Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 74326-74347 [2016-25605]

Download as PDF 74326 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules VII. Approach to Quantifying Cyber Risk The agencies are seeking to develop a consistent, repeatable methodology to support the ongoing measurement of cyber risk within covered entities. Such a methodology could be a valuable tool for covered entities and their regulators to assess how well an entity is managing its aggregate cyber risk and mitigating the residual cyber risk of its sectorcritical systems. At this time the agencies are not aware of any consistent methodologies to measure cyber risk across the financial sector using specific cyber risk management objectives. The agencies are interested in receiving comments on potential methodologies to quantify inherent and residual cyber risk and compare entities across the financial sector. The agencies are familiar with different methodologies to measure cyber risk for the financial sector. Among others, these include existing methodologies like the FAIR Institute’s Factor Analysis of Information Risk standard and Carnegie Mellon’s GoalQuestion-Indicator-Metric process. Building upon these and other methodologies, the agencies are considering how best to measure cyber risk in a consistent, repeatable manner. Questions on Approach to Quantifying Cyber Risk Section Lhorne on DSK30JT082PROD with PROPOSALS 34. What current tools and practices, if any, do covered entities use to assess the cyber risks that their activities, systems and operations pose to other entities within the financial sector, and to assess the cyber risks that other entities’ activities, systems and operations pose to them? How is such risk currently identified, measured, and monitored? 35. What other models, frameworks, or reference materials should the agencies review in considering how best to measure and monitor cyber risk? 36. What methodologies should the agencies consider for the purpose of measuring inherent and residual cyber risk quantitatively and qualitatively? What risk factors should agencies consider incorporating into the measurement of inherent risk? How should the risk factors be consistently measured and weighted? VIII. Considerations for Implementation of the Enhanced Standards The agencies are considering various regulatory approaches to establishing enhanced standards for covered entities. The approaches range from establishing the standards through a policy VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 statement or guidance to imposing the standards through a detailed regulation. Under one approach, the agencies could propose the standards as a combination of a regulatory requirement to maintain a risk management framework for cyber risks along with a policy statement or guidance that describes minimum expectations for the framework, such as policies, procedures, and practices commensurate with the inherent cyber risk level of the covered entity. This approach would be similar to the approach that the agencies have taken in other areas of prudential supervision, such as the Interagency Guidelines Establishing Standards for Safety and Soundness and the Interagency Guidelines Establishing Information Security Standards.21 Under a second approach, the agencies could propose regulations that impose specific cyber risk management standards. For example, the standards could require covered entities to establish a cybersecurity framework commensurate with the covered entity’s structure, risk profile, complexity, activities, and size. Such standards would address the five categories of cyber risk management, discussed above, that the agencies consider key to a comprehensive cyber risk management program: (1) Cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external dependency management; and (5) incident response, cyber resilience, and situational awareness. Within each category, a covered entity would be expected to establish and maintain policies, procedures, practices, controls, personnel and systems that address the applicable category, and to establish and maintain a corporate governance structure that implements the cyber risk management program on an enterprisewide basis and along business line levels, monitors compliance with the program, and adjusts corporate practices to address the changes in risk presented by the firm’s operations. Under a third approach, the agencies could propose a regulatory framework that is more detailed than the second approach. As with the second approach, the regulation could contain standards for the five categories of cyber risk management. However, in contrast to the second approach, the regulation would include details on the specific objectives and practices a firm would be required to achieve in each area of concern in order to demonstrate that its cyber risk management program can 21 See 12 CFR part 208, App. D–1, D–2; 12 CFR part 225, App. F (Board); 12 CFR part 364, App. A, B (FDIC); 12 CFR part 30, App. A, B, and D (OCC). PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 adapt to changes in a firm’s operations and to the evolving cyber environment. In considering which option, or combination of options, to pursue to implement the standards, the agencies will consider whether the approach adopted ensures that the enhanced standards are clear, the additional effort required to implement the standards, whether the standards are sufficiently adaptable to address the changing cyber environment, and the potential costs and other burdens associated with implementing the standards. Questions on Considerations for Implementation of the Enhanced Standards 37. What are the potential benefits or drawbacks associated with each of the options for implementing the standards discussed above? 38. What are the trade-offs, in terms of the potential costs and other burdens, among the three options discussed above? The agencies invite commenters to submit data about the trade-offs among the three options discussed above. 39. Which approach has the potential to most effectively implement the agencies’ expectations for enhanced cyber risk management? Dated: October 19, 2016. Thomas J. Curry, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, October 19, 2016. Robert deV. Frierson, Secretary of the Board. Dated at Washington, DC, this 19th day of October, 2016. By order of the Board of Directors. Federal Deposit Insurance Corporation. Federal Deposit Insurance Corporation by Robert E. Feldman, Executive Secretary. [FR Doc. 2016–25871 Filed 10–25–16; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Parts 324, 329, and 382 RIN 3064–AE46 Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions Federal Deposit Insurance Corporation (FDIC). ACTION: Notice of proposed rulemaking. AGENCY: E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules The FDIC is proposing to add a new part to its rules to improve the resolvability of systemically important U.S. banking organizations and systemically important foreign banking organizations and enhance the resilience and the safety and soundness of certain state savings associations and state-chartered banks that are not members of the Federal Reserve System (‘‘state non-member banks’’ or ‘‘SNMBs’’) for which the FDIC is the primary federal regulator (together, ‘‘FSIs’’ or ‘‘FDIC-supervised institutions’’). Under this proposed rule, covered FSIs would be required to ensure that covered qualified financial contracts (QFCs) to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Federal Deposit Insurance Act (FDI Act). In addition, covered FSIs would generally be prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the covered FSI based on the entry into a resolution proceeding under the FDI Act, or any other resolution proceeding of an affiliate of the covered FSI. The proposal would also amend the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s capital and liquidity rules, and certain related terms in the FDIC’s capital rules. These proposed amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is party would not be affected by the proposed restrictions on such QFCs. The requirements of this proposed rule are substantively identical to those contained in the notice of proposed rulemaking issued by the Board of Governors of the Federal Reserve System (FRB) on May 3, 2016 (FRB NPRM) regarding ‘‘covered entities’’, and the notice of proposed rulemaking issued by the Office of the Comptroller of the Currency (OCC) on August 19, 2016 (OCC NPRM), regarding ‘‘covered banks’’. SUMMARY: Comments must be received by December 12, 2016, except that comments on the Paperwork Reduction Act analysis in part VI of the SUPPLEMENTARY INFORMATION must be received on or before December 27, 2016. Lhorne on DSK30JT082PROD with PROPOSALS DATES: You may submit comments by any of the following methods: Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. ADDRESSES: VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 Agency Web site: https:// www.FDIC.gov/regulations/laws/ federal/. Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. Hand Delivered/Courier: The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m. Email: comments@FDIC.gov. Instructions: Comments submitted must include ‘‘FDIC’’ and ‘‘RIN 3064– AE46’’ in the subject matter line. Comments received will be posted without change to: https:// www.FDIC.gov/regulations/laws/ federal/, including any personal information provided. FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate Director, rbillingsley@fdic.gov, Capital Markets Branch, Division of Risk Management and Supervision; Alexandra Steinberg Barrage, Senior Resolution Policy Specialist, Office of Complex Financial Institutions, abarrage@fdic.gov; David N. Wall, Assistant General Counsel, dwall@ fdic.gov, Cristina Regojo, Counsel, cregojo@fdic.gov, Phillip Sloan, Counsel, psloan@fdic.gov, Greg Feder, Counsel, gfeder@fdic.gov, or Michael Phillips, Counsel, mphillips@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. SUPPLEMENTARY INFORMATION: 74327 I. Introduction Table of Contents A. Background This proposed rule addresses one of the ways the failure of a major financial firm could destabilize the financial system. The disorderly failure of a large, interconnected financial company could cause severe damage to the U.S. financial system and, ultimately, to the economy as a whole, as illustrated by the failure of Lehman Brothers in September 2008. Protecting the financial stability of the United States is a core objective of the Dodd-Frank Act,1 which Congress passed in response to the 2007–2009 financial crisis and the ensuing recession. One way the DoddFrank Act helps to protect the financial stability of the United States is by reducing the damage that such a company’s failure would cause to the financial system if it were to occur. This strategy centers on measures designed to help ensure that a failed company’s resolution proceeding—such as bankruptcy or the special resolution process created by the Dodd-Frank Act—would be more orderly, thereby helping to mitigate destabilizing effects on the rest of the financial system.2 On May 3, 2016, the FRB issued a Notice of Proposed Rulemaking, the FRB NPRM, pursuant to section 165 of the Dodd-Frank Act.3 The FRB’s proposed rule stated that it is intended as a further step to increase the resolvability of U.S. global systemically important banking organizations (GSIBs) 4 and global systemically important foreign banking organizations (foreign GSIBs) that operate in the United States (collectively, ‘‘covered I. Introduction A. Background B. Overview of the Proposal C. Consultation with U.S. Financial Regulators D. Overview of Statutory Authority and Purpose II. Proposed Restrictions on QFCs of GSIBs A. Covered FSIs B. Covered QFCs C. Definition of ‘‘Default Right’’ D. Required Contractual Provisions Related to the U.S. Special Resolution Regimes E. Prohibited Cross-Default Rights F. Process for Approval of Enhanced Creditor Protections III. Transition Periods IV. Expected Effects V. Revisions to Certain Definitions in the FDIC’s Capital and Liquidity Rules VI. Regulatory Analysis A. Paperwork Reduction Act B. Regulatory Flexibility Act: Initial Regulatory Flexibility Analysis C. Riegle Community Development and Regulatory Improvement Act of 1994 D. Solicitation of Comments on the Use of Plain Language 1 The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L. 111–203). According to its preamble, the Dodd-Frank Act is intended ‘‘[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, [and] to protect the American taxpayer by ending bailouts.’’ 2 The Dodd-Frank Act itself pursues this goal through numerous provisions, including by requiring systemically important financial companies to develop resolution plans (also known as ‘‘living wills’’) that lay out how they could be resolved in an orderly manner under bankruptcy if they were to fail and by creating a new back-up resolution regime, the Orderly Liquidation Authority, applicable to systemically important financial companies. 12 U.S.C. 5365(d), 5381–5394. 3 The FRB received seventeen comment letters on the FRB NPRM during the comment period, which ended on August 5, 2016. 4 Under the GSIB surcharge rule’s methodology, there are currently eight U.S. GSIBs: Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley Inc., State Street Corporation, and Wells Fargo & Company. See FRB NPRM, 81 FR 29169, 29175 (May 11, 2016). This list may change in the future in light of changes to the relevant attributes of the current U.S. GSIBs and of other large U.S. bank holding companies. PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 E:\FR\FM\26OCP1.SGM 26OCP1 74328 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS entities’’).5 Subsequent to the FRB NPRM, the OCC issued the OCC NPRM, which applies the same QFC requirements to ‘‘covered banks’’ within the OCC’s jurisdiction. The FDIC is issuing this parallel proposed rule applicable to FSIs that are subsidiaries of a ‘‘covered entity’’ as defined in the FRB NPRM and to subsidiaries of such FSIs (collectively, ‘‘covered FSIs’’). The policy objective of this proposal focuses on improving the orderly resolution of a GSIB by limiting disruptions to a failed GSIB through its FSI subsidiaries’ financial contracts with other companies. The FRB NPRM, the OCC NPRM, and this proposal complement the ongoing work of the FRB and the FDIC on resolution planning requirements for GSIBs, and the FDIC intends this proposed rule to work in tandem with the FRB NPRM and the OCC NPRM.6 As discussed in Part I.D. below, the FDIC has a strong interest in preventing a disorderly termination of covered FSIs’ QFCs upon a GSIB’s entry into resolution proceedings. In fulfilling the FDIC’s responsibilities as (i) the primary federal supervisor for SNMBs and state savings associations; 7 (ii) the insurer of deposits and manager of the Deposit Insurance Fund (DIF); and (iii) the resolution authority for all FDIC-insured institutions under the FDI Act and, if appointed by the Secretary of the Treasury, for large complex financial institutions under Title II of the DoddFrank Act, the FDIC’s interests include ensuring that large complex financial institutions are resolvable in an orderly manner, and that FDIC-insured institutions operate safely and soundly.8 5 See FRB NPRM at § 252.83(a) (defining ‘‘covered entity’’ to include: (1) A bank holding company that is identified as a global systemically important [bank holding company] pursuant to 12 CFR 217.402; (2) A subsidiary of a company identified in paragraph (a)(1) of [section 252.83(a)] (other than a subsidiary that is a covered bank); or (3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global systemically important foreign banking organization (other than a U.S. subsidiary, U.S. branch, or U.S. agency that is a covered bank, section 2(h)(2) company or a DPC branch subsidiary)). In addition to excluding a ‘‘covered bank’’ from the definition of a ‘‘covered entity,’’ the FDIC expects that in its final rule, the FRB would also exclude ‘‘covered FSIs’’ from the NPRM’s definition of a ‘‘covered entity.’’ 81 FR 29169 (May 11, 2016) 6 For additional background regarding the interconnectivity of the largest financial firms, see FRB NPRM, 81 FR 29175–29176 (May 11, 2016). 7 Although the FDIC is the insurer for all insured depository institutions in the United States, it is the primary federal supervisor only for state-chartered banks that are not members of the Federal Reserve System, state-chartered savings associations, and insured state-licensed branches of foreign banks. As of March 31, 2016, the FDIC had primary supervisory responsibility for 3,911 SNMBs and state-chartered savings associations. 8 See https://www.fdic.gov/about/strategic/ strategic/supervision.html. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 The proposed rule specifically addresses QFCs, which are typically entered into by various operating entities in a GSIB group, including covered FSIs. These covered FSIs are affiliates of U.S. GSIBs or foreign GSIBs that have OTC derivatives exposure, making these entities interconnected with other large financial firms. The exercise of default rights against an otherwise healthy covered FSI resulting from the failure of its affiliate—e.g., its top-tier U.S. holding company—may cause it to weaken or fail. Accordingly, FDIC-supervised affiliates of U.S. or foreign GSIBs are exposed, through the interconnectedness of their QFCs and their affiliates’ QFCs, to destabilizing effects if their counterparties or the counterparties of their affiliates exercise default rights upon the entry into resolution of the covered FSI itself or its GSIB affiliate. These potentially destabilizing effects are best addressed by requiring all GSIB entities to amend their QFCs to include contractual provisions aimed at avoiding such destabilization. It is imperative that all entities within the GSIB group amend their QFCs in a similar way, thereby eliminating an incentive for counterparties to concentrate QFCs in entities subject to fewer restrictions. Therefore, the application of this proposed rule to the QFCs of covered FSIs is not only necessary for the safety and soundness of covered FSIs individually and collectively, but also to avoid potential destabilization of the overall banking system. This proposed rule imposes substantively identical requirements contained in the FRB NPRM on covered FSIs. The FDIC consulted with the FRB and the OCC in developing this proposed rule, and intends to continue coordinating with the FRB and the OCC in developing the final rule. Qualified financial contracts, default rights, and financial stability. Like the FRB NPRM, this proposal pertains to several important classes of financial transactions that are collectively known as QFCs.9 QFCs include swaps, other derivatives contracts, repurchase agreements (also known as ‘‘repos’’) and reverse repos, and securities lending and borrowing agreements.10 GSIBs enter into QFCs for a variety of purposes, including to borrow money to 9 The proposal would adopt the definition of ‘‘qualified financial contract’’ set out in section 210(c)(8)(D) of the Dodd-Frank Act, 12 U.S.C. 5390(c)(8)(D). See proposed rule § 382.1. 10 The definition of ‘‘qualified financial contract’’ is broader than this list of examples, and the default rights discussed are not common to all types of QFCs. PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 finance their investments, to lend money, to manage risk, and to enable their clients and counterparties to hedge risks, make markets in securities and derivatives, and take positions in financial investments. QFCs play a role in economically valuable financial intermediation when markets are functioning normally. But they are also a major source of financial interconnectedness, which can pose a threat to financial stability in times of market stress. This proposal—along with the FRB NPRM and OCC NPRM— focuses on a context in which that threat is especially great: The failure of a GSIB that is party to large volumes of QFCs, likely including QFCs with counterparties that are themselves systemically important. QFC continuity is important for the orderly resolution of a GSIB because it helps to ensure that the GSIB entities remain viable and to avoid instability caused by asset fire sales. Together, the FRB and FDIC have identified the exercise of certain default rights in financial contracts as a potential obstacle to orderly resolution in the context of resolution plans filed pursuant to section 165(d) of the DoddFrank Act,11 and have instructed systemically important firms to demonstrate that they are ‘‘amending, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings.’’ 12 More recently, in April 2016,13 the FRB and FDIC noted the important changes that have been made to the structure and operations of the largest financial firms, including the adherence by all U.S. GSIBs and their affiliates to the ISDA 2015 Universal Resolution Stay Protocol.14 Direct defaults and cross-defaults. Like the FRB NPRM and the OCC NPRM, this proposal focuses on two 11 12 U.S.C. 5365(d). and FDIC, ‘‘Agencies Provide Feedback on Second Round Resolution Plans of ‘First-Wave’ Filers’’ (August 5, 2014), available at https:// www.fdic.gov/news/news/press/2014/pr14067.html. See also FRB and FDIC, ‘‘Agencies Provide Feedback on Resolution Plans of Three Foreign Banking Organizations’’ (March 23, 2015), available at https://www.fdic.gov/news/news/press/2015/ pr15027.html; FRB and FDIC, ‘‘Guidance for 2013 165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Initial Resolution Plans in 2012’’ 5–6 (April 15, 2013), available at https://www.fdic.gov/news/news/press/ 2013/pr13027.html. 13 See https://www.fdic.gov/news/news/press/ 2016/pr16031a.pdf, at 13. 14 International Swaps and Derivatives Association, Inc., ‘‘ISDA 2015 Universal Resolution Stay Protocol’’ (November 4, 2015), available at https://assets.isda.org/media/ac6b533f-3/5a7c32f8pdf. 12 FRB E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS distinct scenarios in which a nondefaulting party to a QFC is commonly able to exercise default rights. These two scenarios involve a default that occurs when either the GSIB entity that is a direct party 15 to the QFC or an affiliate of that entity enters a resolution proceeding.16 The first scenario occurs when a GSIB entity that is itself a direct party to the QFC enters a resolution proceeding; this preamble refers to such a scenario as a ‘‘direct default’’ and refers to the default rights that arise from a direct default as ‘‘direct default rights.’’ The second scenario occurs when an affiliate of the GSIB entity that is a direct party to the QFC (such as the direct party’s parent holding company) enters a resolution proceeding; this preamble refers to such a scenario as a ‘‘cross-default’’ and refers to default rights that arise from a cross-default as ‘‘cross-default rights.’’ A GSIB parent entity will often guarantee the derivatives transactions of its subsidiaries and those derivatives contracts could contain cross-default rights against a subsidiary of the GSIB that would be triggered by the bankruptcy filing of the GSIB parent entity even though the subsidiary continues to meet all of its financial obligations. Importantly, like the FRB NPRM and the OCC NPRM, this proposal does not affect all types of default rights, and, where it affects a default right, the proposal does so only temporarily for the purpose of allowing the relevant resolution authority to take action to continue to provide for continued performance on the QFC. Moreover, the proposal is concerned only with default rights that run against a GSIB entity— that is, direct default rights and cross15 In general, a ‘‘direct party’’ refers to a party to a financial contract other than a credit enhancement (such as a guarantee). The definition of ‘‘direct party’’ and related definitions are discussed in more detail below on page 38. 16 This preamble uses phrases such as ‘‘entering a resolution proceeding’’ and ‘‘going into resolution’’ to encompass the concept of ‘‘becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding.’’ These phrases refer to proceedings established by law to deal with a failed legal entity. In the context of the failure of a systemically important banking organization, the most relevant types of resolution proceeding include the following: For most U.S.-based legal entities, the bankruptcy process established by the U.S. Bankruptcy Code (Title 11, United States Code); for U.S. insured depository institutions, a receivership administered by the Federal Deposit Insurance Corporation (FDIC) under the FDI Act (12 U.S.C. 1821); for companies whose ‘‘resolution under otherwise applicable Federal or State law would have serious adverse effects on the financial stability of the United States,’’ the Dodd-Frank Act’s Orderly Liquidation Authority (12 U.S.C. 5383(b)(2)); and, for entities based outside the United States, resolution proceedings created by foreign law. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 default rights that arise from the entry into resolution of a GSIB entity. The proposal would not affect default rights that a GSIB entity (or any other entity) may have against a counterparty that is not a GSIB entity. This limited scope is appropriate because, as described above, the risk posed to financial stability by the exercise of QFC default rights is greatest when the defaulting counterparty is a GSIB entity. Resolution Strategies Single-point-of-entry resolution. Cross-default rights are especially significant in the context of a GSIB failure because GSIBs typically enter into large volumes of QFCs through different entities controlled by the GSIB. For example, a U.S. GSIB is made up of a U.S. bank holding company and numerous operating subsidiaries that are owned, directly or indirectly, by the bank holding company. As stated in the FRB NPRM, from the standpoint of financial stability, the most important of these operating subsidiaries are generally a U.S. insured depository institution, a U.S. broker-dealer, or similar entities organized in other countries. Many complex GSIBs have developed resolution strategies that rely on the single-point-of-entry (SPOE) resolution strategy. In an SPOE resolution of a GSIB, only a single legal entity—the GSIB’s top-tier bank holding company— would enter a resolution proceeding. The effect of losses that led to the GSIB’s failure would pass up from the operating subsidiaries that incurred the losses to the holding company and would then be imposed on the equity holders and unsecured creditors of the holding company through the resolution process. This strategy is designed to help ensure that the GSIB subsidiaries remain adequately capitalized, and that operating subsidiaries of the GSIB are able to stabilize and continue meeting their financial obligations without immediately defaulting or entering resolution themselves. The expectation that the holding company’s equity holders and unsecured creditors would absorb the GSIB’s losses in the event of failure would help to maintain the confidence of the operating subsidiaries’ creditors and counterparties (including their QFC counterparties), reducing their incentive to engage in potentially destabilizing funding runs or margin calls and thus lowering the risk of asset fire sales. A successful SPOE resolution would also avoid the need for separate resolution proceedings for separate legal entities run by separate authorities across multiple jurisdictions, which would be more complex and could PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 74329 therefore destabilize the resolution. An SPOE resolution can also avoid the need for insured bank subsidiaries, including covered FSIs, to be placed into receivership or similar proceedings as the likelihood of their continuing to operate as going concerns will be significantly enhanced if the parent’s entry into resolution proceedings does not trigger the exercise of cross-default rights. Accordingly, this proposed rule, by limiting such cross-default rights based on an affiliate’s entry into resolution proceedings, assists in stabilizing both the covered FSIs and the larger banking system. Multiple-Point-of-Entry Resolution. This proposal would also yield benefits for other approaches to resolution. For example, preventing early terminations of QFCs would increase the prospects for an orderly resolution under a multiple-point-of-entry (MPOE) strategy involving a foreign GSIB’s U.S. intermediate holding company going into resolution or a resolution plan that calls for a GSIB’s U.S. insured depository institution to enter resolution under the FDI Act. As discussed above, this proposal would help support the continued operation of affiliates of an entity experiencing resolution to the extent the affiliate continues to perform on its QFCs. U.S. Bankruptcy Code. While insured depository institutions are not subject to resolution under the Bankruptcy Code, if a bank holding company were to fail, it would likely be resolved under the Bankruptcy Code. When an entity goes into resolution under the Bankruptcy Code, attempts by the debtor’s creditors to enforce their debts through any means other than participation in the bankruptcy proceeding (for instance, by suing in another court, seeking enforcement of a preexisting judgment, or seizing and liquidating collateral) are generally blocked by the imposition of an automatic stay.17 A key purpose of the automatic stay, and of bankruptcy law in general, is to maximize the value of the bankruptcy estate and the creditors’ ultimate recoveries by facilitating an orderly liquidation or restructuring of the debtor. The automatic stay thus solves a collective action problem in which the creditors’ individual incentives to become the first to recover as much from the debtor as possible, before other creditors can do so, collectively cause a value-destroying disorderly liquidation of the debtor.18 17 See 11 U.S.C. 362. e.g., Aiello v. Providian Financial Corp., 239 F.3d 876, 879 (7th Cir. 2001). 18 See, E:\FR\FM\26OCP1.SGM 26OCP1 74330 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS However, the Bankruptcy Code largely exempts QFC 19 counterparties from the automatic stay through special ‘‘safe harbor’’ provisions.20 Under these provisions, any rights that a QFC counterparty has to terminate the contract, set off obligations, and liquidate collateral in response to a direct default are not subject to the stay and may be exercised against the debtor immediately upon default. (The Bankruptcy Code does not itself confer default rights upon QFC counterparties; it merely permits QFC counterparties to exercise certain rights created by other sources, such as contractual rights created by the terms of the QFC.) The Bankruptcy Code’s automatic stay also does not prevent the exercise of cross-default rights against an affiliate of the party entering resolution. The stay generally applies only to actions taken against the party entering resolution or the bankruptcy estate,21 whereas a QFC counterparty exercising a cross-default right is instead acting against a distinct legal entity that is not itself in resolution: The debtor’s affiliate. Title II of the Dodd-Frank Act and the Orderly Liquidation Authority. Title II of the Dodd-Frank Act (Title II) imposes somewhat broader stay requirements on QFCs of companies that enter resolution under that back-up resolution authority. In general, a U.S. bank holding company (such as the top-tier holding company of a U.S. GSIB) that fails would be resolved under the Bankruptcy Code. With Title II, Congress recognized, however, that a financial company might fail under extraordinary circumstances in which an attempt to resolve it through the bankruptcy process would have serious adverse effects on financial stability in the United States. Title II of the DoddFrank Act establishes the Orderly Liquidation Authority, an alternative resolution framework intended to be used rarely to manage the failure of a firm that poses a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.22 Title II authorizes the Secretary of the Treasury, upon the recommendation of other 19 The Bankruptcy Code does not use the term ‘‘qualified financial contract,’’ but the set of transactions covered by its safe harbor provisions closely tracks the set of transactions that fall within the definition of ‘‘qualified financial contract’’ used in Title II of the Dodd-Frank Act and in this proposal. 20 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 559, 560, 561. The Bankruptcy Code specifies the types of parties to which the safe harbor provisions apply, such as financial institutions and financial participants. Id. 21 See 11 U.S.C. 362(a). 22 Section 204(a) of the Dodd-Frank Act, 12 U.S.C. 5384(a). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 government agencies and a determination that several preconditions are met, to place a financial company into a receivership conducted by the FDIC as an alternative to bankruptcy.23 Title II empowers the FDIC to transfer QFCs to a bridge financial company or some other financial company that is not in a resolution proceeding and should therefore be capable of performing under the QFCs.24 To give the FDIC time to effect this transfer, Title II temporarily stays QFC counterparties of the failed entity from exercising termination, netting, and collateral liquidation rights ‘‘solely by reason of or incidental to’’ the failed entity’s entry into Title II resolution, its insolvency, or its financial condition.25 Once the QFCs are transferred in accordance with the statute, Title II permanently stays the exercise of default rights for those reasons.26 Title II addresses cross-default rights through a similar procedure. It empowers the FDIC to enforce contracts of subsidiaries or affiliates of the failed covered financial company that are ‘‘guaranteed or otherwise supported by or linked to the covered financial company, notwithstanding any contractual right to cause the termination, liquidation, or acceleration of such contracts based solely on the insolvency, financial condition, or receivership of’’ the failed company, so long as, in the case of guaranteed or supported QFCs, the FDIC takes certain steps to protect the QFC counterparties’ interests by the end of the business day following the company’s entry into Title II resolution.27 These stay-and-transfer provisions of the Dodd-Frank Act are intended to mitigate the threat posed by QFC default rights. At the same time, the provisions allow for appropriate protections for QFC counterparties of the failed financial company. The provisions stay the exercise of default rights based on the failed company’s entry into resolution, the fact of its insolvency, or its financial condition. And the stay period is temporary, unless the FDIC transfers the QFCs to another financial company that is not in resolution (and should therefore be capable of performing under the QFCs) or, in the case of cross-default rights relating to 23 See section 203 of the Dodd-Frank Act, 12 U.S.C. 5383. 24 See 12 U.S.C. 5390(c)(9). 25 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay generally lasts until 5:00 p.m. eastern time on the business day following the appointment of the FDIC as receiver. 26 12 U.S.C. 5390(c)(10)(B)(i)(II). 27 12 U.S.C. 5390(c)(16); 12 CFR 380.12. PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 guaranteed or supported QFCs, the FDIC takes the action required in order to continue to enforce those contracts.28 The Federal Deposit Insurance Act. Under the FDI Act, a failing insured depository institution would generally enter a receivership administered by the FDIC.29 The FDI Act addresses direct default rights in the failed bank’s QFCs with stay-and-transfer provisions that are substantially similar to the provisions of Title II of the Dodd-Frank Act discussed above.30 However, the FDI Act does not address cross-default rights, leaving the QFC counterparties of the failed depository institution’s affiliates free to exercise any contractual rights they may have to terminate, net, and liquidate collateral based on the depository institution’s entry into resolution. Moreover, as with Title II, there is a possibility that a court of a foreign jurisdiction might decline to enforce the FDI Act’s stay-and-transfer provisions under certain circumstances. B. Overview of the Proposal The FDIC invites comment on all aspects of this proposed rulemaking, which is intended to increase GSIB resolvability by addressing two QFCrelated issues and thereby enhance resiliency of FSIs and the overall banking system. First, the proposal seeks to address the risk that a court in a foreign jurisdiction may decline to enforce the QFC stay-and-transfer provisions of Title II and the FDI Act discussed above. The proposed rule directly enhances the prospects of orderly resolution by establishing the applicability of U.S. special resolution regimes to all counterparties, whether they are foreign or domestic. Although domestic entities are clearly subject to the temporary stay provisions of Title II and the FDI Act, these stays may be difficult to enforce in a cross-border context. As a result, domestic counterparties of a failed U.S. financial institution may be disadvantaged relative to foreign counterparties, as domestic counterparties would be subject to the stay, and accompanying potential market volatility, while, if the stay was not enforced by foreign authorities, foreign counterparties could close out immediately. Furthermore, a mass close out by such foreign counterparties would likely exacerbate market volatility, which in turn would likely magnify harm to the stayed U.S. counterparties’ positions. This proposed rule would reduce the risk of these adverse consequences by requiring 28 See id. U.S.C. 1821(c). 30 See 12 U.S.C. 1821(e)(8)–(10). 29 12 E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS covered FSIs to condition the exercise of default rights in covered contracts on the stay provisions of Title II and the FDI Act. Second, the proposal seeks to address the potential disruption that may occur if a counterparty to a QFC with an affiliate of a GSIB entity that goes into resolution under the Bankruptcy Code or the FDI Act is allowed to exercise cross-default rights. Affiliates of a GSIB that goes into resolution under the Bankruptcy Code may face disruptions to their QFCs as their counterparties exercise cross-default rights. Thus, a healthy covered FSI whose parent bank holding company entered resolution proceedings could fail due to its counterparties exercising cross-default rights. This proposed rule would address this issue by generally restricting the exercise of cross-default rights by counterparties against a covered FSI. Scope of application. The proposal’s requirements would apply to all ‘‘covered FSIs.’’ ‘‘Covered FSIs’’ include: Any state savings associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to section 252.82(a)(1) of the FRB’s Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization 31 that has been designated pursuant to section 252.87 of the FRB’s Regulation YY (12 CFR 252.87). This proposed rule also makes clear that the mandatory contractual stay requirements apply to the subsidiaries of any covered FSI. Under the proposed rule, the term ‘‘covered FSI’’ also includes ‘‘any subsidiary of a covered FSI.’’ For the reasons noted above, all subsidiaries of covered FSIs should also be subject to mandatory contractual stay requirements—e.g., to avoid concentrating QFCs in entities subject to fewer restrictions. ‘‘Qualified financial contract’’ or ‘‘QFC’’ would be defined to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act,32 and would include, among other things, derivatives, repos, and securities 31 The definition of covered FSI does not include insured state-licensed branches of FBOs. Any insured state-licensed branches of global systemically important FBOs would be covered by the Board NPRM. Therefore, unlike the FRB NPRM, the FDIC is not including in this proposal any exclusion for certain QFCs subject to a multi-branch netting arrangement. 32 12 U.S.C. 5390(c)(8)(D). See proposed rule § 382.1. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 lending agreements. Subject to the exceptions discussed below, the proposal’s requirements would apply to any QFC to which a covered FSI is party (covered QFC).33 Required contractual provisions related to the U.S. special resolution regimes. Covered FSIs would be required to ensure that covered QFCs include contractual terms explicitly providing that any default rights or restrictions on the transfer of the QFC are limited to the same extent as they would be pursuant to the U.S. special resolution regimes—that is, Title II and the FDI Act.34 The proposed requirements are not intended to imply that the statutory stay-and-transfer provisions would not in fact apply to a given QFC, but rather to help ensure that all covered QFCs—including QFCs that are governed by foreign law, entered into with a foreign party, or for which collateral is held outside the United States—would be treated the same way in the context of an FDIC receivership under the Dodd-Frank Act or the FDI Act. This provision would address the first issue listed above and would decrease the QFC-related threat to financial stability posed by the failure and resolution of an internationally active GSIB. This section of the proposal is also consistent with analogous legal requirements that have been imposed in other national jurisdictions 35 and with the Financial Stability Board’s ‘‘Principles for Cross-border Effectiveness of Resolution Actions.’’ 36 33 In addition, the proposed rule states at § 382.2(d) that it does not modify or limit, in any manner, the rights and powers of the FDIC as receiver under the FDI Act or Title II of the DoddFrank Act, including, without limitation, the rights of the receiver to enforce provisions of the FDI Act or Title II of the Dodd-Frank Act that limit the enforceability of certain contractual provisions. For example, the suspension of payment and delivery obligations to QFC counterparties during the stay period as provided under the FDI Act and Title II when an entity is in receivership under the FDI Act or Title II remains valid and unchanged irrespective of any contrary contractual provision and may continue to be enforced by the FDIC as receiver. Similarly, the use by a counterparty to a QFC of a contractual provision that allows the party to terminate a QFC on demand, or at its option at a specified time, or from time to time, for any reason, to terminate a QFC on account of the appointment of the FDIC as receiver (or the insolvency or financial condition of the company) remains unenforceable, and the QFC may be enforced by the FDIC as receiver notwithstanding any such purported termination. 34 See proposed rule § 382.3. 35 See, e.g., Bank of England Prudential Regulation Authority, Policy Statement, ‘‘Contractual stays in financial contracts governed by third-country law’’ (November 2015), available at https://www.bankofengland.co.uk/pra/Documents/ publications/ps/2015/ps2515.pdf. 36 Financial Stability Board, ‘‘Principles for Crossborder Effectiveness of Resolution Actions’’ (November 3, 2015), available at https://www.fsb.org/ PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 74331 Prohibited cross-default rights. A covered FSI would be prohibited from entering into covered QFCs that would allow the exercise of cross-default rights—that is, default rights related, directly or indirectly, to the entry into resolution of an affiliate of the direct party—against it.37 Covered FSIs would similarly be prohibited from entering into covered QFCs that would provide for a restriction on the transfer of a credit enhancement supporting the QFC from the covered FSI’s affiliate to a transferee upon or following the entry into resolution of the affiliate. The FDIC does not propose to prohibit covered FSIs from entering into QFCs that contain direct default rights. Under the proposal, a counterparty to a direct QFC with a covered FSI also could, to the extent not inconsistent with Title II or the FDI Act, be granted and could exercise the right to terminate the QFC if the covered FSI fails to perform its obligations under the QFC. As an alternative to bringing their covered QFCs into compliance with the requirements set out in this section of the proposed rule, covered FSIs would be permitted to comply by adhering to the ISDA 2015 Resolution Stay Protocol.38 The FDIC views the ISDA 2015 Resolution Stay Protocol as consistent with the requirements of the proposed rule. The purpose of this section of the proposal is to help ensure that, when a GSIB entity enters resolution under the Bankruptcy Code or the FDI Act,39 its affiliates’ covered QFCs will be protected from disruption to a similar extent as if the failed entity had entered resolution under Title II. In particular, this section would facilitate resolution under the Bankruptcy Code by preventing the QFC counterparties of a GSIB’s subsidiary from exercising default rights on the basis of the entry into bankruptcy by the GSIB’s top-tier wp-content/uploads/Principles-for-Cross-borderEffectiveness-of-Resolution-Actions.pdf. The Financial Stability Board (FSB) was established in 2009 to coordinate the work of national financial authorities and international standard-setting bodies and to develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies to advance financial stability. The FSB brings together national authorities responsible for financial stability in 24 countries and jurisdictions, as well as international financial institutions, sectorspecific international groupings of regulators and supervisors, and committees of central bank experts. See generally Financial Stability Board, available at https://www.fsb.org. 37 See proposed rule § 382.3(b) and § 382.4(b). 38 See proposed rule § 382.5(a). 39 The FDI Act does not stay cross-default rights against affiliates of an insured depository institution based on the entry of the insured depository institution into resolution proceedings under the FDI Act. E:\FR\FM\26OCP1.SGM 26OCP1 74332 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS holding company or any other affiliate of the subsidiary. This section generally would not prevent covered QFCs from allowing the exercise of default rights upon a failure by the direct party to satisfy a payment or delivery obligation under the QFC, the direct party’s entry into bankruptcy, or the occurrence of any other default event that is not related to the entry into a resolution proceeding or the financial condition of an affiliate of the direct party. Process for approval of enhanced creditor protection conditions. As noted above, in the context of addressing the potential disruption that may occur if a counterparty to a QFC with an affiliate of a GSIB entity that goes into resolution under the Bankruptcy Code or the FDI Act is allowed to exercise cross-default rights, the proposed rule generally restricts the exercise of cross-default rights by counterparties against a covered FSI. The proposal would allow the FDIC, at the request of a covered FSI, to approve as compliant with the requirements of 382.5 proposed creditor protection provisions for covered QFCs.40 The FDIC could approve such a request if, in light of several enumerated considerations,41 the alternative approach would mitigate risks to the financial stability of the United States presented by a GSIB’s failure to at least the same extent as the proposed requirements. The FDIC expects to consult with the FRB and OCC during its consideration of a request under this section. Amendments to certain definitions in the FDIC ’s capital and liquidity rules. The proposal would also amend certain definitions in the FDIC’s capital and liquidity rules to help ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is party is not affected by the proposed restrictions on such QFCs. Specifically, the proposal would amend the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s regulatory capital and liquidity rules and would similarly amend the definitions of the terms ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ and ‘‘repo-style transaction’’ in the FDIC’s regulatory capital rules.42 C. Consultation With U.S Financial Regulators In developing this proposal, the FDIC consulted with the FRB and the OCC as a means of promoting alignment across regulations and avoiding redundancy. 40 See proposed rule § 382.5(c). id. 42 See proposed rule §§ 324.2 and 329.3. 41 See VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 The proposal reflects input that the FDIC received during this consultation process. Furthermore, the FDIC expects to consult with foreign financial regulatory authorities regarding this proposal and the establishment of other standards that would maximize the prospects for the cooperative and orderly cross-border resolution of a failed GSIB on an international basis. D. Overview of Statutory Authority and Purpose The FDIC is issuing this proposed rule under its authorities under the FDI Act (12 U.S.C. 1811 et seq.), including its general rulemaking authorities.43 The FDIC views the proposed rule as consistent with its overall statutory mandate.44 An overarching purpose of this proposed rule is to limit disruptions to an orderly resolution of a GSIB and its subsidiaries, thereby furthering financial stability generally. Another purpose is to enhance the safety and soundness of covered FSIs by addressing the two main issues raised by covered QFCs (noted above): Crossborder recognition and cross-default rights. As discussed above and in the FRB NPRM, the exercise of default rights by counterparties of a failed GSIB can have significant impacts on financial stability. These financial stability concerns are necessarily intertwined with the safety and soundness of covered FSIs and the banking system— the disorderly exercise of default rights can produce a sudden, contemporaneous threat to the safety and soundness of individual institutions, including insured depository institutions, throughout the system, which in turn threatens the system as a whole.F Furthermore, the failure of multiple insured depository institutions in the same time period can stress the DIF, which is managed by the FDIC. Covered FSIs could themselves be a contributing factor to financial destabilization due to the interconnectedness of these institutions to each other and to other entities within the financial system. While the covered FSI may not itself be considered systemically important, as part of a GSIB, the disorderly resolution of the covered FSI could 43 See 12 U.S.C. 1819. FDIC is (i) the primary federal supervisor for SNMBs and state savings associations; (ii) insurer of deposits and manager of the deposit insurance fund (DIF); and (iii) the resolution authority for all FDIC-insured institutions under the Federal Deposit Insurance Act and for large complex financial institutions under Title II of the Dodd-Frank Act. See 12 U.S.C. 1811, 1816, 1818, 1819, 1820(g), 1828, 1828m, 1831p–1, 1831–u, 5301 et seq. 44 The PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 result in a significant negative impact on the financial system. Additionally, the application of this proposed rule to the QFCs of covered FSIs should avoid creating what may otherwise be an incentive for GSIBs and their counterparties to concentrate QFCs in entities that are subject to fewer counterparty restrictions. Question 1: The FDIC invites comment on all aspects of this notice of proposed rulemaking. II. Proposed Restrictions on QFCs of Covered FSIs A. Covered FSIs (Section 382.2(a) of the Proposed Rule) The proposed rule would apply to ‘‘covered FSIs.’’ The term ‘‘covered FSI’’ would be defined to include: Any state savings associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to section 252.82(a)(1) of the FRB’s Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization that has been designated pursuant to section 252.87 of the FRB’s Regulation YY (12 CFR 252.87). The mandatory contractual stay requirements would also apply to the subsidiaries of any covered FSI. Under the proposed rule, the term ‘‘covered FSI’’ also includes any ‘‘subsidiary of covered FSI.’’ Question 2: The FDIC invites comment on the proposed definition of the term ‘‘covered FSI.’’ B. Covered QFCs General definition. The proposal would apply to any ‘‘covered QFC,’’ generally defined as any QFC that a covered FSI enters into, executes, or otherwise becomes party to.45 ‘‘Qualified financial contract’’ or ‘‘QFC’’ would be defined as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and would include swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, securities contracts, and forward agreements.46 The proposed definition of ‘‘covered QFC’’ is intended to limit the proposed restrictions to those financial transactions whose disorderly unwind has substantial potential to frustrate the 45 See proposed rule § 382.3(a). For convenience, this preamble generally refers to ‘‘a covered FSI’s QFCs’’ or ‘‘QFCs to which a covered FSI is party’’ as shorthand to encompass this definition. 46 See proposed rule § 382.1; 12 U.S.C. 5390(c)(8)(D). E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS orderly resolution of a GSIB and its affiliates, as discussed above. By adopting the Dodd-Frank Act’s definition, the proposed rule would extend the benefits of the stay-andtransfer protections to the same types of transactions in the event a GSIB enters bankruptcy. In this way, the proposal enhances the prospects for an orderly resolution in bankruptcy (as opposed to resolution under Title II of the DoddFrank Act) of a GSIB. Question 3: The FDIC invites comment on the proposed definitions of ‘‘QFC’’ and ‘‘covered QFC.’’ Exclusion of cleared QFCs. The proposal would exclude from the definition of ‘‘covered QFC’’ all QFCs that are cleared through a central counterparty.47 The FDIC, in consultation with the FRB and OCC, will continue to consider the appropriate treatment of centrally cleared QFCs, in light of differences between cleared and non-cleared QFCs with respect to contractual arrangements, counterparty credit risk, default management, and supervision. Question 4: The FDIC invites comment on the proposed exclusion of cleared QFCs, including the potential effects on the financial stability of the United States of excluding cleared QFCs as well as the potential effects on U.S. financial stability of subjecting covered entities’ relationships with central counterparties to restrictions analogous to this proposal’s restrictions on covered entities’ non-cleared QFCs. In addition, the FDIC invites comment on whether the proposed exclusion of covered entity QFCs in § 382.7 is sufficiently clear. Where a credit enhancement supports a covered QFC, and where a direct party to a covered QFC is a covered FSI, covered entity, or covered bank, would an alternative process better facilitate compliance with this proposal? C. Definition of ‘‘Default Right’’ As discussed above, a party to a QFC generally has a number of rights that it can exercise if its counterparty defaults on the QFC by failing to meet certain contractual obligations. These rights are generally, but not always, contractual in nature. One common default right is a setoff right: the right to reduce the total amount that the non-defaulting party must pay by the amount that its defaulting counterparty owes. A second common default right is the right to liquidate pledged collateral and use the proceeds to pay the defaulting party’s net obligation to the non-defaulting party. Other common rights include the ability to suspend or delay the non47 See proposed rule § 382.7(a). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 defaulting party’s performance under the contract or to accelerate the obligations of the defaulting party. Finally, the non-defaulting party typically has the right to terminate the QFC, meaning that the parties would not make payments that would have been required under the QFC in the future. The phrase ‘‘default right’’ in the proposed rule is broadly defined to include these common rights as well as ‘‘any similar rights.’’ 48 Additionally, the definition includes all such rights regardless of source, including rights existing under contract, statute, or common law. However, the proposed definition excludes two rights that are typically associated with the business-as-usual functioning of a QFC. First, same-day netting that occurs during the life of the QFC in order to reduce the number and amount of payments each party owes the other is excluded from the definition of ‘‘default right.’’ 49 Second, contractual margin requirements that arise solely from the change in the value of the collateral or the amount of an economic exposure are also excluded from the definition.50 The function of these exclusions is to leave such rights unaffected by the proposed rule. However, certain QFCs are also commonly subject to rights that would increase the amount of collateral or margin that the defaulting party (or a guarantor) must provide upon an event of default. The financial impact of such default rights on a covered entity could be similar to the impact of the liquidation and acceleration rights discussed above. Therefore, the proposed definition of ‘‘default right’’ includes such rights (with the exception discussed in the previous paragraph for margin requirements that depend solely on the value of collateral or the amount of an economic exposure).51 Finally, contractual rights to terminate without the need to show cause, including rights to terminate on demand and rights to terminate at contractually specified intervals, are excluded from the definition of ‘‘default right’’ for purposes of the proposed rule’s restrictions on cross-default rights (section 382.4 of the proposed rule).52 This is consistent with the proposal’s objective of restricting only default rights that are related, directly or indirectly, to the entry into resolution of an affiliate of the covered entity, while 48 See proposed rule § 382.1. id. 50 See id. 51 See id. 52 See proposed rule §§ 382.1, 382.4. 49 See PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 74333 leaving other default rights unrestricted.53 Question 5: The FDIC invites comment on all aspects of the proposed definition of ‘‘default right.’’ D. Required Contractual Provisions Related to the U.S. Special Resolution Regimes (Section 382.3 of the Proposed Rule) Under the proposal, a covered QFC would be required to explicitly provide both (a) that the transfer of the QFC (and any interest or obligation in or under it and any property securing it) from the covered entity to a transferee will be effective to the same extent as it would be under the U.S. special resolution regimes if the covered QFC were governed by the laws of the United States or of a state of the United States and (b) that default rights with respect to the covered QFC that could be exercised against a covered entity could be exercised to no greater extent than they could be exercised under the U.S. special resolution regimes if the covered QFC were governed by the laws of the United States or of a state of the United States.54 The proposal would define the term ‘‘U.S. special resolution regimes’’ to mean the FDI Act 55 and Title II of the Dodd-Frank Act,56 along with regulations issued under those statutes.57 The proposed requirements are not intended to imply that a given covered QFC is not governed by the laws of the United States or of a state of the United States, or that the statutory stay-andtransfer provisions would not in fact apply to a given covered QFC. Rather, the requirements are intended to provide certainty that all covered QFCs would be treated the same way in the context of a receivership under the Dodd-Frank Act or the FDI Act. The stay-and-transfer provisions of the U.S. special resolution regimes should be enforced with respect to all contracts of any U.S. GSIB entity that enters resolution under a U.S. special resolution regime as well as all transactions of the subsidiaries of such an entity. Nonetheless, it is possible that a court in a foreign jurisdiction would decline to enforce those provisions in cases brought before it (such as a case 53 The definition of ‘‘default right’’ in this proposal parallels the definition contained in the ISDA Protocol. The proposed rule does not modify or limit the FDIC’s powers in its capacity as receiver under the FDI Act or the Dodd-Frank Act with respect to a counterparties’ contractual or other rights. 54 See proposed rule § 382.3. 55 12 U.S.C. 1811–1835a. 56 12 U.S.C. 5381–5394. 57 See proposed rule § 382.1. E:\FR\FM\26OCP1.SGM 26OCP1 74334 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules regarding a covered QFC between a covered FSI and a non-U.S. entity that is governed by non-U.S. law and secured by collateral located outside the United States). By requiring that the effect of the statutory stay-and-transfer provisions be incorporated directly into the QFC contractually, the proposed requirement would help ensure that a court in a foreign jurisdiction would enforce the effect of those provisions, regardless of whether the court would otherwise have decided to enforce the U.S. statutory provisions themselves.58 For example, the proposed provisions should prevent a U.K. counterparty of a U.S. GSIB from persuading a U.K. court that it should be permitted to seize and liquidate collateral located in the United Kingdom in response to the U.S. GSIB’s entry into Title II resolution. And the knowledge that a court in a foreign jurisdiction would reject the purported exercise of default rights in violation of the required provisions would deter counterparties from attempting to exercise such rights. This requirement would advance the proposal’s goal of removing QFC-related obstacles to the orderly resolution of a GSIB. As discussed above, restrictions on the exercise of QFC default rights are an important prerequisite for an orderly GSIB resolution.59 Question 6: The FDIC invites comment on all aspects of this section of the proposal. E. Prohibited Cross-Default Rights (Section 382.4 of the Proposed Rule) Lhorne on DSK30JT082PROD with PROPOSALS Definitions. Section 382.4 of the proposal applies in the context of insolvency proceedings 60 and pertains to cross-default rights in QFCs between covered FSIs and their counterparties, many of which are subject to credit enhancements (such as a guarantee) provided by an affiliate of the covered FSI. Because credit enhancements on QFCs are themselves ‘‘qualified financial contracts’’ under the DoddFrank Act’s definition of that term (which this proposal would adopt), the proposal includes the following additional definitions in order to 58 See generally Financial Stability Board, ‘‘Principles for Cross-border Effectiveness of Resolution Actions’’ (November 3, 2015), available at https://www.fsb.org/wp-content/uploads/ Principles-for-Cross-border-Effectiveness-ofResolution-Actions.pdf. 59 See FRB NPRM, 81 FR 29178 (May 11, 2016) for additional discussion regarding consistency of this proposal with similar regulatory efforts in foreign jurisdictions. 60 See proposed rule § 382.4 (noting that section does not apply to proceedings under Title II of the Dodd-Frank Act). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 facilitate a precise description of the relationships to which it would apply. First, the proposal distinguishes between a credit enhancement and a ‘‘direct QFC,’’ defined as any QFC that is not a credit enhancement.61 The proposal also defines ‘‘direct party’’ to mean a covered FSI that is itself a party to the direct QFC, as distinct from an entity that provides a credit enhancement.62 In addition, the proposal defines ‘‘affiliate credit enhancement’’ to mean ‘‘a credit enhancement that is provided by an affiliate of the party to the direct QFC that the credit enhancement supports,’’ as distinct from a credit enhancement provided by either the direct party itself or by an unaffiliated party.63 Moreover, the proposal defines ‘‘covered affiliate credit enhancement’’ to mean an affiliate credit enhancement provided by a covered entity, covered bank, or covered FSI, and defines ‘‘covered affiliate support provider’’ to mean the covered entity, covered bank, or covered FSI that provides the covered affiliate credit enhancement.64 Finally, the proposal defines the term ‘‘supported party’’ to mean any party that is the beneficiary of a covered affiliate credit enhancement (that is, the QFC counterparty of a direct party, assuming that the direct QFC is subject to a covered affiliate credit enhancement).65 General prohibitions. Subject to the substantial exceptions discussed below, the proposal would prohibit a covered FSI from being party to a covered QFC that allows for the exercise of any default right that is related, directly or indirectly, to the entry into resolution of an affiliate of the covered FSI.66 The proposal also would generally prohibit a covered FSI from being party to a covered QFC that would prohibit the transfer of any credit enhancement applicable to the QFC (such as another entity’s guarantee of the covered FSI’s obligations under the QFC), along with associated obligations or collateral, upon the entry into resolution of an affiliate of the covered FSI.67 61 See proposed rule § 382.4(c)(2). proposed rule § 382.4(c)(1). 63 See proposed rule § 382.4(c)(3). 64 See proposed rule § 382.4(f)(2). 65 See proposed rule § 382.4(f)(4). 66 See proposed rule § 382.4(b)(1). 67 See proposed rule § 382.4(b)(2). This prohibition would be subject to an exception that would allow supported parties to exercise default rights with respect to a QFC if the supported party would be prohibited from being the beneficiary of a credit enhancement provided by the transferee under any applicable law, including the Employee Retirement Income Security Act of 1974 and the Investment Company Act of 1940. This exception is substantially similar to an exception to the transfer restrictions in section 2(f) of the ISDA 2014 62 See PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 A primary purpose of the proposed restrictions is to facilitate the resolution of a GSIB outside of Title II, including under the Bankruptcy Code. As discussed above, the potential for mass exercises of QFC default rights is one reason why a GSIB’s failure could do severe damage to financial stability. In the context of an SPOE resolution, if the GSIB parent’s entry into resolution led to the mass exercise of cross-default rights by the subsidiaries’ QFC counterparties, then the subsidiaries could themselves fail or experience financial distress. Moreover, the mass exercise of QFC default rights could entail asset fire sales, which likely would affect other financial companies and undermine financial stability. Similar disruptive results can occur with an MPOE resolution of an affiliate of an otherwise performing entity triggers default rights on QFCs involving the performing entity. In an SPOE resolution, this damage could be avoided if actions of the following two types are prevented: The exercise of direct default rights against the top-tier holding company that has entered resolution, and the exercise of cross-default rights against the operating subsidiaries based on their parent’s entry into resolution. (Direct default rights against the subsidiaries would not be exercisable because the subsidiaries would not enter resolution.) In an MPOE resolution, this damage could occur from exercise of default rights against a performing entity based on the failure of an affiliate. Under Title II, the stay-and-transfer provisions would address both direct default rights and cross-default rights. But, as explained above, no similar statutory provisions would apply to a resolution under the Bankruptcy Code. This proposal attempts to address these obstacles to orderly resolution under the Bankruptcy Code by extending the stayand-transfer provisions to any type of resolution of an affiliate of a covered FSI that is not an insured depository institution. Similarly, the proposal would facilitate a transfer of the GSIB parent’s interests in its subsidiaries, along with any credit enhancements it provides for those subsidiaries, to a solvent financial company by prohibiting covered FSIs from having QFCs that would allow the QFC counterparty to prevent such a transfer or to use it as a ground for exercising default rights.68 Resolution Stay Protocol (2014 Protocol) and the ISDA 2015 Universal Resolution Stay Protocol, which was added to address concerns expressed by asset managers during the drafting of the 2014 Protocol. 68 See proposed rule § 382.4(b). E:\FR\FM\26OCP1.SGM 26OCP1 Lhorne on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules The proposal also is intended to facilitate other approaches to GSIB resolution. For example, it would facilitate a similar resolution strategy in which a U.S. depository institution subsidiary of a GSIB enters resolution under the FDI Act while its subsidiaries continue to meet their financial obligations outside of resolution.69 Similarly, the proposal would facilitate the orderly resolution of a foreign GSIB under its home jurisdiction resolution regime by preventing the exercise of cross-default rights against the foreign GSIB’s U.S. operations. The proposal would also facilitate the resolution of the U.S. intermediate holding company of a foreign GSIB, and the recapitalization of its U.S. operating subsidiaries, as part of a broader MPOE resolution strategy under which the foreign GSIB’s operations in other regions would enter separate resolution proceedings. Finally, the proposal would broadly prevent the unanticipated failure of any one GSIB entity from bringing about the disorderly failures of its affiliates by preventing the affiliates’ QFC counterparties from using the first entity’s failure as a ground for exercising default rights against those affiliates that continue meet to their obligations. The proposal is intended to enhance the potential for orderly resolution of a GSIB under the Bankruptcy Code, the FDI Act, or a similar resolution regime. By doing so, the proposal would advance the Dodd-Frank Act’s goal of making orderly GSIB resolution under the Bankruptcy Code workable.70 The proposal could also benefit the counterparties of a subsidiary of a failed GSIB, by preventing the disorderly failure of an otherwise-solvent subsidiary and allowing it to continue to meet its obligations. While it may be in the individual interest of any given counterparty to exercise any available rights against a subsidiary of a failed GSIB, the mass exercise of such rights could harm the counterparties’ collective interest by causing an otherwise-solvent subsidiary to fail. Therefore, like the automatic stay in bankruptcy, which serves to maximize creditors’ ultimate recoveries by preventing a disorderly liquidation of the debtor, the proposal would mitigate this collective action problem to the benefit of the failed firm’s creditors and counterparties by preventing a disorderly resolution. And because many creditors and counterparties of GSIBs are themselves systemically important financial firms, improving outcomes for those creditors and counterparties would further protect the financial stability of the United States. General creditor protections. While the proposed restrictions would facilitate orderly resolution, they would also diminish the ability of covered FSI’s QFC counterparties to include certain protections for themselves in covered QFCs. In order to reduce this effect, the proposal includes several substantial exceptions to the proposed restrictions.71 These permitted creditor protections are intended to allow creditors to exercise cross-default rights outside of an orderly resolution of a GSIB (as described above) and therefore would not be expected to undermine such a resolution. First, in order to ensure that the proposed prohibitions would apply only to cross-default rights (and not direct default rights), the proposal would provide that a covered QFC may permit the exercise of default rights based on the direct party’s entry into a resolution proceeding, other than a proceeding under a U.S. or foreign special resolution regime.72 This provision would help ensure that, if the direct party to a QFC were to enter bankruptcy, its QFC counterparties could exercise any relevant direct default rights. Thus, a covered FSI’s direct QFC counterparties would not risk the delay and expense associated with becoming involved in a bankruptcy proceeding, and would be able to take advantage of default rights that would fall within the Bankruptcy Code’s safe harbor provisions. The proposal would also allow, in the context of an insolvency proceeding, and subject to the statutory requirements and restrictions thereunder, covered QFCs to permit the exercise of default rights based on (i) the failure of the direct party; (ii) the direct party not satisfying a payment or delivery obligation; or (iii) a covered affiliate support provider or transferee not satisfying its payment or delivery obligations under the direct QFC or 71 See proposed rule § 382.4(e). proposed rule § 382.4(e)(1). Special resolution regimes typically stay direct default rights, but may not stay cross-default rights. For example, as discussed above, the FDI Act stays direct default rights, see 12 U.S.C. 1821(e)(10)(B), but does not stay cross-default rights, whereas Title II stays direct default rights and cross-defaults arising from a parent’s receivership, see 12 U.S.C. 5390(c)(10)(B), 5390(c)(16). 72 See 69 As discussed above, the FDI Act would prevent the exercise of direct default rights against the depository institution, but it does not address the threat posed to orderly resolution by cross-default rights in the QFCs of the depository institution’s subsidiaries. This proposal would facilitate orderly resolution under the FDI Act by filling that gap. 70 See 12 U.S.C. 5365(d). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 74335 credit enhancement.73 Moreover, the proposal would allow covered QFCs to permit the exercise of a default right in one QFC that is triggered by the direct party’s failure to satisfy its payment or delivery obligations under another contract between the same parties. The proposed exceptions for the creditor protections described above are intended to help ensure that the proposal permits a covered FSI’s QFC counterparties to protect themselves from imminent financial loss and does not create a risk of delivery gridlocks or daisy-chain effects, in which a covered entity’s failure to make a payment or delivery when due leaves its counterparty unable to meet its own payment and delivery obligations (the daisy-chain effect would be prevented because the covered entity’s counterparty would be permitted to exercise its default rights, such as by liquidating collateral). These exceptions are generally consistent with the treatment of payment and delivery obligations, following the applicable stay period, under the U.S. special resolution regimes. Additional creditor protections for supported QFCs. The proposal would allow additional creditor protections for a non-defaulting counterparty that is the beneficiary of a credit enhancement from an affiliate of the covered FSI that is a covered entity, covered bank, or covered FSI under the proposal.74 The proposal would allow these creditor protections in recognition of the supported party’s interest in receiving the benefit of its credit enhancement. Where a covered QFC is supported by a covered affiliate credit enhancement,75 the covered QFC and the credit enhancement would be permitted to allow the exercise of default rights 76 under the circumstances discussed below after the expiration of a stay period. Under the proposal, the applicable stay period would begin when the receiver is appointed and would end at the later of 5:00 p.m. (eastern time) on the next business day and 48 hours after the entry into resolution.77 This portion of 73 See proposed rule § 382.4(e). proposed rule § 382.4(g). 75 Note that the exception in § 382.4(g) of the proposed rule would not apply with respect to credit enhancements that are not covered affiliate credit enhancements. In particular, it would not apply with respect to a credit enhancement provided by a non-U.S. entity of a foreign GSIB, which would not be a covered entity under the proposal. 76 See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii) (suspending payment and delivery obligations for one business day or less). 77 See proposed rule § 382.4(h)(1). 74 See E:\FR\FM\26OCP1.SGM 26OCP1 74336 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules the proposal is similar to the stay treatment provided in a resolution under Title II or the FDI Act.78 Under the proposal, default rights could be exercised at the end of the stay period if the covered affiliate credit enhancement has not been transferred away from the covered affiliate support provider and that support provider becomes subject to a resolution proceeding other than a proceeding under Chapter 11 of the Bankruptcy Code or the FDI Act.79 Default rights could also be exercised at the end of the stay period if the transferee (if any) of the credit enhancement enters an insolvency proceeding, protecting the supported party from a transfer of the credit enhancement to a transferee that is unable to meet its financial obligations. Default rights could also be exercised at the end of the stay period if the original credit support provider does not remain, and no transferee becomes, obligated to the same (or substantially similar) extent as the original credit support provider was obligated immediately prior to entering a resolution proceeding (including a Chapter 11 proceeding) with respect to (a) the credit enhancement applicable to the covered QFC, (b) all other credit enhancements provided by the credit support provider on any other QFCs between the same parties, and (c) all credit enhancements provided by the credit support provider between the direct party and affiliates of the direct party’s QFC counterparty.80 Such creditor protections would be permitted in order to prevent the support provider or the transferee from ‘‘cherry picking’’ by assuming only those QFCs of a given counterparty that are favorable to the support provider or transferee. Title II and the FDI Act contain similar provisions to prevent cherry picking. Finally, if the covered affiliate credit enhancement is transferred to a transferee, then the non-defaulting counterparty could exercise default rights at the end of the stay period unless either (a) all of the support provider’s ownership interests in the direct party are also transferred to the transferee or (b) reasonable assurance is provided that substantially all of the support provider’s assets (or the net proceeds from the sale of those assets) will be transferred to the transferee in a timely manner. These conditions would help to assure the supported party that the transferee would be providing substantively the same credit enhancement as the covered affiliate support provider.81 Creditor protections related to FDI Act proceedings. Moreover, in the case of a covered QFC that is supported by a covered affiliate credit enhancement, both the covered QFC and the credit enhancement would be permitted to allow the exercise of default rights related to the credit support provider’s entry into resolution proceedings under the FDI Act 82 under the following circumstances: (a) After the FDI Act stay period,83 if the credit enhancement is not transferred under the relevant provisions of the FDI Act 84 and associated regulations, and (b) during the FDI Act stay period, to the extent that the default right permits the supported party to suspend performance under the covered QFC to the same extent as that party would be entitled to do if the covered QFC were with the credit support provider itself and were treated in the same manner as the credit enhancement.85 This provision is intended to ensure that a QFC counterparty of a subsidiary of a covered FSI that goes into FDI Act receivership can receive the equivalent level of protection that the FDI Act provides to QFC counterparties of the covered FSI itself.86 Prohibited terminations. In case of a legal dispute as to a party’s right to exercise a default right under a covered QFC, the proposal would require that a covered QFC must provide that, after an affiliate of the direct party has entered a resolution proceeding, (a) the party seeking to exercise the default right bears the burden of proof that the exercise of that right is indeed permitted by the covered QFC; and (b) the party seeking to exercise the default right must meet a ‘‘clear and convincing evidence’’ standard, a similar 81 12 U.S.C. 5390(c)(16)(A). discussed above, the FDI Act stays direct default rights against the failed depository institution but does not stay the exercise of crossdefault rights against its affiliates. 83 Under the FDI Act, the relevant stay period runs until 5:00 p.m. (eastern time) on the business day following the appointment of the FDIC as receiver. 12 U.S.C. 1821(e)(10)(B)(I). 84 12 U.S.C. 1821(e)(9)–(10). 85 See proposed rule § 382.4(i). 86 See id. (noting that the general creditor protections in section 382.4(e), and the additional creditor protections for supported QFCs in section 382.4(g), are inapplicable to FDI Act proceedings). Lhorne on DSK30JT082PROD with PROPOSALS 82 As 78 See 12 U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i), 5390(c)(16)(A). While the proposed stay period is similar to the stay periods that would be imposed by the U.S. special resolution regimes, it could run longer than those stay periods under some circumstances. 79 See proposed rule § 382.4(g)(1). Chapter 11 (11 U.S.C. 1101–1174) is the portion of the Bankruptcy Code that provides for the reorganization of the failed company, as opposed to its liquidation, and, relative to special resolution regimes, is generally well-understood by market participants. 80 See proposed rule § 382.4(g)(3). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 PO 00000 Frm 00022 Fmt 4702 Sfmt 4702 standard,87 or a more demanding standard. The purpose of this proposed requirement is to deter the QFC counterparty of a covered entity from thwarting the purpose of this proposal by exercising a default right because of an affiliate’s entry into resolution under the guise of other default rights that are unrelated to the affiliate’s entry into resolution. Agency transactions. In addition to entering into QFCs as principals, GSIBs may engage in QFCs as agents for other principals. For example, a GSIB subsidiary may enter into a master securities lending arrangement with a foreign bank as agent for a U.S.-based pension fund. The GSIB subsidiary would document its role as agent for the pension fund, often through an annex to the master agreement, and would generally provide to its customer (the principal party) a securities replacement guarantee or indemnification for any shortfall in collateral in the event of the default of the foreign bank.88 Similarly, a covered FSI may also enter into a QFC as agent acting on behalf of a principal. This proposal would apply to a covered QFC regardless of whether the covered FSI is acting as a principal or as an agent. Section 382.3 and section 382.4 do not distinguish between agents and principals with respect to default rights or transfer restrictions applicable to covered QFCs. Section 382.3 would limit default rights and transfer restrictions that a counterparty may have against a covered FSI consistent with the U.S. special resolution regimes.89 Section 382.4 would ensure that, subject to the enumerated creditor protections, counterparties could not exercise cross-default rights under the covered QFC against the covered FSI, acting as agent or principal, based on the resolution of an affiliate of the covered FSI.90 87 The reference to a ‘‘similar’’ burden of proof is intended to allow covered QFCs to provide for the application of a standard that is analogous to clear and convincing evidence in jurisdictions that do not recognize that particular standard. A covered QFC would not be permitted to provide for a lower standard. 88 The definition of QFC under Title II of the Dodd-Frank Act includes security agreements and other credit enhancements as well as master agreements (including supplements). 12 U.S.C. 5390(c)(8)(D). 89 See proposed rule § 382.3(a)(3). 90 See proposed rule § 382.4(d). If a covered FSI (acting as agent) is a direct party to a covered QFC, then the general prohibitions of section 382.4(b) would only affect the substantive rights of the agent’s principal(s) to the extent that the covered QFC provides default rights based directly or indirectly on the entry into resolution of an affiliate of the covered FSI (acting as agent). See also proposed rule § 382.4(a)(3). E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Compliance with the ISDA 2015 Resolution Stay Protocol. As an alternative to compliance with the requirements of section 382.4 that are described above, a covered FSI could comply with the proposed rule to the extent its QFCs are amended by adherence to the current ISDA 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and the Other Agreements Annex, as well as subsequent, immaterial amendments to the Protocol.91 The Protocol has the same general objective as the proposed rule: to make GSIBs more resolvable by amending their contracts to, in effect, contractually recognize the applicability of U.S. special resolution regimes 92 and to restrict cross-default provisions to facilitate orderly resolution under the U.S. Bankruptcy Code. Moreover, the provisions of the Protocol largely track the requirements of the proposed rule.93 Lhorne on DSK30JT082PROD with PROPOSALS 91 International Swaps and Derivatives Association, Inc., ISDA 2015 Universal Resolution Stay Protocol (November 4, 2015), available at https://assets.isda.org/media/ac6b533f-3/5a7c32f8pdf/. The ISDA 2015 Universal Resolution Stay Protocol (ISDA Protocol) expanded the 2014 ISDA Resolution Stay Protocol to cover securities financing transactions in addition to over-thecounter derivatives documented under ISDA Master Agreements. As between adhering parties, the ISDA Protocol replaces the 2014 ISDA Protocol (which does not cover securities financing transactions). Securities financing transactions (which generally include repurchase agreements and securities lending transactions) are documented under nonISDA master agreements. The Protocol was developed by a working group of member institutions of the International Swaps and Derivatives Association, Inc. (ISDA), in coordination with the FRB, the FDIC, the OCC, and foreign regulatory agencies. The Securities Financing Transaction Annex was developed by the International Capital Markets Association, the International Securities Lending Association, and the Securities Industry and Financial Markets Association, in coordination with ISDA. ISDA is expected to continue supplementing the Protocol with ISDA Resolution Stay Jurisdictional Modular Protocols for the United States and other jurisdictions. A jurisdictional module for the United States that is substantively identical to the Protocol in all respects (aside from exempting QFCs between adherents that are not covered entities, covered FSIs, or covered banks) would be consistent with the current proposal. For additional detail on the development of the 2014 and 2015 ISDA Resolution Stay Protocols, see FRB NPRM, 81 FR at 29181–29182 (May 11, 2016). 92 The Protocol also includes other special resolution regimes. Currently, the Protocol includes special resolution regimes in place in France, Germany, Japan, Switzerland, and the United Kingdom. Other special resolution regimes that meet the definition of ‘‘Protocol-eligible Regime’’ may be added to the Protocol. 93 Sections 2(a) and (b) of the Protocol provide the stays required under paragraph (b)(1) of proposed rule § 382.4 for the most common U.S. insolvency regimes. Section 2(f) of the Protocol overrides transfer restrictions as required under paragraph (b)(2) of proposed rule § 382.4 for transfers that are consistent with the Protocol. The Protocol’s exemptions from the stay for ‘‘Performance Default VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 Consistent with the FDIC’s objective of increasing GSIB resolvability, the proposed rule would allow a covered entity to bring its covered QFCs into compliance by amending them through adherence to the Protocol. Question 7: The FDIC invites comment on the proposed restrictions on cross-default rights in covered FSI’s QFCs. Is the proposal sufficiently clear such that parties to a conforming QFC will understand what default rights are and are not exercisable in the context of a GSIB resolution? How could the proposed restrictions be made clearer? Question 8: The FDIC invites comment on its proposal to treat as compliant with section 382.4 of the proposal any covered QFC that has been amended by the Protocol. Does adherence to the Protocol suffice to meet the goals of this proposal and appropriately safeguard U.S. financial stability? F. Process for Approval of Enhanced Creditor Protections (Section 382.5 of the Proposed Rule) As discussed above, the proposed restrictions would leave many creditor protections that are commonly included in QFCs unaffected. The proposal would also allow any covered FSI to submit to the FDIC a request to approve as compliant with the rule one or more QFCs that contain additional creditor protections—that is, creditor protections that would be impermissible under the restrictions set forth above. A covered FSI making such a request would be required to provide an analysis of the contractual terms for which approval is requested in light of a range of factors that are set forth in the proposed rule and intended to facilitate the FDIC’s consideration of whether permitting the contractual terms would be consistent with the proposed restrictions.94 The FDIC also expects to consult with the Rights’’ and the ‘‘Unrelated Default Rights’’ described in paragraph (a) of the definition are consistent with the proposal’s general creditor protections permitted under paragraph (b) of proposed rule § 382.4. The Protocol’s burden of proof provisions (see section 2(i) of the Protocol and the definition of Unrelated Default Rights) and creditor protections for credit enhancement providers in FDI Act proceedings (see Section 2(d) of the Protocol) are also consistent with the paragraphs (j) and (i), respectively, of proposed rule § 382.4. Note also that, although exercise of Performance Default Rights under the Protocol does not require a showing of clear and convincing evidence while these same rights under the proposal (proposed rule § 252.84(e)) would require such a showing, this difference between the Protocol and the proposal does not appear to be meaningful because clearly documented evidence for such default rights (i.e., payment and performance failures, entry into resolution proceedings) should exist. 94 Proposed rule § 382.5(d)(1)–(10). PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 74337 FRB and OCC during its consideration of such a request—in particular, when the covered QFC is between a covered FSI and either a covered bank or a covered entity. The first two factors concern the potential impact of the requested creditor protections on GSIB resilience and resolvability. The next four concern the potential scope of the proposal: adoption on an industry-wide basis, coverage of existing and future transactions, coverage of one or multiple QFCs, and coverage of some or all covered entities, covered banks, and covered FSIs. Creditor protections that may be applied on an industry-wide basis may help to ensure that impediments to resolution are addressed on a uniform basis, which could increase market certainty, transparency, and equitable treatment. Creditor protections that apply broadly to a range of QFCs and covered entities, covered banks and covered FSIs would increase the chance that all of a GSIB’s QFC counterparties would be treated the same way during a resolution of that GSIB and may improve the prospects for an orderly resolution of that GSIB. By contrast, proposals that would expand counterparties’ rights beyond those afforded under existing QFCs would conflict with the proposal’s goal of reducing the risk of mass unwinds of GSIB QFCs. The proposal also includes three factors that focus on the creditor protections specific to supported parties. The FDIC may weigh the appropriateness of additional protections for supported QFCs against the potential impact of such provisions on the orderly resolution of a GSIB. In addition to analyzing the request under the enumerated factors, a covered FSI requesting that the FDIC approve enhanced creditor protections would be required to submit a legal opinion stating that the requested terms would be valid and enforceable under the applicable law of the relevant jurisdictions, along with any additional relevant information requested by the FDIC. Question 9: The FDIC invites comment on all aspects of the proposed process for approval of enhanced creditor protections. Should the FDIC provide greater specificity on this process? If so, what processes and procedures could be adopted without imposing undue regulatory burden? III. Transition Periods Under the proposal, the final rule would take effect on the first day of the first calendar quarter that begins at least one year after the issuance of the final E:\FR\FM\26OCP1.SGM 26OCP1 74338 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS rule (effective date).95 Entities that are covered FSIs when the final rule is issued would be required to comply with the proposed requirements beginning on the effective date. Thus, a covered FSI would be required to ensure that covered QFCs entered into on or after the effective date comply with the rule’s requirements.96 Moreover, a covered FSI would be required to bring a preexisting covered QFC entered into prior to the effective date into compliance with the rule no later than the first date on or after the effective date on which the covered FSI or an affiliate (that is also a covered entity, covered bank, or covered FSI) enters into a new covered QFC with the counterparty to the preexisting covered QFC or an affiliate of the counterparty.97 (Thus, a covered FSI would not be required to conform a preexisting QFC if that covered FSI and its affiliates do not enter into any new QFCs with the same counterparty or its affiliates on or after the effective date.) Finally, an entity that becomes a covered FSI after the final rule is issued would be required to comply by the first day of the first calendar quarter that begins at least one year after the entity becomes a covered FSI.98 By permitting a covered FSI to remain party to noncompliant QFCs entered into before the effective date unless the covered FSI or any affiliate (that is also a covered entity, covered bank, or covered FSI) enters into new QFCs with the same counterparty or its affiliates, the proposal strikes a balance between ensuring QFC continuity if the GSIB were to fail and ensuring that covered FSIs and their existing counterparties can avoid any compliance costs and disruptions associated with conforming existing QFCs by refraining from entering into new QFCs. The requirement that a covered FSI ensure that all existing QFCs with a particular counterparty and its affiliates are compliant before it or any affiliate of the covered FSI (that is also a covered entity, covered bank, or covered FSI) enters into a new QFC with the same counterparty or its affiliates after the effective date will provide covered FSIs with an incentive to seek the modifications necessary to ensure that 95 Under section 302(b) of the Riegle Community Development and Regulatory Improvement Act of 1994, new FRB regulations that impose requirements on insured depository institutions generally must ‘‘take effect on the first day of a calendar quarter which begins on or after the date on which the regulations are published in final form.’’ 12 U.S.C. 4802(b). 96 See proposed rule §§ 382.3(a)(2)(i); 382.4(a)(2). 97 See proposed rule §§ 382.3(a)(2)(ii), 382.4(a)(2). 98 See proposed rule § 382.2(b). VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 their QFCs with their most important counterparties are compliant. Moreover, the volume of preexisting, noncompliant covered QFCs outstanding can be expected to decrease over time and eventually to reach zero. In light of these considerations, and to avoid creating potentially inappropriate compliance costs with respect to existing QFCs with counterparties that, together with their affiliates, do not enter new covered QFCs with the GSIB on or after the effective date, it would be appropriate to permit a limited number of noncompliant QFCs to remain outstanding, in keeping with the terms described above. The FDIC will monitor covered FSIs’ levels of noncompliant QFCs and evaluate the risk, if any, that they pose to the safety and soundness of the covered FSIs, the banking system, or to U.S. financial stability. Question 10: The FDIC invites comment on the proposed transition periods and the proposed treatment of preexisting QFCs. IV. Expected Effects The proposed rule is intended to promote the financial stability of the United States by reducing the potential that resolution of a GSIB, particularly through bankruptcy, will be disorderly. The proposed rule will help meet this policy objective by more effectively and efficiently managing the exercise of default rights and restrictions contained in QFCs. It would therefore help mitigate the risk of future financial crises and imposition of substantial costs on the U.S. economy.99 The proposed rule furthers the FDIC’s mission and responsibilities, which include resolving failed institutions in the least costly manner and ensuring that FDIC-insured institutions operate safely and soundly. It also furthers the fulfillment of the FDIC’s role as the (i) primary federal supervisor for SNMBs and state savings associations; (ii) resolution authority for all FDIC-insured institutions under the FDI Act; and (iii) resolution authority for large complex financial institutions under Title II of the Dodd-Frank Act. The proposal would likely benefit the counterparties of a subsidiary of a failed GSIB by preventing the disorderly failure of the subsidiary and enabling it to continue to meet its obligations. 99 A recent estimate of the unrealized economic output that resulted from 2007–09 financial crisis in the United States amounted to between $6 and $14 trillion. See ‘‘How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis,’’ Staff Paper No. 20, Federal Reserve Bank of Dallas, July 2013. https://dallasfed.org/assets/documents/ research/staff/staff1301.pdf. PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 Preventing the mass exercise of QFC default rights at the time the parent or other affiliate enters resolution proceedings makes it more likely that the subsidiaries or other affiliates will be able to meet their obligations to QFC counterparties. Moreover, the creditor protections permitted under the proposal would allow any counterparty that does not continue to receive payment under the QFC to exercise its default rights, after any applicable stay period. Because financial crises impose enormous costs on the economy, even small reductions in the probability or severity future financial crises create substantial economic benefits.100 The proposal would materially reduce the risk to the financial stability of the United States that could arise from the failure of a GSIB by enhancing the prospects for the orderly resolution of such a firm, and would thereby materially reduce the probability and severity of financial crises in the future. The costs of the proposed rule are likely to be relatively small and only affect twelve covered FSIs. Covered FSIs and their counterparties are likely to incur administrative costs associated with drafting and negotiating compliant QFCs, but to the extent such parties adhere to the ISDA Protocol, these administrative costs would likely be reduced. While potential administrative costs are difficult to accurately predict, these costs are likely to be small relative to the revenue of the organizations affected by the proposed rule, and to the costs of doing business in the financial sector generally. In addition, the FDIC anticipates that covered FSIs would likely share resources with its parent GSIB and/or GSIB affiliates—which are subject to parallel requirements—to help cover compliance costs. The stay-and-transfer provisions of the Dodd-Frank Act and the FDI Act are already in force, and the ISDA Protocol is already partially effective for the 23 existing GSIB adherents. The partial effectiveness of the ISDA Protocol (regarding Section 1, which addresses recognition of stays on the exercise of default rights and remedies in financial contracts under special resolution regimes, including in the United States, the United Kingdom, Germany, France, Switzerland and Japan) suggests that to the extent covered FSIs already adhere to the ISDA Protocol, some implementation costs will likely be reduced. The proposal could also impose costs on covered FSIs to the extent that they may need to provide their QFC 100 See E:\FR\FM\26OCP1.SGM id. 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules counterparties with better contractual terms in order to compensate those parties for the loss of their ability to exercise default rights that would be restricted by the proposal. These costs may be higher than drafting and negotiating costs. However, they are also expected to be relatively small because of the limited reduction in the rights of counterparties and the availability of other forms of protection for counterparties. The proposal could also create economic costs by causing a marginal reduction in QFC-related economic activity. For example, a covered FSI may not enter into a QFC that it would have otherwise entered into in the absence of the proposed rule. Therefore, economic activity that would have been associated with that QFC absent the proposed rule (such as economic activity that would have otherwise been hedged with a derivatives contract or funded through a repo transaction) might not occur. While uncertainty surrounding the future negotiations of economic actors makes an accurate quantification of any such costs difficult, costs from reduced QFC activity are likely to be very low. The proposed restrictions on default rights in covered QFCs are relatively narrow and would not change a counterparty’s rights in response to its direct counterparty’s entry into a bankruptcy proceeding (that is, the default rights covered by the Bankruptcy Code’s ‘‘safe harbor’’ provisions). Counterparties are also able to prudently manage risk through other means, including entering into QFCs with entities that are not GSIB entities and therefore would not be subject to the proposed rule. Question 11: The FDIC invites comment on all aspects of this evaluation of costs and benefits; in particular, whether covered FSIs expect to be able to share the costs of complying with this rulemaking with affiliated entities. Lhorne on DSK30JT082PROD with PROPOSALS V. Revisions to Certain Definitions in the FDIC’s Capital and Liquidity Rules This proposal would also amend several definitions in the FDIC’s capital and liquidity rules to help ensure that the proposal would not have unintended effects for the treatment of covered FSIs’ netting agreements under those rules, consistent with the proposed amendments contained in the FRB NPRM and the OCC NPRM.101 101 On September 20, 2016, the FDIC adopted a separate final rule (the Final QMNA Rule), following the earlier notice of proposed rulemaking issued in January 2015, see 80 FR 5063 (Jan. 30, VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 The FDIC’s regulatory capital rules permit a banking organization to measure exposure from certain types of financial contracts on a net basis and recognize the risk-mitigating effect of financial collateral for other types of exposures, provided that the contracts are subject to a ‘‘qualifying master netting agreement’’ or agreement that provides for certain rights upon the default of a counterparty.102 The FDIC has defined ‘‘qualifying master netting agreement’’ to mean a netting agreement that permits a banking organization to terminate, apply close-out netting, and promptly liquidate or set-off collateral upon an event of default of the counterparty, thereby reducing its counterparty exposure and market risks.103 On the whole, measuring the amount of exposure of these contracts on a net basis, rather than on a gross basis, results in a lower measure of exposure and thus a lower capital requirement. The current definition of ‘‘qualifying master netting agreement’’ recognizes that default rights may be stayed if the financial company is in resolution under the Dodd-Frank Act, the FDI Act, a substantially similar law applicable to government-sponsored enterprises, or a substantially similar foreign law, or where the agreement is subject by its terms to any of those laws. Accordingly, transactions conducted under netting agreements where default rights may be stayed in those circumstances may qualify for the favorable capital treatment described above. However, the current definition of ‘‘qualifying master netting agreement’’ does not recognize the restrictions that the proposal would impose on the QFCs of covered FSIs. Thus, a master netting agreement that is compliant with this proposal would not qualify as a qualifying master netting agreement. This would result in considerably higher capital and liquidity requirements for QFC counterparties of 2015), covering amendments to the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s capital and liquidity rules and related definitions in its capital rules. The Final QMNA Rule is designed to prevent similar unintended effects from implementation of special resolution regimes in non-U.S. jurisdictions, or by parties’ adherence to the ISDA Protocol. The amendments contained in the Final QMNA Rule also are similar to revisions that the FRB and the OCC made in their joint 2014 interim final rule to ensure that the regulatory capital and liquidity rules’ treatment of certain financial contracts is not affected by the implementation of special resolution regimes in foreign jurisdictions. See 79 FR 78287 (Dec. 30, 2014). 102 See 12 CFR 324.34(a)(2). 103 See the definition of ‘‘qualifying master netting agreement’’ in 12 CFR 324.2 (capital rules) and 329.3 (liquidity rules). PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 74339 covered FSIs, which is not an intended effect of this proposal. Accordingly, the proposal would amend the definition of ‘‘qualifying master netting agreement’’ so that a master netting agreement could qualify where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited to the extent necessary to comply with the requirements of this proposal. This revision would maintain the existing treatment for these contracts under the FDIC’s capital and liquidity rules by accounting for the restrictions that the proposal would place on default rights related to covered FSIs’ QFCs. The FDIC does not believe that the disqualification of master netting agreements that would result in this proposed amendment to the definition of ‘‘qualifying master netting agreement’’ in this proposal would accurately reflect the risk posed by the affected QFCs. As discussed above, the implementation of consistent restrictions on default rights in GSIB QFCs would increase the prospects for the orderly resolution of a failed GSIB and thereby protect the financial stability of the United States. The proposal would similarly revise certain other definitions in the regulatory capital rules to make analogous conforming changes designed to account for this proposal’s restrictions and ensure that a banking organization may continue to recognize the risk-mitigating effects of financial collateral received in a secured lending transaction, repo-style transaction, or eligible margin loan for purposes of the FDIC’s capital rules. Specifically, the proposal would revise the definitions of ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ and ‘‘repo-style transaction’’ to provide that a counterparty’s default rights may be limited as required by this proposal without unintended adverse impacts under the FDIC’s capital rules. The interagency rule establishing margin and capital requirements for covered swap entities (swap margin rule) defines the term ‘‘eligible master netting agreement’’ in a manner similar to the definition of ‘‘qualifying master netting agreement.’’ 104 Thus, it may also be appropriate to amend the definition of ‘‘eligible master netting agreement’’ to account for the proposed restrictions on covered FSIs’ QFCs. Because the FDIC 104 80 FR 74840, 74861–74862 (November 30, 2015). The FDIC’s definition of ‘‘eligible master netting agreement’’ for purposes of the swap margin rule is codified at 12 CFR 349.2. E:\FR\FM\26OCP1.SGM 26OCP1 74340 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules issued the swap margin rule jointly with other U.S. regulatory agencies, however, the FDIC would consult with the other agencies before proposing amendments to that rule’s definition of ‘‘eligible master netting agreement.’’ Question 12: The FDIC invites comment on all aspects of the proposed amendments to the definitions of ‘‘qualifying master netting agreement’’ in the regulatory capital and liquidity rules and ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ and ‘‘repo-style transaction’’ in the capital rules, including whether the definitions recognize the stay of termination rights under the appropriate resolution regimes. VI. Regulatory Analysis A. Paperwork Reduction Act The FDIC is proposing to add a new Part 382 to its rules to require certain FDIC-supervised institutions to ensure that covered QFCs to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act and the FDI Act. In addition, covered FSIs would generally be prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the covered FSI based on the entry into a resolution proceeding under the Dodd-Frank Act, FDI Act, or any other resolution proceeding of an affiliate of the covered FSI. In accordance with the requirements of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 through 3521, (PRA), the FDIC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid OMB control number. Section 382.5 of the proposed rule contains ‘‘collection of information’’ requirements within the meaning of the PRA. Accordingly, the FDIC will obtain an OMB control number relating to the information collection associated with that section. This information collection consists of amendments to covered QFCs and, in some cases, approval requests prepared and submitted to the FDIC regarding modifications to enhanced creditor protection provisions (in lieu of adherence to the ISDA Protocol). Section 382.5(b) of the proposed rule would require a covered banking entity to request the FDIC to approve as compliant with the requirements of section 382.4 of this subpart provisions of one or more forms of covered QFCs or amendments to one or more forms of covered QFCs, with enhanced creditor protection conditions. A covered FSI making a request must provide (1) an analysis of the proposal under each consideration of paragraph 382.5(d); (2) a written legal opinion verifying that proposed provisions or amendments would be valid and enforceable under applicable law of the relevant jurisdictions, including, in the case of proposed amendments, the validity and enforceability of the proposal to amend the covered QFCs; and (3) any additional information relevant to its approval that the FDIC requests. Covered FSIs would also have recordkeeping associated with proposed amendments to their covered QFCs. However, much of the recordkeeping associated with amending the covered QFCs is already expected from a covered FSI. Therefore, the FDIC would expect minimal additional burden to accompany the initial efforts to bring all covered QFCs into compliance. The existing burden estimates for the information collection associated with section 382.5 are as follows: Times/year Respondents Hours per response Paperwork for proposed revisions .................. Total Burden ............................................ Lhorne on DSK30JT082PROD with PROPOSALS Title On occasion ................................................... ......................................................................... 6 ........................ 40 ........................ Question 13: The FDIC invites comments on: (a) Whether the collections of information are necessary for the proper performance of the FDIC’s functions, including whether the information has practical utility; (b) The accuracy of the FDIC’s estimates of the burden of the information collections, including the validity of the methodology and assumptions used; (c) Ways to enhance the quality, utility, and clarity of the information to be collected; (d) Ways to minimize the burden of information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and (e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 should be sent to the addresses listed in the ADDRESSES section. A copy of the comments may also be submitted to the OMB desk officer for the FDIC by mail to U.S. Office of Management and Budget, 725 17th Street NW., #10235, Washington, DC 20503, or by facsimile to 202–395–5806, or by email to oira_ submission@omb.eop.gov, Attention, Federal Banking Agency Desk Officer. B. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires that each federal agency either certify that a proposed rule will not, if promulgated, have a significant economic impact on a substantial number of small entities or prepare and make available for public comment an initial regulatory flexibility analysis of the proposal.105 For the reasons provided below, the FDIC certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. Nevertheless, the FDIC is publishing 105 See PO 00000 Fmt 4702 Sfmt 4702 240 240 and inviting comment on this initial regulatory flexibility analysis. The proposed rule would only apply to FSIs that form part of GSIB organizations, which include the largest, most systemically important banking organizations and certain of their subsidiaries. More specifically, the proposed rule would apply to any covered FSI that is a subsidiary of a U.S. GSIB or foreign GSIB—regardless of size—because an exemption for small entities would significantly impair the effectiveness of the proposed stay-andtransfer provisions and thereby undermine a key objective of the proposal: To reduce the execution risk of an orderly GSIB resolution. The FDIC estimates that the proposed rule would apply to approximately twelve FSIs. As of March 31, 2016, only six of the twelve covered FSIs have derivatives portfolios that could be affected. None of these six banking organizations would qualify as a small entity for the purposes of the RFA.106 In 106 Under regulations issued by the Small Business Administration, small entities include 5 U.S.C. 603, 605. Frm 00026 Total burden hours E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS addition, the FDIC anticipates that any small subsidiary of a GSIB that could be affected by this proposed rule would not bear significant additional costs as it is likely to rely on its parent GSIB, or a large affiliate, that will be subject to similar reporting, recordkeeping, and compliance requirements.107 The proposed rule complements the FRB NPRM and OCC NPRM. It is not designed to duplicate, overlap with, or conflict with any other federal regulation. This initial regulatory flexibility analysis demonstrates that the proposed rule would not, if promulgated, have a significant economic impact on a substantial number of small entities, and the FDIC so certifies.108 Question 14: The FDIC welcomes written comments regarding this initial regulatory flexibility analysis, and requests that commenters describe the nature of any impact on small entities and provide empirical data to illustrate and support the extent of the impact. A final regulatory flexibility analysis will be conducted after consideration of comment received during the public comment period. C. Riegle Community Development and Regulatory Improvement Act of 1994 The Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4701, 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 insured depository institutions generally must take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form. The FDIC has invited comment on these matters in other sections of this proposal and will continue to consider them as part of the overall rulemaking process. banking organizations with total assets of $550 million or less. 107 See FRB NPRM, 81 FR 29169 (May 11, 2016) and OCC NPRM, 81 FR 55381 (August 19, 2016). 108 5 U.S.C. 605. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 Question 15: The FDIC invites comment on this section, including any additional comments that will inform the FDIC’s consideration of the requirements of RCDRIA. D. Solicitation of Comments on the Use of Plain Language Section 722 of the Gramm-LeachBliley Act, 12 U.S.C. 4809, requires the FDIC to use plain language in all proposed and final rules published after January 1, 2000. The FDIC invites comment on how to make this proposed rule easier to understand. Question 16: Has the FDIC organized the material to inform your needs? If not, how could the FDIC present the rule more clearly? Question 17: Are the requirements of the proposed rule clearly stated? If not, how could they be stated more clearly? Question 18: Does the proposal contain unclear technical language or jargon? If so, which language requires clarification? Question 19: Would a different format (such as a different grouping and ordering of sections, a different use of section headings, or a different organization of paragraphs) make the regulation easier to understand? If so, what changes would make the proposal clearer? Question 20: What else could the FDIC do to make the proposal clearer and easier to understand? List of Subjects 12 CFR Part 324 Administrative practice and procedure, Banks, banking, Capital adequacy, Reporting and recordkeeping requirements, Securities, State 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. 12 CFR Part 382 Administrative practice and procedure, Banks, banking, Federal Deposit Insurance Corporation, FDIC, Qualified financial contracts, Reporting and recordkeeping requirements, State savings associations, State non-member banks. For the reasons stated in the supplementary information, the Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter III, parts 324, 329 and 382 as follows: PO 00000 Frm 00027 Fmt 4702 Sfmt 4702 74341 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). 2. Section 324.2 is amended 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. E:\FR\FM\26OCP1.SGM 26OCP1 74342 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Lhorne on DSK30JT082PROD with PROPOSALS (2) Where the agreement is subject by its terms to any of the laws referenced in paragraph (1) of this definition; or (3) Where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited only to the extent necessary to comply with the requirements of part 382 of this title or any similar requirements of another U.S. federal banking agency, as applicable. * * * * * 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: (A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the DoddFrank Act, or under any similar insolvency law applicable to GSEs,5 or laws of foreign jurisdictions that are substantially similar 6 to the U.S. laws referenced in this paragraph in order to facilitate the orderly resolution of the defaulting counterparty; or (B) Where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited only to the 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. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 extent necessary to comply with the requirements of part 382 of this title or any similar requirements of another U.S. federal banking agency, as applicable. (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 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; (ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i) of this definition; or (iii) Where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited only to the extent necessary to comply with the requirements of part 382 of this title or any similar requirements of another U.S. federal banking agency, as applicable; (3) The agreement does not contain a walkaway clause (that is, a provision 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 00028 Fmt 4702 Sfmt 4702 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; (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 E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules 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 where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited only to the extent necessary to comply with the requirements of part 382 of this title or any similar requirements of another U.S. federal banking agency, as applicable; 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 3. The authority citation for part 329 continues to read as follows: ■ Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p–1, 5412. 4. Section 329.3 is amended by revising the definition of ‘‘Qualifying master netting agreement’’ to read as follows: ■ § 329.3 Definitions. Lhorne on DSK30JT082PROD with PROPOSALS * * * * * Qualifying master netting agreement means a written, legally enforceable agreement provided that: (1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty; (2) The agreement provides the FDICsupervised institution the right to accelerate, terminate, and close-out on a net basis all transactions under the 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. VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 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 109 to the U.S. laws referenced in this paragraph (2)(i) in order to facilitate the orderly resolution of the defaulting counterparty; (ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i) of this definition; or (iii) Where the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty is limited only to the extent necessary to comply with the requirements of part 382 of this title or any similar requirements of another U.S. federal banking agency, as applicable; (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 § 329.4(a) with respect to that agreement. * * * * * 12 CFR Chapter III Authority and Issuance For the reasons set forth in the supplementary information, the Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter III of the Code of Federal Regulations as follows: ■ 8. Add part 382 to read as follows: 109 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 00029 Fmt 4702 Sfmt 4702 74343 PART 382—RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS Sec. 382.1 Definitions. 382.2 Applicability. 382.3 U.S. Special resolution regimes. 382.4 Insolvency proceedings. 382.5 Approval of enhanced creditor protection conditions. 382.6 [Reserved.] 382.7 Exclusion of certain QFCs. Authority: 12 U.S.C. 1816, 1818, 1819, 1820(g) 1828, 1828(m), 1831n, 1831o, 1831p– l, 1831(u), 1831w. PART 382—RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS § 382.1 Definitions. Affiliate has the same meaning as in section 12 U.S.C. 1813(w). Central counterparty (CCP) has the same meaning as in Part 324.2 of the FDIC’s Regulations (12 CFR 324.2). Chapter 11 proceeding means a proceeding under Chapter 11 of Title 11, United States Code (11 U.S.C. 1101–74). Control has the same meaning as in section 12 U.S.C. 1813(w). Covered bank has the same meaning as in Part 47.3 of the Office of the Comptroller’s Regulations (12 CFR 47.3). Covered entity has the same meaning as in section 252.82(a) of the Federal Reserve Board’s Regulation YY (12 CFR 252.82). Covered QFC means a QFC as defined in sections 382.3 and 382.4 of this part. Covered FSI means any state savings association or state non-member bank (as defined in the Federal Deposit Insurance Act, 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to section 252.82(a)(1) of the Federal Reserve Board’s Regulation YY (12 CFR part 252.82); or (ii) a global systemically important foreign banking organization that has been designated pursuant to Subpart I of 12 CFR part 252 (FRB Regulation YY), and any subsidiary of a covered FSI. Credit enhancement means a QFC of the type set forth in §§ 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title II of the DoddFrank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or a credit enhancement that the Federal Deposit Insurance Corporation determines by regulation, rule or order is a QFC pursuant to section 210(c)(8)(D)(i) of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)). E:\FR\FM\26OCP1.SGM 26OCP1 Lhorne on DSK30JT082PROD with PROPOSALS 74344 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules Default right (1) Means, with respect to a QFC, any (i) Right of a party, whether contractual or otherwise (including, without limitation, rights incorporated by reference to any other contract, agreement, or document, and rights afforded by statute, civil code, regulation, and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, or modify the obligations of a party thereunder, or any similar rights; and (ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral, or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee’s right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; (2) With respect to section 382.4, does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause. FDI Act means the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.). FDI Act proceeding means a proceeding that commences upon the Federal Deposit Insurance Corporation being appointed as conservator or receiver under section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821). FDI Act stay period means, in connection with an FDI Act proceeding, the period of time during which a party to a QFC with a party that is subject to an FDI Act proceeding may not exercise any right that the party that is not subject to an FDI Act proceeding has to terminate, liquidate, or net such QFC, in VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 accordance with section 11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and any implementing regulations. Global systemically important foreign banking organization means a global systemically important foreign banking organization that has been designated pursuant to Subpart I of 12 CFR part 252 (FRB Regulation YY). Master agreement means a QFC of the type set forth in section 210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V) of Title II of the DoddFrank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V)) or a master agreement that the Federal Deposit Insurance Corporation determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i) of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)). Qualified financial contract (QFC) has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)). Subsidiary of a covered FSI means any subsidiary of a covered FSI as defined in 12 U.S.C. 1813(w). U.S. special resolution regimes means the Federal Deposit Insurance Act (12 U.S.C. 1811–1835a) and regulations promulgated thereunder and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381–5394) and regulations promulgated thereunder. § 382.2 Applicability. (a) Scope of applicability. This part applies to a ‘‘covered FSI,’’ which means any state savings association or state non-member bank (as defined in the Federal Deposit Insurance Act, 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to section 252.82(a)(1) of the Federal Reserve Board’s Regulation YY (12 CFR part 252.82); or (ii) a global systemically important foreign banking organization that has been designated pursuant to Subpart I of 12 CFR part 252 (FRB Regulation YY), and any subsidiary of a covered FSI. (b) Initial applicability of requirements for covered QFCs. A covered FSI must comply with the requirements of §§ 382.3 and 382.4 beginning on the later of (1) The first day of the calendar quarter immediately following 365 days (1 year) after becoming a covered FSI; or (2) The date this subpart first becomes effective. PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 (c) Rule of construction. For purposes of this subpart, the exercise of a default right with respect to a covered QFC includes the automatic or deemed exercise of the default right pursuant to the terms of the QFC or other arrangement. (d) Rights of receiver unaffected. Nothing in this subpart shall in any manner limit or modify the rights and powers of the FDIC as receiver under the FDI Act or Title II of the Dodd-Frank Act, including, without limitation, the rights of the receiver to enforce provisions of the FDI Act or Title II of the Dodd-Frank Act that limit the enforceability of certain contractual provisions. § 382.3 U.S. Special resolution regimes. (a) QFCs required to be conformed. (1) A covered FSI must ensure that each covered QFC conforms to the requirements of this section 382.3. (2) For purposes of this § 382.3, a covered QFC means a QFC that the covered FSI: (i) Enters, executes, or otherwise becomes a party to; or (ii) Entered, executed, or otherwise became a party to before the date this subpart first becomes effective, if the covered FSI or any affiliate that is a covered entity, covered bank, or covered FSI also enters, executes, or otherwise becomes a party to a QFC with the same person or affiliate of the same person on or after the date this subpart first becomes effective. (3) To the extent that the covered FSI is acting as agent with respect to a QFC, the requirements of this section apply to the extent the transfer of the QFC relates to the covered FSI or the default rights relate to the covered FSI or an affiliate of the covered FSI. (b) Provisions required. A covered QFC must explicitly provide that (1) The transfer of the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) from the covered FSI will be effective to the same extent as the transfer would be effective under the U.S. special resolution regimes if the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) were governed by the laws of the United States or a state of the United States and the covered FSI were under the U.S. special resolution regime; and (2) Default rights with respect to the covered QFC that may be exercised against the covered FSI are permitted to be exercised to no greater extent than the default rights could be exercised under the U.S. special resolution regimes if the covered QFC was E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules governed by the laws of the United States or a state of the United States and (A) the covered FSI were under the U.S. special resolution regime; or (B) an affiliate of the covered FSI is subject to a U.S. special resolution regime. (c) Relevance of creditor protection provisions. The requirements of this section apply notwithstanding paragraphs §§ 382.4 and 382.5. Lhorne on DSK30JT082PROD with PROPOSALS § 382.4 Insolvency proceedings. This section 382.4 does not apply to proceedings under Title II of the DoddFrank Act. For purposes of this section: (a) QFCs required to be conformed. (1) A covered FSI must ensure that each covered QFC conforms to the requirements of this § 382.4. (2) For purposes of this § 382.4, a covered QFC has the same definition as in paragraph (a)(2) of § 382.3. (3) To the extent that the covered FSI is acting as agent with respect to a QFC, the requirements of this section apply to the extent the transfer of the QFC relates to the covered FSI or the default rights relate to an affiliate of the covered FSI. (b) General Prohibitions. (1) A covered QFC may not permit the exercise of any default right with respect to the covered QFC that is related, directly or indirectly, to an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding. (2) A covered QFC may not prohibit the transfer of a covered affiliate credit enhancement, any interest or obligation in or under the covered affiliate credit enhancement, or any property securing the covered affiliate credit enhancement to a transferee upon or after an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding unless the transfer would result in the supported party being the beneficiary of the credit enhancement in violation of any law applicable to the supported party. (c) Definitions relevant to the general prohibitions. (1) Direct party. Direct party means a covered entity, covered bank, or covered FSI referenced in paragraph (a) of § 382.2, that is a party to the direct QFC. (2) Direct QFC. Direct QFC means a QFC that is not a credit enhancement, provided that, for a QFC that is a master agreement that includes an affiliate credit enhancement as a supplement to the master agreement, the direct QFC does not include the affiliate credit enhancement. (3) Affiliate credit enhancement. Affiliate credit enhancement means a credit enhancement that is provided by VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 an affiliate of a party to the direct QFC that the credit enhancement supports. (d) Treatment of agent transactions. With respect to a QFC that is a covered QFC for a covered FSI solely because the covered FSI is acting as agent under the QFC, the covered FSI is the direct party. (e) General creditor protections. Notwithstanding paragraph (b) of this section, a covered direct QFC and covered affiliate credit enhancement that supports the covered direct QFC may permit the exercise of a default right with respect to the covered QFC that arises as a result of (1) The direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership, conservatorship, or resolution under the FDI Act, Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (e)(1) in order to facilitate the orderly resolution of the direct party; (2) The direct party not satisfying a payment or delivery obligation pursuant to the covered QFC or another contract between the same parties that gives rise to a default right in the covered QFC; or (3) The covered affiliate support provider or transferee not satisfying a payment or delivery obligation pursuant to a covered affiliate credit enhancement that supports the covered direct QFC. (f) Definitions relevant to the general creditor protections. (1) Covered direct QFC. Covered direct QFC means a direct QFC to which a covered entity, covered bank, or covered FSI referenced in paragraph (a) of 382.2, is a party. (2) Covered affiliate credit enhancement. Covered affiliate credit enhancement means an affiliate credit enhancement in which a covered entity, covered bank, or covered FSI referenced in paragraph (a) of § 382.2, is the obligor of the credit enhancement. (3) Covered affiliate support provider. Covered affiliate support provider means, with respect to a covered affiliate credit enhancement, the affiliate of the direct party that is obligated under the covered affiliate credit enhancement and is not a transferee. (4) Supported party. Supported party means, with respect to a covered affiliate credit enhancement and the direct QFC that the covered affiliate credit enhancement supports, a party that is a beneficiary of the covered affiliate support provider’s obligation(s) under the covered affiliate credit enhancement. PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 74345 (g) Additional creditor protections for supported QFCs. Notwithstanding paragraph (b) of this section, with respect to a covered direct QFC that is supported by a covered affiliate credit enhancement, the covered direct QFC and the covered affiliate credit enhancement may permit the exercise of a default right that is related, directly or indirectly, to the covered affiliate support provider after the stay period if: (1) The covered affiliate support provider that remains obligated under the covered affiliate credit enhancement becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a Chapter 11 proceeding; (2) Subject to paragraph (i) of this section, the transferee, if any, becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding; (3) The covered affiliate support provider does not remain, and a transferee does not become, obligated to the same, or substantially similar, extent as the covered affiliate support provider was obligated immediately prior to entering the receivership, insolvency, liquidation, resolution, or similar proceeding with respect to: (i) The covered affiliate credit enhancement; (ii) All other covered affiliate credit enhancements provided by the covered affiliate support provider in support of other covered direct QFCs between the direct party and the supported party under the covered affiliate credit enhancement referenced in paragraph (g)(3)(i) of this section; and (iii) All covered affiliate credit enhancements provided by the covered affiliate support provider in support of covered direct QFCs between the direct party and affiliates of the supported party referenced in paragraph (g)(3)(ii) of this section; or (4) In the case of a transfer of the covered affiliate credit enhancement to a transferee, (i) All of the ownership interests of the direct party directly or indirectly held by the covered affiliate support provider are not transferred to the transferee; or (ii) Reasonable assurance has not been provided that all or substantially all of the assets of the covered affiliate support provider (or net proceeds therefrom), excluding any assets reserved for the payment of costs and expenses of administration in the receivership, insolvency, liquidation, resolution, or similar proceeding, will be transferred or sold to the transferee in a timely manner. E:\FR\FM\26OCP1.SGM 26OCP1 Lhorne on DSK30JT082PROD with PROPOSALS 74346 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules (h) Definitions relevant to the additional creditor protections for supported QFCs. (1) Stay period. Stay period means, with respect to a receivership, insolvency, liquidation, resolution, or similar proceeding, the period of time beginning on the commencement of the proceeding and ending at the later of 5:00 p.m. (eastern time) on the business day following the date of the commencement of the proceeding and 48 hours after the commencement of the proceeding. (2) Business day. Business day means a day on which commercial banks in the jurisdiction the proceeding is commenced are open for general business (including dealings in foreign exchange and foreign currency deposits). (3) Transferee. Transferee means a person to whom a covered affiliate credit enhancement is transferred upon or following the covered affiliate support provider entering a receivership, insolvency, liquidation, resolution, or similar proceeding or thereafter as part of the restructuring or reorganization involving the covered affiliate support provider. (i) Creditor protections related to FDI Act proceedings. Notwithstanding paragraphs (e) and (g) of this section, which are inapplicable to FDI Act proceedings, and notwithstanding paragraph (b) of this section, with respect to a covered direct QFC that is supported by a covered affiliate credit enhancement, the covered direct QFC and the covered affiliate credit enhancement may permit the exercise of a default right that is related, directly or indirectly, to the covered affiliate support provider becoming subject to FDI Act proceedings (1) After the FDI Act stay period, if the covered affiliate credit enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)–(e)(10) and any regulations promulgated thereunder; or (2) During the FDI Act stay period, if the default right may only be exercised so as to permit the supported party under the covered affiliate credit enhancement to suspend performance with respect to the supported party’s obligations under the covered direct QFC to the same extent as the supported party would be entitled to do if the covered direct QFC were with the covered affiliate support provider and were treated in the same manner as the covered affiliate credit enhancement. (j) Prohibited terminations. A covered QFC must require, after an affiliate of the direct party has become subject to a receivership, insolvency, liquidation, resolution, or similar proceeding, VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 (1) The party seeking to exercise a default right to bear the burden of proof that the exercise is permitted under the covered QFC; and (2) Clear and convincing evidence or a similar or higher burden of proof to exercise a default right. § 382.5 Approval of enhanced creditor protection conditions. (a) Protocol compliance. Notwithstanding paragraph (b) of section 382.4, a covered QFC may permit the exercise of a default right with respect to the covered QFC if the covered QFC has been amended by the ISDA 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and Other Agreements Annex, published by the International Swaps and Derivatives Association, Inc., as of May 3, 2016, and minor or technical amendments thereto. (b) Proposal of enhanced creditor protection conditions. (1) A covered FSI may request that the FDIC approve as compliant with the requirements of § 382.4 proposed provisions of one or more forms of covered QFCs, or proposed amendments to one or more forms of covered QFCs, with enhanced creditor protection conditions. (2) Enhanced creditor protection conditions means a set of limited exemptions to the requirements of § 382.4(b) of this subpart that are different than that of paragraphs (e), (g), and (i) of § 382.4. (3) A covered FSI making a request under paragraph (b)(1) of this section must provide (i) An analysis of the proposal that addresses each consideration in paragraph (d) of this section; (ii) A written legal opinion verifying that proposed provisions or amendments would be valid and enforceable under applicable law of the relevant jurisdictions, including, in the case of proposed amendments, the validity and enforceability of the proposal to amend the covered QFCs; and (iii) Any other relevant information that the FDIC requests. (c) FDIC approval. The FDIC may approve, subject to any conditions or commitments the FDIC may set, a proposal by a covered FSI under paragraph (b) of this section if the proposal, as compared to a covered QFC that contains only the limited exemptions in paragraphs of (e), (g), and (i) of § 382.4 or that is amended as provided under paragraph (a) of this section, would promote the safety and soundness of covered FSIs by mitigating the potential destabilizing effects of the resolution of a global significantly PO 00000 Frm 00032 Fmt 4702 Sfmt 4702 important banking entity that is an affiliate of the covered FSI to at least the same extent. (d) Considerations. In reviewing a proposal under this section, the FDIC may consider all facts and circumstances related to the proposal, including: (1) Whether, and the extent to which, the proposal would reduce the resiliency of such covered FSIs during distress or increase the impact on U.S. financial stability were one or more of the covered FSIs to fail; (2) Whether, and the extent to which, the proposal would materially decrease the ability of a covered FSI, or an affiliate of a covered FSI, to be resolved in a rapid and orderly manner in the event of the financial distress or failure of the entity that is required to submit a resolution plan; (3) Whether, and the extent to which, the set of conditions or the mechanism in which they are applied facilitates, on an industry-wide basis, contractual modifications to remove impediments to resolution and increase market certainty, transparency, and equitable treatment with respect to the default rights of non-defaulting parties to a covered QFC; (4) Whether, and the extent to which, the proposal applies to existing and future transactions; (5) Whether, and the extent to which, the proposal would apply to multiple forms of QFCs or multiple covered FSIs; (6) Whether the proposal would permit a party to a covered QFC that is within the scope of the proposal to adhere to the proposal with respect to only one or a subset of covered FSIs; (7) With respect to a supported party, the degree of assurance the proposal provides to the supported party that the material payment and delivery obligations of the covered affiliate credit enhancement and the covered direct QFC it supports will continue to be performed after the covered affiliate support provider enters a receivership, insolvency, liquidation, resolution, or similar proceeding; (8) The presence, nature, and extent of any provisions that require a covered affiliate support provider or transferee to meet conditions other than material payment or delivery obligations to its creditors; (9) The extent to which the supported party’s overall credit risk to the direct party may increase if the enhanced creditor protection conditions are not met and the likelihood that the supported party’s credit risk to the direct party would decrease or remain the same if the enhanced creditor protection conditions are met; and E:\FR\FM\26OCP1.SGM 26OCP1 Federal Register / Vol. 81, No. 207 / Wednesday, October 26, 2016 / Proposed Rules (10) Whether the proposal provides the counterparty with additional default rights or other rights. § 382.6 [Reserved.] § 382.7 Exclusion of certain QFCs. (a) Exclusion of CCP-cleared QFCs. A covered FSI is not required to conform a covered QFC to which a CCP is party to the requirements of §§ 382.3 or 382.4. (b) Exclusion of covered entity or covered bank QFCs. A covered FSI is not required to conform a covered QFC to the requirements of §§ 382.3 or 382.4 to the extent that a covered entity or covered bank is required to conform the covered QFC to similar requirements of the Federal Reserve Board or Office of the Comptroller of the Currency if the QFC is either (A) a direct QFC to which a covered entity or a covered bank is a direct party or (B) an affiliate credit enhancement to which a covered entity or a covered bank is the obligor. Dated at Washington, DC, this 20th day of September, 2016. By order of the Board of Directors. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. [FR Doc. 2016–25605 Filed 10–25–16; 8:45 am] BILLING CODE P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 25 [Docket No. FAA–2015–2393; Notice No. 25– 16–07–SC] Special Conditions: Bombardier Inc. Models BD–700–2A12 and BD–700– 2A13 Airplanes; Fuselage Post-Crash Fire Survivability Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed special conditions. AGENCY: This action proposes special conditions for the Bombardier Inc. (Bombardier) Model BD–700–2A12 and BD–700–2A13 airplanes. These airplanes will have novel or unusual design features when compared to the state of technology envisioned in the airworthiness standards for transport category airplanes. These features are associated with an aluminum-lithium fuselage construction that may provide different levels of protection from postcrash fire threats than similar aircraft constructed from traditional aluminum structure. The applicable airworthiness regulations do not contain adequate or Lhorne on DSK30JT082PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 15:05 Oct 25, 2016 Jkt 241001 appropriate safety standards for this design feature. These proposed special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards. DATES: Send your comments on or before December 12, 2016. ADDRESSES: Send comments identified by docket number FAA–2015–2393 using any of the following methods: • Federal eRegulations Portal: Go to https://www.regulations.gov/ and follow the online instructions for sending your comments electronically. • Mail: Send comments to Docket Operations, M–30, U.S. Department of Transportation (DOT), 1200 New Jersey Avenue SE., Room W12–140, West Building Ground Floor, Washington, DC 20590–0001. • Hand Delivery or Courier: Take comments to Docket Operations in Room W12–140 of the West Building Ground Floor at 1200 New Jersey Avenue SE., Washington, DC, between 8 a.m. and 5 p.m., Monday through Friday, except federal holidays. • Fax: Fax comments to Docket Operations at 202–493–2251. Privacy: The FAA will post all comments it receives, without change, to https://www.regulations.gov/, including any personal information the commenter provides. Using the search function of the docket Web site, anyone can find and read the electronic form of all comments received into any FAA docket, including the name of the individual sending the comment (or signing the comment for an association, business, labor union, etc.). DOT’s complete Privacy Act Statement can be found in the Federal Register published on April 11, 2000 (65 FR 19477–19478), as well as at https://DocketsInfo.dot.gov/ . Docket: Background documents or comments received may be read at https://www.regulations.gov/ at any time. Follow the online instructions for accessing the docket or go to the Docket Operations in Room W12–140 of the West Building Ground Floor at 1200 New Jersey Avenue SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except federal holidays. FOR FURTHER INFORMATION CONTACT: Alan Sinclair, FAA, Airframe and Cabin Safety Branch, ANM–115, Transport Airplane Directorate, Aircraft Certification Service, 1601 Lind Avenue SW., Renton, Washington 98057–3356; telephone 425–227–2195; facsimile 425–227–1232. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 74347 Comments Invited We invite interested people to take part in this rulemaking by sending written comments, data, or views. The most helpful comments reference a specific portion of the special conditions, explain the reason for any recommended change, and include supporting data. We will consider all comments we receive by the closing date for comments. We may change these special conditions based on the comments we receive. Background On May 30, 2012, Bombardier applied for an amendment to type certificate no. T00003NY to include the new Model BD–700–2A12 and BD–700–2A13 airplanes. These airplanes are derivatives of the Model BD–700 series of airplanes and are marketed as the Bombardier Global 7000 (Model BD– 700–2A12) and Global 8000 (Model BD– 700–2A13). These airplanes are twinengine, transport-category, executiveinterior business jets. The maximum passenger capacity is 19 and the maximum takeoff weights are 106,250 lbs. (Model BD–700–2A12) and 104,800 lbs. (Model BD–700–2A13). Type Certification Basis Under the provisions of Title 14, Code of Federal Regulations (14 CFR) 21.101, Bombardier must show that the Model BD–700–2A12 and BD–700–2A13 airplanes meet the applicable provisions of the regulations listed in Type Certificate no. T00003NY, or the applicable regulations in effect on the date of application for the change, except for earlier amendments as agreed upon by the FAA. In addition, the certification basis includes other regulations, special conditions, and exemptions that are not relevant to these proposed special conditions. Type Certificate no. T00003NY will be updated to include a complete description of the certification basis for these airplane models. If the Administrator finds that the applicable airworthiness regulations (i.e., 14 CFR part 25) do not contain adequate or appropriate safety standards for the Model BD–700–2A12 and BD– 700–2A13 airplanes because of a novel or unusual design feature, special conditions are prescribed under the provisions of § 21.16. Special conditions are initially applicable to the model for which they are issued. Should the type certificate for that model be amended later to include any other model that incorporates the same novel or unusual E:\FR\FM\26OCP1.SGM 26OCP1

Agencies

FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 81, Number 207 (Wednesday, October 26, 2016)]
[Proposed Rules]
[Pages 74326-74347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25605]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324, 329, and 382

RIN 3064-AE46

Restrictions on Qualified Financial Contracts of Certain FDIC-
Supervised Institutions; Revisions to the Definition of Qualifying
Master Netting Agreement and Related Definitions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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[[Page 74327]]

SUMMARY: The FDIC is proposing to add a new part to its rules to
improve the resolvability of systemically important U.S. banking
organizations and systemically important foreign banking organizations
and enhance the resilience and the safety and soundness of certain
state savings associations and state-chartered banks that are not
members of the Federal Reserve System (``state non-member banks'' or
``SNMBs'') for which the FDIC is the primary federal regulator
(together, ``FSIs'' or ``FDIC-supervised institutions''). Under this
proposed rule, covered FSIs would be required to ensure that covered
qualified financial contracts (QFCs) to which they are a party provide
that any default rights and restrictions on the transfer of the QFCs
are limited to the same extent as they would be under the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the
Federal Deposit Insurance Act (FDI Act). In addition, covered FSIs
would generally be prohibited from being party to QFCs that would allow
a QFC counterparty to exercise default rights against the covered FSI
based on the entry into a resolution proceeding under the FDI Act, or
any other resolution proceeding of an affiliate of the covered FSI.
The proposal would also amend the definition of ``qualifying master
netting agreement'' in the FDIC's capital and liquidity rules, and
certain related terms in the FDIC's capital rules. These proposed
amendments are intended to ensure that the regulatory capital and
liquidity treatment of QFCs to which a covered FSI is party would not
be affected by the proposed restrictions on such QFCs. The requirements
of this proposed rule are substantively identical to those contained in
the notice of proposed rulemaking issued by the Board of Governors of
the Federal Reserve System (FRB) on May 3, 2016 (FRB NPRM) regarding
``covered entities'', and the notice of proposed rulemaking issued by
the Office of the Comptroller of the Currency (OCC) on August 19, 2016
(OCC NPRM), regarding ``covered banks''.

DATES: Comments must be received by December 12, 2016, except that
comments on the Paperwork Reduction Act analysis in part VI of the
SUPPLEMENTARY INFORMATION must be received on or before December 27,
2016.

ADDRESSES: You may submit comments by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov. Follow the
instructions for submitting comments.
Agency Web site: https://www.FDIC.gov/regulations/laws/federal/.
Mail: Robert E. Feldman, Executive Secretary, Attention: Comments,
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington,
DC 20429.
Hand Delivered/Courier: The guard station at the rear of the 550
17th Street Building (located on F Street), on business days between
7:00 a.m. and 5:00 p.m.
Email: comments@FDIC.gov.
Instructions: Comments submitted must include ``FDIC'' and ``RIN
3064-AE46'' in the subject matter line. Comments received will be
posted without change to: https://www.FDIC.gov/regulations/laws/federal/
, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate
Director, rbillingsley@fdic.gov, Capital Markets Branch, Division of
Risk Management and Supervision; Alexandra Steinberg Barrage, Senior
Resolution Policy Specialist, Office of Complex Financial Institutions,
abarrage@fdic.gov; David N. Wall, Assistant General Counsel,
dwall@fdic.gov, Cristina Regojo, Counsel, cregojo@fdic.gov, Phillip
Sloan, Counsel, psloan@fdic.gov, Greg Feder, Counsel, gfeder@fdic.gov,
or Michael Phillips, Counsel, mphillips@fdic.gov, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington,
DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Background
B. Overview of the Proposal
C. Consultation with U.S. Financial Regulators
D. Overview of Statutory Authority and Purpose
II. Proposed Restrictions on QFCs of GSIBs
A. Covered FSIs
B. Covered QFCs
C. Definition of ``Default Right''
D. Required Contractual Provisions Related to the U.S. Special
Resolution Regimes
E. Prohibited Cross-Default Rights
F. Process for Approval of Enhanced Creditor Protections
III. Transition Periods
IV. Expected Effects
V. Revisions to Certain Definitions in the FDIC's Capital and
Liquidity Rules
VI. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act: Initial Regulatory Flexibility
Analysis
C. Riegle Community Development and Regulatory Improvement Act
of 1994
D. Solicitation of Comments on the Use of Plain Language

I. Introduction

A. Background

This proposed rule addresses one of the ways the failure of a major
financial firm could destabilize the financial system. The disorderly
failure of a large, interconnected financial company could cause severe
damage to the U.S. financial system and, ultimately, to the economy as
a whole, as illustrated by the failure of Lehman Brothers in September
2008. Protecting the financial stability of the United States is a core
objective of the Dodd-Frank Act,\1\ which Congress passed in response
to the 2007-2009 financial crisis and the ensuing recession. One way
the Dodd-Frank Act helps to protect the financial stability of the
United States is by reducing the damage that such a company's failure
would cause to the financial system if it were to occur. This strategy
centers on measures designed to help ensure that a failed company's
resolution proceeding--such as bankruptcy or the special resolution
process created by the Dodd-Frank Act--would be more orderly, thereby
helping to mitigate destabilizing effects on the rest of the financial
system.\2\
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\1\ The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L.
111-203). According to its preamble, the Dodd-Frank Act is intended
``[t]o promote the financial stability of the United States by
improving accountability and transparency in the financial system,
to end `too big to fail', [and] to protect the American taxpayer by
ending bailouts.''
\2\ The Dodd-Frank Act itself pursues this goal through numerous
provisions, including by requiring systemically important financial
companies to develop resolution plans (also known as ``living
wills'') that lay out how they could be resolved in an orderly
manner under bankruptcy if they were to fail and by creating a new
back-up resolution regime, the Orderly Liquidation Authority,
applicable to systemically important financial companies. 12 U.S.C.
5365(d), 5381-5394.
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On May 3, 2016, the FRB issued a Notice of Proposed Rulemaking, the
FRB NPRM, pursuant to section 165 of the Dodd-Frank Act.\3\ The FRB's
proposed rule stated that it is intended as a further step to increase
the resolvability of U.S. global systemically important banking
organizations (GSIBs) \4\ and global systemically important foreign
banking organizations (foreign GSIBs) that operate in the United States
(collectively, ``covered

[[Page 74328]]

entities'').\5\ Subsequent to the FRB NPRM, the OCC issued the OCC
NPRM, which applies the same QFC requirements to ``covered banks''
within the OCC's jurisdiction.
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\3\ The FRB received seventeen comment letters on the FRB NPRM
during the comment period, which ended on August 5, 2016.
\4\ Under the GSIB surcharge rule's methodology, there are
currently eight U.S. GSIBs: Bank of America Corporation, The Bank of
New York Mellon Corporation, Citigroup Inc., Goldman Sachs Group,
Inc., JPMorgan Chase & Co., Morgan Stanley Inc., State Street
Corporation, and Wells Fargo & Company. See FRB NPRM, 81 FR 29169,
29175 (May 11, 2016). This list may change in the future in light of
changes to the relevant attributes of the current U.S. GSIBs and of
other large U.S. bank holding companies.
\5\ See FRB NPRM at Sec. 252.83(a) (defining ``covered entity''
to include: (1) A bank holding company that is identified as a
global systemically important [bank holding company] pursuant to 12
CFR 217.402; (2) A subsidiary of a company identified in paragraph
(a)(1) of [section 252.83(a)] (other than a subsidiary that is a
covered bank); or (3) A U.S. subsidiary, U.S. branch, or U.S. agency
of a global systemically important foreign banking organization
(other than a U.S. subsidiary, U.S. branch, or U.S. agency that is a
covered bank, section 2(h)(2) company or a DPC branch subsidiary)).
In addition to excluding a ``covered bank'' from the definition of a
``covered entity,'' the FDIC expects that in its final rule, the FRB
would also exclude ``covered FSIs'' from the NPRM's definition of a
``covered entity.'' 81 FR 29169 (May 11, 2016)
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The FDIC is issuing this parallel proposed rule applicable to FSIs
that are subsidiaries of a ``covered entity'' as defined in the FRB
NPRM and to subsidiaries of such FSIs (collectively, ``covered FSIs'').
The policy objective of this proposal focuses on improving the orderly
resolution of a GSIB by limiting disruptions to a failed GSIB through
its FSI subsidiaries' financial contracts with other companies. The FRB
NPRM, the OCC NPRM, and this proposal complement the ongoing work of
the FRB and the FDIC on resolution planning requirements for GSIBs, and
the FDIC intends this proposed rule to work in tandem with the FRB NPRM
and the OCC NPRM.\6\
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\6\ For additional background regarding the interconnectivity of
the largest financial firms, see FRB NPRM, 81 FR 29175-29176 (May
11, 2016).
---------------------------------------------------------------------------

As discussed in Part I.D. below, the FDIC has a strong interest in
preventing a disorderly termination of covered FSIs' QFCs upon a GSIB's
entry into resolution proceedings. In fulfilling the FDIC's
responsibilities as (i) the primary federal supervisor for SNMBs and
state savings associations; \7\ (ii) the insurer of deposits and
manager of the Deposit Insurance Fund (DIF); and (iii) the resolution
authority for all FDIC-insured institutions under the FDI Act and, if
appointed by the Secretary of the Treasury, for large complex financial
institutions under Title II of the Dodd-Frank Act, the FDIC's interests
include ensuring that large complex financial institutions are
resolvable in an orderly manner, and that FDIC-insured institutions
operate safely and soundly.\8\
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\7\ Although the FDIC is the insurer for all insured depository
institutions in the United States, it is the primary federal
supervisor only for state-chartered banks that are not members of
the Federal Reserve System, state-chartered savings associations,
and insured state-licensed branches of foreign banks. As of March
31, 2016, the FDIC had primary supervisory responsibility for 3,911
SNMBs and state-chartered savings associations.
\8\ See https://www.fdic.gov/about/strategic/strategic/supervision.html.
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The proposed rule specifically addresses QFCs, which are typically
entered into by various operating entities in a GSIB group, including
covered FSIs. These covered FSIs are affiliates of U.S. GSIBs or
foreign GSIBs that have OTC derivatives exposure, making these entities
interconnected with other large financial firms. The exercise of
default rights against an otherwise healthy covered FSI resulting from
the failure of its affiliate--e.g., its top-tier U.S. holding company--
may cause it to weaken or fail. Accordingly, FDIC-supervised affiliates
of U.S. or foreign GSIBs are exposed, through the interconnectedness of
their QFCs and their affiliates' QFCs, to destabilizing effects if
their counterparties or the counterparties of their affiliates exercise
default rights upon the entry into resolution of the covered FSI itself
or its GSIB affiliate.
These potentially destabilizing effects are best addressed by
requiring all GSIB entities to amend their QFCs to include contractual
provisions aimed at avoiding such destabilization. It is imperative
that all entities within the GSIB group amend their QFCs in a similar
way, thereby eliminating an incentive for counterparties to concentrate
QFCs in entities subject to fewer restrictions. Therefore, the
application of this proposed rule to the QFCs of covered FSIs is not
only necessary for the safety and soundness of covered FSIs
individually and collectively, but also to avoid potential
destabilization of the overall banking system.
This proposed rule imposes substantively identical requirements
contained in the FRB NPRM on covered FSIs. The FDIC consulted with the
FRB and the OCC in developing this proposed rule, and intends to
continue coordinating with the FRB and the OCC in developing the final
rule.
Qualified financial contracts, default rights, and financial
stability. Like the FRB NPRM, this proposal pertains to several
important classes of financial transactions that are collectively known
as QFCs.\9\ QFCs include swaps, other derivatives contracts, repurchase
agreements (also known as ``repos'') and reverse repos, and securities
lending and borrowing agreements.\10\ GSIBs enter into QFCs for a
variety of purposes, including to borrow money to finance their
investments, to lend money, to manage risk, and to enable their clients
and counterparties to hedge risks, make markets in securities and
derivatives, and take positions in financial investments.
---------------------------------------------------------------------------

\9\ The proposal would adopt the definition of ``qualified
financial contract'' set out in section 210(c)(8)(D) of the Dodd-
Frank Act, 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec. 382.1.
\10\ The definition of ``qualified financial contract'' is
broader than this list of examples, and the default rights discussed
are not common to all types of QFCs.
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QFCs play a role in economically valuable financial intermediation
when markets are functioning normally. But they are also a major source
of financial interconnectedness, which can pose a threat to financial
stability in times of market stress. This proposal--along with the FRB
NPRM and OCC NPRM--focuses on a context in which that threat is
especially great: The failure of a GSIB that is party to large volumes
of QFCs, likely including QFCs with counterparties that are themselves
systemically important.
QFC continuity is important for the orderly resolution of a GSIB
because it helps to ensure that the GSIB entities remain viable and to
avoid instability caused by asset fire sales. Together, the FRB and
FDIC have identified the exercise of certain default rights in
financial contracts as a potential obstacle to orderly resolution in
the context of resolution plans filed pursuant to section 165(d) of the
Dodd-Frank Act,\11\ and have instructed systemically important firms to
demonstrate that they are ``amending, on an industry-wide and firm-
specific basis, financial contracts to provide for a stay of certain
early termination rights of external counterparties triggered by
insolvency proceedings.'' \12\ More recently, in April 2016,\13\ the
FRB and FDIC noted the important changes that have been made to the
structure and operations of the largest financial firms, including the
adherence by all U.S. GSIBs and their affiliates to the ISDA 2015
Universal Resolution Stay Protocol.\14\
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\11\ 12 U.S.C. 5365(d).
\12\ FRB and FDIC, ``Agencies Provide Feedback on Second Round
Resolution Plans of `First-Wave' Filers'' (August 5, 2014),
available at https://www.fdic.gov/news/news/press/2014/pr14067.html.
See also FRB and FDIC, ``Agencies Provide Feedback on Resolution
Plans of Three Foreign Banking Organizations'' (March 23, 2015),
available at https://www.fdic.gov/news/news/press/2015/pr15027.html;
FRB and FDIC, ``Guidance for 2013 165(d) Annual Resolution Plan
Submissions by Domestic Covered Companies that Submitted Initial
Resolution Plans in 2012'' 5-6 (April 15, 2013), available at
https://www.fdic.gov/news/news/press/2013/pr13027.html.
\13\ See https://www.fdic.gov/news/news/press/2016/pr16031a.pdf,
at 13.
\14\ International Swaps and Derivatives Association, Inc.,
``ISDA 2015 Universal Resolution Stay Protocol'' (November 4, 2015),
available at https://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf.
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Direct defaults and cross-defaults. Like the FRB NPRM and the OCC
NPRM, this proposal focuses on two

[[Page 74329]]

distinct scenarios in which a non-defaulting party to a QFC is commonly
able to exercise default rights. These two scenarios involve a default
that occurs when either the GSIB entity that is a direct party \15\ to
the QFC or an affiliate of that entity enters a resolution
proceeding.\16\ The first scenario occurs when a GSIB entity that is
itself a direct party to the QFC enters a resolution proceeding; this
preamble refers to such a scenario as a ``direct default'' and refers
to the default rights that arise from a direct default as ``direct
default rights.'' The second scenario occurs when an affiliate of the
GSIB entity that is a direct party to the QFC (such as the direct
party's parent holding company) enters a resolution proceeding; this
preamble refers to such a scenario as a ``cross-default'' and refers to
default rights that arise from a cross-default as ``cross-default
rights.'' A GSIB parent entity will often guarantee the derivatives
transactions of its subsidiaries and those derivatives contracts could
contain cross-default rights against a subsidiary of the GSIB that
would be triggered by the bankruptcy filing of the GSIB parent entity
even though the subsidiary continues to meet all of its financial
obligations.
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\15\ In general, a ``direct party'' refers to a party to a
financial contract other than a credit enhancement (such as a
guarantee). The definition of ``direct party'' and related
definitions are discussed in more detail below on page 38.
\16\ This preamble uses phrases such as ``entering a resolution
proceeding'' and ``going into resolution'' to encompass the concept
of ``becoming subject to a receivership, insolvency, liquidation,
resolution, or similar proceeding.'' These phrases refer to
proceedings established by law to deal with a failed legal entity.
In the context of the failure of a systemically important banking
organization, the most relevant types of resolution proceeding
include the following: For most U.S.-based legal entities, the
bankruptcy process established by the U.S. Bankruptcy Code (Title
11, United States Code); for U.S. insured depository institutions, a
receivership administered by the Federal Deposit Insurance
Corporation (FDIC) under the FDI Act (12 U.S.C. 1821); for companies
whose ``resolution under otherwise applicable Federal or State law
would have serious adverse effects on the financial stability of the
United States,'' the Dodd-Frank Act's Orderly Liquidation Authority
(12 U.S.C. 5383(b)(2)); and, for entities based outside the United
States, resolution proceedings created by foreign law.
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Importantly, like the FRB NPRM and the OCC NPRM, this proposal does
not affect all types of default rights, and, where it affects a default
right, the proposal does so only temporarily for the purpose of
allowing the relevant resolution authority to take action to continue
to provide for continued performance on the QFC. Moreover, the proposal
is concerned only with default rights that run against a GSIB entity--
that is, direct default rights and cross-default rights that arise from
the entry into resolution of a GSIB entity. The proposal would not
affect default rights that a GSIB entity (or any other entity) may have
against a counterparty that is not a GSIB entity. This limited scope is
appropriate because, as described above, the risk posed to financial
stability by the exercise of QFC default rights is greatest when the
defaulting counterparty is a GSIB entity.
Resolution Strategies
Single-point-of-entry resolution. Cross-default rights are
especially significant in the context of a GSIB failure because GSIBs
typically enter into large volumes of QFCs through different entities
controlled by the GSIB. For example, a U.S. GSIB is made up of a U.S.
bank holding company and numerous operating subsidiaries that are
owned, directly or indirectly, by the bank holding company. As stated
in the FRB NPRM, from the standpoint of financial stability, the most
important of these operating subsidiaries are generally a U.S. insured
depository institution, a U.S. broker-dealer, or similar entities
organized in other countries.
Many complex GSIBs have developed resolution strategies that rely
on the single-point-of-entry (SPOE) resolution strategy. In an SPOE
resolution of a GSIB, only a single legal entity--the GSIB's top-tier
bank holding company--would enter a resolution proceeding. The effect
of losses that led to the GSIB's failure would pass up from the
operating subsidiaries that incurred the losses to the holding company
and would then be imposed on the equity holders and unsecured creditors
of the holding company through the resolution process. This strategy is
designed to help ensure that the GSIB subsidiaries remain adequately
capitalized, and that operating subsidiaries of the GSIB are able to
stabilize and continue meeting their financial obligations without
immediately defaulting or entering resolution themselves. The
expectation that the holding company's equity holders and unsecured
creditors would absorb the GSIB's losses in the event of failure would
help to maintain the confidence of the operating subsidiaries'
creditors and counterparties (including their QFC counterparties),
reducing their incentive to engage in potentially destabilizing funding
runs or margin calls and thus lowering the risk of asset fire sales. A
successful SPOE resolution would also avoid the need for separate
resolution proceedings for separate legal entities run by separate
authorities across multiple jurisdictions, which would be more complex
and could therefore destabilize the resolution. An SPOE resolution can
also avoid the need for insured bank subsidiaries, including covered
FSIs, to be placed into receivership or similar proceedings as the
likelihood of their continuing to operate as going concerns will be
significantly enhanced if the parent's entry into resolution
proceedings does not trigger the exercise of cross-default rights.
Accordingly, this proposed rule, by limiting such cross-default rights
based on an affiliate's entry into resolution proceedings, assists in
stabilizing both the covered FSIs and the larger banking system.
Multiple-Point-of-Entry Resolution. This proposal would also yield
benefits for other approaches to resolution. For example, preventing
early terminations of QFCs would increase the prospects for an orderly
resolution under a multiple-point-of-entry (MPOE) strategy involving a
foreign GSIB's U.S. intermediate holding company going into resolution
or a resolution plan that calls for a GSIB's U.S. insured depository
institution to enter resolution under the FDI Act. As discussed above,
this proposal would help support the continued operation of affiliates
of an entity experiencing resolution to the extent the affiliate
continues to perform on its QFCs.
U.S. Bankruptcy Code. While insured depository institutions are not
subject to resolution under the Bankruptcy Code, if a bank holding
company were to fail, it would likely be resolved under the Bankruptcy
Code. When an entity goes into resolution under the Bankruptcy Code,
attempts by the debtor's creditors to enforce their debts through any
means other than participation in the bankruptcy proceeding (for
instance, by suing in another court, seeking enforcement of a
preexisting judgment, or seizing and liquidating collateral) are
generally blocked by the imposition of an automatic stay.\17\ A key
purpose of the automatic stay, and of bankruptcy law in general, is to
maximize the value of the bankruptcy estate and the creditors' ultimate
recoveries by facilitating an orderly liquidation or restructuring of
the debtor. The automatic stay thus solves a collective action problem
in which the creditors' individual incentives to become the first to
recover as much from the debtor as possible, before other creditors can
do so, collectively cause a value-destroying disorderly liquidation of
the debtor.\18\
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\17\ See 11 U.S.C. 362.
\18\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d
876, 879 (7th Cir. 2001).

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[[Page 74330]]

However, the Bankruptcy Code largely exempts QFC \19\
counterparties from the automatic stay through special ``safe harbor''
provisions.\20\ Under these provisions, any rights that a QFC
counterparty has to terminate the contract, set off obligations, and
liquidate collateral in response to a direct default are not subject to
the stay and may be exercised against the debtor immediately upon
default. (The Bankruptcy Code does not itself confer default rights
upon QFC counterparties; it merely permits QFC counterparties to
exercise certain rights created by other sources, such as contractual
rights created by the terms of the QFC.)
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\19\ The Bankruptcy Code does not use the term ``qualified
financial contract,'' but the set of transactions covered by its
safe harbor provisions closely tracks the set of transactions that
fall within the definition of ``qualified financial contract'' used
in Title II of the Dodd-Frank Act and in this proposal.
\20\ 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556,
559, 560, 561. The Bankruptcy Code specifies the types of parties to
which the safe harbor provisions apply, such as financial
institutions and financial participants. Id.
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The Bankruptcy Code's automatic stay also does not prevent the
exercise of cross-default rights against an affiliate of the party
entering resolution. The stay generally applies only to actions taken
against the party entering resolution or the bankruptcy estate,\21\
whereas a QFC counterparty exercising a cross-default right is instead
acting against a distinct legal entity that is not itself in
resolution: The debtor's affiliate.
---------------------------------------------------------------------------

\21\ See 11 U.S.C. 362(a).
---------------------------------------------------------------------------

Title II of the Dodd-Frank Act and the Orderly Liquidation
Authority. Title II of the Dodd-Frank Act (Title II) imposes somewhat
broader stay requirements on QFCs of companies that enter resolution
under that back-up resolution authority. In general, a U.S. bank
holding company (such as the top-tier holding company of a U.S. GSIB)
that fails would be resolved under the Bankruptcy Code. With Title II,
Congress recognized, however, that a financial company might fail under
extraordinary circumstances in which an attempt to resolve it through
the bankruptcy process would have serious adverse effects on financial
stability in the United States. Title II of the Dodd-Frank Act
establishes the Orderly Liquidation Authority, an alternative
resolution framework intended to be used rarely to manage the failure
of a firm that poses a significant risk to the financial stability of
the United States in a manner that mitigates such risk and minimizes
moral hazard.\22\ Title II authorizes the Secretary of the Treasury,
upon the recommendation of other government agencies and a
determination that several preconditions are met, to place a financial
company into a receivership conducted by the FDIC as an alternative to
bankruptcy.\23\
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\22\ Section 204(a) of the Dodd-Frank Act, 12 U.S.C. 5384(a).
\23\ See section 203 of the Dodd-Frank Act, 12 U.S.C. 5383.
---------------------------------------------------------------------------

Title II empowers the FDIC to transfer QFCs to a bridge financial
company or some other financial company that is not in a resolution
proceeding and should therefore be capable of performing under the
QFCs.\24\ To give the FDIC time to effect this transfer, Title II
temporarily stays QFC counterparties of the failed entity from
exercising termination, netting, and collateral liquidation rights
``solely by reason of or incidental to'' the failed entity's entry into
Title II resolution, its insolvency, or its financial condition.\25\
Once the QFCs are transferred in accordance with the statute, Title II
permanently stays the exercise of default rights for those reasons.\26\
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\24\ See 12 U.S.C. 5390(c)(9).
\25\ 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay
generally lasts until 5:00 p.m. eastern time on the business day
following the appointment of the FDIC as receiver.
\26\ 12 U.S.C. 5390(c)(10)(B)(i)(II).
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Title II addresses cross-default rights through a similar
procedure. It empowers the FDIC to enforce contracts of subsidiaries or
affiliates of the failed covered financial company that are
``guaranteed or otherwise supported by or linked to the covered
financial company, notwithstanding any contractual right to cause the
termination, liquidation, or acceleration of such contracts based
solely on the insolvency, financial condition, or receivership of'' the
failed company, so long as, in the case of guaranteed or supported
QFCs, the FDIC takes certain steps to protect the QFC counterparties'
interests by the end of the business day following the company's entry
into Title II resolution.\27\
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\27\ 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
---------------------------------------------------------------------------

These stay-and-transfer provisions of the Dodd-Frank Act are
intended to mitigate the threat posed by QFC default rights. At the
same time, the provisions allow for appropriate protections for QFC
counterparties of the failed financial company. The provisions stay the
exercise of default rights based on the failed company's entry into
resolution, the fact of its insolvency, or its financial condition. And
the stay period is temporary, unless the FDIC transfers the QFCs to
another financial company that is not in resolution (and should
therefore be capable of performing under the QFCs) or, in the case of
cross-default rights relating to guaranteed or supported QFCs, the FDIC
takes the action required in order to continue to enforce those
contracts.\28\
---------------------------------------------------------------------------

\28\ See id.
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The Federal Deposit Insurance Act. Under the FDI Act, a failing
insured depository institution would generally enter a receivership
administered by the FDIC.\29\ The FDI Act addresses direct default
rights in the failed bank's QFCs with stay-and-transfer provisions that
are substantially similar to the provisions of Title II of the Dodd-
Frank Act discussed above.\30\ However, the FDI Act does not address
cross-default rights, leaving the QFC counterparties of the failed
depository institution's affiliates free to exercise any contractual
rights they may have to terminate, net, and liquidate collateral based
on the depository institution's entry into resolution. Moreover, as
with Title II, there is a possibility that a court of a foreign
jurisdiction might decline to enforce the FDI Act's stay-and-transfer
provisions under certain circumstances.
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\29\ 12 U.S.C. 1821(c).
\30\ See 12 U.S.C. 1821(e)(8)-(10).
---------------------------------------------------------------------------

B. Overview of the Proposal

The FDIC invites comment on all aspects of this proposed
rulemaking, which is intended to increase GSIB resolvability by
addressing two QFC-related issues and thereby enhance resiliency of
FSIs and the overall banking system. First, the proposal seeks to
address the risk that a court in a foreign jurisdiction may decline to
enforce the QFC stay-and-transfer provisions of Title II and the FDI
Act discussed above. The proposed rule directly enhances the prospects
of orderly resolution by establishing the applicability of U.S. special
resolution regimes to all counterparties, whether they are foreign or
domestic. Although domestic entities are clearly subject to the
temporary stay provisions of Title II and the FDI Act, these stays may
be difficult to enforce in a cross-border context. As a result,
domestic counterparties of a failed U.S. financial institution may be
disadvantaged relative to foreign counterparties, as domestic
counterparties would be subject to the stay, and accompanying potential
market volatility, while, if the stay was not enforced by foreign
authorities, foreign counterparties could close out immediately.
Furthermore, a mass close out by such foreign counterparties would
likely exacerbate market volatility, which in turn would likely magnify
harm to the stayed U.S. counterparties' positions. This proposed rule
would reduce the risk of these adverse consequences by requiring

[[Page 74331]]

covered FSIs to condition the exercise of default rights in covered
contracts on the stay provisions of Title II and the FDI Act.
Second, the proposal seeks to address the potential disruption that
may occur if a counterparty to a QFC with an affiliate of a GSIB entity
that goes into resolution under the Bankruptcy Code or the FDI Act is
allowed to exercise cross-default rights. Affiliates of a GSIB that
goes into resolution under the Bankruptcy Code may face disruptions to
their QFCs as their counterparties exercise cross-default rights. Thus,
a healthy covered FSI whose parent bank holding company entered
resolution proceedings could fail due to its counterparties exercising
cross-default rights. This proposed rule would address this issue by
generally restricting the exercise of cross-default rights by
counterparties against a covered FSI.
Scope of application. The proposal's requirements would apply to
all ``covered FSIs.'' ``Covered FSIs'' include: Any state savings
associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member
bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect
subsidiary of (i) a global systemically important bank holding company
that has been designated pursuant to section 252.82(a)(1) of the FRB's
Regulation YY (12 CFR 252.82); or (ii) a global systemically important
foreign banking organization \31\ that has been designated pursuant to
section 252.87 of the FRB's Regulation YY (12 CFR 252.87). This
proposed rule also makes clear that the mandatory contractual stay
requirements apply to the subsidiaries of any covered FSI. Under the
proposed rule, the term ``covered FSI'' also includes ``any subsidiary
of a covered FSI.'' For the reasons noted above, all subsidiaries of
covered FSIs should also be subject to mandatory contractual stay
requirements--e.g., to avoid concentrating QFCs in entities subject to
fewer restrictions.
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\31\ The definition of covered FSI does not include insured
state-licensed branches of FBOs. Any insured state-licensed branches
of global systemically important FBOs would be covered by the Board
NPRM. Therefore, unlike the FRB NPRM, the FDIC is not including in
this proposal any exclusion for certain QFCs subject to a multi-
branch netting arrangement.
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``Qualified financial contract'' or ``QFC'' would be defined to
have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank
Act,\32\ and would include, among other things, derivatives, repos, and
securities lending agreements. Subject to the exceptions discussed
below, the proposal's requirements would apply to any QFC to which a
covered FSI is party (covered QFC).\33\
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\32\ 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec. 382.1.
\33\ In addition, the proposed rule states at Sec. 382.2(d)
that it does not modify or limit, in any manner, the rights and
powers of the FDIC as receiver under the FDI Act or Title II of the
Dodd-Frank Act, including, without limitation, the rights of the
receiver to enforce provisions of the FDI Act or Title II of the
Dodd-Frank Act that limit the enforceability of certain contractual
provisions. For example, the suspension of payment and delivery
obligations to QFC counterparties during the stay period as provided
under the FDI Act and Title II when an entity is in receivership
under the FDI Act or Title II remains valid and unchanged
irrespective of any contrary contractual provision and may continue
to be enforced by the FDIC as receiver. Similarly, the use by a
counterparty to a QFC of a contractual provision that allows the
party to terminate a QFC on demand, or at its option at a specified
time, or from time to time, for any reason, to terminate a QFC on
account of the appointment of the FDIC as receiver (or the
insolvency or financial condition of the company) remains
unenforceable, and the QFC may be enforced by the FDIC as receiver
notwithstanding any such purported termination.
---------------------------------------------------------------------------

Required contractual provisions related to the U.S. special
resolution regimes. Covered FSIs would be required to ensure that
covered QFCs include contractual terms explicitly providing that any
default rights or restrictions on the transfer of the QFC are limited
to the same extent as they would be pursuant to the U.S. special
resolution regimes--that is, Title II and the FDI Act.\34\ The proposed
requirements are not intended to imply that the statutory stay-and-
transfer provisions would not in fact apply to a given QFC, but rather
to help ensure that all covered QFCs--including QFCs that are governed
by foreign law, entered into with a foreign party, or for which
collateral is held outside the United States--would be treated the same
way in the context of an FDIC receivership under the Dodd-Frank Act or
the FDI Act. This provision would address the first issue listed above
and would decrease the QFC-related threat to financial stability posed
by the failure and resolution of an internationally active GSIB. This
section of the proposal is also consistent with analogous legal
requirements that have been imposed in other national jurisdictions
\35\ and with the Financial Stability Board's ``Principles for Cross-
border Effectiveness of Resolution Actions.'' \36\
---------------------------------------------------------------------------

\34\ See proposed rule Sec. 382.3.
\35\ See, e.g., Bank of England Prudential Regulation Authority,
Policy Statement, ``Contractual stays in financial contracts
governed by third-country law'' (November 2015), available at https://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf.
\36\ Financial Stability Board, ``Principles for Cross-border
Effectiveness of Resolution Actions'' (November 3, 2015), available
at https://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
The Financial Stability Board (FSB) was established in 2009 to
coordinate the work of national financial authorities and
international standard-setting bodies and to develop and promote the
implementation of effective regulatory, supervisory, and other
financial sector policies to advance financial stability. The FSB
brings together national authorities responsible for financial
stability in 24 countries and jurisdictions, as well as
international financial institutions, sector-specific international
groupings of regulators and supervisors, and committees of central
bank experts. See generally Financial Stability Board, available at
https://www.fsb.org.
---------------------------------------------------------------------------

Prohibited cross-default rights. A covered FSI would be prohibited
from entering into covered QFCs that would allow the exercise of cross-
default rights--that is, default rights related, directly or
indirectly, to the entry into resolution of an affiliate of the direct
party--against it.\37\ Covered FSIs would similarly be prohibited from
entering into covered QFCs that would provide for a restriction on the
transfer of a credit enhancement supporting the QFC from the covered
FSI's affiliate to a transferee upon or following the entry into
resolution of the affiliate.
---------------------------------------------------------------------------

\37\ See proposed rule Sec. 382.3(b) and Sec. 382.4(b).
---------------------------------------------------------------------------

The FDIC does not propose to prohibit covered FSIs from entering
into QFCs that contain direct default rights. Under the proposal, a
counterparty to a direct QFC with a covered FSI also could, to the
extent not inconsistent with Title II or the FDI Act, be granted and
could exercise the right to terminate the QFC if the covered FSI fails
to perform its obligations under the QFC.
As an alternative to bringing their covered QFCs into compliance
with the requirements set out in this section of the proposed rule,
covered FSIs would be permitted to comply by adhering to the ISDA 2015
Resolution Stay Protocol.\38\ The FDIC views the ISDA 2015 Resolution
Stay Protocol as consistent with the requirements of the proposed rule.
---------------------------------------------------------------------------

\38\ See proposed rule Sec. 382.5(a).
---------------------------------------------------------------------------

The purpose of this section of the proposal is to help ensure that,
when a GSIB entity enters resolution under the Bankruptcy Code or the
FDI Act,\39\ its affiliates' covered QFCs will be protected from
disruption to a similar extent as if the failed entity had entered
resolution under Title II. In particular, this section would facilitate
resolution under the Bankruptcy Code by preventing the QFC
counterparties of a GSIB's subsidiary from exercising default rights on
the basis of the entry into bankruptcy by the GSIB's top-tier

[[Page 74332]]

holding company or any other affiliate of the subsidiary. This section
generally would not prevent covered QFCs from allowing the exercise of
default rights upon a failure by the direct party to satisfy a payment
or delivery obligation under the QFC, the direct party's entry into
bankruptcy, or the occurrence of any other default event that is not
related to the entry into a resolution proceeding or the financial
condition of an affiliate of the direct party.
---------------------------------------------------------------------------

\39\ The FDI Act does not stay cross-default rights against
affiliates of an insured depository institution based on the entry
of the insured depository institution into resolution proceedings
under the FDI Act.
---------------------------------------------------------------------------

Process for approval of enhanced creditor protection conditions. As
noted above, in the context of addressing the potential disruption that
may occur if a counterparty to a QFC with an affiliate of a GSIB entity
that goes into resolution under the Bankruptcy Code or the FDI Act is
allowed to exercise cross-default rights, the proposed rule generally
restricts the exercise of cross-default rights by counterparties
against a covered FSI. The proposal would allow the FDIC, at the
request of a covered FSI, to approve as compliant with the requirements
of 382.5 proposed creditor protection provisions for covered QFCs.\40\
---------------------------------------------------------------------------

\40\ See proposed rule Sec. 382.5(c).
---------------------------------------------------------------------------

The FDIC could approve such a request if, in light of several
enumerated considerations,\41\ the alternative approach would mitigate
risks to the financial stability of the United States presented by a
GSIB's failure to at least the same extent as the proposed
requirements. The FDIC expects to consult with the FRB and OCC during
its consideration of a request under this section.
---------------------------------------------------------------------------

\41\ See id.
---------------------------------------------------------------------------

Amendments to certain definitions in the FDIC 's capital and
liquidity rules. The proposal would also amend certain definitions in
the FDIC's capital and liquidity rules to help ensure that the
regulatory capital and liquidity treatment of QFCs to which a covered
FSI is party is not affected by the proposed restrictions on such QFCs.
Specifically, the proposal would amend the definition of ``qualifying
master netting agreement'' in the FDIC's regulatory capital and
liquidity rules and would similarly amend the definitions of the terms
``collateral agreement,'' ``eligible margin loan,'' and ``repo-style
transaction'' in the FDIC's regulatory capital rules.\42\
---------------------------------------------------------------------------

\42\ See proposed rule Sec. Sec. 324.2 and 329.3.
---------------------------------------------------------------------------

C. Consultation With U.S Financial Regulators

In developing this proposal, the FDIC consulted with the FRB and
the OCC as a means of promoting alignment across regulations and
avoiding redundancy. The proposal reflects input that the FDIC received
during this consultation process. Furthermore, the FDIC expects to
consult with foreign financial regulatory authorities regarding this
proposal and the establishment of other standards that would maximize
the prospects for the cooperative and orderly cross-border resolution
of a failed GSIB on an international basis.

D. Overview of Statutory Authority and Purpose

The FDIC is issuing this proposed rule under its authorities under
the FDI Act (12 U.S.C. 1811 et seq.), including its general rulemaking
authorities.\43\ The FDIC views the proposed rule as consistent with
its overall statutory mandate.\44\ An overarching purpose of this
proposed rule is to limit disruptions to an orderly resolution of a
GSIB and its subsidiaries, thereby furthering financial stability
generally. Another purpose is to enhance the safety and soundness of
covered FSIs by addressing the two main issues raised by covered QFCs
(noted above): Cross-border recognition and cross-default rights.
---------------------------------------------------------------------------

\43\ See 12 U.S.C. 1819.
\44\ The FDIC is (i) the primary federal supervisor for SNMBs
and state savings associations; (ii) insurer of deposits and manager
of the deposit insurance fund (DIF); and (iii) the resolution
authority for all FDIC-insured institutions under the Federal
Deposit Insurance Act and for large complex financial institutions
under Title II of the Dodd-Frank Act. See 12 U.S.C. 1811, 1816,
1818, 1819, 1820(g), 1828, 1828m, 1831p-1, 1831-u, 5301 et seq.
---------------------------------------------------------------------------

As discussed above and in the FRB NPRM, the exercise of default
rights by counterparties of a failed GSIB can have significant impacts
on financial stability. These financial stability concerns are
necessarily intertwined with the safety and soundness of covered FSIs
and the banking system--the disorderly exercise of default rights can
produce a sudden, contemporaneous threat to the safety and soundness of
individual institutions, including insured depository institutions,
throughout the system, which in turn threatens the system as a
whole.[hairsp] Furthermore, the failure of multiple insured depository
institutions in the same time period can stress the DIF, which is
managed by the FDIC. Covered FSIs could themselves be a contributing
factor to financial destabilization due to the interconnectedness of
these institutions to each other and to other entities within the
financial system.
While the covered FSI may not itself be considered systemically
important, as part of a GSIB, the disorderly resolution of the covered
FSI could result in a significant negative impact on the financial
system. Additionally, the application of this proposed rule to the QFCs
of covered FSIs should avoid creating what may otherwise be an
incentive for GSIBs and their counterparties to concentrate QFCs in
entities that are subject to fewer counterparty restrictions.
Question 1: The FDIC invites comment on all aspects of this notice
of proposed rulemaking.

II. Proposed Restrictions on QFCs of Covered FSIs

A. Covered FSIs (Section 382.2(a) of the Proposed Rule)

The proposed rule would apply to ``covered FSIs.'' The term
``covered FSI'' would be defined to include: Any state savings
associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member
bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect
subsidiary of (i) a global systemically important bank holding company
that has been designated pursuant to section 252.82(a)(1) of the FRB's
Regulation YY (12 CFR 252.82); or (ii) a global systemically important
foreign banking organization that has been designated pursuant to
section 252.87 of the FRB's Regulation YY (12 CFR 252.87). The
mandatory contractual stay requirements would also apply to the
subsidiaries of any covered FSI. Under the proposed rule, the term
``covered FSI'' also includes any ``subsidiary of covered FSI.''
Question 2: The FDIC invites comment on the proposed definition of
the term ``covered FSI.''

B. Covered QFCs

General definition. The proposal would apply to any ``covered
QFC,'' generally defined as any QFC that a covered FSI enters into,
executes, or otherwise becomes party to.\45\ ``Qualified financial
contract'' or ``QFC'' would be defined as in section 210(c)(8)(D) of
Title II of the Dodd-Frank Act and would include swaps, repo and
reverse repo transactions, securities lending and borrowing
transactions, commodity contracts, securities contracts, and forward
agreements.\46\
---------------------------------------------------------------------------

\45\ See proposed rule Sec. 382.3(a). For convenience, this
preamble generally refers to ``a covered FSI's QFCs'' or ``QFCs to
which a covered FSI is party'' as shorthand to encompass this
definition.
\46\ See proposed rule Sec. 382.1; 12 U.S.C. 5390(c)(8)(D).
---------------------------------------------------------------------------

The proposed definition of ``covered QFC'' is intended to limit the
proposed restrictions to those financial transactions whose disorderly
unwind has substantial potential to frustrate the

[[Page 74333]]

orderly resolution of a GSIB and its affiliates, as discussed above. By
adopting the Dodd-Frank Act's definition, the proposed rule would
extend the benefits of the stay-and-transfer protections to the same
types of transactions in the event a GSIB enters bankruptcy. In this
way, the proposal enhances the prospects for an orderly resolution in
bankruptcy (as opposed to resolution under Title II of the Dodd-Frank
Act) of a GSIB.
Question 3: The FDIC invites comment on the proposed definitions of
``QFC'' and ``covered QFC.''
Exclusion of cleared QFCs. The proposal would exclude from the
definition of ``covered QFC'' all QFCs that are cleared through a
central counterparty.\47\ The FDIC, in consultation with the FRB and
OCC, will continue to consider the appropriate treatment of centrally
cleared QFCs, in light of differences between cleared and non-cleared
QFCs with respect to contractual arrangements, counterparty credit
risk, default management, and supervision.
---------------------------------------------------------------------------

\47\ See proposed rule Sec. 382.7(a).
---------------------------------------------------------------------------

Question 4: The FDIC invites comment on the proposed exclusion of
cleared QFCs, including the potential effects on the financial
stability of the United States of excluding cleared QFCs as well as the
potential effects on U.S. financial stability of subjecting covered
entities' relationships with central counterparties to restrictions
analogous to this proposal's restrictions on covered entities' non-
cleared QFCs. In addition, the FDIC invites comment on whether the
proposed exclusion of covered entity QFCs in Sec. 382.7 is
sufficiently clear. Where a credit enhancement supports a covered QFC,
and where a direct party to a covered QFC is a covered FSI, covered
entity, or covered bank, would an alternative process better facilitate
compliance with this proposal?

C. Definition of ``Default Right''

As discussed above, a party to a QFC generally has a number of
rights that it can exercise if its counterparty defaults on the QFC by
failing to meet certain contractual obligations. These rights are
generally, but not always, contractual in nature. One common default
right is a setoff right: the right to reduce the total amount that the
non-defaulting party must pay by the amount that its defaulting
counterparty owes. A second common default right is the right to
liquidate pledged collateral and use the proceeds to pay the defaulting
party's net obligation to the non-defaulting party. Other common rights
include the ability to suspend or delay the non-defaulting party's
performance under the contract or to accelerate the obligations of the
defaulting party. Finally, the non-defaulting party typically has the
right to terminate the QFC, meaning that the parties would not make
payments that would have been required under the QFC in the future. The
phrase ``default right'' in the proposed rule is broadly defined to
include these common rights as well as ``any similar rights.'' \48\
Additionally, the definition includes all such rights regardless of
source, including rights existing under contract, statute, or common
law.
---------------------------------------------------------------------------

\48\ See proposed rule Sec. 382.1.
---------------------------------------------------------------------------

However, the proposed definition excludes two rights that are
typically associated with the business-as-usual functioning of a QFC.
First, same-day netting that occurs during the life of the QFC in order
to reduce the number and amount of payments each party owes the other
is excluded from the definition of ``default right.'' \49\ Second,
contractual margin requirements that arise solely from the change in
the value of the collateral or the amount of an economic exposure are
also excluded from the definition.\50\ The function of these exclusions
is to leave such rights unaffected by the proposed rule.
---------------------------------------------------------------------------

\49\ See id.
\50\ See id.
---------------------------------------------------------------------------

However, certain QFCs are also commonly subject to rights that
would increase the amount of collateral or margin that the defaulting
party (or a guarantor) must provide upon an event of default. The
financial impact of such default rights on a covered entity could be
similar to the impact of the liquidation and acceleration rights
discussed above. Therefore, the proposed definition of ``default
right'' includes such rights (with the exception discussed in the
previous paragraph for margin requirements that depend solely on the
value of collateral or the amount of an economic exposure).\51\
---------------------------------------------------------------------------

\51\ See id.
---------------------------------------------------------------------------

Finally, contractual rights to terminate without the need to show
cause, including rights to terminate on demand and rights to terminate
at contractually specified intervals, are excluded from the definition
of ``default right'' for purposes of the proposed rule's restrictions
on cross-default rights (section 382.4 of the proposed rule).\52\ This
is consistent with the proposal's objective of restricting only default
rights that are related, directly or indirectly, to the entry into
resolution of an affiliate of the covered entity, while leaving other
default rights unrestricted.\53\
---------------------------------------------------------------------------

\52\ See proposed rule Sec. Sec. 382.1, 382.4.
\53\ The definition of ``default right'' in this proposal
parallels the definition contained in the ISDA Protocol. The
proposed rule does not modify or limit the FDIC's powers in its
capacity as receiver under the FDI Act or the Dodd-Frank Act with
respect to a counterparties' contractual or other rights.
---------------------------------------------------------------------------

Question 5: The FDIC invites comment on all aspects of the proposed
definition of ``default right.''

D. Required Contractual Provisions Related to the U.S. Special
Resolution Regimes (Section 382.3 of the Proposed Rule)

Under the proposal, a covered QFC would be required to explicitly
provide both (a) that the transfer of the QFC (and any interest or
obligation in or under it and any property securing it) from the
covered entity to a transferee will be effective to the same extent as
it would be under the U.S. special resolution regimes if the covered
QFC were governed by the laws of the United States or of a state of the
United States and (b) that default rights with respect to the covered
QFC that could be exercised against a covered entity could be exercised
to no greater extent than they could be exercised under the U.S.
special resolution regimes if the covered QFC were governed by the laws
of the United States or of a state of the United States.\54\ The
proposal would define the term ``U.S. special resolution regimes'' to
mean the FDI Act \55\ and Title II of the Dodd-Frank Act,\56\ along
with regulations issued under those statutes.\57\
---------------------------------------------------------------------------

\54\ See proposed rule Sec. 382.3.
\55\ 12 U.S.C. 1811-1835a.
\56\ 12 U.S.C. 5381-5394.
\57\ See proposed rule Sec. 382.1.
---------------------------------------------------------------------------

The proposed requirements are not intended to imply that a given
covered QFC is not governed by the laws of the United States or of a
state of the United States, or that the statutory stay-and-transfer
provisions would not in fact apply to a given covered QFC. Rather, the
requirements are intended to provide certainty that all covered QFCs
would be treated the same way in the context of a receivership under
the Dodd-Frank Act or the FDI Act. The stay-and-transfer provisions of
the U.S. special resolution regimes should be enforced with respect to
all contracts of any U.S. GSIB entity that enters resolution under a
U.S. special resolution regime as well as all transactions of the
subsidiaries of such an entity. Nonetheless, it is possible that a
court in a foreign jurisdiction would decline to enforce those
provisions in cases brought before it (such as a case

[[Page 74334]]

regarding a covered QFC between a covered FSI and a non-U.S. entity
that is governed by non-U.S. law and secured by collateral located
outside the United States). By requiring that the effect of the
statutory stay-and-transfer provisions be incorporated directly into
the QFC contractually, the proposed requirement would help ensure that
a court in a foreign jurisdiction would enforce the effect of those
provisions, regardless of whether the court would otherwise have
decided to enforce the U.S. statutory provisions themselves.\58\ For
example, the proposed provisions should prevent a U.K. counterparty of
a U.S. GSIB from persuading a U.K. court that it should be permitted to
seize and liquidate collateral located in the United Kingdom in
response to the U.S. GSIB's entry into Title II resolution. And the
knowledge that a court in a foreign jurisdiction would reject the
purported exercise of default rights in violation of the required
provisions would deter counterparties from attempting to exercise such
rights.
---------------------------------------------------------------------------

\58\ See generally Financial Stability Board, ``Principles for
Cross-border Effectiveness of Resolution Actions'' (November 3,
2015), available at https://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
---------------------------------------------------------------------------

This requirement would advance the proposal's goal of removing QFC-
related obstacles to the orderly resolution of a GSIB. As discussed
above, restrictions on the exercise of QFC default rights are an
important prerequisite for an orderly GSIB resolution.\59\
---------------------------------------------------------------------------

\59\ See FRB NPRM, 81 FR 29178 (May 11, 2016) for additional
discussion regarding consistency of this proposal with similar
regulatory efforts in foreign jurisdictions.
---------------------------------------------------------------------------

Question 6: The FDIC invites comment on all aspects of this section
of the proposal.

E. Prohibited Cross-Default Rights (Section 382.4 of the Proposed Rule)

Definitions. Section 382.4 of the proposal applies in the context
of insolvency proceedings \60\ and pertains to cross-default rights in
QFCs between covered FSIs and their counterparties, many of which are
subject to credit enhancements (such as a guarantee) provided by an
affiliate of the covered FSI. Because credit enhancements on QFCs are
themselves ``qualified financial contracts'' under the Dodd-Frank Act's
definition of that term (which this proposal would adopt), the proposal
includes the following additional definitions in order to facilitate a
precise description of the relationships to which it would apply.
---------------------------------------------------------------------------

\60\ See proposed rule Sec. 382.4 (noting that section does not
apply to proceedings under Title II of the Dodd-Frank Act).
---------------------------------------------------------------------------

First, the proposal distinguishes between a credit enhancement and
a ``direct QFC,'' defined as any QFC that is not a credit
enhancement.\61\ The proposal also defines ``direct party'' to mean a
covered FSI that is itself a party to the direct QFC, as distinct from
an entity that provides a credit enhancement.\62\ In addition, the
proposal defines ``affiliate credit enhancement'' to mean ``a credit
enhancement that is provided by an affiliate of the party to the direct
QFC that the credit enhancement supports,'' as distinct from a credit
enhancement provided by either the direct party itself or by an
unaffiliated party.\63\ Moreover, the proposal defines ``covered
affiliate credit enhancement'' to mean an affiliate credit enhancement
provided by a covered entity, covered bank, or covered FSI, and defines
``covered affiliate support provider'' to mean the covered entity,
covered bank, or covered FSI that provides the covered affiliate credit
enhancement.\64\ Finally, the proposal defines the term ``supported
party'' to mean any party that is the beneficiary of a covered
affiliate credit enhancement (that is, the QFC counterparty of a direct
party, assuming that the direct QFC is subject to a covered affiliate
credit enhancement).\65\
---------------------------------------------------------------------------

\61\ See proposed rule Sec. 382.4(c)(2).
\62\ See proposed rule Sec. 382.4(c)(1).
\63\ See proposed rule Sec. 382.4(c)(3).
\64\ See proposed rule Sec. 382.4(f)(2).
\65\ See proposed rule Sec. 382.4(f)(4).
---------------------------------------------------------------------------

General prohibitions. Subject to the substantial exceptions
discussed below, the proposal would prohibit a covered FSI from being
party to a covered QFC that allows for the exercise of any default
right that is related, directly or indirectly, to the entry into
resolution of an affiliate of the covered FSI.\66\ The proposal also
would generally prohibit a covered FSI from being party to a covered
QFC that would prohibit the transfer of any credit enhancement
applicable to the QFC (such as another entity's guarantee of the
covered FSI's obligations under the QFC), along with associated
obligations or collateral, upon the entry into resolution of an
affiliate of the covered FSI.\67\
---------------------------------------------------------------------------

\66\ See proposed rule Sec. 382.4(b)(1).
\67\ See proposed rule Sec. 382.4(b)(2). This prohibition would
be subject to an exception that would allow supported parties to
exercise default rights with respect to a QFC if the supported party
would be prohibited from being the beneficiary of a credit
enhancement provided by the transferee under any applicable law,
including the Employee Retirement Income Security Act of 1974 and
the Investment Company Act of 1940. This exception is substantially
similar to an exception to the transfer restrictions in section 2(f)
of the ISDA 2014 Resolution Stay Protocol (2014 Protocol) and the
ISDA 2015 Universal Resolution Stay Protocol, which was added to
address concerns expressed by asset managers during the drafting of
the 2014 Protocol.
---------------------------------------------------------------------------

A primary purpose of the proposed restrictions is to facilitate the
resolution of a GSIB outside of Title II, including under the
Bankruptcy Code. As discussed above, the potential for mass exercises
of QFC default rights is one reason why a GSIB's failure could do
severe damage to financial stability. In the context of an SPOE
resolution, if the GSIB parent's entry into resolution led to the mass
exercise of cross-default rights by the subsidiaries' QFC
counterparties, then the subsidiaries could themselves fail or
experience financial distress. Moreover, the mass exercise of QFC
default rights could entail asset fire sales, which likely would affect
other financial companies and undermine financial stability. Similar
disruptive results can occur with an MPOE resolution of an affiliate of
an otherwise performing entity triggers default rights on QFCs
involving the performing entity.
In an SPOE resolution, this damage could be avoided if actions of
the following two types are prevented: The exercise of direct default
rights against the top-tier holding company that has entered
resolution, and the exercise of cross-default rights against the
operating subsidiaries based on their parent's entry into resolution.
(Direct default rights against the subsidiaries would not be
exercisable because the subsidiaries would not enter resolution.) In an
MPOE resolution, this damage could occur from exercise of default
rights against a performing entity based on the failure of an
affiliate.
Under Title II, the stay-and-transfer provisions would address both
direct default rights and cross-default rights. But, as explained
above, no similar statutory provisions would apply to a resolution
under the Bankruptcy Code. This proposal attempts to address these
obstacles to orderly resolution under the Bankruptcy Code by extending
the stay-and-transfer provisions to any type of resolution of an
affiliate of a covered FSI that is not an insured depository
institution. Similarly, the proposal would facilitate a transfer of the
GSIB parent's interests in its subsidiaries, along with any credit
enhancements it provides for those subsidiaries, to a solvent financial
company by prohibiting covered FSIs from having QFCs that would allow
the QFC counterparty to prevent such a transfer or to use it as a
ground for exercising default rights.\68\
---------------------------------------------------------------------------

\68\ See proposed rule Sec. 382.4(b).

---------------------------------------------------------------------------

[[Page 74335]]

The proposal also is intended to facilitate other approaches to
GSIB resolution. For example, it would facilitate a similar resolution
strategy in which a U.S. depository institution subsidiary of a GSIB
enters resolution under the FDI Act while its subsidiaries continue to
meet their financial obligations outside of resolution.\69\ Similarly,
the proposal would facilitate the orderly resolution of a foreign GSIB
under its home jurisdiction resolution regime by preventing the
exercise of cross-default rights against the foreign GSIB's U.S.
operations. The proposal would also facilitate the resolution of the
U.S. intermediate holding company of a foreign GSIB, and the
recapitalization of its U.S. operating subsidiaries, as part of a
broader MPOE resolution strategy under which the foreign GSIB's
operations in other regions would enter separate resolution
proceedings. Finally, the proposal would broadly prevent the
unanticipated failure of any one GSIB entity from bringing about the
disorderly failures of its affiliates by preventing the affiliates' QFC
counterparties from using the first entity's failure as a ground for
exercising default rights against those affiliates that continue meet
to their obligations.
---------------------------------------------------------------------------

\69\ As discussed above, the FDI Act would prevent the exercise
of direct default rights against the depository institution, but it
does not address the threat posed to orderly resolution by cross-
default rights in the QFCs of the depository institution's
subsidiaries. This proposal would facilitate orderly resolution
under the FDI Act by filling that gap.
---------------------------------------------------------------------------

The proposal is intended to enhance the potential for orderly
resolution of a GSIB under the Bankruptcy Code, the FDI Act, or a
similar resolution regime. By doing so, the proposal would advance the
Dodd-Frank Act's goal of making orderly GSIB resolution under the
Bankruptcy Code workable.\70\
---------------------------------------------------------------------------

\70\ See 12 U.S.C. 5365(d).
---------------------------------------------------------------------------

The proposal could also benefit the counterparties of a subsidiary
of a failed GSIB, by preventing the disorderly failure of an otherwise-
solvent subsidiary and allowing it to continue to meet its obligations.
While it may be in the individual interest of any given counterparty to
exercise any available rights against a subsidiary of a failed GSIB,
the mass exercise of such rights could harm the counterparties'
collective interest by causing an otherwise-solvent subsidiary to fail.
Therefore, like the automatic stay in bankruptcy, which serves to
maximize creditors' ultimate recoveries by preventing a disorderly
liquidation of the debtor, the proposal would mitigate this collective
action problem to the benefit of the failed firm's creditors and
counterparties by preventing a disorderly resolution. And because many
creditors and counterparties of GSIBs are themselves systemically
important financial firms, improving outcomes for those creditors and
counterparties would further protect the financial stability of the
United States.
General creditor protections. While the proposed restrictions would
facilitate orderly resolution, they would also diminish the ability of
covered FSI's QFC counterparties to include certain protections for
themselves in covered QFCs. In order to reduce this effect, the
proposal includes several substantial exceptions to the proposed
restrictions.\71\ These permitted creditor protections are intended to
allow creditors to exercise cross-default rights outside of an orderly
resolution of a GSIB (as described above) and therefore would not be
expected to undermine such a resolution.
---------------------------------------------------------------------------

\71\ See proposed rule Sec. 382.4(e).
---------------------------------------------------------------------------

First, in order to ensure that the proposed prohibitions would
apply only to cross-default rights (and not direct default rights), the
proposal would provide that a covered QFC may permit the exercise of
default rights based on the direct party's entry into a resolution
proceeding, other than a proceeding under a U.S. or foreign special
resolution regime.\72\ This provision would help ensure that, if the
direct party to a QFC were to enter bankruptcy, its QFC counterparties
could exercise any relevant direct default rights. Thus, a covered
FSI's direct QFC counterparties would not risk the delay and expense
associated with becoming involved in a bankruptcy proceeding, and would
be able to take advantage of default rights that would fall within the
Bankruptcy Code's safe harbor provisions.
---------------------------------------------------------------------------

\72\ See proposed rule Sec. 382.4(e)(1). Special resolution
regimes typically stay direct default rights, but may not stay
cross-default rights. For example, as discussed above, the FDI Act
stays direct default rights, see 12 U.S.C. 1821(e)(10)(B), but does
not stay cross-default rights, whereas Title II stays direct default
rights and cross-defaults arising from a parent's receivership, see
12 U.S.C. 5390(c)(10)(B), 5390(c)(16).
---------------------------------------------------------------------------

The proposal would also allow, in the context of an insolvency
proceeding, and subject to the statutory requirements and restrictions
thereunder, covered QFCs to permit the exercise of default rights based
on (i) the failure of the direct party; (ii) the direct party not
satisfying a payment or delivery obligation; or (iii) a covered
affiliate support provider or transferee not satisfying its payment or
delivery obligations under the direct QFC or credit enhancement.\73\
Moreover, the proposal would allow covered QFCs to permit the exercise
of a default right in one QFC that is triggered by the direct party's
failure to satisfy its payment or delivery obligations under another
contract between the same parties.
---------------------------------------------------------------------------

\73\ See proposed rule Sec. 382.4(e).
---------------------------------------------------------------------------

The proposed exceptions for the creditor protections described
above are intended to help ensure that the proposal permits a covered
FSI's QFC counterparties to protect themselves from imminent financial
loss and does not create a risk of delivery gridlocks or daisy-chain
effects, in which a covered entity's failure to make a payment or
delivery when due leaves its counterparty unable to meet its own
payment and delivery obligations (the daisy-chain effect would be
prevented because the covered entity's counterparty would be permitted
to exercise its default rights, such as by liquidating collateral).
These exceptions are generally consistent with the treatment of payment
and delivery obligations, following the applicable stay period, under
the U.S. special resolution regimes.
Additional creditor protections for supported QFCs. The proposal
would allow additional creditor protections for a non-defaulting
counterparty that is the beneficiary of a credit enhancement from an
affiliate of the covered FSI that is a covered entity, covered bank, or
covered FSI under the proposal.\74\ The proposal would allow these
creditor protections in recognition of the supported party's interest
in receiving the benefit of its credit enhancement.
---------------------------------------------------------------------------

\74\ See proposed rule Sec. 382.4(g).
---------------------------------------------------------------------------

Where a covered QFC is supported by a covered affiliate credit
enhancement,\75\ the covered QFC and the credit enhancement would be
permitted to allow the exercise of default rights \76\ under the
circumstances discussed below after the expiration of a stay period.
Under the proposal, the applicable stay period would begin when the
receiver is appointed and would end at the later of 5:00 p.m. (eastern
time) on the next business day and 48 hours after the entry into
resolution.\77\ This portion of

[[Page 74336]]

the proposal is similar to the stay treatment provided in a resolution
under Title II or the FDI Act.\78\
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\75\ Note that the exception in Sec. 382.4(g) of the proposed
rule would not apply with respect to credit enhancements that are
not covered affiliate credit enhancements. In particular, it would
not apply with respect to a credit enhancement provided by a non-
U.S. entity of a foreign GSIB, which would not be a covered entity
under the proposal.
\76\ See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii)
(suspending payment and delivery obligations for one business day or
less).
\77\ See proposed rule Sec. 382.4(h)(1).
\78\ See 12 U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i),
5390(c)(16)(A). While the proposed stay period is similar to the
stay periods that would be imposed by the U.S. special resolution
regimes, it could run longer than those stay periods under some
circumstances.
---------------------------------------------------------------------------

Under the proposal, default rights could be exercised at the end of
the stay period if the covered affiliate credit enhancement has not
been transferred away from the covered affiliate support provider and
that support provider becomes subject to a resolution proceeding other
than a proceeding under Chapter 11 of the Bankruptcy Code or the FDI
Act.\79\ Default rights could also be exercised at the end of the stay
period if the transferee (if any) of the credit enhancement enters an
insolvency proceeding, protecting the supported party from a transfer
of the credit enhancement to a transferee that is unable to meet its
financial obligations.
---------------------------------------------------------------------------

\79\ See proposed rule Sec. 382.4(g)(1). Chapter 11 (11 U.S.C.
1101-1174) is the portion of the Bankruptcy Code that provides for
the reorganization of the failed company, as opposed to its
liquidation, and, relative to special resolution regimes, is
generally well-understood by market participants.
---------------------------------------------------------------------------

Default rights could also be exercised at the end of the stay
period if the original credit support provider does not remain, and no
transferee becomes, obligated to the same (or substantially similar)
extent as the original credit support provider was obligated
immediately prior to entering a resolution proceeding (including a
Chapter 11 proceeding) with respect to (a) the credit enhancement
applicable to the covered QFC, (b) all other credit enhancements
provided by the credit support provider on any other QFCs between the
same parties, and (c) all credit enhancements provided by the credit
support provider between the direct party and affiliates of the direct
party's QFC counterparty.\80\ Such creditor protections would be
permitted in order to prevent the support provider or the transferee
from ``cherry picking'' by assuming only those QFCs of a given
counterparty that are favorable to the support provider or transferee.
Title II and the FDI Act contain similar provisions to prevent cherry
picking.
---------------------------------------------------------------------------

\80\ See proposed rule Sec. 382.4(g)(3).
---------------------------------------------------------------------------

Finally, if the covered affiliate credit enhancement is transferred
to a transferee, then the non-defaulting counterparty could exercise
default rights at the end of the stay period unless either (a) all of
the support provider's ownership interests in the direct party are also
transferred to the transferee or (b) reasonable assurance is provided
that substantially all of the support provider's assets (or the net
proceeds from the sale of those assets) will be transferred to the
transferee in a timely manner. These conditions would help to assure
the supported party that the transferee would be providing
substantively the same credit enhancement as the covered affiliate
support provider.\81\
---------------------------------------------------------------------------

\81\ 12 U.S.C. 5390(c)(16)(A).
---------------------------------------------------------------------------

Creditor protections related to FDI Act proceedings. Moreover, in
the case of a covered QFC that is supported by a covered affiliate
credit enhancement, both the covered QFC and the credit enhancement
would be permitted to allow the exercise of default rights related to
the credit support provider's entry into resolution proceedings under
the FDI Act \82\ under the following circumstances: (a) After the FDI
Act stay period,\83\ if the credit enhancement is not transferred under
the relevant provisions of the FDI Act \84\ and associated regulations,
and (b) during the FDI Act stay period, to the extent that the default
right permits the supported party to suspend performance under the
covered QFC to the same extent as that party would be entitled to do if
the covered QFC were with the credit support provider itself and were
treated in the same manner as the credit enhancement.\85\ This
provision is intended to ensure that a QFC counterparty of a subsidiary
of a covered FSI that goes into FDI Act receivership can receive the
equivalent level of protection that the FDI Act provides to QFC
counterparties of the covered FSI itself.\86\
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\82\ As discussed above, the FDI Act stays direct default rights
against the failed depository institution but does not stay the
exercise of cross-default rights against its affiliates.
\83\ Under the FDI Act, the relevant stay period runs until 5:00
p.m. (eastern time) on the business day following the appointment of
the FDIC as receiver. 12 U.S.C. 1821(e)(10)(B)(I).
\84\ 12 U.S.C. 1821(e)(9)-(10).
\85\ See proposed rule Sec. 382.4(i).
\86\ See id. (noting that the general creditor protections in
section 382.4(e), and the additional creditor protections for
supported QFCs in section 382.4(g), are inapplicable to FDI Act
proceedings).
---------------------------------------------------------------------------

Prohibited terminations. In case of a legal dispute as to a party's
right to exercise a default right under a covered QFC, the proposal
would require that a covered QFC must provide that, after an affiliate
of the direct party has entered a resolution proceeding, (a) the party
seeking to exercise the default right bears the burden of proof that
the exercise of that right is indeed permitted by the covered QFC; and
(b) the party seeking to exercise the default right must meet a ``clear
and convincing evidence'' standard, a similar standard,\87\ or a more
demanding standard.
---------------------------------------------------------------------------

\87\ The reference to a ``similar'' burden of proof is intended
to allow covered QFCs to provide for the application of a standard
that is analogous to clear and convincing evidence in jurisdictions
that do not recognize that particular standard. A covered QFC would
not be permitted to provide for a lower standard.
---------------------------------------------------------------------------

The purpose of this proposed requirement is to deter the QFC
counterparty of a covered entity from thwarting the purpose of this
proposal by exercising a default right because of an affiliate's entry
into resolution under the guise of other default rights that are
unrelated to the affiliate's entry into resolution.
Agency transactions. In addition to entering into QFCs as
principals, GSIBs may engage in QFCs as agents for other principals.
For example, a GSIB subsidiary may enter into a master securities
lending arrangement with a foreign bank as agent for a U.S.-based
pension fund. The GSIB subsidiary would document its role as agent for
the pension fund, often through an annex to the master agreement, and
would generally provide to its customer (the principal party) a
securities replacement guarantee or indemnification for any shortfall
in collateral in the event of the default of the foreign bank.\88\
Similarly, a covered FSI may also enter into a QFC as agent acting on
behalf of a principal.
---------------------------------------------------------------------------

\88\ The definition of QFC under Title II of the Dodd-Frank Act
includes security agreements and other credit enhancements as well
as master agreements (including supplements). 12 U.S.C.
5390(c)(8)(D).
---------------------------------------------------------------------------

This proposal would apply to a covered QFC regardless of whether
the covered FSI is acting as a principal or as an agent. Section 382.3
and section 382.4 do not distinguish between agents and principals with
respect to default rights or transfer restrictions applicable to
covered QFCs. Section 382.3 would limit default rights and transfer
restrictions that a counterparty may have against a covered FSI
consistent with the U.S. special resolution regimes.\89\ Section 382.4
would ensure that, subject to the enumerated creditor protections,
counterparties could not exercise cross-default rights under the
covered QFC against the covered FSI, acting as agent or principal,
based on the resolution of an affiliate of the covered FSI.\90\
---------------------------------------------------------------------------

\89\ See proposed rule Sec. 382.3(a)(3).
\90\ See proposed rule Sec. 382.4(d). If a covered FSI (acting
as agent) is a direct party to a covered QFC, then the general
prohibitions of section 382.4(b) would only affect the substantive
rights of the agent's principal(s) to the extent that the covered
QFC provides default rights based directly or indirectly on the
entry into resolution of an affiliate of the covered FSI (acting as
agent). See also proposed rule Sec. 382.4(a)(3).

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[[Page 74337]]

Compliance with the ISDA 2015 Resolution Stay Protocol. As an
alternative to compliance with the requirements of section 382.4 that
are described above, a covered FSI could comply with the proposed rule
to the extent its QFCs are amended by adherence to the current ISDA
2015 Universal Resolution Stay Protocol, including the Securities
Financing Transaction Annex and the Other Agreements Annex, as well as
subsequent, immaterial amendments to the Protocol.\91\
---------------------------------------------------------------------------

\91\ International Swaps and Derivatives Association, Inc., ISDA
2015 Universal Resolution Stay Protocol (November 4, 2015),
available at https://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/.
The ISDA 2015 Universal Resolution Stay Protocol (ISDA Protocol)
expanded the 2014 ISDA Resolution Stay Protocol to cover securities
financing transactions in addition to over-the-counter derivatives
documented under ISDA Master Agreements. As between adhering
parties, the ISDA Protocol replaces the 2014 ISDA 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 Protocol was developed by a working group of member
institutions of the International Swaps and Derivatives Association,
Inc. (ISDA), in coordination with the FRB, the FDIC, the OCC, and
foreign regulatory agencies. The Securities Financing Transaction
Annex was developed by the International Capital Markets
Association, the International Securities Lending Association, and
the Securities Industry and Financial Markets Association, in
coordination with ISDA. ISDA is expected to continue supplementing
the Protocol with ISDA Resolution Stay Jurisdictional Modular
Protocols for the United States and other jurisdictions. A
jurisdictional module for the United States that is substantively
identical to the Protocol in all respects (aside from exempting QFCs
between adherents that are not covered entities, covered FSIs, or
covered banks) would be consistent with the current proposal. For
additional detail on the development of the 2014 and 2015 ISDA
Resolution Stay Protocols, see FRB NPRM, 81 FR at 29181-29182 (May
11, 2016).
---------------------------------------------------------------------------

The Protocol has the same general objective as the proposed rule:
to make GSIBs more resolvable by amending their contracts to, in
effect, contractually recognize the applicability of U.S. special
resolution regimes \92\ and to restrict cross-default provisions to
facilitate orderly resolution under the U.S. Bankruptcy Code. Moreover,
the provisions of the Protocol largely track the requirements of the
proposed rule.\93\ Consistent with the FDIC's objective of increasing
GSIB resolvability, the proposed rule would allow a covered entity to
bring its covered QFCs into compliance by amending them through
adherence to the Protocol.
---------------------------------------------------------------------------

\92\ The Protocol also includes other special resolution
regimes. Currently, the Protocol includes special resolution regimes
in place in France, Germany, Japan, Switzerland, and the United
Kingdom. Other special resolution regimes that meet the definition
of ``Protocol-eligible Regime'' may be added to the Protocol.
\93\ Sections 2(a) and (b) of the Protocol provide the stays
required under paragraph (b)(1) of proposed rule Sec. 382.4 for the
most common U.S. insolvency regimes. Section 2(f) of the Protocol
overrides transfer restrictions as required under paragraph (b)(2)
of proposed rule Sec. 382.4 for transfers that are consistent with
the Protocol. The Protocol's exemptions from the stay for
``Performance Default Rights'' and the ``Unrelated Default Rights''
described in paragraph (a) of the definition are consistent with the
proposal's general creditor protections permitted under paragraph
(b) of proposed rule Sec. 382.4. The Protocol's burden of proof
provisions (see section 2(i) of the Protocol and the definition of
Unrelated Default Rights) and creditor protections for credit
enhancement providers in FDI Act proceedings (see Section 2(d) of
the Protocol) are also consistent with the paragraphs (j) and (i),
respectively, of proposed rule Sec. 382.4. Note also that, although
exercise of Performance Default Rights under the Protocol does not
require a showing of clear and convincing evidence while these same
rights under the proposal (proposed rule Sec. 252.84(e)) would
require such a showing, this difference between the Protocol and the
proposal does not appear to be meaningful because clearly documented
evidence for such default rights (i.e., payment and performance
failures, entry into resolution proceedings) should exist.
---------------------------------------------------------------------------

Question 7: The FDIC invites comment on the proposed restrictions
on cross-default rights in covered FSI's QFCs. Is the proposal
sufficiently clear such that parties to a conforming QFC will
understand what default rights are and are not exercisable in the
context of a GSIB resolution? How could the proposed restrictions be
made clearer?
Question 8: The FDIC invites comment on its proposal to treat as
compliant with section 382.4 of the proposal any covered QFC that has
been amended by the Protocol. Does adherence to the Protocol suffice to
meet the goals of this proposal and appropriately safeguard U.S.
financial stability?

F. Process for Approval of Enhanced Creditor Protections (Section 382.5
of the Proposed Rule)

As discussed above, the proposed restrictions would leave many
creditor protections that are commonly included in QFCs unaffected. The
proposal would also allow any covered FSI to submit to the FDIC a
request to approve as compliant with the rule one or more QFCs that
contain additional creditor protections--that is, creditor protections
that would be impermissible under the restrictions set forth above. A
covered FSI making such a request would be required to provide an
analysis of the contractual terms for which approval is requested in
light of a range of factors that are set forth in the proposed rule and
intended to facilitate the FDIC's consideration of whether permitting
the contractual terms would be consistent with the proposed
restrictions.\94\ The FDIC also expects to consult with the FRB and OCC
during its consideration of such a request--in particular, when the
covered QFC is between a covered FSI and either a covered bank or a
covered entity.
---------------------------------------------------------------------------

\94\ Proposed rule Sec. 382.5(d)(1)-(10).
---------------------------------------------------------------------------

The first two factors concern the potential impact of the requested
creditor protections on GSIB resilience and resolvability. The next
four concern the potential scope of the proposal: adoption on an
industry-wide basis, coverage of existing and future transactions,
coverage of one or multiple QFCs, and coverage of some or all covered
entities, covered banks, and covered FSIs. Creditor protections that
may be applied on an industry-wide basis may help to ensure that
impediments to resolution are addressed on a uniform basis, which could
increase market certainty, transparency, and equitable treatment.
Creditor protections that apply broadly to a range of QFCs and covered
entities, covered banks and covered FSIs would increase the chance that
all of a GSIB's QFC counterparties would be treated the same way during
a resolution of that GSIB and may improve the prospects for an orderly
resolution of that GSIB. By contrast, proposals that would expand
counterparties' rights beyond those afforded under existing QFCs would
conflict with the proposal's goal of reducing the risk of mass unwinds
of GSIB QFCs. The proposal also includes three factors that focus on
the creditor protections specific to supported parties. The FDIC may
weigh the appropriateness of additional protections for supported QFCs
against the potential impact of such provisions on the orderly
resolution of a GSIB.
In addition to analyzing the request under the enumerated factors,
a covered FSI requesting that the FDIC approve enhanced creditor
protections would be required to submit a legal opinion stating that
the requested terms would be valid and enforceable under the applicable
law of the relevant jurisdictions, along with any additional relevant
information requested by the FDIC.
Question 9: The FDIC invites comment on all aspects of the proposed
process for approval of enhanced creditor protections. Should the FDIC
provide greater specificity on this process? If so, what processes and
procedures could be adopted without imposing undue regulatory burden?

III. Transition Periods

Under the proposal, the final rule would take effect on the first
day of the first calendar quarter that begins at least one year after
the issuance of the final

[[Page 74338]]

rule (effective date).\95\ Entities that are covered FSIs when the
final rule is issued would be required to comply with the proposed
requirements beginning on the effective date. Thus, a covered FSI would
be required to ensure that covered QFCs entered into on or after the
effective date comply with the rule's requirements.\96\ Moreover, a
covered FSI would be required to bring a preexisting covered QFC
entered into prior to the effective date into compliance with the rule
no later than the first date on or after the effective date on which
the covered FSI or an affiliate (that is also a covered entity, covered
bank, or covered FSI) enters into a new covered QFC with the
counterparty to the preexisting covered QFC or an affiliate of the
counterparty.\97\ (Thus, a covered FSI would not be required to conform
a preexisting QFC if that covered FSI and its affiliates do not enter
into any new QFCs with the same counterparty or its affiliates on or
after the effective date.) Finally, an entity that becomes a covered
FSI after the final rule is issued would be required to comply by the
first day of the first calendar quarter that begins at least one year
after the entity becomes a covered FSI.\98\
---------------------------------------------------------------------------

\95\ Under section 302(b) of the Riegle Community Development
and Regulatory Improvement Act of 1994, new FRB regulations that
impose requirements on insured depository institutions generally
must ``take effect on the first day of a calendar quarter which
begins on or after the date on which the regulations are published
in final form.'' 12 U.S.C. 4802(b).
\96\ See proposed rule Sec. Sec. 382.3(a)(2)(i); 382.4(a)(2).
\97\ See proposed rule Sec. Sec. 382.3(a)(2)(ii), 382.4(a)(2).
\98\ See proposed rule Sec. 382.2(b).
---------------------------------------------------------------------------

By permitting a covered FSI to remain party to noncompliant QFCs
entered into before the effective date unless the covered FSI or any
affiliate (that is also a covered entity, covered bank, or covered FSI)
enters into new QFCs with the same counterparty or its affiliates, the
proposal strikes a balance between ensuring QFC continuity if the GSIB
were to fail and ensuring that covered FSIs and their existing
counterparties can avoid any compliance costs and disruptions
associated with conforming existing QFCs by refraining from entering
into new QFCs. The requirement that a covered FSI ensure that all
existing QFCs with a particular counterparty and its affiliates are
compliant before it or any affiliate of the covered FSI (that is also a
covered entity, covered bank, or covered FSI) enters into a new QFC
with the same counterparty or its affiliates after the effective date
will provide covered FSIs with an incentive to seek the modifications
necessary to ensure that their QFCs with their most important
counterparties are compliant. Moreover, the volume of preexisting,
noncompliant covered QFCs outstanding can be expected to decrease over
time and eventually to reach zero. In light of these considerations,
and to avoid creating potentially inappropriate compliance costs with
respect to existing QFCs with counterparties that, together with their
affiliates, do not enter new covered QFCs with the GSIB on or after the
effective date, it would be appropriate to permit a limited number of
noncompliant QFCs to remain outstanding, in keeping with the terms
described above. The FDIC will monitor covered FSIs' levels of
noncompliant QFCs and evaluate the risk, if any, that they pose to the
safety and soundness of the covered FSIs, the banking system, or to
U.S. financial stability.
Question 10: The FDIC invites comment on the proposed transition
periods and the proposed treatment of preexisting QFCs.

IV. Expected Effects

The proposed rule is intended to promote the financial stability of
the United States by reducing the potential that resolution of a GSIB,
particularly through bankruptcy, will be disorderly. The proposed rule
will help meet this policy objective by more effectively and
efficiently managing the exercise of default rights and restrictions
contained in QFCs. It would therefore help mitigate the risk of future
financial crises and imposition of substantial costs on the U.S.
economy.\99\ The proposed rule furthers the FDIC's mission and
responsibilities, which include resolving failed institutions in the
least costly manner and ensuring that FDIC-insured institutions operate
safely and soundly. It also furthers the fulfillment of the FDIC's role
as the (i) primary federal supervisor for SNMBs and state savings
associations; (ii) resolution authority for all FDIC-insured
institutions under the FDI Act; and (iii) resolution authority for
large complex financial institutions under Title II of the Dodd-Frank
Act.
---------------------------------------------------------------------------

\99\ A recent estimate of the unrealized economic output that
resulted from 2007-09 financial crisis in the United States amounted
to between $6 and $14 trillion. See ``How Bad Was It? The Costs and
Consequences of the 2007-09 Financial Crisis,'' Staff Paper No. 20,
Federal Reserve Bank of Dallas, July 2013. https://dallasfed.org/assets/documents/research/staff/staff1301.pdf.
---------------------------------------------------------------------------

The proposal would likely benefit the counterparties of a
subsidiary of a failed GSIB by preventing the disorderly failure of the
subsidiary and enabling it to continue to meet its obligations.
Preventing the mass exercise of QFC default rights at the time the
parent or other affiliate enters resolution proceedings makes it more
likely that the subsidiaries or other affiliates will be able to meet
their obligations to QFC counterparties. Moreover, the creditor
protections permitted under the proposal would allow any counterparty
that does not continue to receive payment under the QFC to exercise its
default rights, after any applicable stay period.
Because financial crises impose enormous costs on the economy, even
small reductions in the probability or severity future financial crises
create substantial economic benefits.\100\ The proposal would
materially reduce the risk to the financial stability of the United
States that could arise from the failure of a GSIB by enhancing the
prospects for the orderly resolution of such a firm, and would thereby
materially reduce the probability and severity of financial crises in
the future.
---------------------------------------------------------------------------

\100\ See id.
---------------------------------------------------------------------------

The costs of the proposed rule are likely to be relatively small
and only affect twelve covered FSIs. Covered FSIs and their
counterparties are likely to incur administrative costs associated with
drafting and negotiating compliant QFCs, but to the extent such parties
adhere to the ISDA Protocol, these administrative costs would likely be
reduced. While potential administrative costs are difficult to
accurately predict, these costs are likely to be small relative to the
revenue of the organizations affected by the proposed rule, and to the
costs of doing business in the financial sector generally.
In addition, the FDIC anticipates that covered FSIs would likely
share resources with its parent GSIB and/or GSIB affiliates--which are
subject to parallel requirements--to help cover compliance costs. The
stay-and-transfer provisions of the Dodd-Frank Act and the FDI Act are
already in force, and the ISDA Protocol is already partially effective
for the 23 existing GSIB adherents. The partial effectiveness of the
ISDA Protocol (regarding Section 1, which addresses recognition of
stays on the exercise of default rights and remedies in financial
contracts under special resolution regimes, including in the United
States, the United Kingdom, Germany, France, Switzerland and Japan)
suggests that to the extent covered FSIs already adhere to the ISDA
Protocol, some implementation costs will likely be reduced.
The proposal could also impose costs on covered FSIs to the extent
that they may need to provide their QFC

[[Page 74339]]

counterparties with better contractual terms in order to compensate
those parties for the loss of their ability to exercise default rights
that would be restricted by the proposal. These costs may be higher
than drafting and negotiating costs. However, they are also expected to
be relatively small because of the limited reduction in the rights of
counterparties and the availability of other forms of protection for
counterparties.
The proposal could also create economic costs by causing a marginal
reduction in QFC-related economic activity. For example, a covered FSI
may not enter into a QFC that it would have otherwise entered into in
the absence of the proposed rule. Therefore, economic activity that
would have been associated with that QFC absent the proposed rule (such
as economic activity that would have otherwise been hedged with a
derivatives contract or funded through a repo transaction) might not
occur.
While uncertainty surrounding the future negotiations of economic
actors makes an accurate quantification of any such costs difficult,
costs from reduced QFC activity are likely to be very low. The proposed
restrictions on default rights in covered QFCs are relatively narrow
and would not change a counterparty's rights in response to its direct
counterparty's entry into a bankruptcy proceeding (that is, the default
rights covered by the Bankruptcy Code's ``safe harbor'' provisions).
Counterparties are also able to prudently manage risk through other
means, including entering into QFCs with entities that are not GSIB
entities and therefore would not be subject to the proposed rule.
Question 11: The FDIC invites comment on all aspects of this
evaluation of costs and benefits; in particular, whether covered FSIs
expect to be able to share the costs of complying with this rulemaking
with affiliated entities.

V. Revisions to Certain Definitions in the FDIC's Capital and Liquidity
Rules

This proposal would also amend several definitions in the FDIC's
capital and liquidity rules to help ensure that the proposal would not
have unintended effects for the treatment of covered FSIs' netting
agreements under those rules, consistent with the proposed amendments
contained in the FRB NPRM and the OCC NPRM.\101\
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\101\ On September 20, 2016, the FDIC adopted a separate final
rule (the Final QMNA Rule), following the earlier notice of proposed
rulemaking issued in January 2015, see 80 FR 5063 (Jan. 30, 2015),
covering amendments to the definition of ``qualifying master netting
agreement'' in the FDIC's capital and liquidity rules and related
definitions in its capital rules. The Final QMNA Rule is designed to
prevent similar unintended effects from implementation of special
resolution regimes in non-U.S. jurisdictions, or by parties'
adherence to the ISDA Protocol. The amendments contained in the
Final QMNA Rule also are similar to revisions that the FRB and the
OCC made in their joint 2014 interim final rule to ensure that the
regulatory capital and liquidity rules' treatment of certain
financial contracts is not affected by the implementation of special
resolution regimes in foreign jurisdictions. See 79 FR 78287 (Dec.
30, 2014).
---------------------------------------------------------------------------

The FDIC's regulatory capital rules permit a banking organization
to measure exposure from certain types of financial contracts on a net
basis and recognize the risk-mitigating effect of financial collateral
for other types of exposures, provided that the contracts are subject
to a ``qualifying master netting agreement'' or agreement that provides
for certain rights upon the default of a counterparty.\102\ The FDIC
has defined ``qualifying master netting agreement'' to mean a netting
agreement that permits a banking organization to terminate, apply
close-out netting, and promptly liquidate or set-off collateral upon an
event of default of the counterparty, thereby reducing its counterparty
exposure and market risks.\103\ On the whole, measuring the amount of
exposure of these contracts on a net basis, rather than on a gross
basis, results in a lower measure of exposure and thus a lower capital
requirement.
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\102\ See 12 CFR 324.34(a)(2).
\103\ See the definition of ``qualifying master netting
agreement'' in 12 CFR 324.2 (capital rules) and 329.3 (liquidity
rules).
---------------------------------------------------------------------------

The current definition of ``qualifying master netting agreement''
recognizes that default rights may be stayed if the financial company
is in resolution under the Dodd-Frank Act, the FDI Act, a substantially
similar law applicable to government-sponsored enterprises, or a
substantially similar foreign law, or where the agreement is subject by
its terms to any of those laws. Accordingly, transactions conducted
under netting agreements where default rights may be stayed in those
circumstances may qualify for the favorable capital treatment described
above. However, the current definition of ``qualifying master netting
agreement'' does not recognize the restrictions that the proposal would
impose on the QFCs of covered FSIs. Thus, a master netting agreement
that is compliant with this proposal would not qualify as a qualifying
master netting agreement. This would result in considerably higher
capital and liquidity requirements for QFC counterparties of covered
FSIs, which is not an intended effect of this proposal.
Accordingly, the proposal would amend the definition of
``qualifying master netting agreement'' so that a master netting
agreement could qualify where the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty is limited to the extent necessary to comply with the
requirements of this proposal. This revision would maintain the
existing treatment for these contracts under the FDIC's capital and
liquidity rules by accounting for the restrictions that the proposal
would place on default rights related to covered FSIs' QFCs. The FDIC
does not believe that the disqualification of master netting agreements
that would result in this proposed amendment to the definition of
``qualifying master netting agreement'' in this proposal would
accurately reflect the risk posed by the affected QFCs. As discussed
above, the implementation of consistent restrictions on default rights
in GSIB QFCs would increase the prospects for the orderly resolution of
a failed GSIB and thereby protect the financial stability of the United
States.
The proposal would similarly revise certain other definitions in
the regulatory capital rules to make analogous conforming changes
designed to account for this proposal's restrictions and ensure that a
banking organization may continue to recognize the risk-mitigating
effects of financial collateral received in a secured lending
transaction, repo-style transaction, or eligible margin loan for
purposes of the FDIC's capital rules. Specifically, the proposal would
revise the definitions of ``collateral agreement,'' ``eligible margin
loan,'' and ``repo-style transaction'' to provide that a counterparty's
default rights may be limited as required by this proposal without
unintended adverse impacts under the FDIC's capital rules.
The interagency rule establishing margin and capital requirements
for covered swap entities (swap margin rule) defines the term
``eligible master netting agreement'' in a manner similar to the
definition of ``qualifying master netting agreement.'' \104\ Thus, it
may also be appropriate to amend the definition of ``eligible master
netting agreement'' to account for the proposed restrictions on covered
FSIs' QFCs. Because the FDIC

[[Page 74340]]

issued the swap margin rule jointly with other U.S. regulatory
agencies, however, the FDIC would consult with the other agencies
before proposing amendments to that rule's definition of ``eligible
master netting agreement.''
---------------------------------------------------------------------------

\104\ 80 FR 74840, 74861-74862 (November 30, 2015). The FDIC's
definition of ``eligible master netting agreement'' for purposes of
the swap margin rule is codified at 12 CFR 349.2.
---------------------------------------------------------------------------

Question 12: The FDIC invites comment on all aspects of the
proposed amendments to the definitions of ``qualifying master netting
agreement'' in the regulatory capital and liquidity rules and
``collateral agreement,'' ``eligible margin loan,'' and ``repo-style
transaction'' in the capital rules, including whether the definitions
recognize the stay of termination rights under the appropriate
resolution regimes.

VI. Regulatory Analysis

A. Paperwork Reduction Act

The FDIC is proposing to add a new Part 382 to its rules to require
certain FDIC-supervised institutions to ensure that covered QFCs to
which they are a party provide that any default rights and restrictions
on the transfer of the QFCs are limited to the same extent as they
would be under the Dodd-Frank Act and the FDI Act. In addition, covered
FSIs would generally be prohibited from being party to QFCs that would
allow a QFC counterparty to exercise default rights against the covered
FSI based on the entry into a resolution proceeding under the Dodd-
Frank Act, FDI Act, or any other resolution proceeding of an affiliate
of the covered FSI.
In accordance with the requirements of the Paperwork Reduction Act
of 1995, 44 U.S.C. 3501 through 3521, (PRA), the FDIC may not conduct
or sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid OMB control
number. Section 382.5 of the proposed rule contains ``collection of
information'' requirements within the meaning of the PRA. Accordingly,
the FDIC will obtain an OMB control number relating to the information
collection associated with that section.
This information collection consists of amendments to covered QFCs
and, in some cases, approval requests prepared and submitted to the
FDIC regarding modifications to enhanced creditor protection provisions
(in lieu of adherence to the ISDA Protocol). Section 382.5(b) of the
proposed rule would require a covered banking entity to request the
FDIC to approve as compliant with the requirements of section 382.4 of
this subpart provisions of one or more forms of covered QFCs or
amendments to one or more forms of covered QFCs, with enhanced creditor
protection conditions. A covered FSI making a request must provide (1)
an analysis of the proposal under each consideration of paragraph
382.5(d); (2) a written legal opinion verifying that proposed
provisions or amendments would be valid and enforceable under
applicable law of the relevant jurisdictions, including, in the case of
proposed amendments, the validity and enforceability of the proposal to
amend the covered QFCs; and (3) any additional information relevant to
its approval that the FDIC requests.
Covered FSIs would also have recordkeeping associated with proposed
amendments to their covered QFCs. However, much of the recordkeeping
associated with amending the covered QFCs is already expected from a
covered FSI. Therefore, the FDIC would expect minimal additional burden
to accompany the initial efforts to bring all covered QFCs into
compliance. The existing burden estimates for the information
collection associated with section 382.5 are as follows:

----------------------------------------------------------------------------------------------------------------
Hours per Total burden
Title Times/year Respondents response hours
----------------------------------------------------------------------------------------------------------------
Paperwork for proposed revisions...... On occasion............. 6 40 240
Total Burden...................... ........................ .............. .............. 240
----------------------------------------------------------------------------------------------------------------

Question 13: The FDIC invites comments on:
(a) Whether the collections of information are necessary for the
proper performance of the FDIC's functions, including whether the
information has practical utility;
(b) The accuracy of the FDIC's estimates of the burden of the
information collections, including the validity of the methodology and
assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section. A copy of the comments may
also be submitted to the OMB desk officer for the FDIC by mail to U.S.
Office of Management and Budget, 725 17th Street NW., #10235,
Washington, DC 20503, or by facsimile to 202-395-5806, or by email to
oira_submission@omb.eop.gov, Attention, Federal Banking Agency Desk
Officer.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires that each federal agency either certify that a proposed rule
will not, if promulgated, have a significant economic impact on a
substantial number of small entities or prepare and make available for
public comment an initial regulatory flexibility analysis of the
proposal.\105\ For the reasons provided below, the FDIC certifies that
the proposed rule will not have a significant economic impact on a
substantial number of small entities. Nevertheless, the FDIC is
publishing and inviting comment on this initial regulatory flexibility
analysis.
---------------------------------------------------------------------------

\105\ See 5 U.S.C. 603, 605.
---------------------------------------------------------------------------

The proposed rule would only apply to FSIs that form part of GSIB
organizations, which include the largest, most systemically important
banking organizations and certain of their subsidiaries. More
specifically, the proposed rule would apply to any covered FSI that is
a subsidiary of a U.S. GSIB or foreign GSIB--regardless of size--
because an exemption for small entities would significantly impair the
effectiveness of the proposed stay-and-transfer provisions and thereby
undermine a key objective of the proposal: To reduce the execution risk
of an orderly GSIB resolution.
The FDIC estimates that the proposed rule would apply to
approximately twelve FSIs. As of March 31, 2016, only six of the twelve
covered FSIs have derivatives portfolios that could be affected. None
of these six banking organizations would qualify as a small entity for
the purposes of the RFA.\106\ In

[[Page 74341]]

addition, the FDIC anticipates that any small subsidiary of a GSIB that
could be affected by this proposed rule would not bear significant
additional costs as it is likely to rely on its parent GSIB, or a large
affiliate, that will be subject to similar reporting, recordkeeping,
and compliance requirements.\107\ The proposed rule complements the FRB
NPRM and OCC NPRM. It is not designed to duplicate, overlap with, or
conflict with any other federal regulation.
---------------------------------------------------------------------------

\106\ Under regulations issued by the Small Business
Administration, small entities include banking organizations with
total assets of $550 million or less.
\107\ See FRB NPRM, 81 FR 29169 (May 11, 2016) and OCC NPRM, 81
FR 55381 (August 19, 2016).
---------------------------------------------------------------------------

This initial regulatory flexibility analysis demonstrates that the
proposed rule would not, if promulgated, have a significant economic
impact on a substantial number of small entities, and the FDIC so
certifies.\108\
---------------------------------------------------------------------------

\108\ 5 U.S.C. 605.
---------------------------------------------------------------------------

Question 14: The FDIC welcomes written comments regarding this
initial regulatory flexibility analysis, and requests that commenters
describe the nature of any impact on small entities and provide
empirical data to illustrate and support the extent of the impact. A
final regulatory flexibility analysis will be conducted after
consideration of comment received during the public comment period.

C. Riegle Community Development and Regulatory Improvement Act of 1994

The Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA), 12 U.S.C. 4701, 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 insured
depository institutions generally must take effect on the first day of
a calendar quarter that begins on or after the date on which the
regulations are published in final form.
The FDIC has invited comment on these matters in other sections of
this proposal and will continue to consider them as part of the overall
rulemaking process.
Question 15: The FDIC invites comment on this section, including
any additional comments that will inform the FDIC's consideration of
the requirements of RCDRIA.

D. Solicitation of Comments on the Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act, 12 U.S.C. 4809, requires
the FDIC to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC invites comment on how to
make this proposed rule easier to understand.
Question 16: Has the FDIC organized the material to inform your
needs? If not, how could the FDIC present the rule more clearly?
Question 17: Are the requirements of the proposed rule clearly
stated? If not, how could they be stated more clearly?
Question 18: Does the proposal contain unclear technical language
or jargon? If so, which language requires clarification?
Question 19: Would a different format (such as a different grouping
and ordering of sections, a different use of section headings, or a
different organization of paragraphs) make the regulation easier to
understand? If so, what changes would make the proposal clearer?
Question 20: What else could the FDIC do to make the proposal
clearer and easier to understand?

List of Subjects

12 CFR Part 324

Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Securities, State
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.

12 CFR Part 382

Administrative practice and procedure, Banks, banking, Federal
Deposit Insurance Corporation, FDIC, Qualified financial contracts,
Reporting and recordkeeping requirements, State savings associations,
State non-member banks.

For the reasons stated in the supplementary information, the
Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter
III, parts 324, 329 and 382 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).

0
2. Section 324.2 is amended 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
---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

[[Page 74342]]

(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition; or
(3) Where the right to accelerate, terminate, and close-out on a
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 382 of this title or any similar requirements of another U.S.
federal banking agency, as applicable.
* * * * *
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:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs,\5\ or laws of foreign
jurisdictions that are substantially similar \6\ to the U.S. laws
referenced in this paragraph in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

\5\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
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.
---------------------------------------------------------------------------

(B) Where the right to accelerate, terminate, and close-out on a
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 382 of this title or any similar requirements of another U.S.
federal banking agency, as applicable.
(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;
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition; or
(iii) Where the right to accelerate, terminate, and close-out on a
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is
limited only to the extent necessary to comply with the requirements of
part 382 of this title or any similar requirements of another U.S.
federal banking agency, as applicable;
(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

[[Page 74343]]

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 where the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set-off collateral promptly upon an event
of default of the counterparty is limited only to the extent necessary
to comply with the requirements of part 382 of this title or any
similar requirements of another U.S. federal banking agency, as
applicable; or
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

(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
3. The authority citation for part 329 continues to read as follows:

Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1,
5412.

0
4. Section 329.3 is amended by revising 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, conservatorship,
insolvency, 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 \109\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty;
---------------------------------------------------------------------------

\109\ The FDIC expects to evaluate jointly with the Federal
Reserve and the OCC whether foreign special resolution regimes meet
the requirements of this paragraph.
---------------------------------------------------------------------------

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the supplementary information, the
Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter
III of the Code of Federal Regulations as follows:
0
8. Add part 382 to read as follows:

PART 382--RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS

Sec.
382.1 Definitions.
382.2 Applicability.
382.3 U.S. Special resolution regimes.
382.4 Insolvency proceedings.
382.5 Approval of enhanced creditor protection conditions.
382.6 [Reserved.]
382.7 Exclusion of certain QFCs.

Authority: 12 U.S.C. 1816, 1818, 1819, 1820(g) 1828, 1828(m),
1831n, 1831o, 1831p-l, 1831(u), 1831w.

PART 382--RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS

Sec. 382.1 Definitions.

Affiliate has the same meaning as in section 12 U.S.C. 1813(w).
Central counterparty (CCP) has the same meaning as in Part 324.2 of
the FDIC's Regulations (12 CFR 324.2).
Chapter 11 proceeding means a proceeding under Chapter 11 of Title
11, United States Code (11 U.S.C. 1101-74).
Control has the same meaning as in section 12 U.S.C. 1813(w).
Covered bank has the same meaning as in Part 47.3 of the Office of
the Comptroller's Regulations (12 CFR 47.3).
Covered entity has the same meaning as in section 252.82(a) of the
Federal Reserve Board's Regulation YY (12 CFR 252.82).
Covered QFC means a QFC as defined in sections 382.3 and 382.4 of
this part.
Covered FSI means any state savings association or state non-member
bank (as defined in the Federal Deposit Insurance Act, 12 U.S.C.
1813(e)(2)) that is a direct or indirect subsidiary of (i) a global
systemically important bank holding company that has been designated
pursuant to section 252.82(a)(1) of the Federal Reserve Board's
Regulation YY (12 CFR part 252.82); or (ii) a global systemically
important foreign banking organization that has been designated
pursuant to Subpart I of 12 CFR part 252 (FRB Regulation YY), and any
subsidiary of a covered FSI.
Credit enhancement means a QFC of the type set forth in Sec. Sec.
210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12
U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI))
or a credit enhancement that the Federal Deposit Insurance Corporation
determines by regulation, rule or order is a QFC pursuant to section
210(c)(8)(D)(i) of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).

[[Page 74344]]

Default right (1) Means, with respect to a QFC, any
(i) Right of a party, whether contractual or otherwise (including,
without limitation, rights incorporated by reference to any other
contract, agreement, or document, and rights afforded by statute, civil
code, regulation, and common law), to liquidate, terminate, cancel,
rescind, or accelerate such agreement or transactions thereunder, set
off or net amounts owing in respect thereto (except rights related to
same-day payment netting), exercise remedies in respect of collateral
or other credit support or property related thereto (including the
purchase and sale of property), demand payment or delivery thereunder
or in respect thereof (other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure), suspend,
delay, or defer payment or performance thereunder, or modify the
obligations of a party thereunder, or any similar rights; and
(ii) Right or contractual provision that alters the amount of
collateral or margin that must be provided with respect to an exposure
thereunder, including by altering any initial amount, threshold amount,
variation margin, minimum transfer amount, the margin value of
collateral, or any similar amount, that entitles a party to demand the
return of any collateral or margin transferred by it to the other party
or a custodian or that modifies a transferee's right to reuse
collateral or margin (if such right previously existed), or any similar
rights, in each case, other than a right or operation of a contractual
provision arising solely from a change in the value of collateral or
margin or a change in the amount of an economic exposure;
(2) With respect to section 382.4, does not include any right under
a contract that allows a party to terminate the contract on demand or
at its option at a specified time, or from time to time, without the
need to show cause.
FDI Act means the Federal Deposit Insurance Act (12 U.S.C. 1811 et
seq.).
FDI Act proceeding means a proceeding that commences upon the
Federal Deposit Insurance Corporation being appointed as conservator or
receiver under section 11 of the Federal Deposit Insurance Act (12
U.S.C. 1821).
FDI Act stay period means, in connection with an FDI Act
proceeding, the period of time during which a party to a QFC with a
party that is subject to an FDI Act proceeding may not exercise any
right that the party that is not subject to an FDI Act proceeding has
to terminate, liquidate, or net such QFC, in accordance with section
11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and any
implementing regulations.
Global systemically important foreign banking organization means a
global systemically important foreign banking organization that has
been designated pursuant to Subpart I of 12 CFR part 252 (FRB
Regulation YY).
Master agreement means a QFC of the type set forth in section
210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V) of Title
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12
U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V))
or a master agreement that the Federal Deposit Insurance Corporation
determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i)
of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
Qualified financial contract (QFC) has the same meaning as in
section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Subsidiary of a covered FSI means any subsidiary of a covered FSI
as defined in 12 U.S.C. 1813(w).
U.S. special resolution regimes means the Federal Deposit Insurance
Act (12 U.S.C. 1811-1835a) and regulations promulgated thereunder and
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (12 U.S.C. 5381-5394) and regulations promulgated thereunder.

Sec. 382.2 Applicability.

(a) Scope of applicability. This part applies to a ``covered FSI,''
which means any state savings association or state non-member bank (as
defined in the Federal Deposit Insurance Act, 12 U.S.C. 1813(e)(2))
that is a direct or indirect subsidiary of (i) a global systemically
important bank holding company that has been designated pursuant to
section 252.82(a)(1) of the Federal Reserve Board's Regulation YY (12
CFR part 252.82); or (ii) a global systemically important foreign
banking organization that has been designated pursuant to Subpart I of
12 CFR part 252 (FRB Regulation YY), and any subsidiary of a covered
FSI.
(b) Initial applicability of requirements for covered QFCs. A
covered FSI must comply with the requirements of Sec. Sec. 382.3 and
382.4 beginning on the later of
(1) The first day of the calendar quarter immediately following 365
days (1 year) after becoming a covered FSI; or
(2) The date this subpart first becomes effective.
(c) Rule of construction. For purposes of this subpart, the
exercise of a default right with respect to a covered QFC includes the
automatic or deemed exercise of the default right pursuant to the terms
of the QFC or other arrangement.
(d) Rights of receiver unaffected. Nothing in this subpart shall in
any manner limit or modify the rights and powers of the FDIC as
receiver under the FDI Act or Title II of the Dodd-Frank Act,
including, without limitation, the rights of the receiver to enforce
provisions of the FDI Act or Title II of the Dodd-Frank Act that limit
the enforceability of certain contractual provisions.

Sec. 382.3 U.S. Special resolution regimes.

(a) QFCs required to be conformed. (1) A covered FSI must ensure
that each covered QFC conforms to the requirements of this section
382.3.
(2) For purposes of this Sec. 382.3, a covered QFC means a QFC
that the covered FSI:
(i) Enters, executes, or otherwise becomes a party to; or
(ii) Entered, executed, or otherwise became a party to before the
date this subpart first becomes effective, if the covered FSI or any
affiliate that is a covered entity, covered bank, or covered FSI also
enters, executes, or otherwise becomes a party to a QFC with the same
person or affiliate of the same person on or after the date this
subpart first becomes effective.
(3) To the extent that the covered FSI is acting as agent with
respect to a QFC, the requirements of this section apply to the extent
the transfer of the QFC relates to the covered FSI or the default
rights relate to the covered FSI or an affiliate of the covered FSI.
(b) Provisions required. A covered QFC must explicitly provide that
(1) The transfer of the covered QFC (and any interest and
obligation in or under, and any property securing, the covered QFC)
from the covered FSI will be effective to the same extent as the
transfer would be effective under the U.S. special resolution regimes
if the covered QFC (and any interest and obligation in or under, and
any property securing, the covered QFC) were governed by the laws of
the United States or a state of the United States and the covered FSI
were under the U.S. special resolution regime; and
(2) Default rights with respect to the covered QFC that may be
exercised against the covered FSI are permitted to be exercised to no
greater extent than the default rights could be exercised under the
U.S. special resolution regimes if the covered QFC was

[[Page 74345]]

governed by the laws of the United States or a state of the United
States and (A) the covered FSI were under the U.S. special resolution
regime; or (B) an affiliate of the covered FSI is subject to a U.S.
special resolution regime.
(c) Relevance of creditor protection provisions. The requirements
of this section apply notwithstanding paragraphs Sec. Sec. 382.4 and
382.5.

Sec. 382.4 Insolvency proceedings.

This section 382.4 does not apply to proceedings under Title II of
the Dodd-Frank Act. For purposes of this section:
(a) QFCs required to be conformed. (1) A covered FSI must ensure
that each covered QFC conforms to the requirements of this Sec. 382.4.
(2) For purposes of this Sec. 382.4, a covered QFC has the same
definition as in paragraph (a)(2) of Sec. 382.3.
(3) To the extent that the covered FSI is acting as agent with
respect to a QFC, the requirements of this section apply to the extent
the transfer of the QFC relates to the covered FSI or the default
rights relate to an affiliate of the covered FSI.
(b) General Prohibitions.
(1) A covered QFC may not permit the exercise of any default right
with respect to the covered QFC that is related, directly or
indirectly, to an affiliate of the direct party becoming subject to a
receivership, insolvency, liquidation, resolution, or similar
proceeding.
(2) A covered QFC may not prohibit the transfer of a covered
affiliate credit enhancement, any interest or obligation in or under
the covered affiliate credit enhancement, or any property securing the
covered affiliate credit enhancement to a transferee upon or after an
affiliate of the direct party becoming subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding unless the
transfer would result in the supported party being the beneficiary of
the credit enhancement in violation of any law applicable to the
supported party.
(c) Definitions relevant to the general prohibitions.
(1) Direct party. Direct party means a covered entity, covered
bank, or covered FSI referenced in paragraph (a) of Sec. 382.2, that
is a party to the direct QFC.
(2) Direct QFC. Direct QFC means a QFC that is not a credit
enhancement, provided that, for a QFC that is a master agreement that
includes an affiliate credit enhancement as a supplement to the master
agreement, the direct QFC does not include the affiliate credit
enhancement.
(3) Affiliate credit enhancement. Affiliate credit enhancement
means a credit enhancement that is provided by an affiliate of a party
to the direct QFC that the credit enhancement supports.
(d) Treatment of agent transactions. With respect to a QFC that is
a covered QFC for a covered FSI solely because the covered FSI is
acting as agent under the QFC, the covered FSI is the direct party.
(e) General creditor protections. Notwithstanding paragraph (b) of
this section, a covered direct QFC and covered affiliate credit
enhancement that supports the covered direct QFC may permit the
exercise of a default right with respect to the covered QFC that arises
as a result of
(1) The direct party becoming subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding other than a
receivership, conservatorship, or resolution under the FDI Act, Title
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or
laws of foreign jurisdictions that are substantially similar to the
U.S. laws referenced in this paragraph (e)(1) in order to facilitate
the orderly resolution of the direct party;
(2) The direct party not satisfying a payment or delivery
obligation pursuant to the covered QFC or another contract between the
same parties that gives rise to a default right in the covered QFC; or
(3) The covered affiliate support provider or transferee not
satisfying a payment or delivery obligation pursuant to a covered
affiliate credit enhancement that supports the covered direct QFC.
(f) Definitions relevant to the general creditor protections.
(1) Covered direct QFC. Covered direct QFC means a direct QFC to
which a covered entity, covered bank, or covered FSI referenced in
paragraph (a) of 382.2, is a party.
(2) Covered affiliate credit enhancement. Covered affiliate credit
enhancement means an affiliate credit enhancement in which a covered
entity, covered bank, or covered FSI referenced in paragraph (a) of
Sec. 382.2, is the obligor of the credit enhancement.
(3) Covered affiliate support provider. Covered affiliate support
provider means, with respect to a covered affiliate credit enhancement,
the affiliate of the direct party that is obligated under the covered
affiliate credit enhancement and is not a transferee.
(4) Supported party. Supported party means, with respect to a
covered affiliate credit enhancement and the direct QFC that the
covered affiliate credit enhancement supports, a party that is a
beneficiary of the covered affiliate support provider's obligation(s)
under the covered affiliate credit enhancement.
(g) Additional creditor protections for supported QFCs.
Notwithstanding paragraph (b) of this section, with respect to a
covered direct QFC that is supported by a covered affiliate credit
enhancement, the covered direct QFC and the covered affiliate credit
enhancement may permit the exercise of a default right that is related,
directly or indirectly, to the covered affiliate support provider after
the stay period if:
(1) The covered affiliate support provider that remains obligated
under the covered affiliate credit enhancement becomes subject to a
receivership, insolvency, liquidation, resolution, or similar
proceeding other than a Chapter 11 proceeding;
(2) Subject to paragraph (i) of this section, the transferee, if
any, becomes subject to a receivership, insolvency, liquidation,
resolution, or similar proceeding;
(3) The covered affiliate support provider does not remain, and a
transferee does not become, obligated to the same, or substantially
similar, extent as the covered affiliate support provider was obligated
immediately prior to entering the receivership, insolvency,
liquidation, resolution, or similar proceeding with respect to:
(i) The covered affiliate credit enhancement;
(ii) All other covered affiliate credit enhancements provided by
the covered affiliate support provider in support of other covered
direct QFCs between the direct party and the supported party under the
covered affiliate credit enhancement referenced in paragraph (g)(3)(i)
of this section; and
(iii) All covered affiliate credit enhancements provided by the
covered affiliate support provider in support of covered direct QFCs
between the direct party and affiliates of the supported party
referenced in paragraph (g)(3)(ii) of this section; or
(4) In the case of a transfer of the covered affiliate credit
enhancement to a transferee,
(i) All of the ownership interests of the direct party directly or
indirectly held by the covered affiliate support provider are not
transferred to the transferee; or
(ii) Reasonable assurance has not been provided that all or
substantially all of the assets of the covered affiliate support
provider (or net proceeds therefrom), excluding any assets reserved for
the payment of costs and expenses of administration in the
receivership, insolvency, liquidation, resolution, or similar
proceeding, will be transferred or sold to the transferee in a timely
manner.

[[Page 74346]]

(h) Definitions relevant to the additional creditor protections for
supported QFCs.
(1) Stay period. Stay period means, with respect to a receivership,
insolvency, liquidation, resolution, or similar proceeding, the period
of time beginning on the commencement of the proceeding and ending at
the later of 5:00 p.m. (eastern time) on the business day following the
date of the commencement of the proceeding and 48 hours after the
commencement of the proceeding.
(2) Business day. Business day means a day on which commercial
banks in the jurisdiction the proceeding is commenced are open for
general business (including dealings in foreign exchange and foreign
currency deposits).
(3) Transferee. Transferee means a person to whom a covered
affiliate credit enhancement is transferred upon or following the
covered affiliate support provider entering a receivership, insolvency,
liquidation, resolution, or similar proceeding or thereafter as part of
the restructuring or reorganization involving the covered affiliate
support provider.
(i) Creditor protections related to FDI Act proceedings.
Notwithstanding paragraphs (e) and (g) of this section, which are
inapplicable to FDI Act proceedings, and notwithstanding paragraph (b)
of this section, with respect to a covered direct QFC that is supported
by a covered affiliate credit enhancement, the covered direct QFC and
the covered affiliate credit enhancement may permit the exercise of a
default right that is related, directly or indirectly, to the covered
affiliate support provider becoming subject to FDI Act proceedings
(1) After the FDI Act stay period, if the covered affiliate credit
enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)-(e)(10)
and any regulations promulgated thereunder; or
(2) During the FDI Act stay period, if the default right may only
be exercised so as to permit the supported party under the covered
affiliate credit enhancement to suspend performance with respect to the
supported party's obligations under the covered direct QFC to the same
extent as the supported party would be entitled to do if the covered
direct QFC were with the covered affiliate support provider and were
treated in the same manner as the covered affiliate credit enhancement.
(j) Prohibited terminations. A covered QFC must require, after an
affiliate of the direct party has become subject to a receivership,
insolvency, liquidation, resolution, or similar proceeding,
(1) The party seeking to exercise a default right to bear the
burden of proof that the exercise is permitted under the covered QFC;
and
(2) Clear and convincing evidence or a similar or higher burden of
proof to exercise a default right.

Sec. 382.5 Approval of enhanced creditor protection conditions.

(a) Protocol compliance. Notwithstanding paragraph (b) of section
382.4, a covered QFC may permit the exercise of a default right with
respect to the covered QFC if the covered QFC has been amended by the
ISDA 2015 Universal Resolution Stay Protocol, including the Securities
Financing Transaction Annex and Other Agreements Annex, published by
the International Swaps and Derivatives Association, Inc., as of May 3,
2016, and minor or technical amendments thereto.
(b) Proposal of enhanced creditor protection conditions. (1) A
covered FSI may request that the FDIC approve as compliant with the
requirements of Sec. 382.4 proposed provisions of one or more forms of
covered QFCs, or proposed amendments to one or more forms of covered
QFCs, with enhanced creditor protection conditions.
(2) Enhanced creditor protection conditions means a set of limited
exemptions to the requirements of Sec. 382.4(b) of this subpart that
are different than that of paragraphs (e), (g), and (i) of Sec. 382.4.
(3) A covered FSI making a request under paragraph (b)(1) of this
section must provide
(i) An analysis of the proposal that addresses each consideration
in paragraph (d) of this section;
(ii) A written legal opinion verifying that proposed provisions or
amendments would be valid and enforceable under applicable law of the
relevant jurisdictions, including, in the case of proposed amendments,
the validity and enforceability of the proposal to amend the covered
QFCs; and
(iii) Any other relevant information that the FDIC requests.
(c) FDIC approval. The FDIC may approve, subject to any conditions
or commitments the FDIC may set, a proposal by a covered FSI under
paragraph (b) of this section if the proposal, as compared to a covered
QFC that contains only the limited exemptions in paragraphs of (e),
(g), and (i) of Sec. 382.4 or that is amended as provided under
paragraph (a) of this section, would promote the safety and soundness
of covered FSIs by mitigating the potential destabilizing effects of
the resolution of a global significantly important banking entity that
is an affiliate of the covered FSI to at least the same extent.
(d) Considerations. In reviewing a proposal under this section, the
FDIC may consider all facts and circumstances related to the proposal,
including:
(1) Whether, and the extent to which, the proposal would reduce the
resiliency of such covered FSIs during distress or increase the impact
on U.S. financial stability were one or more of the covered FSIs to
fail;
(2) Whether, and the extent to which, the proposal would materially
decrease the ability of a covered FSI, or an affiliate of a covered
FSI, to be resolved in a rapid and orderly manner in the event of the
financial distress or failure of the entity that is required to submit
a resolution plan;
(3) Whether, and the extent to which, the set of conditions or the
mechanism in which they are applied facilitates, on an industry-wide
basis, contractual modifications to remove impediments to resolution
and increase market certainty, transparency, and equitable treatment
with respect to the default rights of non-defaulting parties to a
covered QFC;
(4) Whether, and the extent to which, the proposal applies to
existing and future transactions;
(5) Whether, and the extent to which, the proposal would apply to
multiple forms of QFCs or multiple covered FSIs;
(6) Whether the proposal would permit a party to a covered QFC that
is within the scope of the proposal to adhere to the proposal with
respect to only one or a subset of covered FSIs;
(7) With respect to a supported party, the degree of assurance the
proposal provides to the supported party that the material payment and
delivery obligations of the covered affiliate credit enhancement and
the covered direct QFC it supports will continue to be performed after
the covered affiliate support provider enters a receivership,
insolvency, liquidation, resolution, or similar proceeding;
(8) The presence, nature, and extent of any provisions that require
a covered affiliate support provider or transferee to meet conditions
other than material payment or delivery obligations to its creditors;
(9) The extent to which the supported party's overall credit risk
to the direct party may increase if the enhanced creditor protection
conditions are not met and the likelihood that the supported party's
credit risk to the direct party would decrease or remain the same if
the enhanced creditor protection conditions are met; and

[[Page 74347]]

(10) Whether the proposal provides the counterparty with additional
default rights or other rights.

Sec. 382.6 [Reserved.]

Sec. 382.7 Exclusion of certain QFCs.

(a) Exclusion of CCP-cleared QFCs. A covered FSI is not required to
conform a covered QFC to which a CCP is party to the requirements of
Sec. Sec. 382.3 or 382.4.
(b) Exclusion of covered entity or covered bank QFCs. A covered FSI
is not required to conform a covered QFC to the requirements of
Sec. Sec. 382.3 or 382.4 to the extent that a covered entity or
covered bank is required to conform the covered QFC to similar
requirements of the Federal Reserve Board or Office of the Comptroller
of the Currency if the QFC is either (A) a direct QFC to which a
covered entity or a covered bank is a direct party or (B) an affiliate
credit enhancement to which a covered entity or a covered bank is the
obligor.

Dated at Washington, DC, this 20th day of September, 2016.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2016-25605 Filed 10-25-16; 8:45 am]
BILLING CODE P

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