ADDRESSES: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments
through the Federal eRulemaking Portal or email, if possible. Please
use the title ``Mandatory Contractual Stay Requirements for Qualified
Financial Contracts'' 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
www.regulations.gov. Enter ``Docket ID OCC-2016-0009'' in the Search
Box and click ``Search.'' 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 public comments.
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.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2016-0009'' 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 include 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 rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to
www.regulations.gov. Enter ``Docket ID OCC-2016-0009'' in the Search
box and click ``Search.'' Click on ``Open Docket Folder'' on the right
side of the screen and then ``Comments.'' Comments can be filtered by
clicking on ``View All'' and then 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. Supporting materials may
be viewed by clicking on ``Open Docket Folder'' and then clicking on
``Supporting Documents.'' The docket may be viewed after the close of
the comment period in the same manner as during the comment period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. 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.
FOR FURTHER INFORMATION CONTACT: Valerie Song, Assistant Director, or
Scott Burnett, Attorney, Bank Activities and Structure Division, (202)
649-5500; Rima Kundnani, Attorney, or Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities Division, (202) 649-6282, 400 7th
Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
A. Qualified Financial Contracts, Default Rights, and Financial
Stability
B. QFC Default Rights and GSIB Resolution Strategies
C. Default Rights and Relevant Resolution Laws
III. Description of the Proposal
A. Overview, Purpose, and Authority
B. Covered Banks
C. Covered QFCs
D. Definition of ``Default Right''
E. Required Contractual Provisions Related to U.S. Special
Resolution Regimes
F. Prohibited Cross-Default Rights
G. Process for Approval of Enhanced Creditor Protections
H. Transition Periods
I. Amendments to Capital Rules
IV. Request for Comments
V. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Unfunded Mandates Reform Act of 1995
D. Riegle Community Development and Regulatory Improvement Act
of 1994
[[Page 55382]]
I. Introduction
In the wake of the financial crisis of 2007-08, U.S. and
international financial regulators have placed increased focus on
improving the resolvability of large, complex financial institutions
that operate in multiple jurisdictions, often called global
systemically important banking organizations (GSIBs).
In connection with these ongoing efforts, on May 3, 2016, the Board
of Governors of the Federal Reserve System (FRB or Board) issued a
notice of proposed rulemaking (NPRM) pursuant to section 165 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) as part of its ongoing efforts to improve the resolvability of
U.S. GSIBs and foreign GSIBs that operate in the United States
(collectively, ``covered entities'' \1\).\2\ The OCC is issuing this
parallel proposed rule applicable to OCC-regulated institutions that
are part of a covered entity under the FRB NPRM. The OCC intends this
proposed rule to complement and work in tandem with the FRB NPRM.
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\1\ The FRB NPRM applies to ``covered entities.'' The term
``covered entity'' includes: any U.S. top-tier bank holding company
identified as a GSIB under the Board's NPRM establishing risk-based
capital surcharges for GSIBs, set forth at 12 CFR 217.402; any
subsidiary of such bank holding company (other than a ``covered
bank''); and any U.S. subsidiary, U.S. branch, or U.S. agency of a
foreign GSIB (other than a ``covered bank''). See FRB NPRM Sec.
252.82. The term ``covered entity'' does not include ``covered
banks,'' which are instead covered by the provisions of this
proposed rule.
\2\ ``Restrictions on Qualified Financial Contracts of
Systemically Important U.S. Banking Organizations and the U.S.
Operations of Systemically Important Foreign Banking Organizations;
Revisions to the Definition of Qualifying Master Netting Agreement
and Related Definitions,'' 81 FR 29691, 29170 (May 11, 2016) (FRB
Proposal, FRB NPRM, Board's Proposal, or Board's NPRM).
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The purpose of the Board's NPRM is to improve the resolvability of
covered entities by ``limiting disruptions to a failed GSIB through its
financial contracts with other companies.'' \3\ Specifically, the
Board's NPRM addresses a threat to financial stability posed by the
potential disorderly exercise of default rights contained in several
important categories of financial contracts collectively known as
``qualified financial contracts'' (QFCs).\4\
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\3\ Id. at 29170.
\4\ Id. The Board's Proposal adopts the definition of
``qualified financial contract'' set out in section 210(c)(8)(D) of
the Dodd-Frank Act, 12 U.S.C. 5390(c)(8)(D). See Board's Proposal
Sec. 252.81. This definition includes, among other things,
derivatives, repurchase agreements (also known as ``repos'') and
reverse repos, and securities lending and borrowing agreements.
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As described more fully in the Board's NPRM and in the Background
section of this preamble, this threat to financial stability arises
because GSIBs are interconnected with other financial firms, including
other GSIBs, through large volumes of QFCs. The failure of one entity
within a GSIB can trigger disruptive terminations of these contracts if
the counterparties of both the failed entity and its affiliates
exercise their contractual rights to terminate the contracts and
liquidate collateral.\5\ These terminations, especially if
counterparties lose confidence in the GSIB quickly, and in large
numbers, can destabilize the financial system and potentially spark a
financial crisis through several channels. For example, they can
destabilize the failed entity's otherwise solvent affiliates, causing
them to weaken or fail with adverse consequences to their
counterparties that can result in a chain reaction that ripples through
the financial system. They also may result in ``fire sales'' of large
volumes of financial assets, in particular, the collateral that secures
the contracts, which can in turn weaken and cause stress for other
firms by depressing the value of similar assets that they hold.
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\5\ As used in this proposed rule, the term ``GSIB'' can refer
to any entity in the GSIB group, including the top-tier parent
entity or any subsidiary thereof. The term ``GSIB entity'' is
sometimes used to refer to an individual component of the GSIB
group.
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As discussed in detail in the Section I.B., the OCC, as the primary
regulator for national banks, Federal savings associations (FSAs), and
Federal branches and agencies, has a strong safety and soundness
interest in preventing such a disorderly termination of QFCs upon a
GSIB's entry into resolution proceedings. QFCs are typically entered
into by various operating entities in the GSIB group, which will often
include a large depository institution that is subject to the OCC's
supervision. These OCC-supervised entities are some of the largest
entities by asset size in the GSIB group, and often a party to large
volumes of QFCs, making these entities highly interconnected with other
large financial firms.\6\ The exercise of default rights against an
otherwise healthy national bank, FSA, or Federal branch or agency
resulting from the failure of its affiliate, for example its top-tier
U.S. holding company, may cause it to weaken or fail, and in turn
spread contagion throughout the financial system, including among the
system of federally chartered and licensed institutions that the OCC
supervises, by causing a chain of failures by other financial
institutions--including other national banks, FSAs, or Federal branches
or agencies--that are its QFC counterparties. Furthermore, if an OCC-
supervised entity itself were to fail, it is imperative that the
default rights triggered by such an event are exercised in an orderly
manner, both by domestic and foreign counterparties, to ensure that
contagion does not spread to other federally chartered and licensed
institutions and beyond throughout the Federal banking system.\7\
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\6\ 81 FR 29619, 29172 (``From the standpoint of financial
stability, the most important of these operating subsidiaries are
generally a U.S. insured depository institution, a U.S. broker-
dealer, and similar entities organized in other countries.'').
\7\ As used in this proposed rule, the term ``Federal banking
system'' refers to all OCC-supervised entities, including national
banks, Federal savings associations, and Federal branches and
agencies. Accordingly, references to impacts on the Federal banking
system refer to how destabilization can adversely affect all such
entities, not just covered banks.
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Accordingly, OCC-supervised affiliates or branches of U.S. or
foreign GSIBs are exposed, through the interconnectedness of their QFCs
and their affiliates' QFCs, to destabilizing effects if their
counterparties or the counterparties of their affiliates exercise
default rights upon the entry into resolution of the covered bank
itself or its GSIB affiliate. These potential destabilizing effects are
best addressed by requiring all GSIB entities to amend their QFCs to
include contractual provisions aimed at avoiding such destabilization.
As the primary supervisor of covered banks, the OCC has a significant
interest in preventing or mitigating these destabilizing effects;
otherwise, the result will be adverse to safety and soundness of
covered banks individually and collectively, with the potential for
spill-over beyond GSIB-affiliated banks and Federal branches and
agencies to the Federal banking system.
As described in the Board's NPRM, measures aimed at improving
financial stability and the probability of a successful resolution of
GSIBs likely will affect the operations of GSIB subsidiaries. In most
cases, the largest GSIB subsidiary by asset size is a national bank
supervised by the OCC. While the ultimate aim of the Board's NPRM and
this proposed rule is focused on the resolution of a GSIB, the proposed
preventative measures would be required to be implemented by GSIBs
while they are going concerns. The OCC has an inherent supervisory
interest in ensuring that measures aimed at improving resolvability in
the event of a GSIB's failure are also consistent with
[[Page 55383]]
the safe and sound operation of the OCC-supervised subsidiary as a
going concern. Accordingly, to ensure that the QFCs entered into by
such entities do not threaten the stability or safety and soundness of
covered banks individually or collectively, the OCC is issuing this
proposed rule, which imposes substantively identical requirements
contained in the FRB NPRM on national banks, FSAs, and Federal branches
and agencies (covered banks). The OCC worked closely with the FRB to
develop this proposed rule.\8\ In addition, the OCC plans to work with
the FRB to coordinate the development of the final rule and may share
comments received in response to the proposed rule, as appropriate.
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\8\ 12 U.S.C. 5365(b)(4) (requiring the Board to consult with
each Financial Stability Oversight Council (FSOC) member that
primarily supervises any subsidiary when any prudential standard is
likely to have a ``significant impact'' on such subsidiary).
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II. Background
The following background discussion describes in detail the
financial contracts that are the subject of this proposed rule, the
default rights often contained in such contracts, and impacts on
financial stability resulting from the exercise of such default rights.
This section also provides background information on the resolution
strategies for GSIBs and how they fit within the resolution frameworks
in the United States.\9\
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\9\ See 81 FR 29169, 29170-73 (May 11, 2016), from which this
discussion is adapted.
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A. Qualified Financial Contracts, Default Rights, and Financial
Stability
The proposed rule covers QFCs, which include swaps, other
derivative contracts, repurchase agreements (repos) and reverse repos,
and securities lending and borrowing agreements. GSIB entities enter
into QFCs to borrow money to finance their investments, to lend money,
to manage risk, to attempt to profit from market movements, and to
enable their clients and counterparties to perform these financial
activities.
QFCs play a role in economically valuable financial intermediation
when markets are functioning normally. But they are also a major source
of financial interconnectedness, which may pose a threat to financial
stability in times of stress. This proposed rule, along with the FRB
NPRM, focuses on one of the most serious threats to both a global
systemically important bank holding company (BHC) and its covered banks
subsidiaries--the failure of a GSIB that is party to large volumes of
QFCs, which are likely to involve QFCs with counterparties that are
themselves systemically important.
By contract, a party to a QFC generally has the right to take
certain actions if its counterparty defaults on the QFC (that is, if it
fails to meet certain contractual obligations). Common default rights
include the right to suspend performance of the non-defaulting party's
obligations, the right to terminate or accelerate the contract, the
right to set off amounts owed between the parties, the right to seize
and liquidate the defaulting party's collateral. In general, default
rights allow a party to a QFC to reduce the credit risk associated with
the QFC by granting it the right to exit the QFC and thereby reduce its
exposure to its counterparty upon the occurrence of a specified
condition, such as its counterparty's entry into resolution
proceedings.
This proposed rule focuses on two distinct scenarios in which a
non-defaulting party to a QFC is commonly able to exercise default
rights. These two scenarios involve a default that occurs when either
the defaulting party to the QFC or an affiliate of that party enters a
resolution proceeding.\10\
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\10\ This preamble uses phrases such as ``entering a resolution
proceeding'' and ``going into resolution'' to refer to the concept
of ``becoming subject to a receivership, insolvency, liquidation,
resolution, or similar proceeding.'' These phrases refer to
proceedings established by law to deal with a failed legal entity.
In the context of the failure of a global systemically important
bank holding company, the most relevant types of resolution
proceeding include: (1) For most U.S.-based legal entities, the
bankruptcy process established by the U.S. Bankruptcy Code (Title
11, United States Code); (2) for U.S. insured depository
institutions, a receivership administered by the Federal Deposit
Insurance Corporation (FDIC) under the Federal Deposit Insurance Act
(12 U.S.C. 1821); (3) for companies whose ``resolution under
otherwise applicable Federal or State law would have serious adverse
effects on the financial stability of the United States,'' the Dodd-
Frank Act's Orderly Liquidation Authority (12 U.S.C. 5383(b)(2));
and, (4) for entities based outside the United States, resolution
proceedings created by foreign law.
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The first scenario occurs when a legal entity that is itself a
party to the QFC enters a resolution proceeding. This proposed rule
refers to such a scenario as a ``direct default'' and refers to the
contractual default rights that arise from a direct default as ``direct
default rights.'' \11\
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\11\ For convenience, this preamble uses the general term
``default'' to refer specifically to a default that occurs when a
QFC party or its affiliate enters a resolution proceeding.
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The second scenario occurs when an affiliate of the legal entity
that is a direct party to the QFC (such as the direct party's parent
holding company) enters a resolution proceeding. This proposed rule
refers to such a scenario as a ``cross-default'' and refers to
contractual default rights that arise from a cross-default as ``cross-
default rights.'' For example, a GSIB parent entity might guarantee the
derivatives transactions of its subsidiaries and those derivatives
contracts could contain cross-default rights against a subsidiary of
the GSIB that would be triggered by the bankruptcy filing of the GSIB
parent entity even though the subsidiary continues to meet all of its
financial obligations.
Direct default rights and cross-default rights are referred to
collectively in this proposed rule as ``default rights.''
As noted in the FRB NPRM, if a significant number of QFC
counterparties exercise their default rights precipitously and in a
manner that would impede an orderly resolution of a GSIB, all QFC
counterparties and the broader financial system, including institutions
supervised by the OCC, may potentially be worse off and less stable.
The destabilization can occur in several ways. First,
counterparties' exercise of default rights may drain liquidity from the
troubled GSIB, forcing it to sell off assets at depressed prices, both
because the sales must be done on a short timeframe and because the
elevated supply will push prices down. These asset ``fire sales'' may
cause or deepen balance-sheet insolvency at the GSIB, reducing the
amount that its other creditors can recover and thereby imposing losses
on those creditors and threatening their solvency (and, indirectly, the
solvency of their own creditors, and so on). The GSIB may also respond
by withdrawing liquidity that it had offered to other firms, forcing
them to engage in asset fire sales. Alternatively, if the GSIB's QFC
counterparty itself liquidates the QFC collateral at fire sale prices,
the effect will again be to weaken the GSIB's balance sheet, because
the debt satisfied by the liquidation would be less than what the value
of the collateral would have been outside the fire sale context. The
counterparty's setoff rights may allow it to further drain the GSIB's
capital and liquidity by withholding payments owed to the GSIB. The
GSIB may also have rehypothecated collateral that it received from QFC
counterparties, for instance in back-to-back repo or securities lending
transactions, in which case demands from those counterparties for the
early return of their rehypothecated collateral could be especially
disruptive.
The asset fire sales can also spread contagion throughout the
financial system by increasing volatility and by lowering the value of
similar assets held by other financial institutions, potentially
causing them to suffer
[[Page 55384]]
diminished market confidence in their own solvency, mark-to-market
losses, margin calls, and creditor runs (which could lead to further
fire sales, worsening the contagion). Finally, the early terminations
of derivatives that the defaulting GSIB relied on to hedge its risks
could leave major risks unhedged, increasing the GSIB's probable losses
going forward.
Where there are significant simultaneous terminations and these
effects occur contemporaneously, such as upon the failure of a GSIB
that is party to a large volume of QFCs, they may pose a substantial
risk to financial stability. In short, QFC continuity is important for
the orderly resolution of a GSIB so that the instability caused by
asset fire sales can be avoided.\12\
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\12\ The Board and the FDIC identified the exercise of default
rights in financial contracts as a potential obstacle to orderly
resolution in the context of resolution plans filed pursuant to
section 165(d) of the Dodd-Frank Act and, accordingly, instructed
the most systemically important firms to demonstrate that they are
``amending, on an industry-wide and firm-specific basis, financial
contracts to provide for a stay of certain early termination rights
of external counterparties triggered by insolvency proceedings.''
FRB and FDIC, ``Agencies Provide Feedback on Second Round Resolution
Plans of `First-Wave' Filers'' (August 5, 2014), available at http://www.federalreserve.gov/newsevents/press/bcreg/20140805a.htm. See
also FRB and FDIC, ``Agencies Provide Feedback on Resolution Plans
of Three Foreign Banking Organizations'' (March 23, 2015), available
at http://www.federalreserve.gov/newsevents/press/bcreg/20150323a.htm; FRB and FDIC, ``Guidance for 2013 165(d) Annual
Resolution Plan Submissions by Domestic Covered Companies that
Submitted Initial Resolution Plans in 2012'' 5-6 (April 15, 2013),
available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20130415c2.pdf.
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As will be discussed further, the proposed rule is primarily
concerned only with default rights that run against a GSIB--that is,
direct default rights and cross-default rights that arise from the
entry into resolution of a GSIB. The proposed rule would not affect
contractual default rights that a GSIB (or any other entity) may have
against a counterparty that is not a GSIB. The OCC believes that this
limited scope is appropriate because the risk posed to financial
stability by the exercise of QFC default rights is greatest when the
defaulting counterparty is a GSIB.
B. QFC Default Rights and GSIB Resolution Strategies
Under the Dodd-Frank Act, many complex GSIBs are required to submit
resolution plans to the Board and the Federal Deposit Insurance
Corporation (FDIC), detailing how the company can be resolved in a
rapid and orderly manner in the event of material financial distress or
failure of the company. In response to these requirements, these firms
have developed resolution strategies that, broadly speaking, fall into
two categories: The single-point-of-entry (SPOE) strategy and the
multiple-point-of-entry (MPOE) strategy. As noted in the Board's
Proposal, cross-default rights in QFCs pose a potential obstacle to the
implementation of either of these strategies.
In an SPOE resolution, only a single legal entity--the GSIB's top-
tier BHC--would enter a resolution proceeding. The losses that led to
the GSIB's failure would be passed up from the operating subsidiaries
that incurred the losses to the holding company and would then be
imposed on the equity holders and unsecured creditors of the holding
company through the resolution process. This strategy is designed to
help ensure that the GSIB's subsidiaries remain adequately capitalized.
An SPOE resolution could thereby prevent those operating subsidiaries
from failing or entering resolution themselves and allow them to
instead continue normal operations. The expectation that the holding
company's equity holders and unsecured creditors would absorb the
GSIB's losses in the event of failure would help to maintain the
confidence of the operating subsidiaries' creditors and counterparties
(including QFC counterparties), reducing their incentive to engage in
potentially destabilizing funding runs or margin calls and thus
lowering the risk of asset fire sales.
An SPOE proceeding can avoid the need for covered banks to be
placed into receivership or similar proceedings, as they would continue
to operate as going concerns, only if the parent's entry into
resolution proceedings does not trigger the exercise of cross-default
rights. Accordingly, this proposed rule, by limiting such cross-default
rights based on an affiliate's entry into resolution proceedings,
enables the SPOE strategy, and in turn, would assist in stabilizing
both the covered bank and the Federal banking system.
This proposed rule would also yield benefits for resolution under
the MPOE strategy. Unlike the SPOE strategy, an MPOE strategy involves
several entities in the GSIB group entering proceedings. For example,
an MPOE strategy might involve a foreign GSIB's U.S. intermediate
holding company going into resolution or a GSIB's U.S. insured
depository institution entering resolution under the Federal Deposit
Insurance Act. Similar to the benefits associated with the SPOE
strategy, this proposed rule would help support the continued operation
of affiliates of an entity experiencing resolution to the extent the
affiliate continues to perform on its QFCs.
C. Default Rights and Relevant Resolution Laws
In order to understand the connection between direct defaults,
cross-defaults, the SPOE and MPOE resolution strategies, and the
threats to financial stability discussed previously, it is necessary to
understand how QFCs, and the default rights contained therein, are
treated when an entity enters resolution. The following sections
discuss the treatment of QFCs in greater detail under three U.S.
resolution laws: the Bankruptcy Code, the Orderly Liquidation
Authority, and the Federal Deposit Insurance Act. As discussed in these
sections, each of these resolution laws has special provisions
detailing the treatment of QFCs upon an entity's entry into such
proceedings.
U.S. Bankruptcy Code. While covered banks themselves are not
subject to resolution under the Bankruptcy Code, in general, if a BHC
were to fail, it would be resolved under the Bankruptcy Code. When an
entity goes into resolution under the Bankruptcy Code, attempts by the
creditors of the debtor to enforce their debts through any means other
than participation in the bankruptcy proceeding (for instance, by suing
in another court, seeking enforcement of a preexisting judgment, or
seizing and liquidating collateral) are generally blocked by the
imposition of an automatic stay, which generally persists throughout
the bankruptcy proceeding.\13\ A key purpose of the automatic stay, and
of bankruptcy law in general, is to maximize the value of the
bankruptcy estate and the creditors' ultimate recoveries by
facilitating an orderly liquidation or restructuring of the debtor. As
a result, the automatic stay addresses the collective action problem,
in which the creditors' individual incentives to race to recover as
much from the debtor as possible, before other creditors can do so,
collectively cause a value-destroying disorderly liquidation of the
debtor.\14\
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\13\ See 11 U.S.C. 362.
\14\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d
876, 879 (7th Cir. 2001).
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The Bankruptcy Code, however, largely exempts QFC counterparties
from the automatic stay through special ``safe harbor'' provisions.\15\
Under these provisions, any contractual rights that a QFC counterparty
has to terminate the contract, set off obligations, and liquidate
collateral in response to a direct default or cross-default are not
[[Page 55385]]
subject to the stay and may be exercised at any time.\16\
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\15\ 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556,
559, 560, 561.
\16\ The Bankruptcy Code does not itself confer any default
rights upon QFC counterparties; it merely permits QFC counterparties
to exercise certain contractual rights that they have under the
terms of the QFC. This proposed rule does not propose to restrict
the exercise of any default rights that fall within the Bankruptcy
Code's safe harbor provisions, which are described here to provide
context.
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Where the failed firm is a GSIB's holding company with covered
banks that are going concerns and are party to large volumes of QFCs,
the mass exercise of default rights under the QFCs based on the
affiliate default represents a significant impediment to the SPOE
resolution strategy.\17\ This is because the failure of a covered
bank's affiliate will trigger the mass exercise of cross-default rights
against the covered bank, which will not be stayed by the affiliate's
entry into bankruptcy proceedings. This will in turn lead to fire sales
that will threaten the ongoing viability of the covered bank and the
successful resolution of the particular GSIB--and thus will also pose a
threat to the federal banking system and broader financial system.
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\17\ As noted previously, the MPOE strategy will similarly
benefit from the override of cross-defaults. The SPOE strategy is
used here for illustrative purposes only.
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Special Resolution Regimes Under U.S. Law. For purposes of this
proposed rule, there are two special resolution regimes under U.S. law:
Title II of the Dodd-Frank Act and the Orderly Liquidation Authority
(OLA); and the Federal Deposit Insurance Act (FDIA). While these
regimes both impose certain limitations on the ability of
counterparties to exercise default rights--thus mitigating the
potential for disorderly resolution due to the exercise by
counterparties of such default rights--these limitations may not be
applicable or clearly enforceable in certain contexts.
Title II of the Dodd-Frank Act and the Orderly Resolution
Authority. Title II of the Dodd-Frank Act establishes an alternative
resolution framework intended ``to provide the necessary authority to
liquidate failing financial companies that pose a significant risk to
the financial stability of the United States in a manner that mitigates
such risk and minimizes moral hazard.'' \18\
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\18\ 12 U.S.C. 5384(a) (Section 204(a) of the Dodd-Frank Act).
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As noted, although a failed BHC would generally be resolved under
the Bankruptcy Code, Congress recognized that a U.S. financial company
might fail under extraordinary circumstances, in which an attempt to
resolve it through the bankruptcy process would have serious adverse
effects on financial stability in the United States. Title II therefore
authorizes the Secretary of the Treasury, upon the recommendation of
other government agencies and a determination that several
preconditions are met, to place a U.S. financial company into a
receivership conducted by the FDIC as an alternative to bankruptcy.
Title II empowers the FDIC, when it acts as receiver in an OLA
resolution, to protect financial stability against the QFC-related
threats discussed previously. Title II addresses direct default rights
in a number of ways. First, Title II empowers the FDIC to transfer the
QFCs to some other financial company that is not in a resolution
proceeding.\19\ To give the FDIC time to effect this transfer, Title II
temporarily stays QFC counterparties of the failed entity from
exercising termination, netting, and collateral liquidation rights
``solely by reason of or incidental to'' the failed entity's entry into
OLA resolution, its insolvency, or its financial condition.\20\ Second,
once the QFCs are transferred in accord with the statute, Title II
permanently stays the exercise of those direct default rights based on
the prior event of default and receivership.\21\
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\19\ 12 U.S.C. 5390(c)(9).
\20\ 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay
generally lasts until 5:00 p.m. eastern time on the business day
following the appointment of the FDIC as receiver.
\21\ If the QFCs 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 FDIC as
receiver of the financial company (or the insolvency or financial
condition of the financial company), but is not stayed from
exercising such rights based upon other events of default. 12 U.S.C.
5390(c)(10)(B)(i)(II).
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Title II addresses cross-default rights through a similar
procedure. It empowers the FDIC ``to enforce contracts of subsidiaries
or affiliates'' of the failed company that are guaranteed or otherwise
supported by or linked to the covered financial company,
notwithstanding any contractual right to cause the termination,
liquidation, or acceleration of such contracts based solely on the
insolvency, financial condition, or receivership of the failed company,
so long as the FDIC takes certain steps to protect the QFC
counterparty's interests by the end of the business day following the
company's entry into OLA resolution.\22\
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\22\ 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
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These stay-and-transfer provisions of the Dodd-Frank Act go far to
mitigate the threat posed by QFC default rights by preventing mass
closeouts against the entity that has entered into OLA proceedings or
its going concern affiliates. At the same time, they allow for
appropriate protections for QFC counterparties of the failed financial
company. They only stay the exercise of default rights based on the
failed company's entry into resolution, the fact of its insolvency, or
its financial condition. And the stay period is brief, unless the FDIC
transfers the QFCs to another financial company that is not in
resolution and should therefore be capable of performing under the
QFCs.
Federal Deposit Insurance Act. Under the FDIA, a failing insured
depository institution would generally enter a receivership
administered by the FDIC.\23\ The FDIA addresses direct default rights
in the failed bank's QFCs with stay-and-transfer provisions that are
substantially similar to the provisions of Title II of the Dodd-Frank
Act as discussed.\24\ However, the FDIA does not address cross-default
rights, leaving the QFC counterparties of the failed depository
institution's affiliates free to exercise any contractual rights they
may have to terminate, net, and liquidate collateral based on the
depository institution's entry into resolution.
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\23\ 12 U.S.C. 1821(c).
\24\ See 12 U.S.C. 1821(e)(8)-(10).
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III. Description of the Proposal
A. Overview, Purpose, and Authority
As discussed previously, and in the Board's Proposal, the exercise
of default rights by counterparties of a failed GSIB can have a
significant impact on financial stability. This financial stability
concern is necessarily intertwined with the safety and soundness of
covered banks and the federal banking system--the disorderly exercise
of default rights can produce a sudden, contemporaneous threat to the
safety and soundness of individual institutions throughout the system,
which in turn threatens the system as a whole.[hairsp] Accordingly,
national banks, FSAs, and Federal branches and agencies are affected by
financial instability--even if such instability is precipitated outside
the Federal banking system--and can themselves also be sources of
financial destabilization due to the interconnectedness of these
institutions to each other and to other entities within the financial
system. Thus, safety and soundness of individual national banks, FSAs,
and Federal branches and agencies, the federal banking system, and
financial stability of the system as a whole are interconnected.
[[Page 55386]]
The purpose of this proposed rule is to enhance the safety and
soundness of covered banks and the federal banking system, thereby also
bolstering financial stability generally, by addressing the two main
issues raised by covered QFCs with the orderly resolution of these
covered banks as generally described in the Board's Proposal.
While Title II and the FDIA empower the use of the QFC stay-and-
transfer provisions, a court in a foreign jurisdiction may decline to
enforce these important provisions. The proposed rule directly improves
the safety and soundness of covered banks by clarifying the
applicability of U.S. special resolution regimes to all counterparties,
whether they are foreign or domestic. Although domestic entities are
clearly subject to the temporary stay provisions of OLA and the FDIA,
these stays may be difficult to enforce in a cross-border context. As a
result, domestic counterparties of a failed U.S. financial institution
may be disadvantaged relative to foreign counterparties, as the
domestic counterparties would be subject to the stay, and accompanying
potential market volatility, while if the stay was not enforced by
foreign authorities, foreign counterparties could close out
immediately. Furthermore, a mass close out by such foreign
counterparties would likely exacerbate market volatility, which in turn
would likely magnify harm to the stayed U.S. counterparties' positions,
which are likely to include other national banks and FSAs. This
proposed rule would eliminate the potential for these adverse
consequences by requiring covered banks to condition the exercise of
default rights in covered contracts on the stay provisions of OLA and
the FDIA.
In spite of the QFC stay-and-transfer provisions in Title II and
the FDIA, the affiliates of a global systemically important BHC that
goes into resolution under the Bankruptcy Code may face disruptions to
their QFCs as their counterparties exercise cross-default rights. Thus,
a healthy covered bank whose parent BHC entered resolution proceedings
could fail due to its counterparties exercising cross-default rights.
This is clearly both a safety and soundness concern for the otherwise
healthy covered bank, but it also has the additional negative effect of
defeating the orderly resolution of the GSIB, since a key element of
SPOE resolution in the United States is ensuring that critical
operating subsidiaries--such as covered banks--continue to operate on a
going concern basis. This proposed rule would address this issue by
generally restricting the exercise of cross-default rights by
counterparties against a covered bank.
Moreover, a disorderly resolution like that described previously
could jeopardize not just the covered bank and the orderly resolution
of its failed parent BHC, but all surviving counterparties, many of
which are likely to be other national banks and other FSAs, regardless
of size or interconnectedness, by harming the overall condition of the
Federal banking system and the financial system as a whole. A
disorderly resolution could result in additional defaults, fire sales
of collateral, and other consequences likely to amplify the systemic
fallout of the resolution of a covered bank.
The proposed rule is designed to minimize such disorder, and
therefore enhance the safety and soundness of all individual national
banks, FSAs, and Federal branches and agencies, the Federal banking
system, and the broader financial system. This is particularly
important because financial institutions are more sensitive than other
firms to the overall health of the financial system.\25\
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\25\ The OCC, along with the FDIC and FRB, recently made this
point in the swap margin NPRM. 79 FR 57348, 57361 (September 24,
2014) (``Financial firms present a higher level of risk than other
types of counterparties because the profitability and viability of
financial firms is more tightly linked to the health of the
financial system than other types of counterparties. Because
financial counterparties are more likely to default during a period
of financial stress, they pose greater systemic risk and risk to the
safety and soundness of the covered swap entity.'').
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The proposed rule covers the OCC-supervised operations of foreign
banking organizations (FBOs) designated as systemically important,
including national bank and FSA subsidiaries, as well as Federal
branches and agencies, of these FBOs. As with a national bank or FSA
subsidiary of a U.S. global systemically important BHC, the OCC
believes that this proposed rule should apply to a national bank or FSA
subsidiary of a global systematically important FBO for essentially the
same reasons. While the national bank or FSA may not be considered
systemically important itself, as part of a GSIB, the disorderly
resolution of the covered national banks and FSAs could have a
significant negative impact on the Federal banking system and on the
U.S. financial system, in general.
Specifically, the proposed rule is designed to prevent the failure
of a global systemically important FBO from disrupting the ongoing
operations or orderly resolution of the covered bank by protecting the
healthy national bank or FSA from the mass triggering of default rights
by the QFC counterparties. Additionally, the application of this
proposed rule to the QFCs of these national bank and FSA subsidiaries
should avoid creating what may otherwise be an incentive for
counterparties to concentrate QFCs in these firms because they are
subject to fewer counterparty restrictions.
Similarly, it is important to cover any Federal branch or agency of
a global systemically important FBO in order to ensure the orderly
resolution of these entities if the parent FBO were to be placed into
resolution in its home jurisdiction. However, to avoid unduly broad
application of the proposed rule and imposing unnecessary restrictions
on the QFCs of global systemically important FBOs, the proposed rule
would exclude certain QFCs that do not have a clear nexus to its U.S.
operations. Specifically, the proposed rule would exclude covered QFCs
under multi-branch arrangements that either are not booked at the
Federal branch or agency or do not provide for payment or delivery at
the Federal branch or agency. The OCC believes that this provides a
reasonable limitation on the scope of the proposed rule to those QFCs
of covered Federal branches and agencies that have a direct effect on
the Federal banking system and the general financial stability of the
United States.
The OCC is issuing this proposed rule under its authorities under
the National Bank Act (12 U.S.C. 1 et seq.), the Home Owners' Loan Act
(12 U.S.C. 1461 et seq.), and the International Banking Act of 1978 (12
U.S.C. 3101 et seq.), including its general rulemaking authorities.\26\
As discussed in detail in Section I. B., the OCC views the proposed
rule as consistent with its overall statutory mandate of assuring the
safety and soundness of entities subject to its supervision, including
national banks, FSAs, and Federal branches and agencies.\27\
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\26\ See 12 U.S.C. 93a, 1463(a)(2), and 3108(a).
\27\ See 12 U.S.C. 1. This primary responsibility is also
defined in various provisions throughout the OCC's express statutory
authorities with respect to each institution type under their
respective statutes.
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B. Covered Banks (Section 47.3(a), (b), (c))
The proposed rule would apply to all ``covered banks.'' The term
``covered bank'' would be defined to include (i) any national bank or
FSA that is a subsidiary of a global systemically important BHC that
has been designated pursuant to subpart I of 12 CFR part 252 of this
title (FRB Regulation YY); or (ii) is a national bank or FSA
subsidiary, or Federal branch or agency of a global systemically
important FBO that has
[[Page 55387]]
been designated pursuant to FRB Regulation YY.
The proposed rule defines global systemically important BHC and
global systemically important FBO by cross-reference to newly added
subpart I of 12 CFR part 252 of the Board's Proposal. The list of
banking organizations that meet the methodology proposed in the FRB
NPRM is currently the same set of banking organizations that meet the
Basel Committee on Banking Supervision (BCBS) definition of a GSIB.\28\
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\28\ In November 2015, the Financial Stability Board and BCBS
published a list of banks that meet the BCBS definition of a global
systemically important bank (BCBS G-SIB) based on year-end 2014
data. A list based on year-end 2014 data was published November 3,
2015 (available at http://www.fsb.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf).
The U.S. top-tier BHCs that are currently identified as a BCBS G-
SIBs are Bank of America Corporation, Bank of New York Mellon
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan
Chase & Co., Morgan Stanley, State Street Corporation, and Wells
Fargo & Company.
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This proposed rule covers national bank and FSA subsidiaries of
global systemically important BHCs and FBOs, and Federal branches and
agencies of global systemically important FBOs. In the United States,
covered QFCs typically are entered into at the subsidiary level, which
would include through the national bank, FSA or Federal branch or
agency, rather than through the U.S. intermediate holding company.\29\
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\29\ Under the clean holding company component of the FRB's
recent Total Loss-Absorbing Capacity (TLAC) proposal, the U.S.
intermediate holding companies of foreign GSIB entities would be
prohibited from entering into QFCs with third parties. See 80 FR
74926 (November 30, 2015).
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The OCC believes if the orderly resolution of a covered entity as
defined under the FRB's Proposal is to be successful, then it is
necessary that all national banks, FSAs, and Federal branches and
agencies of systemically important global systemically important BHCs
and FBOs be subject to the mandatory contractual requirements in this
proposed rule. Moreover, this proposed rule would make clear that the
mandatory contractual stay requirements apply to the subsidiaries of
any national bank, FSA, or Federal branch or agency that is a covered
bank. Under the proposed rule, the term covered bank also includes any
subsidiary of a national bank, FSA, or Federal branch or agency. The
definition of ``subsidiary of covered bank'' in the proposed rule
mirrors the definition of subsidiary in the FRB's Regulation YY (12 CFR
252.2), and it is intended to be substantially the same as the FRB's
definition with respect to a subsidiary of a covered bank. Essentially,
for the same reasons that it is necessary to cover all national banks,
FSAs, and Federal branches and agencies of global systemically
important BHCs and FBOs under the proposed rule, the OCC believes that
it is necessary that all subsidiaries of those covered banks also be
subject to the mandatory contractual stay requirements. As mentioned,
unless all entities that are part of a GSIB are covered, counterparties
might have incentives to migrate their covered QFCs to uncovered
entities.
Question 1: While the exercise of mass closeout rights against any
individual national bank, FSA or Federal branch or agency would raise
concerns, the OCC is especially concerned about the potential spill-
over effect such mass closeouts would have, either individually or
collectively, on the Federal banking system if the entity itself is
systemically important or part of a larger banking group that is
systemically important. Are there alternative approaches for
determining which national banks, FSAs and Federal branches and
agencies should be considered systemically important?
Question 2: While the primary focus of this rule is on, covered
banks--i.e., those that are subsidiaries or branches of U.S. or foreign
GSIBS--there is some concern that given the interconnected nature of
QFCs, a market disruption could significantly impact all national
banks, FSAs and Federal branches and agencies. Should this proposed
rule be expanded to cover more OCC-regulated entities, for example,
those national banks, FSAs or Federal branches and agencies with
material levels of QFC activities? How could material levels of QFC
activities be defined and measured?
Question 3: Conversely, is the scope of this proposed rule too
broad? The proposed rule would apply to all covered QFCs of covered
banks as well as all of their subsidiaries, regardless of size or
volume of transactions. A key policy concern is that unless all
subsidiaries of a covered bank are subject to the direct and cross-
default restrictions of the proposed rule, covered banks and their
counterparties would have the incentive to transfer their QFCs to
unprotected subsidiaries of the covered bank. Could the scope of
entities covered by the proposed rule be narrowed while still achieving
its policy objectives? If so, what criteria could be used? For example,
should a subsidiary of covered banks that only engages in some de
minimis level of covered QFCs be safely excluded from the scope of this
proposed rule? Are there alternative ways to define what will be
considered subsidiaries for purposes of this rule?
Question 4: Some of the subsidiaries of covered banks under the
proposed rule could be subject to additional supervision by another
U.S. agency, such as the case of a broker-dealer subsidiary of a
national bank. Does the issue of potentially conflicting jurisdiction
need to be addressed? If so, how? For example, should the rule provide
a carve out for a subsidiary of a covered bank that is subject to
comparable requirements under the regulations of another agency?
Question 5: The scope of this proposed rule is designed to cover
any national bank or FSA that is a subsidiary of a global systemically
important BHC or FBO under the FRB NPRM. While this scope of coverage
ensures that all national banks or FSAs under a global systemically
important BHC or FBO would be subject to the same substantive
contractual mandatory stay under the FRB NPRM, the proposed rule does
not take into account the potential situation of a standalone national
bank or FSA, not under a BHC, that might itself be considered
systemically important. Although no such entity exists currently, the
OCC is considering whether to amend the definition of covered bank to
include any national bank or FSB that meets a certain asset threshold
test. In this case, the OCC is considering using the $700 billion in
total consolidated assets that is used in the Enhanced Supplementary
Leverage Ratio.\30\ Should the OCC decide to address standalone
national banks and FSBs, what methodology and factors should the OCC
consider in deciding which institutions to include?
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\30\ See 79 FR 24528 (May 1, 2014).
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C. Covered QFCs (Sections 47.4(a), 47.5(a), 47.7, 47.8)
General requirement. The proposed rule would require covered banks
to ensure that each ``covered QFC'' conforms to the requirements of
sections 47.4 and 47.5. These sections require that a covered QFC (1)
contain contractual stay-and-transfer provisions similar to those
imposed under Title II of the Dodd-Frank Act and the FDIA, and (2)
limit the exercise of default rights based on the insolvency of an
affiliate of the covered bank. A ``covered QFC'' is generally defined
as any QFC that a covered bank enters, executes, or otherwise becomes
party to. A party to a QFC includes a party acting as agent under the
QFC. ``Qualified financial contract'' or ``QFC'' would be defined to
have the same meaning as in section 210(c)(8)(D) of Title II of the
Dodd-Frank
[[Page 55388]]
Act and would include derivatives, swaps, repurchase, reverse
repurchase, and securities lending and borrowing transactions.
Except for certain QFCs under multi-branch master agreements, the
definition of QFC would include a single QFC, but also all QFCs under a
master agreement. Master agreements are contracts that contain general
terms that the parties wish to apply to multiple transactions between
them; having executed the master agreement, the parties can then
include those terms in future contracts through reference to the master
agreement. The proposed rule defines master agreement as defined by
Title II of the Dodd-Frank Act or any master agreement designated by
regulation by the FDIC. Under the definition, master agreements for
QFCs, together with all supplements to the master agreement (including
underlying transactions), would be treated as a single QFC.\31\
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\31\ 12 U.S.C. 5390(c)(8)(D)(viii); see also 12 U.S.C.
1821(e)(8)(D)(vii); 109 H. Rpt. 31, Part 1 (April 8, 2005)
(explaining that a ``master agreement for one or more securities
contracts, commodity contracts, forward contracts, repurchase
agreements or swap agreements will be treated as a single QFC under
the FDIA or the FCUA (but only with respect to the underlying
agreements are themselves QFCs)'').
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The proposed definition of ``QFC'' is intended to cover those
financial transactions whose disorderly unwind has substantial
potential to frustrate, directly or indirectly, the orderly resolution
of the covered bank or any affiliate of such covered bank. The Dodd-
Frank Act uses its definition of ``qualified financial contract'' to
determine the scope of the stay-and-transfer provisions that it applies
to direct default and cross-default rights in an OLA resolution. By
adopting the Dodd-Frank Act's definition, the proposed rule would track
Congress's judgment as to which financial transactions could, if not
subject to appropriate restrictions, pose an obstacle to the orderly
resolution of a systemically important financial company.
Question 6: With regard to the proposed definitions of ``QFC'' and
``covered QFC'' are there other types of financial contracts or
transactions that should be included in the definition of a ``covered
QFC'' in the proposed rule because they could pose a similar risk to
the safety and soundness of the covered national banks, FSAs, and
Federal branches and agencies and to the Federal banking system?
Conversely, is the definition of covered QFC too broad? Are there types
of financial contracts that fall within the definition of covered QFC
that could be excluded without compromising the policy objectives of
the proposed rule?
Question 7: Should this proposed rule include a reservation of
authority provision that would maintain OCC's supervisory flexibility,
on a case-by-case basis, to include or exclude from the proposed rule
(1) specific OCC-supervised entities (and their subsidiaries) and (2)
financial contracts or transactions, if consistent with the purposes of
the proposed rule?
Exclusion of cleared QFCs. The proposed rule would exclude from the
definition of ``covered QFC'' all QFCs that are cleared through a
central counterparty (CCP). The OCC continues to consider the
appropriate treatment of centrally cleared QFCs, in light of
differences between cleared and uncleared QFCs with respect to
contractual arrangements, counterparty credit risk, default management,
and supervision.
Question 8: Should the QFCs between a CCP (or other financial
market utility) and a member covered bank be subject to the
requirements of this proposed rule? What additional risks do such
cleared QFCs pose to the orderly resolution of covered banks and the
Federal banking system? What other factors should be considered?
Exclusion of certain QFCs under foreign bank multi-branch master
agreements. Under the proposed rule, the definition of a ``QFC'' would
include a master agreement that covers other QFCs. In addition, under
this definition those QFCs covered by the master agreement would be
treated as a single QFC. By design, this definition of QFC is intended
to ensure that the proposed rule would apply to all of the relevant
QFCs entered into by a covered bank. However, as applied to the QFCs of
Federal branches and agencies under a multi-branch master agreement,
this definition may be too broad in its scope.
Foreign banks have multi-branch master agreements that permit
transactions to be entered into both at a U.S. branch or agency of the
foreign bank and at a foreign branch (located outside of the United
States) of the foreign bank. Under this proposed rule, a QFC of a
Federal branch or agency, as well as all of the QFCs entered into by
foreign branches under the same multi-branch master agreement would be
treated as a single QFC of the Federal branch or agency, and would
therefore be subject to the requirements of this proposed rule. Where
the QFC of the foreign branch has some U.S. nexus, such as permitting
payment or delivery in the United States, the OCC believes that
subjecting those QFCs to this proposed rule is reasonable and
consistent with protecting the safety and soundness of the Federal
banking system. However, where the QFC of the foreign branch does not
permit any payment or delivery in the United States, the OCC believes
that applying this proposed rule to such QFCs lacks a sufficient
connection to the U.S. operations of the Federal branch or agency and
may be unduly broad.
Absent the possibility under the QFC of payment or delivery in the
United States, the OCC believes that the impact of such QFCs on the
Federal branch or agency covered by this proposed rule, or on the
Federal banking system and the United States as a whole, is indirect
and relatively immaterial. For this reason, the proposed rule would
exclude QFCs under such a ``multi-branch master agreement'' that are
not booked at a Federal branch or agency covered by this proposed rule,
and for which no payment or delivery may be made at the Federal branch
or agency. Conversely, the multi-branch master agreement would be a
covered QFC with respect to QFC transactions that are booked and
permits payment and delivery at a Federal branch or agency covered by
this proposed rule.
Question 9: Should the scope of the proposed rule be limited to
only those transactions that are booked, or provide for payment and
delivery, at the Federal branch or agency?
D. Definition of ``Default Right''
As discussed previously, a party to a QFC generally has a number of
rights that it can exercise if its counterparty defaults on the QFC by
failing to meet certain contractual obligations. These rights are
generally, but not always, contractual in nature. One common default
right is a setoff right which is the right to reduce the total amount
that the non-defaulting party must pay by the amount that its
defaulting counterparty owes. A second common default right is the
right to liquidate pledged collateral and use the proceeds to pay the
defaulting party's net obligation to the non-defaulting party. Other
common rights include the ability to suspend or delay the non-
defaulting party's performance under the contract or to accelerate the
obligations of the defaulting party.
Finally, the non-defaulting party typically has the right to
terminate the QFC, meaning that the parties would not make payments
that would have been required under the QFC in the future. The phrase
``default right'' in the proposed rule text at Sec. 47.2 is broadly
defined to include these common rights as well as ``any similar
rights.'' Additionally, the definition includes all
[[Page 55389]]
such rights regardless of source, including rights existing under
contract, statute, or common law.
However, the proposed definition excludes two rights that are
typically associated with the business-as-usual functioning of a QFC.
First, same-day netting that occurs during the life of the QFC in order
to reduce the number and amount of payments each party owes the other
is excluded from the definition of ``default right.'' \32\ Second,
contractual margin requirements that arise solely from the change in
the value of the collateral or the amount of an economic exposure are
also excluded from the definition.\33\ The effect of these exclusions
is to leave such rights unaffected by the proposed rule. The exclusions
are appropriate because the proposed rule is intended to improve
resolvability by addressing default rights that could disrupt an
orderly resolution, and not to interrupt the parties' business-as-usual
dealings under a QFC.
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\32\ See Proposed Rule Sec. 47.2.
\33\ See id.
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However, certain QFCs are also commonly subject to rights that
would increase the amount of collateral or margin that the defaulting
party (or a guarantor) must provide upon an event of default. The
financial impact of such default rights on a covered bank could be
similar to the impact of the liquidation and acceleration rights
discussed previously. Therefore, the proposed definition of ``default
right'' includes such rights (with the exception discussed in the
previous paragraph for margin requirements that depend solely on the
value of collateral or the amount of an economic exposure).\34\
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\34\ See id.
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Finally, contractual rights to terminate without the need to show
cause, including rights to terminate on demand and rights to terminate
at contractually specified intervals, are excluded from the definition
of ``default right'' for purposes the proposed rule's restrictions on
cross-default rights (section 47.5 of the proposed rule).\35\ This is
consistent with the proposed rule's objective of restricting only
default rights that are related, directly or indirectly, to the entry
into resolution of an affiliate of the covered bank, while leaving
other default rights unrestricted.
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\35\ See Proposed Rule Sec. Sec. 47.2 and 47.5.
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Question 10: The OCC invites comment on all aspects of the proposed
definition of ``default right'' In particular, are the proposed
exclusions appropriate in light of the objectives of the proposal? To
what extent does the exclusion of rights that allow a party to
terminate the contract ``on demand or at its option at a specified
time, or from time to time, without the need to show cause'' create an
incentive for firms to include these rights in future contracts to
evade the proposed restrictions? To what extent should other regulatory
requirements (e.g., liquidity coverage ratio or the short-term
wholesale funding components of the GSIB surcharge rule) be revised to
create a counterincentive? Would additional exclusions be appropriate?
To what extent should it be clarified that the ``need to show cause''
includes the need to negotiate alternative terms with the other party
prior to termination or similar requirements (e.g., Master Securities
Loan Agreement, Annex III--Term Loans)?
E. Required Contractual Provisions Related to U.S. Special Resolution
Regimes (Section 47.4)
Under the proposed rule, a covered QFC would be required to
explicitly provide both (a) that the transfer of the QFC (and any
interest or obligation in or under it and any property collateralizing
it) from the covered bank to a transferee would be effective to the
same extent as it would be under the U.S. special resolution regimes if
the covered QFC were governed by the laws of the United States or of a
state of the United States and (b) that default rights with respect to
the covered QFC that could be exercised against a covered bank could be
exercised to no greater extent than they could be exercised under the
U.S. special resolution regimes if the covered QFC were governed by the
laws of the United States or of a state of the United States.\36\ The
proposed rule would define the term ``U.S. Special Resolution Regimes''
to mean the FDIA \37\ and Title II of the Dodd-Frank Act,\38\ along
with regulations issued under those statutes.\39\
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\36\ See Proposed Rule Sec. 47.4.
\37\ 12 U.S.C. 1811-1835a.
\38\ 12 U.S.C. 5381-5394.
\39\ See Proposed Rule Sec. 47.2.
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The proposed requirements are not intended to imply that a given
covered QFC is not governed by the laws of the United States or of a
state of the United States, or that the statutory stay-and-transfer
provisions would not in fact apply to a given covered QFC. This section
of the proposed rule would not have any substantive impact on those
covered QFCs that are already subject to the U.S. special resolution
regimes. Rather, the requirements are intended to provide certainty
that all covered QFCs would be treated the same way in the context of a
receivership of a covered bank under the Dodd-Frank Act or the FDIA.
Thus, the purpose of this provision is to ensure that if a national
bank or FSA covered by this proposed rule is placed into receivership
under any U.S. special resolution regime, the stay-and-transfer
provisions would extend to all foreign counterparties as a matter of
contract law.
The stay-and-transfer provisions of the U.S. special resolution
regimes should be enforced with respect to all contracts of any U.S.
GSIB entity that enters resolution under a U.S. special resolution
regime as well as all transactions of the subsidiaries of such an
entity. Nonetheless, it is possible that a court in a foreign
jurisdiction would decline to enforce those provisions in cases brought
before it (such as a case regarding a covered QFC between a covered
bank and a non-U.S. entity that is governed by non-U.S. law and secured
by collateral located outside the United States). By requiring that the
effect of the statutory stay-and-transfer provisions be incorporated
directly into the QFC contractually, the proposed requirement would
help ensure that a court in a foreign jurisdiction would enforce the
effect of those provisions, regardless of whether the court would
otherwise have decided to enforce the U.S. statutory provisions
themselves.\40\ For example, the proposed provisions should prevent a
U.K. counterparty of a U.S. GSIB from persuading a U.K. court that it
should be permitted to seize and liquidate collateral located in the
United Kingdom in response to the U.S. GSIB's entry into OLA
resolution. And the knowledge that a court in a foreign jurisdiction
would reject the purported exercise of default rights in violation of
the required provisions would deter covered banks' counterparties from
attempting to exercise such rights.
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\40\ See generally Financial Stability Board, ``Principles for
Cross-border Effectiveness of Resolution Actions'' (November 3,
2015), available at http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
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The OCC believes that this proposed rule directly addresses a major
QFC-related obstacle to the orderly resolution of covered banks. As
discussed previously, restrictions on the exercise of QFC default
rights are an important prerequisite for an orderly GSIB resolution.
Congress recognized the importance of such restrictions when it enacted
the stay-and-transfer provisions of the U.S. special resolution
regimes. As demonstrated by the 2007-2009 financial crisis, the modern
financial system is global in scope, and covered banks are party to
large volumes of
[[Page 55390]]
QFCs with connections to foreign jurisdictions. The stay-and-transfer
provisions of the U.S. special resolution regimes would not achieve
their purpose of facilitating orderly resolution in the context of the
failure of a GSIB with large volumes of such QFCs if QFCs could escape
the effect of those provisions. As discussed in detail in Section I of
this proposed rule, the OCC has a supervisory interest in preventing or
mitigating the destabilizing effects of a disorderly GSIB resolution;
otherwise, the result will be adverse to safety and soundness of
covered banks individually and collectively, as well as the broader
Federal banking system. To remove any doubt about the scope of coverage
of these provisions, the proposed requirement would ensure that the
stay-and-transfer provisions apply as a matter of contract to all
covered QFCs, wherever the transaction. This will advance the
resolvability goals of the Dodd-Frank Act and the FDIA.\41\
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\41\ As noted in the Board's Proposal, this proposed rule is
consistent with efforts by regulators in other jurisdictions to
address similar risks by requiring that financial firms within their
jurisdictions ensure that the effect of the similar provisions under
these foreign jurisdictions' respective special resolution regimes
would be enforced by courts in other jurisdictions, including the
United States. See e.g., PRA Rulebook: CRR Firms and Non-Authorised
Persons: Stay in Resolution Instrument 2015, available at http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf; see also Bank of England, Prudential Regulation
Authority, ``Contractual stays in financial contracts governed by
third-country law'' (PS25/15).
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Question 11: While the direct default requirements are proposed to
apply broadly to all covered QFCs of covered banks, the primary focus
of this requirements is with QFCs with foreign counterparties not
directly subject to the U.S. special resolution regimes. U.S.
counterparties are less of a concern because these counterparties would
already be subject to the stay-and-transfer requirements under
statutory requirements of the U.S. special resolution regimes. With
respect to the direct default requirements, the proposed rule does not
distinguish between U.S. and foreign counterparties because the OCC
believes that the broad application of this proposed rule would be
simpler to implement and less burdensome given the standardized nature
of QFCs and their associated master netting agreements. Should the
direct default requirements of the proposed rule apply only to covered
QFCs with foreign counterparties not subject to U.S. special resolution
regimes? What would be the costs and regulatory burden associated with
identifying and maintaining separate versions of covered QFCs for U.S.
and foreign counterparties?
F. Prohibited Cross-Default Rights (Section 47.5)
Definitions. Section 47.5 of the proposed rule pertains to cross-
default rights in QFCs between covered banks and their counterparties,
many of which are subject to credit enhancements (such as guarantees)
provided by an affiliate of the covered bank. Because credit
enhancements on QFCs are themselves ``qualified financial contracts''
under the Dodd-Frank Act's definition of that term (which this proposed
rule would adopt), the proposed rule includes the following additional
definitions in order to precisely describe the relationships to which
this section applies.
First, the proposed rule distinguishes between a credit enhancement
and a ``direct QFC,'' which is defined as any QFC that is not a credit
enhancement. The proposed rule also defines ``direct party'' to mean a
covered bank that itself is a party to the direct QFC, as distinct from
an entity that provide a credit enhancement. In addition, the proposed
rule defines ``affiliate credit enhancement'' to mean ``a credit
enhancement that is provided by an affiliate of the party to the direct
QFC that the credit enhancement supports,'' as distinct from a credit
enhancement provided by either the direct party itself or by an
unaffiliated party. Moreover, the proposed rule defines ``covered
affiliate credit enhancement'' to mean an affiliate credit enhancement
provided by a covered bank, or a covered entity under the Board's
proposal, and defines ``covered affiliate support provider to mean the
covered bank that provides the covered affiliate credit enhancement.
Finally, the proposed rule defines the term ``supported party'' to mean
any party that is the beneficiary of a covered affiliate credit
enhancement (that is, the QFC counterparty of a direct party, assuming
that the direct QFC is subject to a covered affiliate credit
enhancement).
General Prohibition. Subject to the substantial exceptions to be
discussed, the proposed rule would prohibit a covered bank from being a
party to a covered QFC that allows for the exercise of any default
right that is related, directly or indirectly, to the entry into
resolution of an affiliate of the covered bank. The proposed rule also
would generally prohibit a covered bank from being party to a covered
QFC that would prohibit the transfer of any credit enhancement
applicable to the QFC (such as another entity's guarantee of the
covered bank's obligations under the QFC), along with associated
obligations or collateral, upon the entry into resolution of an
affiliate of the covered bank.\42\
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\42\ This prohibition would be subject to an exception that
would allow supported parties to exercise default rights with
respect to a QFC if the supported party would be prohibited from
being the beneficiary of a credit enhancement provided by the
transferee under any applicable law, including the Employee
Retirement Income Security Act of 1974 and the Investment Company
Act of 1940. This exception is substantially similar to an exception
to the transfer restrictions in section 2(f) of the ISDA 2014
Resolution Stay Protocol (2014 Protocol) and the ISDA 2015 Universal
Resolution Stay Protocol, which was added to address the concerns
expressed by asset managers during the drafting of the 2014
Protocol.
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A primary purpose of the proposed restrictions is to facilitate the
resolution of a GSIB outside of Title II, including under the
Bankruptcy Code. As discussed in the background section, the potential
for the mass exercise of QFC default rights is a major reason why the
failure of a global systemically important BHC could have a severe
negative impact on financial stability and on the Federal banking
system. In the context of an SPOE resolution, if the global
systemically important BHC's entry into resolution triggers the mass
exercise of cross-default rights by the subsidiaries' QFC
counterparties of the covered QFCs against the national bank or FSA
subsidiary, then the national bank or FSA could themselves experience
financial distress or failure. Moreover, the mass exercise of covered
QFC default rights would entail asset fire sales, which could affect
other U.S. financial companies and undermine financial stability of the
U.S. financial system. Similar disruptive results can occur with an
MPOE resolution of an affiliate of an otherwise performing entity
triggers default rights on QFCs involving the performing covered bank.
In an SPOE resolution, this damage can be avoided if actions of the
following two types are prevented: The exercise of direct default
rights against the top-tier holding company that has entered
resolution, and the exercise of cross-default rights against the
national bank and FSA subsidiaries and other operating subsidiaries
based on their parent's entry into resolution. Direct default rights
against the national bank or FSA subsidiary would not be exercisable,
because that subsidiary would continue normal operations and would not
enter resolution. In an MPOE resolution, this damage occurs from the
exercise of default rights against a performing entity based on the
failure of an affiliate.
Under the OLA, the Dodd-Frank Act's stay-and-transfer provisions
would address both direct default rights and cross-default rights. But,
as explained in the Background section, no similar
[[Page 55391]]
statutory provisions would apply to a resolution under the Bankruptcy
Code. This proposed rule attempts to address these obstacles to orderly
resolution under the Bankruptcy Code by extending the stay-and
transfer-provisions to any type of resolution. Similarly, the proposed
rule would facilitate a transfer of the GSIB parent's interests in its
subsidiaries, along with any credit enhancements it provides for those
subsidiaries, to a solvent financial company by prohibiting covered
banks from having QFCs that would allow the QFC counterparty to prevent
such a transfer or to use it as a ground for exercising default rights.
Accordingly, the proposed rule would broadly prevent the unanticipated
failure of any one GSIB entity from bringing about the disorderly
failures of its affiliates by preventing the affiliates' QFC
counterparties from using the first entity's failure as a ground for
exercising default rights against those affiliates that continue meet
to their obligations.\43\
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\43\ As noted in the Board's Proposal, this proposed rule will
also facilitate many approaches to GSIB resolution, including where
the U.S. intermediate holding company of a foreign GSIB enters
proceedings as part of a broader MPOE resolution.
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The proposed rule is intended to enhance the potential for orderly
resolution of a GSIB under the Bankruptcy Code, the FDIA, or similar
resolution proceedings. In doing so, the proposed rule would advance
the Dodd-Frank Act's goal of making orderly resolution of a workable
covered bank under the Bankruptcy Code.\44\
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\44\ See 12 U.S.C. 5365(d).
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The proposed rule could also prevent the disorderly failure of the
national bank or FSA subsidiary and allow it to continue normal
operations. In addition, while it may be in the individual interest of
any given counterparty to exercise any available contractual rights to
run on the national bank or FSA subsidiary, the mass exercise of such
rights could harm the collective interest of all the counterparties by
causing the subsidiary to fail. Therefore, like the automatic stay in
bankruptcy, which also serves to maximize creditors' ultimate
recoveries by preventing a disorderly liquidation of the debtor, the
proposed rule would mitigate this collective action problem to the
benefit of the creditors and counterparties of covered banks by
preventing a disorderly resolution. And because many of these
counterparties and creditors are themselves covered banks, or other
systemically important financial firms, improving outcomes for these
creditors and counterparties would further protect the safety and
soundness of the Federal banking system and financial stability of the
United States.
General creditor protections. While the proposed restrictions would
facilitate orderly resolution, they would also have the effect of
diminishing the ability of the counterparties of the covered banks to
include protections for themselves in covered QFCs. In order to reduce
this effect, the proposed rule includes several significant exceptions
to the proposed restrictions. These permitted creditor protections are
intended to allow creditors to exercise cross-default rights outside of
an orderly resolution of a GSIB (as described previously and in the
Board's Proposal) and therefore would not be expected to undermine such
a resolution.
First, to ensure that the proposed prohibitions would apply only to
cross-default rights (and not direct default rights), the proposed rule
would provide that a covered QFC may permit the exercise of default
rights based on the direct party's entry into a resolution proceeding,
other than a proceeding under a U.S. or foreign special resolution
regime.\45\ This provision would help ensure that, if the direct party
to a QFC were to enter bankruptcy, its QFC counterparties could
exercise any relevant direct default rights. Thus, a covered bank's
direct QFC counterparties would not risk the delay and expense
associated with becoming involved in a bankruptcy proceeding, and would
be able to take advantage of default rights that would fall within the
Bankruptcy Code's safe harbor provisions.
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\45\ Special resolution regimes typically stay direct default
rights, but may not stay cross-default rights. For example, as
discussed previously, the FDIA stays direct default rights, see 12
U.S.C. 1821(e)(10)(B), but does not stay cross-default rights,
whereas the Dodd-Frank Act's OLA stays direct default rights and
cross-defaults arising from a parent's receivership, see 12 U.S.C.
5390(c)(10)(B), 5390(c)(16).
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The proposed rule would also allow covered QFCs to permit the
exercise of default rights based on the failure of (1) the direct
party, (2) a covered affiliate support provider, or (3) a transferee
that assumes a credit enhancement to satisfy its payment or delivery
obligations under the direct QFC or credit enhancement. Moreover, the
proposed rule would allow covered QFCs to permit the exercise of a
default right in one QFC that is triggered by the direct party's
failure to satisfy its payment or delivery obligations under another
contract between the same parties. This exception takes appropriate
account of the interdependence that exists among the contracts in
effect between the same counterparties.
The proposed exceptions for the creditor protections described are
intended to help ensure that the proposed rule permits a covered bank's
QFC counterparties to protect themselves from imminent financial loss
and does not create a risk of delivery gridlocks or daisy-chain
effects, in which a covered bank's failure to make a payment or
delivery when due leaves its counterparty unable to meet its own
payment and delivery obligations (the daisy-chain effect would be
prevented because the covered bank's counterparty would be permitted to
exercise its default rights, such as by liquidating collateral). These
exceptions are generally consistent with the treatment of payment and
delivery obligations under the U.S. special resolution regimes.\46\
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\46\ See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii)
(suspending payment and delivery obligations for one business day or
less).
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These exceptions also help to ensure that a covered entity's QFC
counterparty would not risk the delay and expense associated with
becoming involved in a bankruptcy proceeding, since, unlike a typical
creditor of an entity that enters bankruptcy, the QFC counterparty
would retain its ability under the Bankruptcy Code's safe harbors to
exercise direct default rights. This should further reduce the
counterparty's incentive to run. Reducing incentives to run in the lead
up to resolution promotes orderly resolution because a QFC creditor run
(such as a mass withdrawal of repo funding) could lead to a disorderly
resolution and pose a threat to financial stability.
Additional creditor protections for supported QFCs. The proposed
rule would allow additional creditor protections for a non-defaulting
counterparty that is the beneficiary of a credit enhancement from an
affiliate of the covered bank that is also a covered bank under the
proposed rule. The proposed rule would allow these creditor protections
in recognition of the supported party's interest in receiving the
benefit of its credit enhancement. The Board has concluded that these
creditor protections would not undermine an SPOE resolution of a
GSIB.\47\
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\47\ See 81 FR 29169 (May 11, 2016).
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Where a covered QFC is supported by a covered affiliate credit
enhancement,\48\ the covered QFC and
[[Page 55392]]
the credit enhancement would be permitted to allow the exercise of
default rights under the circumstances after the expiration of a stay
period. Under the proposed rule, the applicable stay period would begin
when the credit support provider enters resolution and would end at the
later of 5:00 p.m. (eastern time) on the next business day and 48 hours
after the entry into resolution. This portion of the proposed rule is
similar to the stay treatment provided in a resolution under the OLA or
the FDIA.\49\
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\48\ Note that the proposed rule would not apply with respect to
credit enhancements that are not covered affiliate credit
enhancements. In particular, it would not apply with respect to a
credit enhancement provided by a non-U.S. entity of a foreign GSIB,
which would not be a covered bank under the proposed rule.
\49\ See U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i),
5390(c)(16)(A). While the proposed stay period is similar to the
stay periods that would be imposed by the U.S. special resolution
regimes, it could run longer than those stay periods under some
circumstances.
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Under the proposed rule, default rights could be exercised at the
end of the stay period if the covered affiliate credit enhancement has
not been transferred away from the covered affiliate support provider
and that support provider becomes subject to a resolution proceeding
other than a proceeding under Chapter 11 of the Bankruptcy Code.\50\
Default rights could also be exercised at the end of the stay period if
the transferee (if any) of the credit enhancement enters a resolution
proceeding, protecting the supported party from a transfer of the
credit enhancement to a transferee that is unable to meet its financial
obligations.
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\50\ Chapter 11 (11 U.S.C. 1101-1174) is the portion of the
Bankruptcy Code that provides for the reorganization of the failed
company, as opposed to its liquidation, and, relative to special
resolution regimes, is generally well-understood by market
participants.
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Default rights could also be exercised at the end of the stay
period if the original credit support provider does not remain, and no
transferee becomes, obligated to the same (or substantially similar)
extent as the original credit support provider was obligated
immediately prior to entering a resolution proceeding (including a
Chapter 11 proceeding) with respect to (a) the credit enhancement
applicable to the covered QFC, (b) all other credit enhancements
provided by the credit support provider on any other QFCs between the
same parties, and (c) all credit enhancements provided by the credit
support provider between the direct party and affiliates of the direct
party's QFC counterparty. Such creditor protections would be permitted
to prevent the support provider or the transferee from ``cherry
picking'' by assuming only those QFCs of a given counterparty that are
favorable to the support provider or transferee. Title II of the Dodd-
Frank Act and the FDIA contain similar provisions to prevent cherry
picking.
Finally, if the covered affiliate credit enhancement is transferred
to a transferee, then the non-defaulting counterparty could exercise
default rights at the end of the stay period unless either (a) all of
the support provider's ownership interests in the direct party are also
transferred to the transferee or (b) reasonable assurance is provided
that substantially all of the support provider's assets (or the net
proceeds from the sale of those assets) will be transferred to the
transferee in a timely manner. These conditions would help to assure
the supported party that the transferee would be at least roughly as
financially capable of providing the credit enhancement as the covered
affiliate support provider.
Creditor protections related to FDIA proceedings. Moreover, in the
case of a covered QFC that is supported by a covered affiliate credit
enhancement, both the covered QFC and the credit enhancement would be
permitted to allow the exercise of default rights related to the credit
support provider's entry into resolution proceedings under the FDIA
\51\ under the following circumstances: (a) After the FDIA stay
period,\52\ if the credit enhancement is not transferred under the
relevant provisions of the FDIA \53\ and associated regulations, and
(b) during the FDIA stay period, to the extent that the default right
permits the supported party to suspend performance under the covered
QFC to the same extent as that party would be entitled to do if the
covered QFC were with the credit support provider itself and were
treated in the same manner as the credit enhancement. This provision is
intended to ensure that a QFC counterparty of a subsidiary of a covered
bank that goes into FDIA receivership can receive the same level of
protection that the FDIA provides to QFC counterparties of the covered
bank itself.
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\51\ As discussed, the FDIA stays direct default rights against
the failed depository institution but does not stay the exercise of
cross-default rights against its affiliates.
\52\ Under the FDIA, the relevant stay period runs until 5:00
p.m. (eastern time) on the business day following the appointment of
the FDIC as receiver. 12 U.S.C. 1821(e)(10)(B)(I).
\53\ 12 U.S.C. 1821(e)(9)-(10).
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Prohibited terminations. In case of a legal dispute as to a party's
right to exercise a default right under a covered QFC, the proposed
rule would require that a covered QFC must provide that, after an
affiliate of the direct party has entered a resolution proceeding, (a)
the party seeking to exercise the default right shall bear the burden
of proof that the exercise of that right is indeed permitted by the
covered QFC and (b) the party seeking to exercise the default right
must meet a ``clear and convincing evidence'' standard,\54\ a similar
standard, or a more demanding standard.
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\54\ The reference to a ``similar'' burden of proof is intended
to allow covered QFCs to provide for the application of a standard
that is analogous to clear and convincing evidence in jurisdictions
that do not recognize that particular standard. A covered QFC would
not be permitted to provide for a lower standard.
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The purpose of this proposed requirement is to prevent QFC
counterparties from circumventing the limitations on resolution-related
default rights in this proposal by exercising other contractual default
rights in instances where such QFC counterparty cannot demonstrate that
the exercise of such other contractual default rights is unrelated to
the affiliate's entry into resolution.
Agency transactions. In addition to entering into QFCs as
principal, GSIBs may engage in QFCs as agent for other principals. For
example, a GSIB subsidiary may enter into a master securities lending
arrangement with a foreign bank as agent for a U.S.-based pension fund.
The GSIB would document its role as agent for the pension fund, often
through an annex to the master agreement, and would generally provide
to its customer (the principal party) a securities replacement
guarantee or indemnification for any shortfall in collateral in the
event of the default of the foreign bank.\55\ A covered bank may also
enter into a QFC as principal where there is an agent acting on its
behalf or on behalf of its counterparty.
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\55\ The definition of QFC under Title II of the Dodd-Frank Act
includes security agreements and other credit enhancements as well
as master agreements (including supplements). 12 U.S.C.
5390(c)(8)(D).
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This proposed rule would apply to a covered QFC regardless of
whether the covered bank or the covered bank's direct counterparty is
acting as a principal or as an agent. This proposed rule does not
distinguish between agents and principals with respect to default
rights or transfer restrictions applicable to covered QFCs. The
proposed rule would limit default rights and transfer restrictions that
the principal and its agent may have against a covered bank consistent
with the U.S. special resolution regimes. This proposed rule would
ensure that, subject to the enumerated creditor protections, neither
the agent nor the
[[Page 55393]]
principal could exercise cross-default rights under the covered QFC
against the covered bank based on the resolution of an affiliate of the
covered bank.\56\
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\56\ If a covered bank (acting as agent) is a direct party to a
covered QFC, then the general prohibitions of section 47.5(d) would
only affect the substantive rights of the agent's principal(s) to
the extent that the covered QFC provides default rights based
directly or indirectly on the entry into resolution of an affiliate
of the covered bank (acting as agent).
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Question 12: With respect to the proposed restrictions on cross-
default rights in covered banks' QFCs, is the proposed rule
sufficiently clear, such that parties to a conforming QFC will
understand what default rights are, and are not exercisable, in the
context of a GSIB resolution? How could the proposed restrictions be
further clarified?
Question 13: Section 47.5(e)(2) of the proposed rule, addressing
general creditor protections, would permit the exercise of default
rights based on the failure of the direct party to satisfy its payment
or delivery obligations under the covered QFC or ``another contract
between the same parties'' that give rise to a default right in the
covered QFC. This exception is not limited to covered QFCs but is
intended to reflect the interdependence among all contracts between the
same counterparties. Does the scope of the terms ``contract'' and
``same parties'' need to be clarified? Should the term ``same parties''
be clarified to include affiliate credit support providers as well as
counterparties?
Question 14: Are the proposed restrictions on cross-default rights
under-inclusive, such that the proposed terms would permit default
rights that would have the same or similar potential to undermine an
orderly SPOE resolution and should therefore be subjected to similar
restrictions?
Question 15: Would it be appropriate for the prohibition to
explicitly cover default rights that are based on or related to the
``financial condition'' of an affiliate of the direct party (for
example, rights based on an affiliate's credit rating, stock price, or
regulatory capital levels)?
Question 16: Should the proposed restrictions be expanded to cover
contractual rights that a QFC counterparty may have to exit the
termination at will or without cause, including rights that arise on a
periodic basis? Could such rights be used to circumvent the proposed
restrictions on cross-default rights? If so, how, if at all, should the
proposed rule regulate such contractual rights?
Question 17: With respect to the proposed provisions permitting
specific creditor protections in a covered QFC, does the proposed rule
draw an appropriate balance between protecting financial stability from
risks associated with QFC unwinds and maintaining important creditor
protections? Should the proposed set of permitted creditor protections
be expanded to allow for other creditor protections that would fall
within the proposed restrictions? Is the proposed set of permitted
creditor protections sufficiently clear?
Question 18: With respect to the proposed requirement for burden-
of-proof provisions in a covered QFC, is the standard clear? Would the
proposed requirement advance the goals of this proposed rule? Would
those goals be better advanced by alternative or complementary
provisions?
Question 19: Should the proposed rule require periodic legal review
of the legal enforceability of the required provisions in relevant
jurisdictions? If periodic legal review is not required, should covered
banks be required to monitor the applicable law in the relevant
jurisdiction for material changes in law?
Question 20: The OCC invites comment on all aspects of the proposed
treatment of agency transactions, including whether credit protections
should apply to QFCs where the direct party is acting as agent under
the QFC.
G. Process for Approval of Enhanced Creditor Protections (Section 47.6)
As discussed previously, the proposed restrictions would leave many
creditor protections that are commonly included in QFCs unaffected. The
proposed rule would also allow any covered bank to submit to the OCC a
request to approve as compliant with the proposed rule one or more QFCs
that contain additional creditor protections--that is, creditor
protections that would be impermissible under the proposed restrictions
set forth previously. A covered bank making such a request would be
required to explain how its request is consistent with the purposes of
this proposed rule, including an analysis of the contractual terms for
which approval is requested in light of a range of factors that are
laid out by the proposed rule and intended to facilitate the OCC's
consideration of whether permitting the contractual terms would be
consistent with the proposed restrictions. The OCC expects to consult
with the FDIC and Board during its consideration of a request under
this section.
The first two factors concern the potential impact of the requested
creditor protections on GSIB resilience and resolvability. The next
four concern the potential scope of the covered bank's request:
Adoption on an industry-wide basis, coverage of existing and future
transactions, coverage of one or multiple QFCs, and coverage of some or
all covered banks. Creditor protections that may be applied on an
industry-wide basis may help to ensure that impediments to resolution
are addressed on a uniform basis, which could increase market
certainty, transparency, and equitable treatment. Creditor protections
that apply broadly to a range of QFCs and covered banks would increase
the chance that all of a GSIB's QFC counterparties would be treated the
same way during a resolution of that GSIB and may improve the prospects
for an orderly resolution of that GSIB. By contrast, covered bank
requests that would expand counterparties' rights beyond those afforded
under existing QFCs would conflict with the proposed rule's goal of
reducing the risk of mass unwinds of GSIB QFCs. The proposed rule also
includes three factors that focus on the creditor protections specific
to supported parties. The OCC may weigh the appropriateness of
additional protections for supported QFCs against the potential impact
of such provisions on the orderly resolution of a GSIB.
In addition to analyzing the request under the enumerated factors,
a covered bank requesting that the OCC approve enhanced creditor
protections would be required to submit a legal opinion stating that
the requested terms would be valid and enforceable under the applicable
law of the relevant jurisdictions, along with any additional relevant
information requested by the OCC.
Under the proposed rule, the OCC could approve a request for an
alternative set of creditor protections if the terms of that QFC, as
compared to a covered QFC containing only the limited exceptions
discussed previously, would promote the orderly resolution of federally
chartered or licensed institutions or their affiliates, prevent or
mitigate risks to the financial stability of the United States or the
Federal banking system that could arise from the failure of a global
systemically important BHC or global systemically important FBO, and
protect the safety and soundness of covered banks to at least the same
extent. The proposed request-and-approval process would improve
flexibility by allowing for an industry-proposed alternative to the set
of creditor protections permitted by the proposed rule while ensuring
that any
[[Page 55394]]
approved alternative would serve the proposed rule's policy goals to at
least the same extent.
Compliance with the International Swaps and Derivatives Association
(ISDA) 2015 Universal Resolution Stay Protocol. In lieu of the process
for the approval of enhanced creditor protections that are described
previously, a covered bank would be permitted to comply with the
proposed rule by amending a covered QFC through adherence to the ISDA
2015 Universal Resolution Stay Protocol (including immaterial
amendments to the Protocol).\57\ The Protocol ``enables parties to
amend the terms of their financial contracts to contractually recognize
the cross-border application of special resolution regimes applicable
to certain financial companies and support the resolution of certain
financial companies under the U.S. Bankruptcy Code.'' \58\ The Protocol
amends ISDA Master Agreements, which are used for derivatives
transactions. Market participants also may amend their master
agreements for securities financing transactions by adhering to the
Securities Financing Transaction Annex \59\ to the Protocol and may
amend all other QFCs by adhering to the Other Agreements Annex. Thus, a
covered bank would be able to comply with the proposed rule with
respect to all of its covered QFCs through adherence to the Protocol
and the annexes.
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\57\ International Swaps and Derivatives Association, Inc.,
``ISDA 2015 Universal Resolution Stay Protocol'' (November 4, 2015),
available at http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/.
The Protocol was developed by a working group of member institutions
of the ISDA, in coordination with the FRB, the FDIC, the OCC, and
foreign financial supervisory agencies. ISDA is expected to
supplement the Protocol with ISDA Resolution Stay Jurisdictional
Modular Protocols for the United States and other jurisdictions. A
U.S. module that is the same in all respects to the Protocol aside
from exempting QFCs between adherents that are not covered banks
would be consistent with the current proposed rule.
\58\ Protocol Press Release at http://www2.isda.org/functional-areas/protocol-management/protocol/22.
\59\ The Securities Financing Transaction Annex was developed by
the International Capital Markets Association, the International
Securities Lending Association, and the Securities Industry and
Financial Markets Association, in coordination with the ISDA.
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The Protocol has the same general objective as the proposed rule,
which is to make GSIB entities more resolvable by amending their
contracts to, in effect, contractually recognize the applicability of
special resolution regimes (including the OLA and the FDIA) and to
restrict cross-default provisions to facilitate orderly resolution
under the U.S. Bankruptcy Code. The provisions of the Protocol largely
track the requirements of the proposed rule.\60\ However, the Protocol
does have a narrower scope than the proposed rule,\61\ and it allows
for somewhat stronger creditor protections than would otherwise be
permitted under the proposed rule.\62\
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\60\ For example, sections 2(a) and 2(b) of the Protocol impose
general prohibitions on cross-default rights based on the entry of
an affiliate of the direct party into the most common U.S.
resolution proceedings, including resolution under the Bankruptcy
Code. By allowing the exercise of ``Performance Default Rights'' and
``Unrelated Default Rights,'' as those terms are defined in section
6 of the Protocol, sections 2(a) and 2(b) also generally permit the
creditor protections that would be allowed under the proposed rule.
Section 2(f) of the Protocol overrides certain contractual
provisions that would block the transfer of a credit enhancement to
a transferee entity. Section 2(i), complemented by the Protocol's
definition of the term ``Unrelated Default Rights,'' provides that a
party seeking to exercise permitted default rights must bear the
burden of establishing by clear and convincing evidence that those
rights may indeed be exercised.
\61\ The restrictions on default rights imposed by section 2 of
the Protocol apply only when an affiliate of the direct party enters
``U.S. Insolvency Proceedings,'' which is defined to include
proceedings under Chapters 7 and 11 of the Bankruptcy Code, the
FDIA, and the Securities Investor Protection Act. By contrast,
section 47.4 of the proposed rule would apply broadly to default
rights related to affiliates of the direct party ``becoming subject
to a receivership, insolvency, liquidation, resolution, or similar
proceeding,'' which encompasses proceedings under State and foreign
law.
\62\ For example, the Protocol allows a non-defaulting party to
exercise cross-default rights based on the entry of an affiliate of
the direct party into certain resolution proceedings if the direct
party's U.S. parent has not gone into resolution. See paragraph (b)
of the Protocol's definition of ``Unrelated Default Rights''; see
also sections 1 and 3(b) of the Protocol. As another example, if the
affiliate credit support provider that has entered bankruptcy
remains obligated under the credit enhancement, rather than
transferring it to a transferee, then the Protocol's restrictions on
the exercise of default rights continue to apply beyond the stay
period only if the Bankruptcy Court issues a ``Creditor Protection
Order.'' Such an order would, among other things, grant
administrative expense status to the non-defaulting party's claims
under the credit enhancement. See sections 2(b)(i)(B) and
2(b)(iii)(B) of the Protocol and the Protocol's definitions of
``Creditor Protection Order'' and ``DIP Stay Conditions.''
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The Protocol also includes a feature, not included in the proposed
rule, that compensates for the Protocol's narrower scope and allowance
for stronger creditor protections: When an entity (whether or not it is
a covered bank) adheres to the Protocol, it necessarily adheres to the
Protocol with respect to all covered entities that have also adhered to
the Protocol.\63\ Thus, if all covered banks adhere to the Protocol,
any other entity that chooses to adhere will simultaneously adhere with
respect to all covered entities and covered banks. By allowing for all
covered QFCs to be modified by the same contractual terms, this ``all-
or-none'' feature would promote transparency, predictability, and equal
treatment with respect to counterparties' default rights during the
resolution of a GSIB entity and thereby advance the proposed rule's
objective of increasing the likelihood that such a resolution could be
carried out in an orderly manner.
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\63\ Under section 4(a) of the Protocol, the Protocol is
generally effective as between any two adhering parties, once the
relevant effective date has arrived. Under section 4(b)(ii), an
adhering party that is not a covered bank may choose to opt out of
section 2 of the Protocol with respect to its contracts with any
other adhering party that is also not a covered bank. However, the
Protocol will apply to relationships between any covered bank that
adheres and any other adhering party.
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Like section 47.5 of the proposed rule, section 2 of the Protocol
was developed to increase GSIB resolvability under the Bankruptcy Code
and other U.S. insolvency regimes. The Protocol does allow for somewhat
broader creditor protections than would otherwise be permitted under
the proposed rule, but, consistent with the Protocol's purpose, those
additional creditor protections would not materially diminish the
prospects for the orderly resolution of a GSIB. And the Protocol
carries the desirable all-or-none feature, which would further increase
a GSIB entity's resolvability and which the proposed rule otherwise
lacks. For these reasons, and consistent with the broad policy
objective of enhancing the stability of the U.S. financial system by
increasing the resolvability of systemically important financial
companies in the United States, the proposed rule would allow a covered
bank to bring its covered QFCs into compliance by amending them through
adherence to the Protocol (and, as relevant, the annexes to the
Protocol).
Question 21: Are the proposed considerations for the approval of
enhanced credit protections the appropriate factors for the OCC to take
into account in deciding whether to grant a request for approval? What
other considerations are potentially relevant to such a decision?
Question 22: Should the OCC provide greater specificity for the
process and procedures for the submission and approval of requests for
alternative enhanced credit protections? If so, what processes and
procedures could be adopted without imposing undue regulatory burden?
Question 23: The OCC invites comment on its proposal to treat as
compliant with section 47.6 of the proposal any covered QFC that has
been amended by the Protocol. Does adherence to the Protocol suffice to
meet the goals of this proposed rule, appropriately protect the Federal
banking system and safeguard U.S. financial stability? Should
additional
[[Page 55395]]
guidance be provided that would clarify the consultation process with
the FRB or any other relevant supervisory agency?
H. Transition Periods (Sections 47.4 and 47.5)
Under this proposed rule, the final rule would take effect on the
first day of the first calendar quarter that begins at least one year
after the issuance of the final rule (effective date).\64\ National
banks, FSAs, and Federal branches and agencies that are covered banks
when the final rule is issued would be required to comply with the
proposed requirements beginning on the effective date. Thus, a covered
bank would be required to ensure that covered QFCs entered into on or
after the effective date comply with the rule's requirements. Moreover,
a covered bank would be required to bring preexisting covered QFCs
entered into prior to the effective date into compliance with the rule
no later than the first date on or after the effective date on which
the covered bank enters into a new covered QFC with the counterparty to
the preexisting covered QFC or with an affiliate of that counterparty.
Thus, a covered bank would not be required to conform a preexisting QFC
if that covered bank does not enter into any new QFCs with the same
counterparty or an affiliate of that counterparty on or after the
effective date. Finally, a national bank, FSA, or Federal branch or
agency that becomes a covered bank after the final rule is issued would
be required to comply by the first day of the first calendar quarter
that begins at least one year after it becomes a covered bank.
---------------------------------------------------------------------------
\64\ Under section 302(b) of the Riegle Community Development
and Regulatory Improvement Act of 1994, new regulations that impose
requirements on insured depository institutions generally must
``take effect on the first day of a calendar quarter which begins on
or after the date on which the regulations are published in final
form.'' 12 U.S.C. 4802(b).
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By permitting a covered bank to remain party to nonconforming QFCs
entered into before the effective date unless the covered bank enters
into new QFCs with the same counterparty or its affiliate, the proposed
rule draws a balance between ensuring QFC continuity if a global
systemically important BHC or FBO were to fail and ensuring that
covered banks and their existing counterparties can avoid any
compliance costs associated with conforming existing QFCs by refraining
from entering into new QFCs and avoiding unnecessary disruption to
existing QFCs. The requirement that a covered bank ensure that all
existing QFCs are compliant before entering into a new QFC with the
same counterparty or its affiliate will provide covered banks with an
incentive to seek the modifications necessary to ensure that their QFCs
with the most significant counterparties are compliant.
A covered bank would be required to bring a preexisting covered QFC
entered into prior to the effective date into compliance with the rule
no later than the first date on or after the effective date on which
the covered bank or an affiliate (that is also a covered entity or
covered bank) enters into a new covered QFC with the counterparty to
the preexisting covered QFC or an affiliate of the counterparty. The
OCC believes such an approach is warranted to ensure that adoption of
the contractual provisions required by the proposed rule are consistent
between a given counterparty, any affiliate of the counterparty, and
the covered bank and all of the affiliates of the covered bank (which
would essentially be all of the entities under a global systemically
important BHC or FBO). The OCC is concerned that to allow
counterparties to adopt the required contractual provisions with
affiliated covered entities, but not the covered bank, poses a risk to
the safety and soundness of the covered bank and would frustrate the
goal of facilitating the orderly resolution of the covered bank (and
its affiliate covered entities). Furthermore, the OCC expects that, as
a practical matter, the decision of how to comply with this proposed
rule and the FRB Proposal with respect to a given counterparty, and its
affiliates, will be made in close coordination between the covered bank
and its affiliated covered entities.
The OCC believes that adoption of the modifications required by the
proposed rule should be consistent between a given counterparty and all
entities under a global systemically important BHC or FBO, which
necessitates allowing a trade by either a covered bank or a covered
entity to trigger adoption of the required provisions. Moreover, the
volume of nonconforming covered QFCs outstanding can be expected to
decrease over time and eventually to reach zero. In light of these
considerations, and to avoid creating potentially inappropriate
compliance costs with respect to existing QFCs (which a covered bank
would generally be unable to modify without its counterparty's
consent), it may be appropriate to permit a limited number of
nonconforming QFCs to remain outstanding, in keeping with the terms
described previously. The OCC will monitor covered banks' levels of
nonconforming QFCs and evaluate the risk, if any, that they pose to the
safety and soundness of the covered banks or to the Federal banking
system and to U.S. financial stability.
Question 24: With respect to the proposed transaction periods,
would there be a reasonable basis for adopting different compliance
deadlines with respect to different classes of QFCs? If so, how should
those classes be distinguished, and what would be a reasonable time
frame for compliance?
Question 25: Is it necessary for a covered bank to bring
preexisting covered QFCs entered into prior to the effective date into
compliance with the rule based on a covered bank's affiliate's (that is
also a covered entity or covered bank) transaction with a counterparty
or its affiliates? Is it appropriate to ensure consistent treatment
across all affiliated covered banks, covered entities, and affiliated
counterparties?
I. Amendments to Capital Rules
The Basel III Capital Framework, as implemented by the OCC and the
other banking agencies, permits a bank 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,'' a collateral agreement, eligible margin loan, or
repo-style transaction (collectively referred to as netting agreements)
that provides for certain rights upon a counterparty default. With
limited exception, to qualify for netting treatment, a qualifying
netting agreement must permit a bank 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.\65\ 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.
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\65\ See 12 CFR 3.2 definition of collateral agreement, eligible
margin loan, repo-style transaction, and qualifying master netting
agreement.
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An exception to the immediate close-out requirement is made for the
stay of default rights if the financial company is in receivership,
conservatorship, or resolution under Title II of the Dodd-Frank
Act,\66\ or the FDIA.\67\ Accordingly, transactions conducted under
netting agreements where default rights may be stayed under Title II of
the
[[Page 55396]]
Dodd-Frank Act or the FDIA would not be disqualified from netting
treatment.
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\66\ See 12 U.S.C. 5390(c)(8)-(16).
\67\ See 12 U.S.C. 1821(e)(8)-(13).
---------------------------------------------------------------------------
On December 30, 2014, the OCC and the FRB issued an interim final
rule (effective January 1, 2015) that amended the definitions of
``qualifying master netting agreement,'' ``collateral agreement,''
``eligible margin loan,'' and ``repo-style transaction,'' in the OCC
and FRB regulatory capital rules, and ``qualifying master netting
agreement'' in the OCC and FRB liquidity coverage ratio (LCR) rules to
expand the exception to the immediate close-out requirement to ensure
that the current netting treatment under the regulatory capital,
liquidity, and lending limits rules for over-the-counter (OTC)
derivatives, repo-style transactions, eligible margin loans, and other
collateralized transactions would be unaffected by the adoption of
various foreign special resolution regimes through the ISDA
Protocol.\68\ In particular, the interim final rule amended 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 FDIA, 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 FDIA.
---------------------------------------------------------------------------
\68\ The FDIC issued a NPRM on January 30, 2015 to propose these
conforming amendments. See 80 FR 5063 (January 30, 2015).
---------------------------------------------------------------------------
Section 47.4 of the proposed rule essentially limits the default
rights exercisable against a covered bank to the same stay and transfer
restrictions imposed under the U.S. special resolution regime against a
direct counterparty. Section 47.4 of the proposed rule mirrors the
contractual stay and transfer restrictions reflected in the ISDA
Protocol with one notable difference. While adoption of the ISDA
Protocol is voluntary, covered banks subject to the proposed rule must
conform their covered QFCs to the stay and transfer restrictions in
section 47.4.
With respect to limitations on cross-default rights in proposed
section 47.5, the OCC is proposing amendments in order to maintain the
existing netting treatment for covered QFCs for purposes of the
regulatory capital, liquidity, and lending limits rules. Specifically,
the OCC is proposing to amend the definition of ``qualifying master
netting agreement,'' as well as to make conforming amendments to
``collateral agreement, ``eligible margin loan,'' and ``repo-style
transaction,'' in the regulatory capital rules in part 3, and
``qualifying master netting agreement'' in the LCR rules in part 50 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 proposed section 47.5. Without these proposed amendments,
covered banks that amend their covered QFCs to comply with this
proposed rule would no longer be permitted to recognize covered QFCs 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 proposed requirements in section 47.5. The OCC does
not believe that the disqualification of covered QFCs from master
netting agreements would accurately reflect the risk posed by these OTC
derivative transactions.
Although the proposed rule reformats some of the definitions in
parts 3 and 50 to include the text from the interim final rule, the
proposed amendments do not alter the substance or effect of the prior
amendment adopted by the interim final rule.
The rule establishing margin and capital requirements for covered
swap entities (swap margin rule) defines the term ``eligible master
netting agreement'' in a manner similar to the definition of
``qualifying master netting agreement.'' \69\ Thus, it may also be
appropriate to amend the definition of ``eligible master netting
agreement'' to account for the proposed restrictions on covered
entities' QFCs.
---------------------------------------------------------------------------
\69\ 80 FR 74840, 74861-74862 (November 30, 2015).
---------------------------------------------------------------------------
Question 26: As noted, the requirements of this proposed rule are
mandatory for all covered banks with respect to their covered QFCs.
Under the proposed rule failure by a covered bank to conform its
covered QFCs to the mandatory requirements would be a violation of the
rule. In light of the important policy objectives of this proposed
rule, should the regulatory capital and LCR rules require that
nonconforming covered QFCs that violate the requirements of the
proposed rule be disqualified from netting treatment?
Question 27. In order to qualify for netting treatment under the
regulatory capital rules, eligible margin loans, qualifying master
netting agreements, and repo-style transactions require national banks
and FSAs to conduct sufficient legal review to ensure that the
provisions of these financial contracts would be enforceable in all
relevant jurisdictions. Should the scope of the legal review
requirement be expanded to explicitly include the enforceability of the
direct default and cross-default provisions required by the proposed
rule?
IV. Request for Comments
In addition to the specifically enumerated questions in the
preamble, the OCC requests comment on all aspects of this proposed
rule. The OCC requests that, for the specifically enumerated questions,
commenters include the number of the question in their response to make
review of the comments more efficient.
V. Regulatory Analysis
A. Paperwork Reduction Act
In accordance with section 3512 of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521) (as amended), the OCC 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.
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the PRA. In accordance
with the requirements of the PRA, the OCC may not conduct or sponsor,
and the respondent is not required to respond to, an information
collection unless it displays a currently-valid OMB control number. The
information collection requirements contained in this proposed
rulemaking have been submitted to OMB for review and approval under
section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of
the OMB's implementing regulations (5 CFR 1320).
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the OCC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use
[[Page 55397]]
of automated collection techniques or other forms of information
technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer for the
agencies: by mail to U.S. Office of Management and Budget, 725 17th
Street NW., #10235, Washington, DC 20503; by facsimile to (202) 395-
5806; or by email to: oira_submission@omb.eop.gov, Attention, Federal
Banking Agency Desk Officer.
Title of Information Collection: Mandatory Contractual Stay
Requirements for Qualified Financial Contracts.
Affected Public: Businesses or other for-profit.
Respondents: Banks or FSAs (including any subsidiary of a bank or
FSA) that are subsidiaries of a global systemically important BHC that
has been designated pursuant to 252.82(a)(1) of the Federal Reserve
Board's Regulation YY; Banks or FSAs (including any subsidiary of a
bank or FSA) that are subsidiaries of a global systemically important
FBO designated pursuant to section 252.87 of the Federal Reserve
Board's Regulation YY; and Federal branches and agencies (including any
U.S. subsidiary of a Federal branch or agency), of a global
systemically important FBO that has been designated pursuant to section
252.87 of the Federal Reserve Board's Regulation YY.
Abstract: Section 47.6 provides that a covered bank may request
that the OCC approve as compliant with the requirements of section
47.5, regarding insolvency proceedings, provisions of one or more forms
of covered QFCs, or amendments to one or more forms of covered QFCs,
with enhanced creditor protection conditions. The request must include:
(1) an analysis of the proposal under each consideration of the
relevance of creditor protection provisions; (2) a written legal
opinion verifying that proposed provisions or amendments would be valid
and enforceable under applicable law of the relevant jurisdictions,
including, in the case of proposed amendments, the validity and
enforceability of the proposal to amend the covered QFCs; and (3) any
additional information relevant to its approval that the OCC requests.
Burden Estimates:
Estimated Number of Respondents: 42.
Estimated Burden per Respondent:
Reporting (Sec. 47.7): 40 hours.
Total Estimated Burden: 1,680 hours.
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (``RFA''),
generally requires that, in connection with a NPRM, an agency prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities.\70\ The Small Business Administration has defined ``small
entities'' for banking purposes to include a bank or savings
association with $175 million or less in assets.\71\
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\70\ See 5 U.S.C. 603(a).
\71\ See 13 CFR 121.201.
---------------------------------------------------------------------------
The OCC currently supervises approximately 1,032 small entities.
The scope of the proposal is limited to large banks and their
affiliates. Therefore, the proposed rule will not impact any OCC-
supervised small entities. Accordingly, the proposal will not have a
significant economic impact on a substantial number of small entities.
C. Unfunded Mandates Reform Act of 1995
The OCC has analyzed the proposed rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA).\72\ Under this analysis,
the OCC considered whether the proposed rule includes a Federal mandate
that may result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation). The
UMRA does not apply to regulations that incorporate requirements
specifically set forth in law.
---------------------------------------------------------------------------
\72\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------
The OCC's estimated UMRA cost is less than $2 million. Therefore,
the OCC finds that the proposed rule does not trigger the UMRA cost
threshold. Accordingly, the OCC has not prepared the written statement
described in section 202 of the UMRA.
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (RCDRI Act),\73\ in determining the
effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, the OCC will consider,
consistent with the principles of safety and soundness and the public
interest: (1) Any administrative burdens that the proposed rule would
place on depository institutions, including small depository
institutions and customers of depository institutions, and (2) the
benefits of the proposed rule. The OCC requests comment on any
administrative burdens that the proposed rule would place on depository
institutions, including small depository institutions, and their
customers, and the benefits of the proposed rule that the OCC should
consider in determining the effective date and administrative
compliance requirements for a final rule.
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\73\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 3
Administrative practice and procedure; Capital; Federal savings
associations; National banks; Reporting and recordkeeping requirements;
Risk.
12 CFR Part 47
Administrative practice and procedure; Banks and banking; Bank
resolution; Default rights; Federal savings associations, National
banks, Qualified financial contracts; Reporting and recordkeeping
requirements; Securities.
12 CFR Part 50
Administrative practice and procedure; Banks and banking;
Liquidity; Reporting and recordkeeping requirements; Savings
associations.
Authority and Issuance
For the reasons stated in the Supplementary Information, the Office
of the Comptroller of the Currency proposes to amend part 3, add a new
part 47, and amend part 50 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).
0
2. Section 3.2 is amended by:
0
a. Revising the definition of ``collateral agreement'' by:
0
i. Removing the word ``or'' at the end of paragraph (1);
0
ii. Removing the period at the end of paragraph (2) and adding in its
place ``; or''; and
0
iii. Adding a new paragraph (3).
[[Page 55398]]
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin
loan''; and
0
c. Revising the definition of ``qualifying master netting agreement''
by:
0
i. Removing the word ``or'' at the end of paragraph (2)(i);
0
ii. Removing the '';'' at the end of paragraph (2)(ii) and adding in
its place ``; or''; and
0
iii. Adding a new paragraph (2)(iii).
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 * * *
* * * * *
(3) Where 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 of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 47 of this title 12 or any similar requirements of another U.S.
Federal banking agency, as applicable.
* * * * *
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:
(A) 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
FRB's Regulation EE (12 CFR part 231).
\6\ The OCC expects to evaluate jointly with the FRB and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(B) Where 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 of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 47 of this title 12 or any similar requirements of another U.S.
Federal banking agency, as applicable;
or
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
* * * * *
(2) * * *
* * * * *
(iii) Where 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 of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 47 of this title 12 or any similar requirements of another U.S.
Federal banking agency, as applicable.
* * * * *
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:
(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 \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 FRB and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(2) Where 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 of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 47 of this title 12 or any similar requirements of another U.S.
Federal banking agency, as applicable; or
* * * * *
PART 47--MANDATORY CONTRACTUAL STAY REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
0
3. The authority citation for Part 47 shall read as follows:
Authority: 12 U.S.C. 1, 93a, 481, 1462a, 1463, 1464, 1467a,
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 3102(b), 3108(a),
5412(b)(2)(B), (D)-(F).
0
4. Add new Part 47 to read as follows:
PART 47--MANDATORY CONTRACTUAL STAY REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
Sec.
47.1 Authority and Purpose.
47.2 Definitions.
47.3 Applicability.
47.4 U.S. Special Resolution Regimes.
47.5 Insolvency Proceedings.
47.6 Approval of Enhanced Creditor Protection Conditions.
47.7 Exclusion of Certain QFCs.
47.8 Foreign Bank Multi-Branch Master Agreements.
PART 47--MANDATORY CONTRACTUAL STAY REQUIREMENTS FOR QUALIFIED
FINANCIAL CONTRACTS
Sec. 47.1 Authority and Purpose.
(a) Authority. 12 U.S.C. 1, 93a, 1462a, 1463, 1464, 1467a, 1818,
1828, 1831n, 1831p-1, 1831w, 1835, 3102(b), 3108(a), 5412(b)(2)(B),
(D)-(F).
(b) Purpose. The purpose of this part is to promote the safety and
soundness of federally chartered or licensed institutions by mitigating
the potential destabilizing effects of the resolution of a global
significantly important banking entity on an affiliate that is a
covered bank (as defined by this part) by requiring covered banks to
include in financial contracts covered by this part certain mandatory
contractual
[[Page 55399]]
provisions relating to stays on acceleration and close out rights and
transfer rights.
Sec. 47.2 Definitions.
Central counterparty or CCP has the same meaning as in section
252.81 of the Federal Reserve Board's Regulation YY (12 CFR 252.81).
Chapter 11 proceeding means a proceeding under the provisions of
Chapter 11 of the bankruptcy laws of the United States at 11 U.S.C.
1101-74 (Chapter 11 of Title 11, United States Code).
Covered entity has the same meaning as in section 252.82(a) of the
Federal Reserve Board's Regulation YY (12 CFR 252.82).
Covered QFC means a QFC as defined in sections 47.4(a) and 47.5(a)
of this part.
Credit enhancement means a QFC of the type set forth in Title II of
the Dodd-Frank Act at section 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V),
(v)(VI), or (vi)(VI), 12 U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X),
(iv)(V), (v)(VI), or (vi)(VI); or a credit enhancement that the Federal
Deposit Insurance Corporation determines by regulation is a QFC
pursuant to section 210(c)(8)(D)(i), 12 U.S.C. 5390(c)(8)(D)(i), of the
Dodd-Frank Act.
Default right (1) Means, with respect to a QFC, any:
(i) Right of a party, whether contractual or otherwise (including,
without limitation, rights incorporated by reference to any other
contract, agreement, or document, and rights afforded by statute, civil
code, regulation, and common law), to liquidate, terminate, cancel,
rescind, or accelerate such agreement or transactions thereunder, set
off or net amounts owing in respect thereto (except rights related to
same-day payment netting), exercise remedies in respect of collateral
or other credit support or property related thereto (including the
purchase and sale of property), demand payment or delivery thereunder
or in respect thereof (other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure), suspend,
delay, or defer payment or performance thereunder, or modify the
obligations of a party thereunder, or any similar rights; and
(ii) Right or contractual provision that alters the amount of
collateral or margin that must be provided with respect to an exposure
thereunder, including by altering any initial amount, threshold amount,
variation margin, minimum transfer amount, the margin value of
collateral, or any similar amount, that entitles a party to demand the
return of any collateral or margin transferred by it to the other party
or a custodian or that modifies a transferee's right to reuse
collateral or margin (if such right previously existed), or any similar
rights, in each case, other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure;
(2) With respect to section 47.5 of this part, does not include any
right under a contract that allows a party to terminate the contract on
demand, or at its option at a specified time, or from time to time,
without the need to show cause.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).
FDIA proceeding means a proceeding in which the Federal Deposit
Insurance Corporation is appointed as conservator or receiver under
section 11 of the Federal Deposit Insurance Act, 12 U.S.C. 1821.
FDIA stay period means, in connection with an FDIA proceeding, the
period of time during which a party to a QFC whose counterparty is
subject to an FDIA proceeding may not exercise any right that the
counterparty has to terminate, liquidate, or net such QFC, in
accordance with section 11(e) of the Federal Deposit Insurance Act, 12
U.S.C. 1821(e), and any implementing regulations.
Master agreement means a QFC of the type set forth in Title II of
the Dodd-Frank Act at section 210(c)(8)(D)(ii)(XI), (iii)(IX),
(iv)(IV), (v)(V), or (vi)(V), 12 U.S.C. 5390(c)(8)(D)(ii)(XI),
(iii)(IX), (iv)(IV), (v)(V), or (vi)(V); or a master agreement that the
Federal Deposit Insurance Corporation determines by regulation is a QFC
pursuant to section 210(c)(8)(D)(i) of the Dodd-Frank Act, 12 U.S.C.
5390(c)(8)(D)(i).
QFC or qualified financial contract has the same meaning as in
section 210(c)(8)(D) of Title II of the Dodd-Frank Act, 12 U.S.C.
5390(c)(8)(D).
Subsidiary of covered bank means any operating subsidiary of a
national bank, Federal savings association, or Federal branch or agency
as defined in 12 CFR 5.34 (national banks) or 12 CFR 5.38 (FSAs), or
any other subsidiary of a covered bank as defined in section
252.82(a)(2) and (3) of the Federal Reserve Board's Regulation YY (12
CFR 252.82(a)(2) and (3)).
U.S. special resolution regimes means the Federal Deposit Insurance
Act at 12 U.S.C. 1811-1835a and regulations promulgated thereunder and
Title II of the Dodd-Frank Act, 12 U.S.C. 5381-5394, and regulations
promulgated thereunder.
Sec. 47.3 Applicability.
(a) Scope of applicability. This part applies to a ``covered
bank,'' which includes:
(i) A national bank or Federal savings association (including any
subsidiary of a national bank or a Federal savings association) that is
a subsidiary of a global systemically important bank holding company
that has been designated pursuant to section 252.82(a)(1) of the
Federal Reserve Board's Regulation YY (12 CFR 252.82(a)(1)); or
(ii) A national bank or Federal savings association (including any
subsidiary of a national bank or a Federal savings association) that is
a subsidiary of a global systemically important foreign banking
organization that has been designated pursuant to section 252.87 of the
Federal Reserve Board's Regulation YY (12 CFR 252.87); or
(iii) A Federal branch or agency, as defined in the Subpart B of
Part 28 of this Chapter (governing Federal branches and agencies), and
any U.S. subsidiary of the Federal branch or agency, of a global
systemically important foreign banking organization that has been
designated pursuant to section 252.87 of the Federal Reserve Board's
Regulation YY (12 CFR 252.87).
(b) Subsidiary of a covered bank. This part generally applies to
the subsidiary of any national bank, Federal savings association, or
Federal branch or agency that is a covered bank under paragraph (a)(1)
of this section. Specifically, the covered bank is required to ensure
that a covered QFC to which the subsidiary is a party (as a direct
counterparty or a support provider) satisfies the requirements of
sections 47.4 and 47.5 of this part in the same manner and to the same
extent applicable to the covered bank.
(c) Initial applicability of requirements for covered QFCs. A
covered bank must comply with the requirements of sections 47.4 and
47.5 beginning on the later of
(1) The first day of the calendar quarter immediately following 365
days (1 year) after becoming a covered bank; or
(2) The date this subpart first becomes effective.
(d) Rule of construction. For purposes of this subpart, the
exercise of a default right with respect to a covered QFC includes the
automatic or deemed exercise of the default right pursuant to the terms
of the QFC or other arrangement.
[[Page 55400]]
Sec. 47.4 U.S. Special Resolution Regimes.
(a) QFCs required to be conformed. (1) A covered bank must ensure
that each of its covered QFCs conforms to the requirements of this
section 47.4.
(2) For purposes of this section 47.4, a covered QFC means a QFC
that the covered bank:
(i) Enters, executes, or otherwise becomes a party to; or
(ii) Entered, executed, or otherwise became a party to before the
date this subpart first becomes effective, if the covered bank or any
affiliate that is a covered bank or covered entity also enters,
executes, or otherwise becomes a party to a QFC with the same person or
affiliate of the same person on or after the date this subpart first
becomes effective.
(3) To the extent that the covered bank is acting as agent with
respect to a QFC, the requirements of this section apply to the extent
the transfer of the QFC relates to the covered bank or the default
rights relate to the covered bank or an affiliate of the covered bank.
(b) Provisions required. A covered QFC must explicitly provide
that:
(1) The transfer of the covered QFC (and any interest and
obligation in or under, and any property securing, the covered QFC)
from the covered bank will be effective to the same extent as the
transfer would be effective under the U.S. special resolution regimes
if the covered QFC (and any interest and obligation in or under, and
any property securing, the covered QFC) were governed by the laws of
the United States or a state of the United States and the covered bank
were under the U.S. special resolution regime; and
(2) Default rights with respect to the covered QFC that may be
exercised against the covered bank are permitted to be exercised to no
greater extent than the default rights could be exercised under the
U.S. special resolution regimes if the covered QFC was governed by the
laws of the United States or a state of the United States and the
covered bank were under the U.S. special resolution regime.
(c) Relevance of creditor protection provisions. The requirements
of this section apply notwithstanding paragraphs (e), (g), and (i) of
section 47.5.
Sec. 47.5 Insolvency Proceedings.
(a) QFCs required to be conformed. (1) A covered bank must ensure
that each covered QFC conforms to the requirements of this section
47.5.
(2) For purposes of this section 47.5, a covered QFC has the same
definition as in paragraph (a)(2) of section 47.4.
(3) To the extent that the covered bank is acting as agent with
respect to a QFC, the requirements of this section apply to the extent
the transfer of the QFC relates to the covered bank or the default
rights relate to an affiliate of the covered bank.
(b) General Prohibitions. (1) A covered QFC may not permit the
exercise of any default right with respect to the covered QFC that is
related, directly or indirectly, to an affiliate of the direct party
becoming subject to a receivership, insolvency, liquidation,
resolution, or similar proceeding.
(2) A covered QFC may not prohibit the transfer of a covered
affiliate credit enhancement, any interest or obligation in or under
the covered affiliate credit enhancement, or any property securing the
covered affiliate credit enhancement to a transferee upon an affiliate
of the direct party becoming subject to a receivership, insolvency,
liquidation, resolution, or similar proceeding unless the transfer
would result in the supported party being the beneficiary of the credit
enhancement in violation of any law applicable to the supported party.
(c) Definitions relevant to the general prohibitions and this part.
(1) Direct party. Direct party means covered bank, or covered entity
referenced in section 47.2, that is a party to the direct QFC.
(2) Direct QFC. Direct QFC means a QFC that is not a credit
enhancement, provided that, for a QFC that is a master agreement that
includes an affiliate credit enhancement as a supplement to the master
agreement, the direct QFC does not include the affiliate credit
enhancement.
(3) Affiliate credit enhancement. Affiliate credit enhancement
means a credit enhancement that is provided by an affiliate of a party
to the direct QFC that the credit enhancement supports.
(d) Treatment of agent transactions. With respect to a QFC that is
a covered QFC for a covered bank solely because the covered bank is
acting as agent under the QFC, the covered bank is the direct party.
(e) General creditor protections. Notwithstanding paragraph (b) of
this section, a covered direct QFC and covered affiliate credit
enhancement that supports the covered direct QFC may permit the
exercise of a default right with respect to the covered QFC that arises
as a result of:
(1) The direct party becoming subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding other than a
receivership, conservatorship, or resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or laws of foreign jurisdictions that are
substantially similar to the U.S. laws referenced in this paragraph
(e)(1) in order to facilitate the orderly resolution of the direct
party;
(2) The direct party not satisfying a payment or delivery
obligation pursuant to the covered QFC or another contract between the
same parties that gives rise to a default right in the covered QFC; or
(3) The covered affiliate support provider or transferee not
satisfying a payment or delivery obligation pursuant to a covered
affiliate credit enhancement that supports the covered direct QFC.
(f) Definitions relevant to the general creditor protections and
this part. (1) Covered direct QFC. Covered direct QFC means a direct
QFC to which a covered bank, or a covered entity referenced in section
47.2, is a party.
(2) Covered affiliate credit enhancement. Covered affiliate credit
enhancement means an affiliate credit enhancement in which a covered
bank, or a covered entity referenced in section 47.2, is the obligor of
the credit enhancement.
(3) Covered affiliate support provider. Covered affiliate support
provider means, with respect to a covered affiliate credit enhancement,
the affiliate of the direct party that is obligated under the covered
affiliate credit enhancement and is not a transferee.
(4) Supported party. Supported party means, with respect to a
covered affiliate credit enhancement and the direct QFC that the
covered affiliate credit enhancement supports, a party that is a
beneficiary of the covered affiliate support provider's obligation
under the covered affiliate credit enhancement.
(g) Additional creditor protections for supported QFCs.
Notwithstanding paragraph (b) of this section, with respect to a
covered direct QFC that is supported by a covered affiliate credit
enhancement, the covered direct QFC and the covered affiliate credit
enhancement may permit the exercise of a default right that is related,
directly or indirectly, to the covered affiliate support provider after
the stay period if:
(1) The covered affiliate support provider that remains obligated
under the covered affiliate credit enhancement becomes subject to a
receivership, insolvency, liquidation, resolution, or similar
proceeding other than a Chapter 11 proceeding;
(2) Subject to paragraph (i) of this section, the transferee, if
any, becomes subject to a receivership, insolvency,
[[Page 55401]]
liquidation, resolution, or similar proceeding;
(3) The covered affiliate support provider does not remain, and a
transferee does not become, obligated to the same, or substantially
similar, extent as the covered affiliate support provider was obligated
immediately prior to entering the receivership, insolvency,
liquidation, resolution, or similar proceeding with respect to:
(i) The covered affiliate credit enhancement,
(ii) All other covered affiliate credit enhancements provided by
the covered affiliate support provider in support of other covered
direct QFCs between the direct party and the supported party under the
covered affiliate credit enhancement referenced in paragraph
47(g)(3)(i), and
(iii) All covered affiliate credit enhancements provided by the
covered affiliate support provider in support of covered direct QFCs
between the direct party and affiliates of the supported party
referenced in paragraph 47.5(g)(3)(ii); or
(4) In the case of a transfer of the covered affiliate credit
enhancement to a transferee:
(i) All of the ownership interests of the direct party directly or
indirectly held by the covered affiliate support provider are not
transferred to the transferee; or
(ii) Reasonable assurance has not been provided that all or
substantially all of the assets of the covered affiliate support
provider (or net proceeds therefrom), excluding any assets reserved for
the payment of costs and expenses of administration in the
receivership, insolvency, liquidation, resolution, or similar
proceeding, will be transferred or sold to the transferee in a timely
manner.
(h) Definitions relevant to the additional creditor protections for
supported QFCs and this part. (1) Stay period. Stay period means, with
respect to a receivership, insolvency, liquidation, resolution, or
similar proceeding, the period of time beginning on the commencement of
the proceeding and ending at the later of 5:00 p.m. (eastern time) on
the business day following the date of the commencement of the
proceeding and 48 hours after the commencement of the proceeding.
(2) Business day. Business day means a day on which commercial
banks in the jurisdiction the proceeding is commenced are open for
general business (including dealings in foreign exchange and foreign
currency deposits).
(3) Transferee. Transferee means a person to whom a covered
affiliate credit enhancement is transferred upon the covered affiliate
support provider entering a receivership, insolvency, liquidation,
resolution, or similar proceeding or thereafter as part of the
restructuring or reorganization involving the covered affiliate support
provider.
(i) Creditor protections related to FDIA proceedings.
Notwithstanding paragraph (b) of this section, with respect to a
covered direct QFC that is supported by a covered affiliate credit
enhancement, the covered direct QFC and the covered affiliate credit
enhancement may permit the exercise of a default right that is related,
directly or indirectly, to the covered affiliate support provider
becoming subject to FDIA proceedings:
(1) After the FDIA stay period, if the covered affiliate credit
enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)-(e)(10)
and any regulations promulgated thereunder; or
(2) During the FDIA stay period, if the default right may only be
exercised so as to permit the supported party under the covered
affiliate credit enhancement to suspend performance with respect to the
supported party's obligations under the covered direct QFC to the same
extent as the supported party would be entitled to do if the covered
direct QFC were with the covered affiliate support provider and were
treated in the same manner as the covered affiliate credit enhancement.
(j) Prohibited terminations. A covered QFC must require, after an
affiliate of the direct party has become subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding:
(1) The party seeking to exercise a default right to bear the
burden of proof that the exercise is permitted under the covered QFC;
and
(2) Clear and convincing evidence or a similar or higher burden of
proof to exercise a default right.
Sec. 47.6 Approval of Enhanced Creditor Protection Conditions.
(a) Protocol compliance. A covered QFC may permit the exercise of a
default right with respect to the covered QFC if the covered QFC has
been amended by the ISDA 2015 Universal Resolution Stay Protocol,
including the Securities Financing Transaction Annex and Other
Agreements Annex published by the International Swaps and Derivatives
Association, Inc., as of May 3, 2016, and minor or technical amendments
thereto.
(b) Proposal of enhanced creditor protection conditions. (1) A
covered bank may request that the OCC approve as compliant with the
requirements of section 47.5 of this part provisions of one or more
forms of covered QFCs, or amendments to one or more forms of covered
QFCs, with enhanced creditor protection conditions.
(2) Enhanced creditor protection conditions means a set of limited
exemptions to the requirements of section 47.5(b) of this part that are
different than that of paragraphs (e), (g), and (i) of section 46.5 of
this part.
(3) A covered bank making a request under paragraph (b)(1) of this
section must provide:
(i) An analysis of the proposal that addresses each consideration
in paragraph (d) of this section;
(ii) A written legal opinion verifying that proposed provisions or
amendments would be valid and enforceable under applicable law of the
relevant jurisdictions, including, in the case of proposed amendments,
the validity and enforceability of the proposal to amend the covered
QFCs; and
(iii) Any other relevant information that the OCC requests.
(c) OCC approval. The OCC may approve, subject to any conditions or
commitments the OCC may impose, a proposal by a covered bank under
paragraph (b) of this section if the proposal, as compared to a covered
QFC that contains only the limited exemptions in paragraphs of (e),
(g), and (i) of section 47.5 of this part, would promote the safety and
soundness of federally chartered or licensed institutions by mitigating
the potential destabilizing effects of the resolution of a global
significantly important banking entity that is an affiliate of the
covered bank, at least to the same extent.
(d) Considerations. In reviewing a proposal under this section, the
OCC may consider all facts and circumstances related to the proposal,
including:
(1) Whether, and the extent to which, the proposal would reduce the
resiliency of such covered banks during distress or increase the impact
of the failure of one or more of the covered banks;
(2) Whether, and the extent to which, the proposal would materially
decrease the ability of a covered bank, or an affiliate of a covered
bank, to be resolved in a rapid and orderly manner in the event of the
financial distress or failure of the entity that is required to submit
a resolution plan pursuant to Section 165(d) of the Dodd-Frank Act, 12
U.S.C. 5635(d), and the implementing regulations in 12 CFR
[[Page 55402]]
part 243 (FRB) and 12 CFR part 381 (FDIC);
(3) Whether, and the extent to which, the set of conditions or the
mechanism in which they are applied facilitates, on an industry-wide
basis, contractual modifications to remove impediments to resolution
and increase market certainty, transparency, and equitable treatment
with respect to the default rights of non-defaulting parties to a
covered QFC;
(4) Whether, and the extent to which, the proposal applies to
existing and future transactions;
(5) Whether, and the extent to which, the proposal would apply to
multiple forms of QFCs or multiple covered banks;
(6) Whether the proposal would permit a party to a covered QFC that
is within the scope of the proposal to adhere to the proposal with
respect to only one or a subset of covered banks;
(7) With respect to a supported party, the degree of assurance the
proposal provides to the supported party that the material payment and
delivery obligations of the covered affiliate credit enhancement and
the covered direct QFC it supports will continue to be performed after
the covered affiliate support provider enters a receivership,
insolvency, liquidation, resolution, or similar proceeding;
(8) The presence, nature, and extent of any provisions that require
a covered affiliate support provider or transferee to meet conditions
other than material payment or delivery obligations to its creditors;
(9) The extent to which the supported party's overall credit risk
to the direct party may increase if the enhanced creditor protection
conditions are not met and the likelihood that the supported party's
credit risk to the direct party would decrease or remain the same if
the enhanced creditor protection conditions are met; and
(10) Whether the proposal provides the counterparty with additional
default rights or other rights.
Sec. 47.7 Exclusion of Certain QFCs.
(a) Exclusion of CCP-cleared QFCs. A covered bank is not required
to conform a covered QFC to which a CCP is a party to the requirements
of sections 47.4 and 47.5.
(b) Exclusion of covered entity QFCs. A covered bank is not
required to conform a covered QFC to the requirements of sections 47.4
and 47.5 to the extent that a covered entity is required to conform the
covered QFC to similar requirements of the Federal Reserve Board if the
QFC is either a direct QFC to which a covered entity is a direct party
or an affiliate credit enhancement to which a covered entity is the
obligor.
Sec. 47.8 Foreign Bank Multi-branch Master Agreements.
(a) Treatment of foreign bank multi-branch master agreements. With
respect to a Federal branch or agency of a globally significant foreign
banking organization, a foreign bank multi-branch master agreement that
is a covered QFC solely because the master agreement permits agreements
or transactions that are QFCs to be entered into at one or more Federal
branches or agencies of the globally significant foreign banking
organization will be considered a covered QFC for purposes of this
subpart only with respect to such agreements or transactions booked at
such Federal branches or agencies or for which a payment or delivery
may be made at such Federal branches or agencies.
(b) Definition of foreign bank multi-branch master agreements. A
foreign bank multi-branch master agreement means a master agreement
that permits a Federal branch or agency and another place of business
of a foreign bank that is outside the United States to enter
transactions under the agreement.
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
0
5. 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
6. Section 50.3 is amended by revising the definition of ``qualifying
master netting agreement'' by:
0
i. Removing the word ``or'' at the end of paragraph (2)(i);
0
ii. Removing the '';'' at the end of paragraph (2)(ii) and adding in
its place ``; or''; and
0
iii. Adding a new paragraph (2)(iii).
The revisions are set forth below:
Sec. 50.3 Definitions.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
* * * * *
(2) * * *
* * * * *
(iii) Where 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 of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 47 of this title 12 or any similar requirements of another U.S.
Federal banking agency, as applicable.
* * * * *
Dated: August 10, 2016.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2016-19671 Filed 8-18-16; 8:45 am]
BILLING CODE 4810-33-P