Regulatory Capital Rules, Liquidity Coverage Ratio: Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 71348-71356 [2016-25021]
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Federal Register / Vol. 81, No. 200 / Monday, October 17, 2016 / Rules and Regulations
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(a) So much time has elapsed since the
criminal behavior happened, or it happened
under such unusual circumstances that it is
unlikely to recur or does not cast doubt on
the individual’s reliability, trustworthiness,
or good judgment;
(b) The person was pressured or coerced
into committing the act and those pressures
are no longer present in the person’s life;
(c) Evidence that the person did not
commit the offense;
(d) There is evidence of successful
rehabilitation; including but not limited to
the passage of time without recurrence of
criminal activity, remorse or restitution, job
training or higher education, good
employment record, or constructive
community involvement.
Guideline K: Handling Protected
Information
33. The Concern. Deliberate or negligent
failure to comply with rules and regulations
for protecting classified or other sensitive
information raises doubt about an
individual’s trustworthiness, judgment,
reliability, or willingness and ability to
safeguard such information, and is a serious
security concern.
34. Conditions that could raise a security
concern and may be disqualifying include:
(a) Deliberate or negligent disclosure of
classified or other protected information to
unauthorized persons, including but not
limited to personal or business contacts, to
the media, or to persons present at seminars,
meetings, or conferences;
(b) Collecting or storing classified or other
protected information in any unauthorized
location;
(c) Loading, drafting, editing, modifying,
storing, transmitting, or otherwise handling
classified reports, data, or other information
on any unapproved equipment including but
not limited to any typewriter, word
processor, or computer hardware, software,
drive, system, gameboard, handheld, ‘‘palm’’
or pocket device or other adjunct equipment;
(d) Inappropriate efforts to obtain or view
classified or other protected information
outside one’s need to know;
(e) Copying classified or other protected
information in a manner designed to conceal
or remove classification or other document
control markings;
(f) Viewing or downloading information
from a secure system when the information
is beyond the individual’s need to know;
(g) Any failure to comply with rules for the
protection of classified or other sensitive
information;
(h) Negligence or lax security habits that
persist despite counseling by management;
(i) Failure to comply with rules or
regulations that results in damage to the
National Security, regardless of whether it
was deliberate or negligent.
35. Conditions that could mitigate security
concerns include:
(a) So much time has elapsed since the
behavior, or it happened so infrequently or
under such unusual circumstances that it is
unlikely to recur or does not cast doubt on
the individual’s current reliability,
trustworthiness, or good judgment;
(b) The individual responded favorably to
counseling or remedial security training and
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now demonstrates a positive attitude toward
the discharge of security responsibilities;
(c) The security violations were due to
improper or inadequate training.
Guideline L: Outside Activities
36. The Concern. Involvement in certain
types of outside employment or activities is
of security concern if it poses a conflict of
interest with an individual’s security
responsibilities and could create an increased
risk of unauthorized disclosure of classified
information.
37. Conditions that could raise a security
concern and may be disqualifying include:
(a) Any employment or service, whether
compensated or volunteer, with:
(1) The government of a foreign country;
(2) Any foreign national, organization, or
other entity;
(3) A representative of any foreign interest;
(4) Any foreign, domestic, or international
organization or person engaged in analysis,
discussion, or publication of material on
intelligence, defense, foreign affairs, or
protected technology;
(b) Failure to report or fully disclose an
outside activity when this is required.
38. Conditions that could mitigate security
concerns include:
(a) Evaluation of the outside employment
or activity by the appropriate security or
counterintelligence office indicates that it
does not pose a conflict with an individual’s
security responsibilities or with the national
security interests of the United States;
(b) The individual terminates the
employment or discontinued the activity
upon being notified that it was in conflict
with his or her security responsibilities.
Guideline M: Use of Information Technology
Systems
39. The Concern. Noncompliance with
rules, procedures, guidelines or regulations
pertaining to information technology systems
may raise security concerns about an
individual’s reliability and trustworthiness,
calling into question the willingness or
ability to properly protect sensitive systems,
networks, and information. Information
Technology Systems include all related
computer hardware, software, firmware, and
data used for the communication,
transmission, processing, manipulation,
storage, or protection of information.
40. Conditions that could raise a security
concern and may be disqualifying include:
(a) Illegal or unauthorized entry into any
information technology system or component
thereof;
(b) Illegal or unauthorized modification,
destruction, manipulation or denial of access
to information, software, firmware, or
hardware in an information technology
system;
(c) Use of any information technology
system to gain unauthorized access to
another system or to a compartmented area
within the same system;
(d) Downloading, storing, or transmitting
classified information on or to any
unauthorized software, hardware, or
information technology system;
(e) Unauthorized use of a government or
other information technology system;
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(f) Introduction, removal, or duplication of
hardware, firmware, software, or media to or
from any information technology system
without authorization, when prohibited by
rules, procedures, guidelines or regulations.
(g) Negligence or lax security habits in
handling information technology that persist
despite counseling by management;
(h) Any misuse of information technology,
whether deliberate or negligent, that results
in damage to the national security.
41. Conditions that could mitigate security
concerns include:
(a) So much time has elapsed since the
behavior happened, or it happened under
such unusual circumstances, that it is
unlikely to recur or does not cast doubt on
the individual’s reliability, trustworthiness,
or good judgment;
(b) The misuse was minor and done only
in the interest of organizational efficiency
and effectiveness, such as letting another
person use one’s password or computer when
no other timely alternative was readily
available;
(c) The conduct was unintentional or
inadvertent and was followed by a prompt,
good-faith effort to correct the situation and
by notification of supervisor.
[FR Doc. 2016–24469 Filed 10–14–16; 8:45 am]
BILLING CODE 6450–01–P
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 324 and 329
RIN 3064–AE30
Regulatory Capital Rules, Liquidity
Coverage Ratio: Revisions to the
Definition of Qualifying Master Netting
Agreement and Related Definitions
Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
AGENCY:
The FDIC is adopting a final
rule that amends the definition of
‘‘qualifying master netting agreement’’
under the regulatory capital rules and
the liquidity coverage ratio rule. In this
final rule, the FDIC also is amending the
definitions of ‘‘collateral agreement,’’
‘‘eligible margin loan,’’ and ‘‘repo-style
transaction’’ under the regulatory
capital rules. These amendments are
designed to ensure that the regulatory
capital and liquidity treatment of certain
financial contracts generally would not
be affected by implementation of special
resolution regimes in non-U.S.
jurisdictions that are substantially
similar to the U.S. resolution framework
or by changes to the International Swaps
and Derivative Association (ISDA)
Master Agreement that provide for
contractual submission to such regimes.
The Office of the Comptroller of the
Currency (OCC) and the Board of
SUMMARY:
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Federal Register / Vol. 81, No. 200 / Monday, October 17, 2016 / Rules and Regulations
Governors of the Federal Reserve
System (Federal Reserve) issued in
December 2014, a joint interim final rule
that is substantially identical to this
final rule.
DATES: The final rule is effective
October 17, 2016.
FOR FURTHER INFORMATION CONTACT:
Ryan Billingsley, Acting Associate
Director, rbillingsley@fdic.gov;
Benedetto Bosco, Chief, Capital Policy
Section, bbosco@fdic.gov; Eric Schatten,
Capital Markets Policy Analyst, Capital
Markets Strategies, eschatten@fdic.gov,
Capital Markets Branch, Division of Risk
Management Supervision, (202) 898–
6888; or David Wall, Assistant General
Counsel, dwall@fdic.gov; Cristina
Regojo, Counsel; cregojo@fdic.gov;
Michael Phillips, Counsel, mphillips@
fdic.gov, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
jstallworth on DSK7TPTVN1PROD with RULES
I. Summary
The regulatory capital rules of the
Federal Reserve, the OCC, and the FDIC
(collectively, the agencies) permit a
banking organization to measure
exposure from certain types of financial
contracts on a net basis, provided that
the contracts are subject to a ‘‘qualifying
master netting agreement’’ that provides
for certain rights upon a counterparty
default.1 The agencies, by rule, have
defined a qualifying master netting
agreement 2 as a netting agreement that,
among other things, permits a banking
organization to terminate, apply closeout netting, and promptly liquidate or
set-off collateral upon an event of
default of the counterparty (default
rights), thereby reducing its
counterparty exposure and market risks.
On the whole, measuring the amount of
exposure of these contracts on a net
basis, rather than a gross basis, results
in a lower measure of exposure, and
thus, a lower capital requirement, under
the regulatory capital rules. Similarly,
the Liquidity Coverage Ratio (LCR)
Rule 3 allows a banking organization to
1 See 12 CFR part 3 (OCC); 12 CFR part 217
(Federal Reserve); 12 CFR part 324 (FDIC). The term
‘‘banking organization’’ includes national banks,
state member banks, state nonmember banks,
savings associations, and top-tier bank holding
companies domiciled in the United States not
subject to the Federal Reserve’s Small Bank Holding
Company Policy Statement (12 CFR part 225,
appendix C), as well as top-tier savings and loan
holding companies domiciled in the United States,
except for certain savings and loan holding
companies that are substantially engaged in
insurance underwriting or commercial activities.
2 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal
Reserve); 12 CFR 324.2 (FDIC).
3 See 12 CFR part 50 (OCC); 12 CFR part 249
(Federal Reserve); 12 CFR part 329 (FDIC).
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net the inflows and outflows associated
with derivative transactions subject to a
qualifying master netting agreement,
which generally results in a more
accurate measure of cash outflows than
if a banking organization were to
calculate its derivatives inflows and
outflows on a gross basis.
The agencies’ current definition of
‘‘qualifying master netting agreement’’
recognizes that default rights may be
stayed if the financial company is in
receivership, conservatorship, or
resolution under Title II of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),4 or
under the Federal Deposit Insurance Act
(FDI Act).5 Accordingly, transactions
conducted under netting agreements
where default rights may be stayed
under Title II of the Dodd-Frank Act or
the FDI Act may qualify for the
favorable capital treatment described
above. However, the FDIC’s current
definition of ‘‘qualifying master netting
agreement’’ does not recognize that
default rights may be stayed where a
master netting agreement is subject to
limited stays under non-U.S. special
resolution regimes or where
counterparties agree through contract
that a special resolution regime would
apply. When the FDIC adopted the
current definition of ‘‘qualifying master
netting agreement,’’ no other
jurisdiction had adopted a special
resolution regime, and no banking
organizations had communicated to the
FDIC an intent to enter into contractual
amendments to clarify that bilateral
over-the-counter (OTC) derivatives
transactions are subject to certain
provisions of certain U.S. and foreign
special resolution regimes.
Regarding non-U.S. special resolution
regimes that provide a limited stay of
termination rights and other remedies in
financial contracts, in 2014, the
European Union (EU) finalized the Bank
Recovery and Resolution Directive
(BRRD), which prescribes aspects of a
special resolution regime that EU
member nations should implement. For
the BRRD to be fully implemented, each
member nation of the EU must
transpose the BRRD requirements into
local law. The implementation of the
4 See
12 U.S.C. 5390(c)(8)–(16).
12 U.S.C. 1821(e)(8)–(13). The definition
would also recognize that default rights may be
stayed under any similar insolvency law applicable
to government sponsored enterprises (GSEs).
Generally under the agencies’ regulatory capital
rules, government-sponsored enterprise means an
entity established or chartered by the U.S.
government to serve public purposes specified by
the U.S. Congress but whose debt obligations are
not explicitly guaranteed by the full faith and credit
of the U.S. government. See 12 CFR 3.2 (OCC); 12
CFR 217.2 (Federal Reserve); 12 CFR 324.2 (FDIC).
5 See
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71349
BRRD by EU member nations was
permitted as early as January 1, 2015,
and the transposition process is largely
complete.
Regarding contractual amendments
between counterparties to OTC
derivatives, various U.S. banking
organizations have adhered to the 2015
Universal ISDA Resolution Stay
Protocol (ISDA Protocol),6 which is a
multilateral amendment mechanism
that provides for cross-border
application of temporary stays under
special resolution regimes (including
Title II of the Dodd-Frank Act and the
FDI Act). The ISDA Protocol would
apply the provisions of Title II of the
Dodd-Frank Act or the FDI Act, as
appropriate, concerning stays of
termination rights and other remedies in
qualified financial contracts entered
into by U.S. financial companies,
including insured banks, if
counterparties to such transactions are
not subject to U.S. law. It would also
apply similar provisions of the laws and
regulations of certain EU member
countries that have implemented the
BRRD to counterparties of financial
companies in those countries. Thus, the
ISDA Protocol would limit the rights of
counterparties to exercise termination
rights and other remedies in financial
contracts to the same extent that those
rights would be limited under the
sovereign resolution regime applicable
to their counterparties or, in certain
circumstances, their counterparties’
affiliates.
In addition, the ISDA Protocol
provides for limited stays of termination
rights and other remedies for crossdefaults resulting from affiliate
insolvency proceedings under a limited
number of U.S. insolvency regimes.
ISDA Master Agreements 7 and
securities financing transactions
(documented under industry standard
documentation for such transactions) 8
6 See ISDA Protocol at https://assets.isda.org/
media/f253b540-25/958e4aed.pdf/.
7 The ISDA Master Agreement is a form of
agreement that governs OTC derivatives
transactions and is used by a significant portion of
the parties to bilateral OTC derivatives transactions,
including large, internationally active banking
organizations. Furthermore, the ISDA Master
Agreement generally creates a single legal
obligation that provides for the netting of all
individual transactions covered by the agreement.
8 The ISDA Protocol is an expansion of the ISDA
2014 Resolution Stay Protocol and covers securities
financing transactions in addition to over-thecounter derivatives documented under ISDA Master
Agreements. As between adhering parties, the ISDA
Protocol replaces the ISDA 2014 Resolution Stay
Protocol (which does not cover securities financing
transactions). Securities financing transactions
(which generally include repurchase agreements
and securities lending transactions) are documented
under non-ISDA master agreements. The ISDA
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between counterparties that adhere to
the ISDA Protocol are automatically
amended to stay certain default rights
and other remedies provided under the
agreement. The effective date of certain
provisions of the ISDA Protocol was
January 1, 2016.
A master netting agreement under
which default rights may be stayed
under the BRRD or that incorporates the
ISDA Protocol would no longer qualify
as a qualifying master netting agreement
under the FDIC’s current regulatory
capital and liquidity rules. This would
result in considerably higher capital and
liquidity requirements.
The FDIC issued in the Federal
Register of January 30, 2015, proposed
amendments to the definition of
qualifying master netting agreement in
the regulatory capital and liquidity rules
and certain related definitions in the
regulatory capital rules (January 2015
NPR).9 This final rule adopts those
revised definitions in the proposed rule
issued in the January 2015 NPR, as
amended to better conform with the
interim final rule jointly issued by the
Federal Reserve and the OCC in
December 2014.10
Under this final rule, the FDIC
permits an otherwise qualifying master
netting agreement to qualify for favored
netting treatment under the FDIC’s
regulatory capital and liquidity rules if
(i) default rights under the agreement
may be stayed under a qualifying nonU.S. special resolution regime or (ii) the
agreement incorporates a qualifying
special resolution regime by contract.
Through these revisions, the final rule
maintains the existing treatment for
these contracts for purposes of the
regulatory capital and liquidity rules,
while recognizing the recent changes
instituted by the BRRD and the ISDA
Protocol.
The final rule also revises certain
other definitions of the regulatory
capital rules to make various
conforming changes designed to ensure
that a banking organization may
continue to recognize the risk mitigating
effects of financial collateral 11 received
Protocol addresses financial contracts under these
master agreements in the ‘‘Securities Financing
Transaction Annex.’’
9 80 FR 5063 (January 30, 2015).
10 79 FR 78287 (December 30, 2014).
11 Generally, under the agencies’ regulatory
capital rules, financial collateral means collateral in
the form of: (i) Cash on deposit with the banking
organization (including cash held for the banking
organization by a third-party custodian or trustee);
(ii) gold bullion; (iii) long-term debt securities that
are not resecuritization exposures and that are
investment grade; (iv) short-term debt instruments
that are not resecuritization exposures and that are
investment grade; (v) equity securities that are
publicly traded; (vi) convertible bonds that are
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in a secured lending transaction, repostyle transaction, or eligible margin loan
for purposes of the regulatory capital
and liquidity rules. Specifically, the
final rule revises the definition of
‘‘collateral agreement,’’ ‘‘eligible margin
loan,’’ 12 and repo-style transaction’’ 13
to provide that a counterparty’s default
rights may be stayed under a non-U.S.
special resolution regime or, if
applicable, that are made subject to a
special resolution regime by contract.14
II. Background
A. U.S. Resolution Regime
It is common market practice for
bilateral derivatives and certain other
types of financial contracts entered into
by large banking organizations to permit
a non-defaulting counterparty to
exercise early termination rights and
other contractual remedies upon a
counterparty (or a related entity)
experiencing an event of default. These
contractual provisions are generally
recognized as a credit risk mitigant
publicly traded; or (vii) money market fund shares
and other mutual fund shares if a price for the
shares is publicly quoted daily. In addition, the
regulatory capital rules also require that the banking
organization have a perfected, first-priority security
interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on
deposit and notwithstanding the prior security
interest of any custodial agent). See 12 CFR 3.2
(OCC); 12 CFR 217.2 (Federal Reserve); 12 CFR
324.2 (FDIC).
12 Generally under the agencies’ regulatory capital
rules, eligible margin loan means an extension of
credit where: (i) The extension of credit is
collateralized exclusively by liquid and readily
marketable debt or equity securities, or gold; (ii) the
collateral is marked-to-fair value daily, and the
transaction is subject to daily margin maintenance
requirements; and (iii) the extension of credit is
conducted under an agreement that provides the
banking organization with default rights, provided
that any exercise of rights under the agreement will
not be stayed or avoided under applicable law in
the relevant jurisdictions, other than in
receivership, conservatorship, resolution under the
Federal Deposit Insurance Act, Title II of the DoddFrank Act, or under any similar insolvency law
applicable to GSEs. In addition, in order to
recognize an exposure as an eligible margin loan a
banking organization must comply with the
requirements of section 3(b) of the regulatory
capital rules with respect to that exposure.
13 Generally, under the agencies’ regulatory
capital rules, repo-style transaction means a
repurchase or reverse repurchase transaction, or a
securities borrowing or securities lending
transaction, including a transaction in which the
banking organization acts as agent for a customer
and indemnifies the customer against loss, provided
that: (1) The transaction is based solely on liquid
and readily marketable securities, cash, or gold; (2)
the transaction is marked-to-fair value daily and
subject to daily margin maintenance requirements;
(3) the transaction provides certain default rights.
In addition, in order to recognize an exposure as a
repo-style transaction for purposes of this subpart,
a banking organization must comply with the
requirements of section 3(b) of the regulatory
capital rules. See 12 CFR 3.2 (OCC); 12 CFR 217.2
(Federal Reserve); 12 CFR 324.2 (FDIC).
14 See 12 CFR part 32.
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because the provisions allow a nondefaulting party the uninterrupted right
to close-out, net, and liquidate any
collateral securing its claim under the
contract upon a counterparty’s default.
However, as the failure of Lehman
Brothers demonstrated, the
uninterrupted exercise of such rights by
counterparties of a globally active
financial company with a significant
derivatives portfolio could impede the
orderly resolution of the financial
company and pose risks to financial
stability. The United States has enacted
laws that impose a limited stay on the
exercise of early termination rights and
other remedies with regard to qualified
financial contracts (such as OTC
derivatives, securities financing
transactions, and margin loans) with
insured depository institutions in
resolution under the FDI Act and, in
2010, with financial companies in
resolution under Title II of the DoddFrank Act.
B. Foreign Special Resolution
Procedures and the ISDA Protocol
In recognition of the issues faced in
the financial crisis concerning
resolution of globally-active financial
companies, the EU issued the BRRD on
April 15, 2014, which requires EU
member states to implement a
resolution mechanism by December 31,
2014, in order to increase the likelihood
for successful national or cross-border
resolutions of a financial company
organized in the EU.15 The BRRD
contains special resolution powers,
including a limited stay on certain
financial contracts that is similar to the
stays provided under Title II of the
Dodd-Frank Act and the FDI Act.
Therefore, the operations of U.S.
banking organizations located in
jurisdictions that have implemented the
BRRD could become subject to an
orderly resolution under the BRRD,
including the application of a limited
statutory stay of a counterparty’s right to
exercise early termination rights and
other remedies with respect to certain
financial contracts. The BRRD is
generally designed to be consistent with
the Key Attributes of Effective
Resolution Regimes for Financial
Institutions (Key Attributes),16 which
were published by the Financial
15 On January 1, 2015, most of the provisions of
the BRRD were in effect in a number of the EU
member states.
16 The Key Attributes area available at
www.financialstabilityboard.org/publications/r_
111104cc.pdf. See specifically Key Attributes 4.1–
4.4 regarding set-off, netting, collateralization and
segregation of client assets and Appendix I Annex
5 regarding temporary stays on early termination
rights.
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Stability Board (FSB) 17 of the G–20 18
member nations in October 2011, and is
designed to increase the likelihood for
successful national or cross-border
resolutions of a financial company
organized in the EU.
ISDA launched the ISDA Protocol on
November 12, 2015, which provides a
mechanism for parties to transactions
under ISDA Master Agreements (and
securities financing transactions
documented under industry standard
documentation for such transactions) to
amend those agreements to stay certain
early termination rights and other
remedies provided under the agreement.
As of July 14, 2016, 217 parties,
including several of the largest U.S.
banking organizations,19 have adhered
to the ISDA Protocol and have thereby
modified their ISDA Master
Agreements. Like other qualified
financial contracts, OTC derivatives
transactions executed under standard
ISDA Master Agreements allow a party
to terminate the agreement immediately
upon an event of default of its
counterparty, including if its
counterparty (or a related entity) 20
enters insolvency or similar
proceedings.
17 The FSB is an international body that monitors
and makes recommendations about the global
financial system. The FSB coordinates the
regulatory, supervisory, and other financial sector
policies of national financial authorities and
international standard-setting bodies.
18 The G–20 membership comprises a mix of the
world’s largest advanced and emerging economies.
The G–20 members are Argentina, Australia, Brazil,
Canada, China, France, Germany, India, Indonesia,
Italy, Japan, Republic of Korea, Mexico, Russia,
Saudi Arabia, South Africa, Turkey, the United
Kingdom, the United States, and the European
Union. Following the most recent financial crisis,
leaders of the G–20 member nations recognized that
the orderly cross-border resolution of a globally
active financial company requires all countries to
have effective national resolution regimes to resolve
failing financial companies in an orderly manner
and that national resolution regimes should be
consistent with one another. Subjecting the same
financial company to conflicting legal rules,
procedures, and mechanisms across jurisdictions
can create uncertainty, instability, possible systemic
contagion, and higher costs of resolution. The Key
Attributes were adopted by the G–20 leaders and
are now international-agreed-upon standards that
set forth the responsibilities and powers that
national resolution regimes should have to resolve
a failing systemically important financial
institution.
19 The U.S. banking organizations that have
adhered to the ISDA Protocol include Bank of
America Corporation, The Bank of New York
Mellon, Citigroup Inc., The Goldman Sachs Group,
Inc., JPMorgan Chase & Co., Wells Fargo & Co.,
Morgan Stanley, and certain subsidiaries thereof.
See current list of adhering parties to the ISDA
Protocol at https://www2.isda.org/functional-areas/
protocol-management/protocol-data-csv/22.
20 Under the ISDA Protocol, a related entity is
defined to include (i) each parent or (ii) an affiliate
that is (a) a creditor support provider or (b) a
specified entity.
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The contractual amendments
effectuated pursuant to the ISDA
Protocol would apply the provisions of
Title II of the Dodd-Frank Act and the
FDI Act concerning limited stays of
termination rights and other remedies in
qualified financial contracts to ISDA
Master Agreements between adhering
counterparties, including adhering
counterparties that are not otherwise
subject to U.S. law. The amendments
also would apply substantially similar
provisions of certain non-U.S. laws, to
ISDA Master Agreements between
adhering counterparties that are not
otherwise subject to such laws.21 Thus,
the contractual amendments effectuated
pursuant to the ISDA Protocol would
permit a party that has agreed to adhere
to the ISDA Protocol to exercise early
termination rights and other remedies
only to the extent that it would be
entitled to do so under the special
resolution regime applicable to its
adhering counterparties (or related
entities, as applicable).22
C. Description of Relevant Provisions of
the Regulatory Capital and the Liquidity
Coverage Ratio Rules
As noted above, the agencies’
regulatory capital rules permit a banking
organization to measure exposure from
certain types of financial contracts on a
net basis, provided that the contracts are
subject to a qualifying master netting
agreement or other agreement that
contains specific provisions.
Specifically, under the current
regulatory capital rules, a banking
organization with multiple OTC
derivatives that are subject to a
qualifying master netting agreement
would be able to calculate a net
exposure amount by netting the sum of
all positive and negative fair values of
the individual OTC derivative contracts
subject to the qualifying master netting
agreement and calculating a riskweighted asset amount based on the net
exposure amount. For purposes of the
current supplementary leverage ratio (as
applied only to advanced approaches
banking organizations), a banking
organization that has one or more OTC
derivatives with the same counterparty
21 The provisions of the ISDA Protocol relating to
the special resolution regimes in these jurisdictions
became effective on January 1, 2016, for ISDA
Master Agreements between the adherents. The
ISDA Protocol also provides a mechanism for
adhering parties to opt-in to special resolution
regimes in other FSB member jurisdictions so long
as the regimes meet conditions specified in the
ISDA Protocol relating to creditor safeguards, which
are consistent with the Key Attributes.
22 Parties adhering to the ISDA Protocol initially
were contractually subject to the statutory special
resolution regimes of France, Germany, Japan,
Switzerland, the United Kingdom and the United
States.
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71351
that are subject to a qualifying master
netting agreement would be permitted
to not include in total leverage exposure
cash variation margin received from
such counterparty that has offset the
mark-to-fair value of the derivative
asset, or cash collateral that is posted to
such counterparty that has reduced the
banking organization’s on-balance sheet
assets.23
In addition, for risk-based capital
purposes, a banking organization with a
securities financing transaction that
meets the definition of a repo-style
transaction with financial collateral, a
margin loan that meets the definition of
an eligible margin loan with financial
collateral, or an OTC derivative contract
collateralized with financial collateral
may determine a net exposure amount
to its counterparty according to section
37 or section 132 of the regulatory
capital rules. A banking organization
with multiple repo-style transactions or
eligible margin loans with a
counterparty that are subject to a
qualifying master netting agreement
may net the exposure amounts of the
individual transactions under that
agreement. In addition, for purposes of
the supplementary leverage ratio, an
advanced approaches banking
organization with multiple repo-style
transactions with the same counterparty
that are subject to a qualifying master
netting agreement would be permitted
to net for purposes of calculating the
counterparty credit risk component of
its total leverage exposure. In general,
recognition of netting results in a lower
23 Under the agencies’ regulatory capital rules, the
general framework consists of two approaches: (1)
The standardized approach, which, beginning on
January 1, 2015, applies to all banking organizations
regardless of total asset size, and (2) the advanced
approaches, which currently apply to large
internationally active banking organizations
(defined as those banking organizations with $250
billion or more in total consolidated assets or $10
billion or more in total on-balance sheet foreign
exposure, depository institution subsidiaries of
those banking organizations that use the advanced
approaches rule, and banking organizations that
elect to use the advanced approaches). As a general
matter, the standardized approach sets forth
standardized risk weights for different asset types
for regulatory capital calculations, whereas, for
certain assets, the advanced approaches make use
of risk assessments provided by banking
organizations’ internal systems as inputs for
regulatory capital calculations. Consistent with
section 171 of the Dodd-Frank Act (codified at 12
U.S.C. 5371), a banking organization that is required
to calculate its risk-based capital requirements
under the advanced approaches (i.e., an advanced
approaches banking organization) also must
determine its risk-based capital requirements under
the generally applicable risk-based capital rules,
which is the standardized approach as of January
1, 2015). The lower—or more binding—ratio for
each risk-based capital requirement is the ratio that
the advanced approaches banking organization
must use to determine its compliance with
minimum regulatory capital requirements.
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measure of risk-weighted assets and
total leverage exposure than if a banking
organization were to calculate its OTC
derivatives, repo-style transactions, and
eligible margin loans on a gross basis.
The agencies also use the concept of
a qualifying master netting agreement in
the LCR rule.24 The LCR rule requires a
banking organization to maintain an
amount of high-quality liquid assets (the
numerator) to match at least 100 percent
of its total net cash outflows over a
prospective 30 calendar-day period (the
denominator). For derivative
transactions subject to a qualifying
master netting agreement, a banking
organization would be able to calculate
the net derivative outflow or inflow
amount by netting the contractual
payments and collateral that it would
provide to, or receive from, the
counterparty over a prospective 30
calendar-day period.25 If the derivative
transactions are not subject to a
qualifying master netting agreement,
then the derivative cash outflows for
that counterparty would be included in
the net derivative cash outflow amount
and the derivative cash inflows for that
counterparty would be included in the
net derivative cash inflow amount,
without any netting and subject to the
LCR rule’s cap on total inflows.
Recognition of netting generally results
in a more accurate measure of outflows
than if a banking organization were to
calculate its inflows and outflows on its
derivatives transactions on a gross basis.
jstallworth on DSK7TPTVN1PROD with RULES
III. The Final Rule
The final rule amends the definitions
of ‘‘collateral agreement, ‘‘eligible
margin loan,’’ ‘‘qualifying master netting
agreement,’’ and ‘‘repo-style
transaction’’ in the FDIC’s regulatory
capital rules and ‘‘qualifying master
netting agreement’’ in the FDIC’s LCR
rules to ensure that the regulatory
capital and liquidity treatment of OTC
derivatives, repo-style transactions,
eligible margin loans, and other
collateralized transactions would be
unaffected by the adoption of various
foreign special resolution regimes and
the ISDA Protocol. In particular, the
final rule amends these definitions to
provide that a relevant netting
agreement or collateral agreement may
provide for a limited stay or avoidance
of rights where the agreement is subject
24 The agencies’ LCR rule may be found at 12 CFR
part 50 (OCC); 12 CFR part 249 (Federal Reserve);
and 12 CFR part 329 (FDIC).
25 The LCR rule provides that foreign currency
transactions that meet certain criteria can be netted
regardless of whether those transactions are covered
by a qualified master netting agreement. See 12 CFR
50.32(c)(2) (OCC); 12 CFR 249.32(c)(2) (Federal
Reserve); 12 CFR 329.32(c)(2) (FDIC).
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by its terms to, or incorporates, certain
resolution regimes applicable to
financial companies, including Title II
of the Dodd-Frank Act, the FDI Act, or
any similar foreign resolution regime
that are jointly determined by the
agencies to be substantially similar to
Title II of the Dodd-Frank Act or the FDI
Act.
In determining whether the laws of
foreign jurisdictions are ‘‘similar’’ to the
FDI Act and Title II of the Dodd-Frank
Act, the FDIC, jointly with the OCC and
FRB, intends to consider all aspects of
U.S. law, including all aspects of stays
provided thereunder.26 Relevant factors
include, for instance, creditor
safeguards or protections provided
under a foreign resolution regime as
well as the length of stay.27
This final rule allows for the
continuation of the existing netting
treatment for these contracts for
purposes of the regulatory capital and
liquidity rules. Implementation of
consistent, national resolution regimes
on a global basis furthers the orderly
resolution of internationally active
financial companies, and enhances
financial stability. In addition, the
development of the ISDA Protocol
furthers the principles of Title II of the
Dodd-Frank Act and the FDI Act (in
instances where a counterparty is a U.S.
entity or its subsidiary) to
counterparties who are not otherwise
subject to U.S. law.
In addition to giving contractual effect
to limited stays of termination rights
under special resolution regimes on a
cross-border basis, the ISDA Protocol
also provides for limited stay of
termination rights for cross-defaults
resulting from affiliate insolvency
proceedings under a limited number of
U.S. general insolvency regimes,
including the U.S. bankruptcy code.
This provision takes effect upon the
effective date of implementing
26 See 12 U.S.C. 1821(e)(8)–(13) and 5390(c)(8)–
(16). As noted above, the ISDA Protocol covers only
resolution regimes that are considered to be
consistent with the principles of the Key Attributes.
Therefore, it is also expected that any limited
statutory stay under foreign law determined for
purposes of this final rule to be similar to the FDI
Act and Title II of the Dodd-Frank Act would also
be consistent with the relevant principles of the Key
Attributes.
27 Under Title II of the Dodd-Frank Act,
counterparties are stayed until 5:00 p.m. on the
business day following the date of appointment of
a receiver from exercising termination, liquidation,
or netting rights under the qualified financial
contract. 12 U.S.C. 5390(c)(10)(B)(i)(I). If the
qualified financial contracts are transferred to a
solvent third party before the stay expires, the
counterparty is permanently enjoined from
exercising such rights based upon the appointment
of the receiver, but is not stayed from exercising
such rights based upon other events of default. See
12 U.S.C. 5390(c)(10)(B)(i)(II).
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regulations in the United States. To the
extent the agencies implement
regulations to give effect to these
provisions of the ISDA Protocol, the
FDIC will consider further amending the
definition of ‘‘qualifying master netting
agreement’’ in the regulatory capital and
liquidity rules and the definition of
‘‘collateral agreement’’, ‘‘repo-style
transaction’’ and ‘‘eligible margin loan’’
in the regulatory capital rules.
The qualified master netting
agreement definition in the FDIC’s
capital and liquidity rules also relates to
the eligible master netting agreement
definition in the swap margin rules
issued by the adopting agencies in
November 2015.28 The swap margin
rule establishes margin requirements for
non-cleared swaps entered into by an
entity supervised by one of the adopting
agencies that is also registered with the
Commodity Futures Trading
Commission or the Securities and
Exchange Commission as a dealer or
major participants in non-cleared swaps
(such entities are referred to in the swap
margin rule as ‘‘covered swap entities.’’)
The swap margin rule allows a covered
swap entity to net variation margin and
initial margin requirements for noncleared swaps subject to the rule when
such swaps are subject to an ‘‘eligible
master netting agreement’’ between the
covered swap entity and its
counterparty.
The swap margin rule’s definition of
‘‘eligible master netting agreement’’ is
substantively the same as the definition
of ‘‘qualified master netting agreement’’
as amended by this final rule.
IV. Summary of Comments on the
January 2015 NPR
The FDIC received three comments on
the January 2015 NPR. One comment
was generally supportive of the
proposed rule in the January 2015 NPR
as a necessary technical amendment
that would promote the objective of
establishing effective resolution regimes
for globally active financial companies.
That commenter also recommended that
the FDIC revisit in the near term the
broader policy questions surrounding
the impact of close-out netting on
systemic risk mitigation, and evaluate
how well the regulatory capital and
liquidity coverage ratio rules reflect the
risks associated with netted financial
contracts.29
Two of the commenters 30 noted the
absence of reference to any stays
authorized by state insurance law in the
28 See
80 FR 74840 (November 30, 2015).
Risk Council.
30 American Council of Life Insurers;
Northwestern Mutual.
29 Systemic
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consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations. In addition,
new regulations that impose additional
reporting, disclosures, or other new
requirements on an insured depository
institution 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.
The FDIC has determined that this final
rule does not impose any additional
reporting, disclosure, or other new
requirements on insured depository
institutions and thus section 302 of
RCDRIA does not apply.
The Administrative Procedure Act
(‘‘APA’’) requires that a final rule be
published in the Federal Register no
less than 30 days before its effective
date unless good cause is found and
published with the final rule.33 The
FDIC finds good cause for the final rule
to take effect on the date it is published
in the Federal Register. Having the final
rule take effect on the date of
publication in the Federal Register will
allow affected FDIC-supervised
institutions to use the definition of
qualified master netting agreement as
amended by the final rule when they
file their respective Call Report for the
third quarter period ending on
September 30, 2016.
V. Effective Date
This final rule is effective upon
publication in the Federal Register. The
final rule imposes no new requirements,
and will benefit FDIC-supervised
institutions that adhere to the ISDA
Protocol by allowing for the
continuation of the existing netting
treatment for certain financial contracts
for purposes of the regulatory capital
and liquidity rules.
Section 302 of the Riegle Community
Development and Regulatory
Improvement Act 32 (RCDRIA) generally
requires that each Federal banking
agency, in determining the effective date
and administrative compliance
requirements for new regulations that
impose additional reporting, disclosure,
or other requirements on insured
depository institutions, consider,
jstallworth on DSK7TPTVN1PROD with RULES
proposed definition of ‘‘qualifying
master netting agreement.’’ Some States
may be considering amending laws
applicable to the conservation,
rehabilitation, liquidation and
insolvency of insurance companies to
provide authority for close-outs of
derivative and similar financial
contracts to be stayed for twenty-four
hours, similar to stays under the FDI Act
and the Dodd-Frank Act. The
commenters maintained that failure to
include stays under state insurance
resolution proceedings within the
definition of ‘‘qualifying master netting
agreement’’ might adversely affect
derivative and similar financial
transactions between state-regulated
insurance companies and their
counterparties, including FDICsupervised institutions. As such stays
may be analogous to similar stays under
the other resolution authorities
referenced in the rule’s definition, the
commenters recommend that state law
should also be referenced.
The narrow purpose of amending the
definition of ‘‘qualifying master netting
agreement’’ in the proposed rule and
this final rule is to maintain the
regulatory capital and liquidity
treatment of certain financial contracts
as unaffected by the ISDA Master
Agreement and stays by non-U.S.
resolution authorities. The FDIC has
considered the comments for purposes
of the final rule, and has determined
that the commenters raise an issue that
is beyond that limited purpose.31
VI. Expected Effects
The final rule is intended to prevent
any change in the treatment of QFCs
under capital and liquidity rules that
may result from the establishment of
non-U.S. special resolution regimes or
by contract. As stated above, the final
rule maintains the existing treatment for
these contracts for purposes of the
regulatory capital and liquidity rules,
while recognizing the recent changes
instituted by the BRRD and the ISDA
Protocol. Implementation of consistent,
national resolution regimes on a global
basis furthers the orderly resolution of
internationally active financial
companies, and enhances financial
stability. In addition, the development
of the ISDA Protocol furthers the
principles of Title II of the Dodd-Frank
Act and the FDI Act (in instances where
a counterparty is a U.S. entity or its
subsidiary) to counterparties who are
not otherwise subject to U.S. law.
This final rule will benefit FDICsupervised institutions that adhere to
the ISDA Protocol by allowing for the
31 Although the issue is currently outside the
scope of this rulemaking, staff may consider the
treatment of derivatives and other similar financial
contracts subject to stays in state insurance
resolution proceedings in the context of further
rulemaking, in consultation with the other agencies
and with State insurance regulatory authorities.
32 12 U.S.C. 4802.
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33 See
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71353
continuation of the existing netting
treatment for these contracts for
purposes of the regulatory capital and
liquidity rules. Absent the final rule,
such FDIC-supervised institutions
would be unable to include a master
netting agreement under which default
rights may be stayed under the BRRD or
that incorporates the ISDA Protocol as a
qualifying master netting agreement
under the FDIC’s current regulatory
capital and liquidity regulations, and
would be required to hold more capital
and liquid assets as a result.
The final rule may result in
administrative costs associated with
changing the legal language that govern
QFCs for a small number of entities.
These costs are likely to be very small
relative to the increase in capital and
liquidity requirements likely to result if
capital and liquidity requirements for
QFCs had to be calculated on a gross
basis. Any administrative costs
associated with the proposed rule are
likely to be very low given that similar
legal structures already exist in the
ISDA Protocol. The FDIC estimates that
six FDIC-supervised institutions will be
directly affected by this rule. Therefore,
any administrative costs for FDICsupervised institutions is likely to be
low and the volume of costs for all
FDIC-supervised institutions is likely to
have no significant impact on financial
institutions or the economy.
VII. Regulatory Analysis
A. Small Business Regulatory
Enforcement Fairness Act
The Office of Management and Budget
has determined that the final rule is not
a ‘‘major rule’’ within the meaning of
the Small Business Regulatory
Enforcement Fairness Act of 1996 (Title
II, Pub. L. 104–121).
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA), requires an
agency, in connection with a final rule,
to prepare an Initial Regulatory
Flexibility Act analysis describing the
impact of the final rule on small entities
(defined by the Small Business
Administration for purposes of the RFA
to include banking entities with total
assets of $550 million or less) or to
certify that the final rule would not have
a significant economic impact on a
substantial number of small entities.
The FDIC believes that the final rule
would not have a significant economic
impact on a substantial number of small
entities.
Under regulations issued by the Small
Business Administration, a small entity
includes a depository institution, bank
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holding company, or savings and loan
holding company with total assets of
$550 million or less (a small banking
organization).34 As of March 31, 2016,
there were approximately 2,942 small
state nonmember banks and 275 small
state savings associations under the
FDIC’s supervisory jurisdiction.
The final rule is expected only to
apply to banking organizations that
adhere to the ISDA Protocol or engage
in a substantial amount of cross-border
derivatives transactions. Small entities
generally would not fall into this
category. Accordingly, the FDIC believes
that this final rule would not have a
significant economic impact on small
banking organizations supervised by the
FDIC and therefore believes that there
are no significant alternatives to the
issuance of this final rule that would
reduce the economic impact on small
banking organizations supervised by the
FDIC. Pursuant to section 605(b) of the
RFA, the FDIC certifies that the Final
Rule will not have a significant
economic impact on a substantial
number of small entities.
C. Paperwork Reduction Act
In accordance with the requirements
of the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3521) (PRA), the FDIC
may not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (‘‘OMB’’)
control number. The FDIC has reviewed
this final rule and determined that it
does not create any new, or revise any
existing, collection of information
pursuant to the PRA. Consequently, no
information has been submitted to the
Office on Management and Budget for
review.
jstallworth on DSK7TPTVN1PROD with RULES
D. The Treasury and General
Government Appropriations Act, 1999—
Assessment of Federal Regulations and
Policies on Families
The FDIC has determined that the
final rule will not affect family wellbeing within the meaning of section 654
of the Treasury and General
Government Appropriations Act,
enacted as part of the Omnibus
Consolidated and Emergency
Supplemental Appropriations Act of
1999 (Pub. L. 105–277, 112 Stat. 2681).
34 See 13 CFR 121.201. Effective July 14, 2014, the
Small Business Administration revised the size
standards for banking organizations to $550 million
in assets from $500 million in assets. 79 FR 33647
(June 12, 2014).
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E. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, 113
Stat. 1338, 1471 (Nov. 12, 1999),
requires the Federal banking agencies to
use plain language in all proposed and
final rules published after January 1,
2000. The FDIC invited comments on
how to make this rule easier to
understand. No comments addressing
this issue were received.
List of Subjects
12 CFR Part 329
Administrative practice and
procedure; Banks, banking; Federal
Deposit Insurance Corporation, FDIC;
Liquidity; Reporting and recordkeeping
requirements.
For the reasons set forth in the
supplementary information, the Federal
Deposit Insurance Corporation amends
12 CFR Chapter III, parts 324 and 329
to read as follows:
PART 324—CAPITAL ADEQUACY OF
FDIC-SUPERVISED INSTITUTIONS
1. The authority citation for part 324
continues to read as follows:
■
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 1831o, 1835, 3907, 3909,
4808; 5371; 5412; Pub. L. 102–233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub.
L. 102–242, 105 Stat. 2236, 2355, as amended
by Pub. L. 103–325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.
2236, 2386, as amended by Pub. L. 102–550,
106 Stat. 3672, 4089 (12 U.S.C. 1828 note);
Pub. L. 111–203, 124 Stat. 1376, 1887 (15
U.S.C. 78o–7 note).
[Amended]
2. In § 324.210, redesignate footnote
29 as footnote 33.
■
[Amended]
3. In § 324.202, redesignate footnotes
27 and 28 as footnotes 31 and 32.
■
§ 324.134
[Amended]
4. In § 324.134, redesignate footnote
26 as footnote 30.
■
§ 324.101
[Amended]
5. In § 324.101, redesignate footnote
25 as footnote 29.
■
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6. In § 324.22, redesignate footnotes
18 through 24 as footnotes 22 through
28.
§ 324.20
[Amended]
7. In § 324.20, redesignate footnotes 8
through 17 as footnotes 12 through 21.
■
§ 324.11
[Amended]
8. In § 324.11, redesignate footnote 7
as footnote 11.
■
[Amended]
9. In § 324.4, redesignate footnote 6 as
footnote 10.
■
Administrative practice and
procedure; Banks, banking; Capital
adequacy; Reporting and recordkeeping
requirements; Savings associations;
State non-member banks.
§ 324.202
[Amended]
■
§ 324.4
12 CFR Part 324
§ 324.210
§ 324.22
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10. Section 324.2 is amended by
redesignating footnote 5 as footnote 9,
and by revising the definitions of
‘‘Collateral agreement, ’’ ‘‘Eligible
margin loan’’, ‘‘Qualifying master
netting agreement’’, and ‘‘Repo-style
transaction’’ to read as follows:
■
§ 324.2
Definitions.
*
*
*
*
*
Collateral agreement means a legal
contract that specifies the time when,
and circumstances under which, a
counterparty is required to pledge
collateral to an FDIC-supervised
institution for a single financial contract
or for all financial contracts in a netting
set and confers upon the FDICsupervised institution a perfected, firstpriority security interest
(notwithstanding the prior security
interest of any custodial agent), or the
legal equivalent thereof, in the collateral
posted by the counterparty under the
agreement. This security interest must
provide the FDIC-supervised institution
with a right to close out the financial
positions and liquidate the collateral
upon an event of default of, or failure
to perform by, the counterparty under
the collateral agreement. A contract
would not satisfy this requirement if the
FDIC-supervised institution’s exercise of
rights under the agreement may be
stayed or avoided under applicable law
in the relevant jurisdictions, other than:
(1) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 4 to the U.S. laws
referenced in this paragraph (1) in order
to facilitate the orderly resolution of the
defaulting counterparty; or
4 The FDIC expects to evaluate jointly with the
Federal Reserve and the OCC whether foreign
special resolution regimes meet the requirements of
this paragraph.
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(2) Where the agreement is subject by
its terms to any of the laws referenced
in paragraph (1) of this definition.
*
*
*
*
*
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is
collateralized exclusively by liquid and
readily marketable debt or equity
securities, or gold;
(ii) The collateral is marked to fair
value daily, and the transaction is
subject to daily margin maintenance
requirements; and
(iii) The extension of credit is
conducted under an agreement that
provides the FDIC-supervised
institution the right to accelerate and
terminate the extension of credit and to
liquidate or set-off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation,
conservatorship, or similar proceeding,
of the counterparty, provided that, in
any such case, any exercise of rights
under the agreement will not be stayed
or avoided under applicable law in the
relevant jurisdictions, other than in
receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs,5 or
laws of foreign jurisdictions that are
substantially similar 6 to the U.S. laws
referenced in this paragraph in order to
facilitate the orderly resolution of the
defaulting counterparty.
(2) In order to recognize an exposure
as an eligible margin loan for purposes
of this subpart, an FDIC-supervised
institution must comply with the
requirements of § 324.3(b) with respect
to that exposure.
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
5 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act, or netting
contracts between or among financial institutions
under sections 401–407 of the Federal Deposit
Insurance Corporation Improvement Act or the
Federal Reserve Board’s Regulation EE (12 CFR part
231).
6 The FDIC expects to evaluate jointly with the
Federal Reserve and the OCC whether foreign
special resolution regimes meet the requirements of
this paragraph.
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receivership, insolvency,
conservatorship, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the FDICsupervised institution the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 7 to the U.S. laws
referenced in this paragraph (2)(i) in
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this subpart, an FDICsupervised institution must comply
with the requirements of § 324.3(d) of
this chapter with respect to that
agreement.
*
*
*
*
*
Repo-style transaction means a
repurchase or reverse repurchase
transaction, or a securities borrowing or
securities lending transaction, including
a transaction in which the FDICsupervised institution acts as agent for
a customer and indemnifies the
customer against loss, provided that:
(1) The transaction is based solely on
liquid and readily marketable securities,
cash, or gold;
(2) The transaction is marked-to-fair
value daily and subject to daily margin
maintenance requirements;
7 The FDIC expects to evaluate jointly with the
Federal Reserve and the OCC whether foreign
special resolution regimes meet the requirements of
this paragraph.
PO 00000
Frm 00031
Fmt 4700
Sfmt 4700
71355
(3)(i) The transaction is a ‘‘securities
contract’’ or ‘‘repurchase agreement’’
under section 555 or 559, respectively,
of the Bankruptcy Code (11 U.S.C. 555
or 559), a qualified financial contract
under section 11(e)(8) of the Federal
Deposit Insurance Act, or a netting
contract between or among financial
institutions under sections 401–407 of
the Federal Deposit Insurance
Corporation Improvement Act or the
Federal Reserve’s Regulation EE (12 CFR
part 231); or
(ii) If the transaction does not meet
the criteria set forth in paragraph (3)(i)
of this definition, then either:
(A) The transaction is executed under
an agreement that provides the FDICsupervised institution the right to
accelerate, terminate, and close-out the
transaction on a net basis and to
liquidate or set-off collateral promptly
upon an event of default, including
upon an event of receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Act, or under any
similar insolvency law applicable to
GSEs, or laws of foreign jurisdictions
that are substantially similar 8 to the
U.S. laws referenced in this paragraph
(3)(ii)(A) in order to facilitate the
orderly resolution of the defaulting
counterparty; or
(B) The transaction is:
(1) Either overnight or
unconditionally cancelable at any time
by the FDIC-supervised institution; and
(2) Executed under an agreement that
provides the FDIC-supervised
institution the right to accelerate,
terminate, and close-out the transaction
on a net basis and to liquidate or set off
collateral promptly upon an event of
counterparty default; and
(4) In order to recognize an exposure
as a repo-style transaction for purposes
of this subpart, an FDIC-supervised
institution must comply with the
requirements of § 324.3(e) with respect
to that exposure.
*
*
*
*
*
PART 329—LIQUIDITY RISK
MEASUREMENT STANDARDS
11. The authority citation for part 329
continues to read as follows:
■
8 The FDIC expects to evaluate jointly with the
Federal Reserve and the OCC whether foreign
special resolution regimes meet the requirements of
this paragraph.
E:\FR\FM\17OCR1.SGM
17OCR1
71356
Federal Register / Vol. 81, No. 200 / Monday, October 17, 2016 / Rules and Regulations
Authority: 12 U.S.C. 1815, 1816, 1818,
1819, 1828, 1831p–1, 5412.
12. Amend § 329.3 as follows:
a. Redesignate footnote 1 as footnote
2.; and
■ b. Revise the definition of ‘‘Qualifying
master netting agreement’’ to read as
follows:
■
■
§ 329.3
Definitions.
jstallworth on DSK7TPTVN1PROD with RULES
*
*
*
*
*
Qualifying master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
receivership, insolvency,
conservatorship, liquidation, or similar
proceeding, of the counterparty;
(2) The agreement provides the FDICsupervised institution the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than:
(i) In receivership, conservatorship, or
resolution under the Federal Deposit
Insurance Act, Title II of the DoddFrank Act, or under any similar
insolvency law applicable to GSEs, or
laws of foreign jurisdictions that are
substantially similar 1 to the U.S. laws
referenced in this paragraph (2)(i) in
order to facilitate the orderly resolution
of the defaulting counterparty; or
(ii) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i) of
this definition;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
1 The FDIC expects to evaluate jointly with the
Federal Reserve and the OCC whether foreign
special resolution regimes meet the requirements of
this paragraph.
VerDate Sep<11>2014
14:00 Oct 14, 2016
Jkt 241001
for purposes of this subpart, an FDICsupervised institution must comply
with the requirements of § 329.4(a) with
respect to that agreement.
*
*
*
*
*
By order of the Board of directors of the
Federal Deposit Insurance Corporation.
Dated: September 20, 2016.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2016–25021 Filed 10–14–16; 8:45 am]
BILLING CODE P
FARM CREDIT ADMINISTRATION
12 CFR Parts 650, 651, 653, and 655
RIN 3052–AC89
Federal Agricultural Mortgage
Corporation Governance; Standards of
Conduct; Risk Management; and
Disclosure and Reporting
Farm Credit Administration.
Notice of effective date.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, Agency or
our) amended our regulations to related
to the Federal Agricultural Mortgage
Corporation’s (Farmer Mac or
Corporation) risk governance and
making enhancements to existing
disclosure and reporting requirements.
The risk governance regulations require
the Corporation to establish and
maintain a board-level risk management
committee and a risk officer, as well as
risk management policies and internal
controls. The changes to disclosure and
reporting requirements remove
repetitive reporting and allow for
electronic filing of reports. We also
finalized rules on the examination and
enforcement authorities held by the
FCA Office of Secondary Market
Oversight over the Corporation. In
accordance with the law, the effective
date of the rule is no earlier than 30
days from the date of publication in the
Federal Register during which either or
both Houses of Congress are in session.
DATES: Effective date: Under the
authority of 12 U.S.C. 2252, the
regulation amending 12 CFR parts 650,
651, 653, and 655 published on July 27,
2016 (81 FR 49139) is effective October
17, 2016.
FOR FURTHER INFORMATION CONTACT:
Joseph Connor, Associate Director for
Policy and Analysis, Office of
Secondary Market Oversight, Farm
Credit Administration, McLean, VA
22102–5090, (703) 883–4364, TTY
(703) 883–4056,
SUMMARY:
PO 00000
Frm 00032
Fmt 4700
Sfmt 4700
or
Laura McFarland, Senior Counsel,
Office of General Counsel, Farm
Credit Administration, McLean, VA
22102–5090, (703) 883–4020, TTY
(703) 883–4056.
SUPPLEMENTARY INFORMATION: The Farm
Credit Administration amended our
regulations related to the Federal
Agricultural Mortgage Corporation’s
(Farmer Mac or Corporation) risk
governance and making enhancements
to existing disclosure and reporting
requirements. The risk governance
regulations require the Corporation to
establish and maintain a board-level risk
management committee and a risk
officer, as well as risk management
policies and internal controls. The
changes to disclosure and reporting
requirements remove repetitive
reporting and allow for electronic filing
of reports. We also finalized rules on the
examination and enforcement
authorities held by the FCA Office of
Secondary Market Oversight over the
Corporation. In accordance with 12
U.S.C. 2252, the effective date of the
final rule is no earlier than 30 days from
the date of publication in the Federal
Register during which either or both
Houses of Congress are in session. Based
on the records of the sessions of
Congress, the effective date of the
regulations is October 17, 2016.
(12 U.S.C. 2252(a)(9) and (10))
Dated: October 12, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2016–25050 Filed 10–14–16; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 25
[Docket No. FAA–2013–0920; Special
Conditions No. 25–501–SC]
Special Conditions: Learjet Model 45
Series Airplanes; Aircraft Electronic
System Security Protection From
Unauthorized External Access
Federal Aviation
Administration (FAA), DOT.
ACTION: Final special conditions; request
for comments; correction.
AGENCY:
The FAA is correcting a final
special conditions; request for
comments document published in the
Federal Register on October 31, 2013
(78 FR 65153). In that document the
special conditions number was incorrect
SUMMARY:
E:\FR\FM\17OCR1.SGM
17OCR1
]]>Agencies
[Federal Register Volume 81, Number 200 (Monday, October 17, 2016)]
[Rules and Regulations]
[Pages 71348-71356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25021]
=======================================================================
-----------------------------------------------------------------------
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 324 and 329
RIN 3064-AE30
Regulatory Capital Rules, Liquidity Coverage Ratio: Revisions to
the Definition of Qualifying Master Netting Agreement and Related
Definitions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is adopting a final rule that amends the definition
of ``qualifying master netting agreement'' under the regulatory capital
rules and the liquidity coverage ratio rule. In this final rule, the
FDIC also is amending the definitions of ``collateral agreement,''
``eligible margin loan,'' and ``repo-style transaction'' under the
regulatory capital rules. These amendments are designed to ensure that
the regulatory capital and liquidity treatment of certain financial
contracts generally would not be affected by implementation of special
resolution regimes in non-U.S. jurisdictions that are substantially
similar to the U.S. resolution framework or by changes to the
International Swaps and Derivative Association (ISDA) Master Agreement
that provide for contractual submission to such regimes. The Office of
the Comptroller of the Currency (OCC) and the Board of
[[Page 71349]]
Governors of the Federal Reserve System (Federal Reserve) issued in
December 2014, a joint interim final rule that is substantially
identical to this final rule.
DATES: The final rule is effective October 17, 2016.
FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate
Director, rbillingsley@fdic.gov; Benedetto Bosco, Chief, Capital Policy
Section, bbosco@fdic.gov; Eric Schatten, Capital Markets Policy
Analyst, Capital Markets Strategies, eschatten@fdic.gov, Capital
Markets Branch, Division of Risk Management Supervision, (202) 898-
6888; or David Wall, Assistant General Counsel, dwall@fdic.gov;
Cristina Regojo, Counsel; cregojo@fdic.gov; Michael Phillips, Counsel,
mphillips@fdic.gov, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Summary
The regulatory capital rules of the Federal Reserve, the OCC, and
the FDIC (collectively, the agencies) permit a banking organization to
measure exposure from certain types of financial contracts on a net
basis, provided that the contracts are subject to a ``qualifying master
netting agreement'' that provides for certain rights upon a
counterparty default.\1\ The agencies, by rule, have defined a
qualifying master netting agreement \2\ as a netting agreement that,
among other things, permits a banking organization to terminate, apply
close-out netting, and promptly liquidate or set-off collateral upon an
event of default of the counterparty (default rights), thereby reducing
its counterparty exposure and market risks. On the whole, measuring the
amount of exposure of these contracts on a net basis, rather than a
gross basis, results in a lower measure of exposure, and thus, a lower
capital requirement, under the regulatory capital rules. Similarly, the
Liquidity Coverage Ratio (LCR) Rule \3\ allows a banking organization
to net the inflows and outflows associated with derivative transactions
subject to a qualifying master netting agreement, which generally
results in a more accurate measure of cash outflows than if a banking
organization were to calculate its derivatives inflows and outflows on
a gross basis.
---------------------------------------------------------------------------
\1\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Federal Reserve);
12 CFR part 324 (FDIC). The term ``banking organization'' includes
national banks, state member banks, state nonmember banks, savings
associations, and top-tier bank holding companies domiciled in the
United States not subject to the Federal Reserve's Small Bank
Holding Company Policy Statement (12 CFR part 225, appendix C), as
well as top-tier savings and loan holding companies domiciled in the
United States, except for certain savings and loan holding companies
that are substantially engaged in insurance underwriting or
commercial activities.
\2\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal Reserve); 12 CFR
324.2 (FDIC).
\3\ See 12 CFR part 50 (OCC); 12 CFR part 249 (Federal Reserve);
12 CFR part 329 (FDIC).
---------------------------------------------------------------------------
The agencies' current definition of ``qualifying master netting
agreement'' recognizes that default rights may be stayed if the
financial company is in receivership, conservatorship, or resolution
under Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),\4\ or under the Federal Deposit
Insurance Act (FDI Act).\5\ Accordingly, transactions conducted under
netting agreements where default rights may be stayed under Title II of
the Dodd-Frank Act or the FDI Act may qualify for the favorable capital
treatment described above. However, the FDIC's current definition of
``qualifying master netting agreement'' does not recognize that default
rights may be stayed where a master netting agreement is subject to
limited stays under non-U.S. special resolution regimes or where
counterparties agree through contract that a special resolution regime
would apply. When the FDIC adopted the current definition of
``qualifying master netting agreement,'' no other jurisdiction had
adopted a special resolution regime, and no banking organizations had
communicated to the FDIC an intent to enter into contractual amendments
to clarify that bilateral over-the-counter (OTC) derivatives
transactions are subject to certain provisions of certain U.S. and
foreign special resolution regimes.
---------------------------------------------------------------------------
\4\ See 12 U.S.C. 5390(c)(8)-(16).
\5\ See 12 U.S.C. 1821(e)(8)-(13). The definition would also
recognize that default rights may be stayed under any similar
insolvency law applicable to government sponsored enterprises
(GSEs). Generally under the agencies' regulatory capital rules,
government-sponsored enterprise means an entity established or
chartered by the U.S. government to serve public purposes specified
by the U.S. Congress but whose debt obligations are not explicitly
guaranteed by the full faith and credit of the U.S. government. See
12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal Reserve); 12 CFR 324.2
(FDIC).
---------------------------------------------------------------------------
Regarding non-U.S. special resolution regimes that provide a
limited stay of termination rights and other remedies in financial
contracts, in 2014, the European Union (EU) finalized the Bank Recovery
and Resolution Directive (BRRD), which prescribes aspects of a special
resolution regime that EU member nations should implement. For the BRRD
to be fully implemented, each member nation of the EU must transpose
the BRRD requirements into local law. The implementation of the BRRD by
EU member nations was permitted as early as January 1, 2015, and the
transposition process is largely complete.
Regarding contractual amendments between counterparties to OTC
derivatives, various U.S. banking organizations have adhered to the
2015 Universal ISDA Resolution Stay Protocol (ISDA Protocol),\6\ which
is a multilateral amendment mechanism that provides for cross-border
application of temporary stays under special resolution regimes
(including Title II of the Dodd-Frank Act and the FDI Act). The ISDA
Protocol would apply the provisions of Title II of the Dodd-Frank Act
or the FDI Act, as appropriate, concerning stays of termination rights
and other remedies in qualified financial contracts entered into by
U.S. financial companies, including insured banks, if counterparties to
such transactions are not subject to U.S. law. It would also apply
similar provisions of the laws and regulations of certain EU member
countries that have implemented the BRRD to counterparties of financial
companies in those countries. Thus, the ISDA Protocol would limit the
rights of counterparties to exercise termination rights and other
remedies in financial contracts to the same extent that those rights
would be limited under the sovereign resolution regime applicable to
their counterparties or, in certain circumstances, their
counterparties' affiliates.
---------------------------------------------------------------------------
\6\ See ISDA Protocol at https://assets.isda.org/media/f253b540-25/958e4aed.pdf/.
---------------------------------------------------------------------------
In addition, the ISDA Protocol provides for limited stays of
termination rights and other remedies for cross-defaults resulting from
affiliate insolvency proceedings under a limited number of U.S.
insolvency regimes. ISDA Master Agreements \7\ and securities financing
transactions (documented under industry standard documentation for such
transactions) \8\
[[Page 71350]]
between counterparties that adhere to the ISDA Protocol are
automatically amended to stay certain default rights and other remedies
provided under the agreement. The effective date of certain provisions
of the ISDA Protocol was January 1, 2016.
---------------------------------------------------------------------------
\7\ The ISDA Master Agreement is a form of agreement that
governs OTC derivatives transactions and is used by a significant
portion of the parties to bilateral OTC derivatives transactions,
including large, internationally active banking organizations.
Furthermore, the ISDA Master Agreement generally creates a single
legal obligation that provides for the netting of all individual
transactions covered by the agreement.
\8\ The ISDA Protocol is an expansion of the ISDA 2014
Resolution Stay Protocol and covers securities financing
transactions in addition to over-the-counter derivatives documented
under ISDA Master Agreements. As between adhering parties, the ISDA
Protocol replaces the ISDA 2014 Resolution Stay Protocol (which does
not cover securities financing transactions). Securities financing
transactions (which generally include repurchase agreements and
securities lending transactions) are documented under non-ISDA
master agreements. The ISDA Protocol addresses financial contracts
under these master agreements in the ``Securities Financing
Transaction Annex.''
---------------------------------------------------------------------------
A master netting agreement under which default rights may be stayed
under the BRRD or that incorporates the ISDA Protocol would no longer
qualify as a qualifying master netting agreement under the FDIC's
current regulatory capital and liquidity rules. This would result in
considerably higher capital and liquidity requirements.
The FDIC issued in the Federal Register of January 30, 2015,
proposed amendments to the definition of qualifying master netting
agreement in the regulatory capital and liquidity rules and certain
related definitions in the regulatory capital rules (January 2015
NPR).\9\ This final rule adopts those revised definitions in the
proposed rule issued in the January 2015 NPR, as amended to better
conform with the interim final rule jointly issued by the Federal
Reserve and the OCC in December 2014.\10\
---------------------------------------------------------------------------
\9\ 80 FR 5063 (January 30, 2015).
\10\ 79 FR 78287 (December 30, 2014).
---------------------------------------------------------------------------
Under this final rule, the FDIC permits an otherwise qualifying
master netting agreement to qualify for favored netting treatment under
the FDIC's regulatory capital and liquidity rules if (i) default rights
under the agreement may be stayed under a qualifying non-U.S. special
resolution regime or (ii) the agreement incorporates a qualifying
special resolution regime by contract. Through these revisions, the
final rule maintains the existing treatment for these contracts for
purposes of the regulatory capital and liquidity rules, while
recognizing the recent changes instituted by the BRRD and the ISDA
Protocol.
The final rule also revises certain other definitions of the
regulatory capital rules to make various conforming changes designed to
ensure that a banking organization may continue to recognize the risk
mitigating effects of financial collateral \11\ received in a secured
lending transaction, repo-style transaction, or eligible margin loan
for purposes of the regulatory capital and liquidity rules.
Specifically, the final rule revises the definition of ``collateral
agreement,'' ``eligible margin loan,'' \12\ and repo-style
transaction'' \13\ to provide that a counterparty's default rights may
be stayed under a non-U.S. special resolution regime or, if applicable,
that are made subject to a special resolution regime by contract.\14\
---------------------------------------------------------------------------
\11\ Generally, under the agencies' regulatory capital rules,
financial collateral means collateral in the form of: (i) Cash on
deposit with the banking organization (including cash held for the
banking organization by a third-party custodian or trustee); (ii)
gold bullion; (iii) long-term debt securities that are not
resecuritization exposures and that are investment grade; (iv)
short-term debt instruments that are not resecuritization exposures
and that are investment grade; (v) equity securities that are
publicly traded; (vi) convertible bonds that are publicly traded; or
(vii) money market fund shares and other mutual fund shares if a
price for the shares is publicly quoted daily. In addition, the
regulatory capital rules also require that the banking organization
have a perfected, first-priority security interest or, outside of
the United States, the legal equivalent thereof (with the exception
of cash on deposit and notwithstanding the prior security interest
of any custodial agent). See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal
Reserve); 12 CFR 324.2 (FDIC).
\12\ Generally under the agencies' regulatory capital rules,
eligible margin loan means an extension of credit where: (i) The
extension of credit is collateralized exclusively by liquid and
readily marketable debt or equity securities, or gold; (ii) the
collateral is marked-to-fair value daily, and the transaction is
subject to daily margin maintenance requirements; and (iii) the
extension of credit is conducted under an agreement that provides
the banking organization with default rights, provided that any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs. In addition, in order to
recognize an exposure as an eligible margin loan a banking
organization must comply with the requirements of section 3(b) of
the regulatory capital rules with respect to that exposure.
\13\ Generally, under the agencies' regulatory capital rules,
repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the banking
organization acts as agent for a customer and indemnifies the
customer against loss, provided that: (1) The transaction is based
solely on liquid and readily marketable securities, cash, or gold;
(2) the transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements; (3) the transaction provides
certain default rights. In addition, in order to recognize an
exposure as a repo-style transaction for purposes of this subpart, a
banking organization must comply with the requirements of section
3(b) of the regulatory capital rules. See 12 CFR 3.2 (OCC); 12 CFR
217.2 (Federal Reserve); 12 CFR 324.2 (FDIC).
\14\ See 12 CFR part 32.
---------------------------------------------------------------------------
II. Background
A. U.S. Resolution Regime
It is common market practice for bilateral derivatives and certain
other types of financial contracts entered into by large banking
organizations to permit a non-defaulting counterparty to exercise early
termination rights and other contractual remedies upon a counterparty
(or a related entity) experiencing an event of default. These
contractual provisions are generally recognized as a credit risk
mitigant because the provisions allow a non-defaulting party the
uninterrupted right to close-out, net, and liquidate any collateral
securing its claim under the contract upon a counterparty's default.
However, as the failure of Lehman Brothers demonstrated, the
uninterrupted exercise of such rights by counterparties of a globally
active financial company with a significant derivatives portfolio could
impede the orderly resolution of the financial company and pose risks
to financial stability. The United States has enacted laws that impose
a limited stay on the exercise of early termination rights and other
remedies with regard to qualified financial contracts (such as OTC
derivatives, securities financing transactions, and margin loans) with
insured depository institutions in resolution under the FDI Act and, in
2010, with financial companies in resolution under Title II of the
Dodd-Frank Act.
B. Foreign Special Resolution Procedures and the ISDA Protocol
In recognition of the issues faced in the financial crisis
concerning resolution of globally-active financial companies, the EU
issued the BRRD on April 15, 2014, which requires EU member states to
implement a resolution mechanism by December 31, 2014, in order to
increase the likelihood for successful national or cross-border
resolutions of a financial company organized in the EU.\15\ The BRRD
contains special resolution powers, including a limited stay on certain
financial contracts that is similar to the stays provided under Title
II of the Dodd-Frank Act and the FDI Act. Therefore, the operations of
U.S. banking organizations located in jurisdictions that have
implemented the BRRD could become subject to an orderly resolution
under the BRRD, including the application of a limited statutory stay
of a counterparty's right to exercise early termination rights and
other remedies with respect to certain financial contracts. The BRRD is
generally designed to be consistent with the Key Attributes of
Effective Resolution Regimes for Financial Institutions (Key
Attributes),\16\ which were published by the Financial
[[Page 71351]]
Stability Board (FSB) \17\ of the G-20 \18\ member nations in October
2011, and is designed to increase the likelihood for successful
national or cross-border resolutions of a financial company organized
in the EU.
---------------------------------------------------------------------------
\15\ On January 1, 2015, most of the provisions of the BRRD were
in effect in a number of the EU member states.
\16\ The Key Attributes area available at
www.financialstabilityboard.org/publications/r_111104cc.pdf. See
specifically Key Attributes 4.1-4.4 regarding set-off, netting,
collateralization and segregation of client assets and Appendix I
Annex 5 regarding temporary stays on early termination rights.
\17\ The FSB is an international body that monitors and makes
recommendations about the global financial system. The FSB
coordinates the regulatory, supervisory, and other financial sector
policies of national financial authorities and international
standard-setting bodies.
\18\ The G-20 membership comprises a mix of the world's largest
advanced and emerging economies. The G-20 members are Argentina,
Australia, Brazil, Canada, China, France, Germany, India, Indonesia,
Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South
Africa, Turkey, the United Kingdom, the United States, and the
European Union. Following the most recent financial crisis, leaders
of the G-20 member nations recognized that the orderly cross-border
resolution of a globally active financial company requires all
countries to have effective national resolution regimes to resolve
failing financial companies in an orderly manner and that national
resolution regimes should be consistent with one another. Subjecting
the same financial company to conflicting legal rules, procedures,
and mechanisms across jurisdictions can create uncertainty,
instability, possible systemic contagion, and higher costs of
resolution. The Key Attributes were adopted by the G-20 leaders and
are now international-agreed-upon standards that set forth the
responsibilities and powers that national resolution regimes should
have to resolve a failing systemically important financial
institution.
---------------------------------------------------------------------------
ISDA launched the ISDA Protocol on November 12, 2015, which
provides a mechanism for parties to transactions under ISDA Master
Agreements (and securities financing transactions documented under
industry standard documentation for such transactions) to amend those
agreements to stay certain early termination rights and other remedies
provided under the agreement. As of July 14, 2016, 217 parties,
including several of the largest U.S. banking organizations,\19\ have
adhered to the ISDA Protocol and have thereby modified their ISDA
Master Agreements. Like other qualified financial contracts, OTC
derivatives transactions executed under standard ISDA Master Agreements
allow a party to terminate the agreement immediately upon an event of
default of its counterparty, including if its counterparty (or a
related entity) \20\ enters insolvency or similar proceedings.
---------------------------------------------------------------------------
\19\ The U.S. banking organizations that have adhered to the
ISDA Protocol include Bank of America Corporation, The Bank of New
York Mellon, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Wells Fargo & Co., Morgan Stanley, and certain
subsidiaries thereof. See current list of adhering parties to the
ISDA Protocol at https://www2.isda.org/functional-areas/protocol-management/protocol-data-csv/22.
\20\ Under the ISDA Protocol, a related entity is defined to
include (i) each parent or (ii) an affiliate that is (a) a creditor
support provider or (b) a specified entity.
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The contractual amendments effectuated pursuant to the ISDA
Protocol would apply the provisions of Title II of the Dodd-Frank Act
and the FDI Act concerning limited stays of termination rights and
other remedies in qualified financial contracts to ISDA Master
Agreements between adhering counterparties, including adhering
counterparties that are not otherwise subject to U.S. law. The
amendments also would apply substantially similar provisions of certain
non-U.S. laws, to ISDA Master Agreements between adhering
counterparties that are not otherwise subject to such laws.\21\ Thus,
the contractual amendments effectuated pursuant to the ISDA Protocol
would permit a party that has agreed to adhere to the ISDA Protocol to
exercise early termination rights and other remedies only to the extent
that it would be entitled to do so under the special resolution regime
applicable to its adhering counterparties (or related entities, as
applicable).\22\
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\21\ The provisions of the ISDA Protocol relating to the special
resolution regimes in these jurisdictions became effective on
January 1, 2016, for ISDA Master Agreements between the adherents.
The ISDA Protocol also provides a mechanism for adhering parties to
opt-in to special resolution regimes in other FSB member
jurisdictions so long as the regimes meet conditions specified in
the ISDA Protocol relating to creditor safeguards, which are
consistent with the Key Attributes.
\22\ Parties adhering to the ISDA Protocol initially were
contractually subject to the statutory special resolution regimes of
France, Germany, Japan, Switzerland, the United Kingdom and the
United States.
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C. Description of Relevant Provisions of the Regulatory Capital and the
Liquidity Coverage Ratio Rules
As noted above, the agencies' regulatory capital rules permit a
banking organization to measure exposure from certain types of
financial contracts on a net basis, provided that the contracts are
subject to a qualifying master netting agreement or other agreement
that contains specific provisions. Specifically, under the current
regulatory capital rules, a banking organization with multiple OTC
derivatives that are subject to a qualifying master netting agreement
would be able to calculate a net exposure amount by netting the sum of
all positive and negative fair values of the individual OTC derivative
contracts subject to the qualifying master netting agreement and
calculating a risk-weighted asset amount based on the net exposure
amount. For purposes of the current supplementary leverage ratio (as
applied only to advanced approaches banking organizations), a banking
organization that has one or more OTC derivatives with the same
counterparty that are subject to a qualifying master netting agreement
would be permitted to not include in total leverage exposure cash
variation margin received from such counterparty that has offset the
mark-to-fair value of the derivative asset, or cash collateral that is
posted to such counterparty that has reduced the banking organization's
on-balance sheet assets.\23\
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\23\ Under the agencies' regulatory capital rules, the general
framework consists of two approaches: (1) The standardized approach,
which, beginning on January 1, 2015, applies to all banking
organizations regardless of total asset size, and (2) the advanced
approaches, which currently apply to large internationally active
banking organizations (defined as those banking organizations with
$250 billion or more in total consolidated assets or $10 billion or
more in total on-balance sheet foreign exposure, depository
institution subsidiaries of those banking organizations that use the
advanced approaches rule, and banking organizations that elect to
use the advanced approaches). As a general matter, the standardized
approach sets forth standardized risk weights for different asset
types for regulatory capital calculations, whereas, for certain
assets, the advanced approaches make use of risk assessments
provided by banking organizations' internal systems as inputs for
regulatory capital calculations. Consistent with section 171 of the
Dodd-Frank Act (codified at 12 U.S.C. 5371), a banking organization
that is required to calculate its risk-based capital requirements
under the advanced approaches (i.e., an advanced approaches banking
organization) also must determine its risk-based capital
requirements under the generally applicable risk-based capital
rules, which is the standardized approach as of January 1, 2015).
The lower--or more binding--ratio for each risk-based capital
requirement is the ratio that the advanced approaches banking
organization must use to determine its compliance with minimum
regulatory capital requirements.
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In addition, for risk-based capital purposes, a banking
organization with a securities financing transaction that meets the
definition of a repo-style transaction with financial collateral, a
margin loan that meets the definition of an eligible margin loan with
financial collateral, or an OTC derivative contract collateralized with
financial collateral may determine a net exposure amount to its
counterparty according to section 37 or section 132 of the regulatory
capital rules. A banking organization with multiple repo-style
transactions or eligible margin loans with a counterparty that are
subject to a qualifying master netting agreement may net the exposure
amounts of the individual transactions under that agreement. In
addition, for purposes of the supplementary leverage ratio, an advanced
approaches banking organization with multiple repo-style transactions
with the same counterparty that are subject to a qualifying master
netting agreement would be permitted to net for purposes of calculating
the counterparty credit risk component of its total leverage exposure.
In general, recognition of netting results in a lower
[[Page 71352]]
measure of risk-weighted assets and total leverage exposure than if a
banking organization were to calculate its OTC derivatives, repo-style
transactions, and eligible margin loans on a gross basis.
The agencies also use the concept of a qualifying master netting
agreement in the LCR rule.\24\ The LCR rule requires a banking
organization to maintain an amount of high-quality liquid assets (the
numerator) to match at least 100 percent of its total net cash outflows
over a prospective 30 calendar-day period (the denominator). For
derivative transactions subject to a qualifying master netting
agreement, a banking organization would be able to calculate the net
derivative outflow or inflow amount by netting the contractual payments
and collateral that it would provide to, or receive from, the
counterparty over a prospective 30 calendar-day period.\25\ If the
derivative transactions are not subject to a qualifying master netting
agreement, then the derivative cash outflows for that counterparty
would be included in the net derivative cash outflow amount and the
derivative cash inflows for that counterparty would be included in the
net derivative cash inflow amount, without any netting and subject to
the LCR rule's cap on total inflows. Recognition of netting generally
results in a more accurate measure of outflows than if a banking
organization were to calculate its inflows and outflows on its
derivatives transactions on a gross basis.
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\24\ The agencies' LCR rule may be found at 12 CFR part 50
(OCC); 12 CFR part 249 (Federal Reserve); and 12 CFR part 329
(FDIC).
\25\ The LCR rule provides that foreign currency transactions
that meet certain criteria can be netted regardless of whether those
transactions are covered by a qualified master netting agreement.
See 12 CFR 50.32(c)(2) (OCC); 12 CFR 249.32(c)(2) (Federal Reserve);
12 CFR 329.32(c)(2) (FDIC).
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III. The Final Rule
The final rule amends the definitions of ``collateral agreement,
``eligible margin loan,'' ``qualifying master netting agreement,'' and
``repo-style transaction'' in the FDIC's regulatory capital rules and
``qualifying master netting agreement'' in the FDIC's LCR rules to
ensure that the regulatory capital and liquidity treatment of OTC
derivatives, repo-style transactions, eligible margin loans, and other
collateralized transactions would be unaffected by the adoption of
various foreign special resolution regimes and the ISDA Protocol. In
particular, the final rule amends these definitions to provide that a
relevant netting agreement or collateral agreement may provide for a
limited stay or avoidance of rights where the agreement is subject by
its terms to, or incorporates, certain resolution regimes applicable to
financial companies, including Title II of the Dodd-Frank Act, the FDI
Act, or any similar foreign resolution regime that are jointly
determined by the agencies to be substantially similar to Title II of
the Dodd-Frank Act or the FDI Act.
In determining whether the laws of foreign jurisdictions are
``similar'' to the FDI Act and Title II of the Dodd-Frank Act, the
FDIC, jointly with the OCC and FRB, intends to consider all aspects of
U.S. law, including all aspects of stays provided thereunder.\26\
Relevant factors include, for instance, creditor safeguards or
protections provided under a foreign resolution regime as well as the
length of stay.\27\
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\26\ See 12 U.S.C. 1821(e)(8)-(13) and 5390(c)(8)-(16). As noted
above, the ISDA Protocol covers only resolution regimes that are
considered to be consistent with the principles of the Key
Attributes. Therefore, it is also expected that any limited
statutory stay under foreign law determined for purposes of this
final rule to be similar to the FDI Act and Title II of the Dodd-
Frank Act would also be consistent with the relevant principles of
the Key Attributes.
\27\ Under Title II of the Dodd-Frank Act, counterparties are
stayed until 5:00 p.m. on the business day following the date of
appointment of a receiver from exercising termination, liquidation,
or netting rights under the qualified financial contract. 12 U.S.C.
5390(c)(10)(B)(i)(I). If the qualified financial contracts are
transferred to a solvent third party before the stay expires, the
counterparty is permanently enjoined from exercising such rights
based upon the appointment of the receiver, but is not stayed from
exercising such rights based upon other events of default. See 12
U.S.C. 5390(c)(10)(B)(i)(II).
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This final rule allows for the continuation of the existing netting
treatment for these contracts for purposes of the regulatory capital
and liquidity rules. Implementation of consistent, national resolution
regimes on a global basis furthers the orderly resolution of
internationally active financial companies, and enhances financial
stability. In addition, the development of the ISDA Protocol furthers
the principles of Title II of the Dodd-Frank Act and the FDI Act (in
instances where a counterparty is a U.S. entity or its subsidiary) to
counterparties who are not otherwise subject to U.S. law.
In addition to giving contractual effect to limited stays of
termination rights under special resolution regimes on a cross-border
basis, the ISDA Protocol also provides for limited stay of termination
rights for cross-defaults resulting from affiliate insolvency
proceedings under a limited number of U.S. general insolvency regimes,
including the U.S. bankruptcy code. This provision takes effect upon
the effective date of implementing regulations in the United States. To
the extent the agencies implement regulations to give effect to these
provisions of the ISDA Protocol, the FDIC will consider further
amending the definition of ``qualifying master netting agreement'' in
the regulatory capital and liquidity rules and the definition of
``collateral agreement'', ``repo-style transaction'' and ``eligible
margin loan'' in the regulatory capital rules.
The qualified master netting agreement definition in the FDIC's
capital and liquidity rules also relates to the eligible master netting
agreement definition in the swap margin rules issued by the adopting
agencies in November 2015.\28\ The swap margin rule establishes margin
requirements for non-cleared swaps entered into by an entity supervised
by one of the adopting agencies that is also registered with the
Commodity Futures Trading Commission or the Securities and Exchange
Commission as a dealer or major participants in non-cleared swaps (such
entities are referred to in the swap margin rule as ``covered swap
entities.'') The swap margin rule allows a covered swap entity to net
variation margin and initial margin requirements for non-cleared swaps
subject to the rule when such swaps are subject to an ``eligible master
netting agreement'' between the covered swap entity and its
counterparty.
---------------------------------------------------------------------------
\28\ See 80 FR 74840 (November 30, 2015).
---------------------------------------------------------------------------
The swap margin rule's definition of ``eligible master netting
agreement'' is substantively the same as the definition of ``qualified
master netting agreement'' as amended by this final rule.
IV. Summary of Comments on the January 2015 NPR
The FDIC received three comments on the January 2015 NPR. One
comment was generally supportive of the proposed rule in the January
2015 NPR as a necessary technical amendment that would promote the
objective of establishing effective resolution regimes for globally
active financial companies. That commenter also recommended that the
FDIC revisit in the near term the broader policy questions surrounding
the impact of close-out netting on systemic risk mitigation, and
evaluate how well the regulatory capital and liquidity coverage ratio
rules reflect the risks associated with netted financial contracts.\29\
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\29\ Systemic Risk Council.
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Two of the commenters \30\ noted the absence of reference to any
stays authorized by state insurance law in the
[[Page 71353]]
proposed definition of ``qualifying master netting agreement.'' Some
States may be considering amending laws applicable to the conservation,
rehabilitation, liquidation and insolvency of insurance companies to
provide authority for close-outs of derivative and similar financial
contracts to be stayed for twenty-four hours, similar to stays under
the FDI Act and the Dodd-Frank Act. The commenters maintained that
failure to include stays under state insurance resolution proceedings
within the definition of ``qualifying master netting agreement'' might
adversely affect derivative and similar financial transactions between
state-regulated insurance companies and their counterparties, including
FDIC-supervised institutions. As such stays may be analogous to similar
stays under the other resolution authorities referenced in the rule's
definition, the commenters recommend that state law should also be
referenced.
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\30\ American Council of Life Insurers; Northwestern Mutual.
---------------------------------------------------------------------------
The narrow purpose of amending the definition of ``qualifying
master netting agreement'' in the proposed rule and this final rule is
to maintain the regulatory capital and liquidity treatment of certain
financial contracts as unaffected by the ISDA Master Agreement and
stays by non-U.S. resolution authorities. The FDIC has considered the
comments for purposes of the final rule, and has determined that the
commenters raise an issue that is beyond that limited purpose.\31\
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\31\ Although the issue is currently outside the scope of this
rulemaking, staff may consider the treatment of derivatives and
other similar financial contracts subject to stays in state
insurance resolution proceedings in the context of further
rulemaking, in consultation with the other agencies and with State
insurance regulatory authorities.
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V. Effective Date
This final rule is effective upon publication in the Federal
Register. The final rule imposes no new requirements, and will benefit
FDIC-supervised institutions that adhere to the ISDA Protocol by
allowing for the continuation of the existing netting treatment for
certain financial contracts for purposes of the regulatory capital and
liquidity rules.
Section 302 of the Riegle Community Development and Regulatory
Improvement Act \32\ (RCDRIA) generally requires that each Federal
banking agency, in determining the effective date and administrative
compliance requirements for new regulations that impose additional
reporting, disclosure, or other requirements on insured depository
institutions, consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations. In addition, new regulations
that impose additional reporting, disclosures, or other new
requirements on an insured depository institution 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. The FDIC
has determined that this final rule does not impose any additional
reporting, disclosure, or other new requirements on insured depository
institutions and thus section 302 of RCDRIA does not apply.
---------------------------------------------------------------------------
\32\ 12 U.S.C. 4802.
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The Administrative Procedure Act (``APA'') requires that a final
rule be published in the Federal Register no less than 30 days before
its effective date unless good cause is found and published with the
final rule.\33\ The FDIC finds good cause for the final rule to take
effect on the date it is published in the Federal Register. Having the
final rule take effect on the date of publication in the Federal
Register will allow affected FDIC-supervised institutions to use the
definition of qualified master netting agreement as amended by the
final rule when they file their respective Call Report for the third
quarter period ending on September 30, 2016.
---------------------------------------------------------------------------
\33\ See 5 U.S.C. 553(d).
---------------------------------------------------------------------------
VI. Expected Effects
The final rule is intended to prevent any change in the treatment
of QFCs under capital and liquidity rules that may result from the
establishment of non-U.S. special resolution regimes or by contract. As
stated above, the final rule maintains the existing treatment for these
contracts for purposes of the regulatory capital and liquidity rules,
while recognizing the recent changes instituted by the BRRD and the
ISDA Protocol. Implementation of consistent, national resolution
regimes on a global basis furthers the orderly resolution of
internationally active financial companies, and enhances financial
stability. In addition, the development of the ISDA Protocol furthers
the principles of Title II of the Dodd-Frank Act and the FDI Act (in
instances where a counterparty is a U.S. entity or its subsidiary) to
counterparties who are not otherwise subject to U.S. law.
This final rule will benefit FDIC-supervised institutions that
adhere to the ISDA Protocol by allowing for the continuation of the
existing netting treatment for these contracts for purposes of the
regulatory capital and liquidity rules. Absent the final rule, such
FDIC-supervised institutions would be unable to include a master
netting agreement under which default rights may be stayed under the
BRRD or that incorporates the ISDA Protocol as a qualifying master
netting agreement under the FDIC's current regulatory capital and
liquidity regulations, and would be required to hold more capital and
liquid assets as a result.
The final rule may result in administrative costs associated with
changing the legal language that govern QFCs for a small number of
entities. These costs are likely to be very small relative to the
increase in capital and liquidity requirements likely to result if
capital and liquidity requirements for QFCs had to be calculated on a
gross basis. Any administrative costs associated with the proposed rule
are likely to be very low given that similar legal structures already
exist in the ISDA Protocol. The FDIC estimates that six FDIC-supervised
institutions will be directly affected by this rule. Therefore, any
administrative costs for FDIC-supervised institutions is likely to be
low and the volume of costs for all FDIC-supervised institutions is
likely to have no significant impact on financial institutions or the
economy.
VII. Regulatory Analysis
A. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget has determined that the final
rule is not a ``major rule'' within the meaning of the Small Business
Regulatory Enforcement Fairness Act of 1996 (Title II, Pub. L. 104-
121).
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency, in connection with a final rule, to prepare an
Initial Regulatory Flexibility Act analysis describing the impact of
the final rule on small entities (defined by the Small Business
Administration for purposes of the RFA to include banking entities with
total assets of $550 million or less) or to certify that the final rule
would not have a significant economic impact on a substantial number of
small entities. The FDIC believes that the final rule would not have a
significant economic impact on a substantial number of small entities.
Under regulations issued by the Small Business Administration, a
small entity includes a depository institution, bank
[[Page 71354]]
holding company, or savings and loan holding company with total assets
of $550 million or less (a small banking organization).\34\ As of March
31, 2016, there were approximately 2,942 small state nonmember banks
and 275 small state savings associations under the FDIC's supervisory
jurisdiction.
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\34\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
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The final rule is expected only to apply to banking organizations
that adhere to the ISDA Protocol or engage in a substantial amount of
cross-border derivatives transactions. Small entities generally would
not fall into this category. Accordingly, the FDIC believes that this
final rule would not have a significant economic impact on small
banking organizations supervised by the FDIC and therefore believes
that there are no significant alternatives to the issuance of this
final rule that would reduce the economic impact on small banking
organizations supervised by the FDIC. Pursuant to section 605(b) of the
RFA, the FDIC certifies that the Final Rule will not have a significant
economic impact on a substantial number of small entities.
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3521) (PRA), the FDIC may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (``OMB'') control number. The FDIC has reviewed this final
rule and determined that it does not create any new, or revise any
existing, collection of information pursuant to the PRA. Consequently,
no information has been submitted to the Office on Management and
Budget for review.
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
E. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The FDIC invited comments on how to make this rule
easier to understand. No comments addressing this issue were received.
List of Subjects
12 CFR Part 324
Administrative practice and procedure; Banks, banking; Capital
adequacy; Reporting and recordkeeping requirements; Savings
associations; State non-member banks.
12 CFR Part 329
Administrative practice and procedure; Banks, banking; Federal
Deposit Insurance Corporation, FDIC; Liquidity; Reporting and
recordkeeping requirements.
For the reasons set forth in the supplementary information, the
Federal Deposit Insurance Corporation amends 12 CFR Chapter III, parts
324 and 329 to read as follows:
PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS
0
1. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
Sec. 324.210 [Amended]
0
2. In Sec. 324.210, redesignate footnote 29 as footnote 33.
Sec. 324.202 [Amended]
0
3. In Sec. 324.202, redesignate footnotes 27 and 28 as footnotes 31
and 32.
Sec. 324.134 [Amended]
0
4. In Sec. 324.134, redesignate footnote 26 as footnote 30.
Sec. 324.101 [Amended]
0
5. In Sec. 324.101, redesignate footnote 25 as footnote 29.
Sec. 324.22 [Amended]
0
6. In Sec. 324.22, redesignate footnotes 18 through 24 as footnotes 22
through 28.
Sec. 324.20 [Amended]
0
7. In Sec. 324.20, redesignate footnotes 8 through 17 as footnotes 12
through 21.
Sec. 324.11 [Amended]
0
8. In Sec. 324.11, redesignate footnote 7 as footnote 11.
Sec. 324.4 [Amended]
0
9. In Sec. 324.4, redesignate footnote 6 as footnote 10.
0
10. Section 324.2 is amended by redesignating footnote 5 as footnote 9,
and by revising the definitions of ``Collateral agreement, ''
``Eligible margin loan'', ``Qualifying master netting agreement'', and
``Repo-style transaction'' to read as follows:
Sec. 324.2 Definitions.
* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to an FDIC-supervised institution for a single
financial contract or for all financial contracts in a netting set and
confers upon the FDIC-supervised institution a perfected, first-
priority security interest (notwithstanding the prior security interest
of any custodial agent), or the legal equivalent thereof, in the
collateral posted by the counterparty under the agreement. This
security interest must provide the FDIC-supervised institution with a
right to close out the financial positions and liquidate the collateral
upon an event of default of, or failure to perform by, the counterparty
under the collateral agreement. A contract would not satisfy this
requirement if the FDIC-supervised institution's exercise of rights
under the agreement may be stayed or avoided under applicable law in
the relevant jurisdictions, other than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \4\ to the U.S. laws
referenced in this paragraph (1) in order to facilitate the orderly
resolution of the defaulting counterparty; or
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\4\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
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[[Page 71355]]
(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition.
* * * * *
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid
and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked to fair value daily, and the
transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that
provides the FDIC-supervised institution the right to accelerate and
terminate the extension of credit and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, conservatorship, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, or resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs,\5\ or laws of foreign jurisdictions
that are substantially similar \6\ to the U.S. laws referenced in this
paragraph in order to facilitate the orderly resolution of the
defaulting counterparty.
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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
Federal Reserve Board's Regulation EE (12 CFR part 231).
\6\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
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(2) In order to recognize an exposure as an eligible margin loan
for purposes of this subpart, an FDIC-supervised institution must
comply with the requirements of Sec. 324.3(b) with respect to that
exposure.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, insolvency,
conservatorship, liquidation, or similar proceeding, of the
counterparty;
(2) The agreement provides the FDIC-supervised institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \7\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
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\7\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
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(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, an FDIC-supervised
institution must comply with the requirements of Sec. 324.3(d) of this
chapter with respect to that agreement.
* * * * *
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the FDIC-supervised
institution acts as agent for a customer and indemnifies the customer
against loss, provided that:
(1) The transaction is based solely on liquid and readily
marketable securities, cash, or gold;
(2) The transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements;
(3)(i) The transaction is a ``securities contract'' or ``repurchase
agreement'' under section 555 or 559, respectively, of the Bankruptcy
Code (11 U.S.C. 555 or 559), a qualified financial contract under
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting
contract between or among financial institutions under sections 401-407
of the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in
paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides
the FDIC-supervised institution the right to accelerate, terminate, and
close-out the transaction on a net basis and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case, any exercise of rights
under the agreement will not be stayed or avoided under applicable law
in the relevant jurisdictions, other than in receivership,
conservatorship, or resolution under the Federal Deposit Insurance Act,
Title II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs, or laws of foreign jurisdictions that are
substantially similar \8\ to the U.S. laws referenced in this paragraph
(3)(ii)(A) in order to facilitate the orderly resolution of the
defaulting counterparty; or
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\8\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
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(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by
the FDIC-supervised institution; and
(2) Executed under an agreement that provides the FDIC-supervised
institution the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set off collateral
promptly upon an event of counterparty default; and
(4) In order to recognize an exposure as a repo-style transaction
for purposes of this subpart, an FDIC-supervised institution must
comply with the requirements of Sec. 324.3(e) with respect to that
exposure.
* * * * *
PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS
0
11. The authority citation for part 329 continues to read as follows:
[[Page 71356]]
Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
5412.
0
12. Amend Sec. 329.3 as follows:
0
a. Redesignate footnote 1 as footnote 2.; and
0
b. Revise the definition of ``Qualifying master netting agreement'' to
read as follows:
Sec. 329.3 Definitions.
* * * * *
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, insolvency,
conservatorship, liquidation, or similar proceeding, of the
counterparty;
(2) The agreement provides the FDIC-supervised institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \1\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\1\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, an FDIC-supervised
institution must comply with the requirements of Sec. 329.4(a) with
respect to that agreement.
* * * * *
By order of the Board of directors of the Federal Deposit
Insurance Corporation.
Dated: September 20, 2016.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2016-25021 Filed 10-14-16; 8:45 am]
BILLING CODE P
