Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 50228-50268 [2017-21951]

Download as PDF 50228 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 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: Final rule. AGENCY: The FDIC is adding regulations 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 nonmember banks’’ or ‘‘SNMBs’’) for which the FDIC is the primary Federal regulator (together, ‘‘FSIs’’ or ‘‘FDICsupervised institutions’’). This final rule requires that FSIs and their subsidiaries (‘‘covered FSIs’’) 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 are generally 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 final rule also amends 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 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 restrictions on such QFCs. DATES: The final rule is effective on January 1, 2018, except for amendatory instruction #6 which is delayed indefinitely. Once OCC adopts its related final rule, FDIC will publish a document announcing the effective date of the amendatory instruction. FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate Director, rbillingsley@fdic.gov, Capital sradovich on DSK3GMQ082PROD with RULES2 SUMMARY: VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 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, Michael Phillips, Counsel, mphillips@fdic.gov, Greg Feder, Counsel, gfeder@fdic.gov, or Francis Kuo, Counsel, fkuo@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. Notice of Proposed Rulemaking and General Summary of Comments C. Overview of the Final Rule D. Consultation With U.S. Financial Regulators E. Overview of Statutory Authority and Purpose II. Restrictions on QFCs of Covered FSIs 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 E. Small Business Regulatory Enforcement Fairness Act I. Introduction A. Background This final 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 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 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 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 The 2016 Notices of Proposed Rulemaking 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 entities’’).5 Subsequent to the FRB NPRM, the OCC issued the OCC Notice of Proposed Rulemaking (OCC NPRM),6 which applies the same QFC 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 81 FR 29169 (May 11, 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 § 252.82(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 § 252.82 (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 its final rule, the FRB also excluded entities supervised by the FDIC from the definition of a ‘‘covered entity.’’ 82 FR 42882 (September 12, 2017). 6 81 FR 55,381 (Aug. 19, 2016). E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations requirements to ‘‘covered banks’’ within the OCC’s jurisdiction. The FDIC issued a parallel proposal (FDIC NPRM, also referred to as ‘‘the proposal’’ or ‘‘the 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’’).7 After considering the comments received on the FDIC NPRM, the FDIC is now finalizing its rule (‘‘FDIC FR’’). The final rule is intended to work in tandem with the FRB’s final rule adopted on September 1, 2017 (‘‘FRB FR’’) and the OCC’s expected final rule (‘‘OCC FR’’). The policy objective of this final rule is to improve the orderly resolution of a GSIB by limiting disruptions to a failed GSIB through its FSI subsidiaries’ financial contracts with other companies. The FRB FR, the OCC FR, and FDIC FR complement the ongoing work of the FRB and the FDIC on resolution planning requirements for GSIBs. 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; 8 (ii) the insurer of deposits and manager of the Deposit Insurance Fund (DIF); and (iii) the resolution authority for all FDICinsured 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.9 The final 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. 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, FDICsupervised affiliates of U.S. or foreign FR 74,326 (Oct. 26, 2016). 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 June 30, 2017, the FDIC had primary supervisory responsibility for 3,711 SNMBs and State-chartered savings associations. 9 See https://www.fdic.gov/about/strategic/ strategic/supervision.html. 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.10 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 final 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. The FDIC received a total of 14 comment letters in response to the FDIC NPRM from trade groups representing GSIBs or GSIB groups, buy-side and end-users of derivatives, individuals and community advocates. There was substantial overlap in the comments received by the FRB, OCC and FDIC regarding the NPRMs. Notably, a copy of comments the commenter had already sent to the FRB or the OCC generally accompanied the comments received by the FDIC and were incorporate therein by reference. Commenters requested that the agencies coordinate in developing final rules and consider comments submitted to the other agencies regarding their NPRMs. All comments were considered in developing the final rule. Comments are discussed in the relevant sections that follow. The FDIC consulted with the FRB and the OCC in developing the final rule. Qualified financial contracts, default rights, and financial stability. Like the FDIC NPRM, this final rule pertains to several important classes of financial transactions that are collectively known as QFCs.11 QFCs include swaps, other derivatives contracts, repurchase agreements (also known as ‘‘repos’’) and reverse repos, and securities lending and borrowing agreements.12 Financial 7 81 sradovich on DSK3GMQ082PROD with RULES2 8 Although VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 10 For additional background regarding the interconnectivity of the largest financial firms, see FRB NPRM, 81 FR 29175–29176 (May 11, 2016). 11 The final rule adopts the definition of ‘‘qualified financial contract’’ set out in section 210(c)(8)(D) of the Dodd-Frank Act, 12 U.S.C. 5390(c)(8)(D). See final rule § 382.1. 12 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. See final rule § 382.1. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 50229 institutions 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. 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. The final rule focuses on a context in which that threat is especially great: The failure of a GSIB that is an affiliate of a covered FSI that is party to large volumes of QFCs, which are likely to include 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,13 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.’’ 14 More recently, in April 2016,15 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.16 13 12 U.S.C. 5365(d). and FDIC, ‘‘Agencies Provide Feedback on Second Round Resolution Plans of ‘First-Wave’ Filers’’ (Aug. 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’’ (Mar. 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 (Apr. 15, 2013), available at https://www.fdic.gov/news/news/press/ 2013/pr13027.html. 15 See https://www.fdic.gov/news/news/press/ 2016/pr16031a.pdf, at 13. 16 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. 14 FRB E:\FR\FM\30OCR2.SGM 30OCR2 50230 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 Direct defaults and cross-defaults. This rule focuses on two distinct scenarios in which a 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 17 to the QFC or an affiliate of that entity enters a resolution proceeding.18 The first scenario occurs when a GSIB entity that is itself a direct party to the QFC enters a resolution proceeding and such event gives rise to default rights under the QFC it is a party to; 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 and such event gives rise to default rights under the QFC it is a party to; this preamble refers to such a scenario as a ‘‘crossdefault’’ and refers to default rights that arise from a cross-default as ‘‘crossdefault 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, the final rule does not affect all types of default rights, and, where it affects a default right, the rule 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 or to transfer the QFC. Moreover, the final rule is concerned 17 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. 18 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 proceedings 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 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 DoddFrank 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 18:25 Oct 27, 2017 Jkt 244001 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 final rule does 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 and their affiliates often enter into large volumes of QFCs. 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. From the standpoint of financial stability, the most important of these operating subsidiaries are generally a U.S. insured depository institution, a U.S. brokerdealer, 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 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 would be more complex and could therefore destabilize the resolution of a GSIB. 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 final rule, by limiting such cross-default rights in covered QFCs 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 final rule is also intended to 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-ofentry (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, the final rule should help support the continued operation of one or more affiliates of an entity that has entered 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 U.S. Bankruptcy Code, if a bank holding company were to fail, it would likely be resolved under the U.S. Bankruptcy Code. When an entity goes into resolution under the U.S. 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.19 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, 19 See E:\FR\FM\30OCR2.SGM 11 U.S.C. 362. 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 collectively cause a value-destroying disorderly liquidation of the debtor.20 However, the U.S. Bankruptcy Code largely exempts QFC.21 counterparties of the debtor from the automatic stay through special ‘‘safe harbor’’ provisions.22 Under these provisions, any rights that a QFC counterparty has to terminate the contract, set-off obligations, or 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 U.S. 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 U.S. 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,23 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 stay requirements on QFCs of financial 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 U.S. Bankruptcy Code. With Title II of the Dodd-Frank Act, 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 20 See, e.g., Aiello v. Providian Financial Corp., 239 F.3d 876, 879 (7th Cir. 2001). 21 The U.S. 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 final rule. 22 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 559, 560, 561. The U.S. Bankruptcy Code specifies the types of parties to which the safe harbor provisions apply, such as financial institutions and financial participants. Id. 23 See 11 U.S.C. 362(a). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 stability of the United States in a manner that mitigates such risk and minimizes moral hazard.24 Title II of the Dodd-Frank Act 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.25 Title II of the Dodd-Frank Act 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.26 To give the FDIC time to effect this transfer, Title II of the Dodd-Frank Act 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.27 Once the QFCs are transferred in accordance with the statute, Title II of the Dodd-Frank Act permanently stays the exercise of default rights for those reasons.28 Title II of the Dodd-Frank Act 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, if such contracts are guaranteed or otherwise supported by the covered financial company, 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.29 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 appropriate protections for QFC counterparties of the failed financial 24 Section 204(a) of the Dodd-Frank Act, codified at 12 U.S.C. 5384(a). 25 See section 203 of the Dodd-Frank Act, codified at 12 U.S.C. 5383. 26 See 12 U.S.C. 5390(c)(9). 27 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay generally lasts until 5 p.m. eastern time on the business day following the appointment of the FDIC as receiver. 28 12 U.S.C. 5390(c)(10)(B)(i)(II). 29 12 U.S.C. 5390(c)(16); 12 CFR 380.12. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 50231 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. Further, 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 crossdefault rights relating to guaranteed or supported QFCs, the FDIC takes the action required in order to continue to enforce those contracts.30 The Federal Deposit Insurance Act. Under the FDI Act, a failing insured depository institution would generally enter a receivership administered by the FDIC.31 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.32 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, or liquidate QFCs with such affiliates 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. Notice of Proposed Rulemaking and General Summary of Comments The proposal was intended to increase GSIB resolvability and resiliency by addressing two QFCrelated issues. First, the proposal sought 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. Second, the proposal sought to address the potential disruptions 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 provided cross-default rights. Scope of application. The proposal’s requirements would have applied 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 § 252.82(a)(1) of the FRB’s 30 See id. U.S.C. 1821(c). 32 See 12 U.S.C. 1821(e)(8)–(10). 31 12 E:\FR\FM\30OCR2.SGM 30OCR2 50232 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization 33 that has been designated pursuant to § 252.87 of the FRB’s Regulation YY (12 CFR 252.87). This final rule also makes clear that the mandatory contractual stay requirements apply to the subsidiaries of any covered FSI. Under the final 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. In the proposal, ‘‘qualified financial contract’’ or ‘‘QFC’’ was defined to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act,34 and included, among other arrangements, derivatives, repos, and securities borrowing and lending agreements. Subject to the exceptions discussed below, the proposal’s requirements would have applied to any QFC to which a covered FSI is party (covered QFC).35 Under the proposal, a covered FSI would have been required to conform pre-existing QFCs if a covered FSI entered into a new QFC with a counterparty or its affiliate. Required contractual provisions related to the U.S. special resolution regimes. Under the proposal, covered FSIs would have been 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 at 33 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 FRB FR. Therefore, unlike the FRB FR, the FDIC is not including in the rule any special provisions relating to multi-branch netting arrangements. 34 12 U.S.C. 5390(c)(8)(D). See proposed rule § 382.1. 35 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, as a basis for termination of a QFC on account of the appointment of the FDIC as receiver (or the insolvency or financial condition of the company) remains unenforceable. This provision is retained in the final rule. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 least the same extent as they would be pursuant to the U.S. Special Resolution Regimes—that is, Title II and the FDI Act.36 The proposed requirements were 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 would be treated the same way in the context of an FDIC receivership under the Dodd-Frank Act or the FDI Act. This section of the proposal was also consistent with analogous legal requirements that have been imposed in other national jurisdictions 37 and with the Financial Stability Board’s ‘‘Principles for Cross-border Effectiveness of Resolution Actions.’’ 38 Prohibited cross-default rights. Under the proposal, a covered FSI would generally have been 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.39 Covered FSIs would generally have been similarly prohibited from entering into covered QFCs that included 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 did not propose to prohibit covered FSIs from entering into QFCs that allow its counterparties to exercise direct default rights against the covered FSI.40 Under the proposal, a covered FSI also could, to the extent not inconsistent with Title II or the FDI Act, enter into a QFC that grants its counterparty 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 the proposed rule, covered FSIs would have been permitted to comply by adhering to the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex 36 See proposed rule § 382.3. e.g., Bank of England Prudential Regulation Authority, Policy Statement, ‘‘Contractual stays in financial contracts governed by third-country law’’ (Nov. 2015), available at https://www.bankofengland.co.uk/pra/Documents/ publications/ps/2015/ps2515.pdf. 38 Financial Stability Board, ‘‘Principles for Crossborder Effectiveness of Resolution Actions’’ (Nov. 3, 2015), available at https://www.fsb.org/wp-content/ uploads/Principles-for-Cross-border-Effectivenessof-Resolution-Actions.pdf. 39 See proposed rule § 382.4(b). 40 However, those default rights would nonetheless have been subject to Title II and FDI Act. 37 See, PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 and the Other Agreements Annex (together, the ‘‘Universal Protocol’’).41 The preamble to the proposal explained that the FDIC viewed the Universal Protocol as achieving an outcome consistent with the outcome intended by the requirements of the proposed rule by similarly limiting direct default rights and cross-default rights. 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 would have generally restricted the exercise of crossdefault rights by counterparties against a covered FSI. The proposal also would have allowed 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.42 The FDIC would have been permitted to approve such a request if, in light of several enumerated considerations,43 the alternative creditor protections 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.44 Amendments to certain definitions in the FDIC ’s capital and liquidity rules. The proposal would have amended 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 would not be affected by the proposed restrictions on such QFCs. Specifically, the proposal would have amended the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s regulatory capital and liquidity rules and would have similarly amended the definitions of the terms ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ and ‘‘repo-style transaction’’ in the FDIC’s regulatory capital rules.45 Comments on the Proposal. The FDIC received 14 comments on the proposed rule from banking organizations, trade associations, public interest advocacy groups, and private individuals. FDIC staff also met with some commenters at 41 ISDA, ‘‘Attachment to the ISDA 2015 Universal Resolution Stay Protocol,’’ (Nov. 4, 2015), available at https://assets.isda.org/media/ac6b533f-3/ 5a7c32f8-pdf/. See proposed rule § 382.5(a). 42 See proposed rule § 382.5(c). 43 See proposed rule § 382.5(c). 44 This provision is retained in the final rule and the FDIC expects to consult with the FRB and OCC during its consideration of a request under this section. 45 See proposed rule §§ 324.2 and 329.3. E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations their request to discuss their comments on the proposal, and summaries of these meetings may be found on the FDIC’s public Web site. A number of commenters including GSIBs that would be subject to the proposed requirements included in the proposal expressed strong support for the proposed rule as a well-considered effort to reduce systemic risk with minimal burden and as an important step to ensure a more efficient and orderly resolution process for GSIB entities and thereby to protect the stability of the U.S. financial system. Other commenters, however, expressed concern with the proposed rule. These commenters generally argued that the proposal should not restrict contractual rights of GSIB counterparties and contended that the proposal would have shifted the costs of resolving the covered FSIs, covered entities, and covered banks to non-defaulting counterparties. Some commenters argued that the proposal would not assuredly mitigate systemic risk, as the requirements could result in increased market and credit risk for QFC counterparties of a GSIB. Commenters also argued that it would be more appropriate for Congress to impose the proposal’s restrictions on contractual rights through the legislative process rather than through a regulation. As described above, the proposal applied to ‘‘covered FSIs.’’ A covered FSI included any subsidiary of a covered FSI. The proposal defined ‘‘subsidiary of a covered FSI’’ as an entity owned or controlled directly or indirectly by a covered FSI. ‘‘Control’’ was defined by reference to the Bank Holding Company Act of 1956, as amended (‘‘BHC Act’’). The other NPRMs similarly used the definition of control from the BHC Act for purposes of determining the entities that would have been subject to the requirements of the NPRMs. Commenters urged the agencies to move to a financial consolidation standard to define the subsidiaries of covered FSIs, arguing that the concept of control under the BHC Act includes entities (1) that are not under the operational control of the GSIB entity and (2) over whom the GSIB may not have the practical ability to require remediation. Furthermore, commenters urged that non-financial consolidated subsidiaries are unlikely to raise the types of concerns for the orderly resolution of GSIBs targeted by the proposal. For similar reasons, these commenters argued that, for purposes of the requirement that a covered FSI conform existing QFCs if a covered FSI enters into a new QFC with a counterparty or its affiliate, a VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 counterparty’s ‘‘affiliate’’ should also be defined by reference to financial consolidation rather than BHC Act control. Commenters also expressed concern that the definition of ‘‘covered QFCs’’ under the proposal was overly broad. The proposal required a covered QFC to explicitly provide that it is subject to the stay-and-transfer provisions of Title II and the FDI Act and generally prohibited a covered FSI from being a party to a QFC that would allow the exercise of cross-default rights. Commenters argued that the final rule should exclude QFCs that do not contain any contractual transfer restrictions, direct default rights, or cross-default rights, as these QFCs do not give rise to the risk that counterparties will exercise their contractual rights in a manner that is inconsistent with the provisions of the U.S. Special Resolution Regimes. Commenters also urged the FDIC to exclude QFCs governed by U.S. law from the requirement that QFCs explicitly ‘‘opt in’’ to the U.S. Special Resolution Regimes since it is already clear that such QFCs are subject to the stay-and-transfer provisions of Title II and the FDI Act. With respect to the proposal’s prohibition against provisions that would allow the exercise of cross-default rights in covered QFCs of a GSIB, commenters argued that the final rule should clarify that QFCs that do not contain such cross-default rights or transfer restrictions regarding related credit enhancements are not within the scope of the prohibition. Commenters also requested that certain types of contracts that may include transfer or default rights subject to the proposal’s requirements (e.g., warrants; certain commodity contracts including commodity swaps; certain utility and gas supply contracts; certain retail customer and investment advisory agreements; securities underwriting agreements; securities lending authorization agreements) be excluded from all requirements of the final rule because these types of contracts do not raise the risks to the resolution of a covered FSI or financial stability that are the target of this final rule and because certain existing contracts of these types would be difficult, if not impossible, to amend. Commenters also requested that securities contracts that typically settle in the short term or that typically include only transfer restrictions and not default rights similarly be excluded from all requirements of the final rule because they do not impose ongoing or continuing obligations on either party after settlement. In all of the above PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 50233 cases, commenters argued that remediation of such outstanding contracts would be burdensome with no meaningful resolution benefits. Certain commenters also urged that the final rule apply only to contracts entered into after the final rule’s effective date and not to contracts existing as of the final rule’s effective date. As noted above, the proposal would have deemed compliant covered QFCs amended by the existing Universal Protocol (which allows for creditor protections in addition to those otherwise permitted by the proposed rule). Commenters generally supported this aspect of the proposal, although they requested express clarification that adherence to the existing Universal Protocol would satisfy all of the requirements of the final rule. Commenters urged that the final rule should also provide a safe harbor for a future ISDA protocol that would be substantially similar to the existing Universal Protocol except that it would seek to address the specific needs of buy-side market participants, such as asset managers, insurance companies, and pension funds who are counterparties to QFCs with GSIBs, to allow, for example, entity-by-entity adherence and the exclusion of certain foreign special resolution regimes. Commenters expressed support for the exemption in the proposal for cleared QFCs but requested that this exemption be broadened to extend to the client leg of a cleared back-to-back transaction and also to exclude any contract cleared, processed, or settled on a financial market utility (FMU) as well as any QFC conducted according to the rules of an FMU. Commenters also requested an exemption for QFCs with sovereign entities and central banks. Commenters further requested a longer period of time for covered FSIs, entities, and banks to conform covered QFCs with certain types of counterparties to the requirements of the final rule. Commenters also requested that the FDIC coordinate with other regulatory agencies, consider comments submitted to the OCC and the FRB regarding their proposals and from entities not regulated by the FDIC, and finalize a rule with conformance periods consistent with the OCC’s and FRB’s final rules. In addition, commenters requested confirmation that modifications to contracts to comply with this rule would not trigger other regulatory requirements (e.g., margin requirements for non-cleared swaps) or impact the enforceability of QFCs. The FDIC has considered the comments received on the proposal, including those of entities not regulated by the E:\FR\FM\30OCR2.SGM 30OCR2 50234 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 FDIC, as well as the comments submitted to the OCC and FRB regarding their respective proposals, and these comments and any corresponding changes in the final rule are described in more detail throughout the remainder of this SUPPLEMENTARY INFORMATION. C. Overview of Final Rule The FDIC is adopting this final rule to improve the resolvability of GSIBs and thereby furthering financial stability and enhancing the resilience, and the safety and soundness of covered FSIs. The FDIC has made a number of changes to the proposal in response to concerns raised by commenters, as further described below. The final rule is intended to protect covered FSIs and to facilitate the orderly resolution of the most systemically important banking firms—GSIBs—by limiting the ability of the counterparties of the firms’ FSI subsidiaries to terminate qualified financial contracts upon the entry of the GSIB or one or more of its affiliates into resolution. The rule requires the inclusion of contractual restrictions on the exercise of certain default rights in those QFCs. In particular, the final rule requires the QFCs of covered FSIs to contain contractual provisions that opt into the stay-and-transfer provisions of the FDI Act and the Dodd-Frank Act to reduce the risk that the stay-and-transfer related actions by the receiver would be successfully challenged by a QFC counterparty or a court in a foreign jurisdiction. The final rule also prohibits covered FSIs from entering into QFCs that contain cross-default rights, subject to certain creditor protection exceptions that would not be expected to interfere with an orderly resolution. The final rule also furthers the implementation of the Universal Protocol, which extends, through contractual agreement, the application of the resolution frameworks of the FDI Act and the Dodd-Frank Act to all QFCs entered into by an adhering GSIB and its adhering subsidiaries, including QFCs entered into outside of the United States, and establishes restrictions on cross-default rights that are similar to those in the final rule. The final rule is necessary to implement the Universal Protocol provisions regarding the resolution of a GSIB under the U.S. Bankruptcy Code, as these provisions do not become effective until implemented by U.S. regulations. To support further adherence to the Universal Protocol, the final rule creates a safe harbor allowing covered FSIs to sign up to the Universal Protocol and thereby amend their QFCs VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 pursuant to the Universal Protocol as an alternative to implementing the restrictions of the final rule on a counterparty-by-counterparty basis. In addition, the final rule provides that covered QFCs amended pursuant to adherence of a covered FSI to a new protocol (the ‘‘U.S. Protocol’’) would be deemed to conform to the requirements of the final rule. The U.S. Protocol may differ (and is required to differ) from the Universal Protocol in certain respects discussed below, but otherwise must be substantively identical to the Universal Protocol. The final rule requires covered FSIs to conform certain covered QFCs to the requirements of the final rule beginning one year after the effective date of the final rule (first compliance date) and phases in conformance requirements with respect to all covered QFCs over a two-year period depending on the type of counterparty. As explained below, a covered FSI generally is required to conform pre-existing QFCs only if the covered FSI or an affiliate of the covered FSI enters into a new QFC with the same counterparty or a consolidated affiliate of the counterparty on or after the first compliance date. Covered FSIs The final rule, like the proposal, applies to ‘‘covered FSIs,’’ which generally are State savings associations and State non-member banks and their subsidiaries. ‘‘Subsidiary’’ continues to be defined in the final rule by reference to BHC Act control. As discussed below, certain other types of subsidiaries, including a subsidiary that is owned in satisfaction of debt previously contracted in good faith, a portfolio concern controlled by a small business investment company, or a subsidiary that promotes the public welfare, are excluded from the definition of covered FSI and therefore not required to conform any QFCs. Covered Qualified Financial Contracts The final rule like the proposal defines ‘‘qualified financial contract’’ or ‘‘QFC’’ to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act 46 and would include, among other things, derivatives, repos, and securities lending agreements.47 Subject to the exceptions discussed below, the final rule’s requirements apply to any QFC to which a covered FSI is party (covered QFC). The final rule makes clear that covered FSIs do not need to conform QFCs that have no transfer restrictions, direct default rights, or cross-default rights as these QFCs have no provisions that the rule is intended to address.48 The final rule also excludes certain retail investment advisory agreements, and certain existing warrants. It also provides the FDIC with authority to exempt one or more covered FSIs from conforming certain contracts or types of contracts to the one or more of the requirements of the final rule after considering, in addition to any other factor the FDIC deems relevant, the burden the exemption would relieve and the potential impact of the exemption on the resolvability of the covered FSI or its affiliates.49 The final rule also makes clear that a covered FSI must conform existing QFCs with a counterparty if the GSIB group (i.e., the covered FSI or its affiliates that are covered FSIs or covered banks or covered entities) enters into a new QFC with that counterparty or its consolidated affiliate, defined by reference to financial consolidation principles. In particular, the final rule provides that a covered QFC includes a QFC that the covered FSI entered, executed, or otherwise became a party to before the first compliance date of this final rule if the covered FSI or any affiliate that is a covered FSI, covered entity or covered bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of that person on or after the first compliance date.50 ‘‘Consolidated affiliate’’ is a defined term in the final rule that is defined by reference to financial consolidation principles.51 Required Contractual Provisions Related to the U.S. Special Resolution Regimes Under the final rule, covered FSIs are 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.52 However, any covered QFC that is governed under U.S. law and involves only parties (other than the covered FSI) that are domiciled (in the case of individuals), incorporated in, organized under, the laws of the United States or any State, or whose principal place of business is located in the United States, including any State, or that is a U.S. branch or U.S. agency (U.S. counterparties) is also 48 See final rule § 382.2. final rule § 382.7. 50 See final rule § 382.2(c). 51 See final rule § 382.1. 52 See final rule § 382.3. 49 See 46 12 U.S.C. 5390(c)(8)(D). See proposed rule § 382.1. 47 See final rule § 382.1. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations excluded from the requirements of the final rule relating to Title II of the DoddFrank Act and the FDI Act because it is clear that in these circumstances the stay-and-transfer provisions of those acts would be enforceable in a U.S. forum.53 Prohibited Cross-Default Rights Under the final rule, a covered FSI is 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.54 Covered FSIs are similarly prohibited from entering into covered QFCs that would restrict the transfer of a credit enhancement supporting the QFC from the covered FSI’s affiliate to a transferee upon the entry into resolution of the affiliate.55 The final rule does not prohibit covered FSIs from entering into QFCs that provide their counterparties with direct default rights against the covered FSI. Under the final rule, a covered FSI may be a party to a QFC that provides the counterparty with the right to terminate the QFC if the covered FSI fails to perform its obligations under the QFC.56 Process for Approval of Enhanced Creditor Protection Conditions The final rule also allows the FDIC, at the request of a covered FSI, to approve as compliant with the final rule covered QFCs with creditor protections other than those that would otherwise be permitted under § 382.4 of the final rule.58 The FDIC could approve such a request if, in light of several enumerated considerations, the alternative approach would prevent or mitigate risks to the financial stability of the United States presented by a GSIB’s failure and would protect the safety and soundness of covered FSIs to at least the same extent as the final rule’s requirements.59 sradovich on DSK3GMQ082PROD with RULES2 Industry-Developed Protocol Amendments to Certain Definitions in the FDIC’s Capital and Liquidity Rules The final rule also amends 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 final rule amends the definition of ‘‘qualifying master netting agreement’’ in the FDIC’s regulatory capital and liquidity rules and similarly amends the definitions of the terms ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ and ‘‘repo-style transaction’’ in the FDIC’s regulatory capital rules. As an alternative to bringing their covered QFCs into compliance with the requirements of the final rule, the final rule allows covered FSIs to comply with the rule by adhering to the Universal Protocol.57 The final rule also permits compliance with the final rule through adherence to a new protocol (the U.S. Protocol) that is the same as the existing Universal Protocol but for minor changes intended to encourage a broader range of QFC counterparties to adhere only with respect to covered FSIs, covered entities, and covered banks. The Universal Protocol and the U.S. Protocol differ from the requirements of this final rule in certain respects. Nevertheless, as described in greater detail below, the final rule allows compliance through adherence to these protocols in light of the fact that the protocols contain certain desirable features that the final rule lacks and produce outcomes substantially similar to this final rule. D. Consultation With U.S. Financial Regulators In developing this final rule, the FDIC consulted with the FRB and the OCC as a means of promoting alignment across regulations and avoiding redundancy. Furthermore, the FDIC has consulted with and expects to continue to consult with foreign financial regulatory authorities regarding the implementation of this final rule 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.60 The FRB has finalized a rulemaking that would subject entities to requirements substantially identical to those finalized here for covered FSIs. Similarly, the OCC is expected to finalize a rulemaking that would subject covered banks, including the national banks of GSIBs, to requirements substantially identical to those proposed 53 See final rule § 382.3. final rule § 382.4(b). 55 See id. 56 These rights may nonetheless be subject to limitations governing their exercise in a resolution under Title II or the FDI Act. 57 See final rule § 382.5(a). 54 See VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 58 See final rule § 382.5(c). final rule § 382.5(c) and (d). 60 Several commenters requested that the FDIC consult with the FRB and the OCC in developing its final rule and coordinate its final rule with that of the FRB and OCC. Certain commenters also requested that the FDIC consult with foreign regulatory authorities in developing its final rule. 59 See PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 50235 here for covered FSIs. The FDIC has consulted with the OCC and the FRB in the development of their respective final rules. The banking agencies have endeavored to harmonize their respective rules to the extent possible and to provide specificity and clarity in the final rule to minimize the possibility of conflicting interpretations or uncertainty in their application. Moreover, the banking agencies intend to consult with each other and coordinate as needed regarding implementation of the final rule. E. Overview of Statutory Authority and Purpose The FDIC is issuing this final rule under its authorities under the FDI Act (12 U.S.C. 1811 et seq.), including its general rulemaking authorities.61 The FDIC views the final rule as consistent with its overall statutory mandate.62 An overarching purpose of the final 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. As discussed above, 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 could stress the DIF, which is managed by the FDIC. While a 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 GSIB. Additionally, the application of the final rule to the QFCs of covered FSIs should avoid creating what may otherwise be 61 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 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, 1831u, 5301 et seq. 62 The E:\FR\FM\30OCR2.SGM 30OCR2 50236 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations an incentive for GSIBs and their counterparties to concentrate QFCs in entities that are subject to fewer counterparty restrictions. II. Restrictions on QFCs of Covered FSIs A. Covered FSIs (Section 382.2(a) of the Proposed Rule) The proposed rule applied to ‘‘covered FSIs.’’ The term ‘‘covered FSI’’ included: 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 § 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 § 252.87 of the FRB’s Regulation YY (12 CFR 252.87). Under the proposed rule, the term ‘‘covered FSI’’ included any ‘‘subsidiary of covered FSI.’’ The definition of ‘‘subsidiary’’ under the proposal included any company that is owned or controlled directly or indirectly by another company where the term ‘‘control’’ was defined by reference to the BHC Act.63 The BHC Act definition of control includes ownership, control or the power to vote 25 percent of any class of voting securities; control in any manner of the election of a majority of the directors or trustees of; or exercise of a controlling influence over the management or policies.64 Commenters noted that covered FSIs are not excluded from the definition of covered entities in the FRB NPRM. They urged the FDIC to coordinate with the FRB and the OCC to ensure that only a single set of rules applies to a GSIB entity. As discussed above, the banking agencies have coordinated and the FRB final rule excludes covered FSIs from the scope of entities covered by that rule.65 A number of commenters urged the agencies to move to a financial consolidation standard to define a ‘‘subsidiary’’ of a covered entity, 63 See 12 CFR 252.2. U.S.C. 1841(a). 65 Commenters requested further clarification on the interaction between the final rules of the banking agencies to avoid legal uncertainty. As noted above, each banking agency either has already or is in the process of finalizing rules that are substantially identical to this final rule, and the banking agencies are expected to coordinate in the interpretation of the rules. Section 382.7(b) of the final rule, which addresses potential overlap between the agencies’ final rules, has been clarified in response to commenters’ requests. Section 382.7(b) is discussed in more detail below. sradovich on DSK3GMQ082PROD with RULES2 64 12 VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 covered bank or covered FSI instead of by reference to BHC Act control.66 These commenters argued that, under Generally Accepted Accounting Principles, a company generally would consolidate an entity in which it holds a majority voting interest or over which it has the power to direct the most significant economic activities, to the extent it also holds a variable interest in the entity. In addition, commenters asserted that financially consolidated subsidiaries are often subject to operational control and generally fully integrated into the parent’s enterprisewide governance, policies, procedures, control frameworks, business strategies, information technology systems, and management systems. These commenters noted that the concept of BHC Act control was designed to serve other policy purposes (e.g., separation between banking and commercial activities). A number of commenters argued that BHC Act control may include an entity that is not under the day-to-day operational control of the GSIB and over whom the GSIB does not have the practical ability to require remediation of that entity’s QFCs to comply with the proposed rule. Moreover, commenters contended that entities that are not consolidated with a GSIB for financial reporting purposes are unlikely to raise the types of concerns for the orderly resolution of GSIBs targeted by the proposal. Commenters also noted that the Universal Protocol and, generally, the standard forms of ISDA master agreements define ‘‘affiliate’’ by reference to ownership of a majority of the voting power of an entity or person. For these reasons, commenters urged that the term ‘‘subsidiary’’ of a covered FSI should be based on financial consolidation under the final rule. Commenters urged that regardless of whether financial consolidation standard is adopted for the purpose of defining ‘‘subsidiary,’’ the final rule should exclude from the definition of ‘‘covered FSI, covered bank, or covered entity’’ entities over which the GSIB does not exercise operational control, such as merchant banking portfolio companies, section 2(h)(2) companies, joint ventures, sponsored funds as distinct from their sponsors or investment advisors, securitization vehicles, entities in which the GSIB holds only a minority interest and does not exert a controlling influence, and 66 Commenters generally expressed a similar view with respect to the definition of ‘‘affiliate’’ of a covered FSI as the term is used in §§ 382.3 and 382.4 of the proposed rule. That term which was similarly defined by reference to BHC Act control under the proposal. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 subsidiaries held pursuant to provisions for debt previously contracted in good faith (DPC subsidiaries).67 Further, commenters asked the FDIC to coordinate with the FRB and the OCC to ensure the scope of entities covered under the terms ‘‘subsidiary’’ and ‘‘affiliate’’ is consistent. Consistent with the FRB and the OCC, the FDIC is excluding from the definition of ‘‘covered FSI’’ subsidiaries that are portfolio concerns, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), or that is owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24) and designed to promote the public welfare, and companies owned in satisfaction of debt previously contracted in good faith. Certain commenters requested other exclusions from the definition of ‘‘covered entity’’ that are not applicable to the FDIC’s final rule. For example, certain commenters argued that subsidiaries of foreign GSIBs for which the foreign GSIB has been given special relief by an FRB order not to hold the subsidiary under an intermediate holding company (IHC) should not be included in the definition of covered entity, even if such entities would be consolidated under financial consolidation principles. The FDIC is not addressing these comments. Under the final rule, a ‘‘covered FSI’’ is generally 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 § 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 § 252.87 of the FRB’s Regulation YY (12 CFR 252.87), and any subsidiary of a covered FSI, other than a portfolio concern, as defined under 13 CFR 107.50 that is controlled by a small business investment company as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662) or owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24). U.S. GSIB subsidiaries. Covered FSI would also generally include all subsidiaries of a covered FSI other than 67 See, e.g., 12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 CFR 225.12(b), 225.22(d)(1). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations the exceptions noted above.68 Therefore, in order to increase the resilience and resolvability of the FSI and the entire GSIB entity of which it is a part by addressing the potential obstacles to orderly resolution posed by QFCs, it is necessary to apply the restrictions to the subsidiaries. In particular, to facilitate the resolution of a GSIB under an SPOE strategy, in which only the top-tier holding company would enter a resolution proceeding while its subsidiaries would continue to meet their financial obligations, or an MPOE strategy where an affiliate of an entity that is otherwise performing under a QFC enters resolution, it is necessary to ensure that those subsidiaries or affiliates do not enter into QFCs that contain cross-default rights that the counterparty could exercise based on the holding company’s or an affiliate’s entry into resolution (or that any such cross-default rights are stayed when the holding company enters resolution). Moreover, including U.S. and non-U.S. entities as covered FSIs should help ensure that such cross-default rights do not affect the ability of performing and solvent entities—regardless of jurisdiction—to remain outside of resolution proceedings. ‘‘Subsidiary’’ in the final rule continues to be defined by reference to BHC Act control as does the definition of ‘‘affiliate.’’ 69 The final rule does not limit the definition of covered FSIs to only those subsidiaries of GSIBs that are financially consolidated as requested by certain commenters. Defining ‘‘subsidiary’’ and ‘‘affiliate’’ by reference to BHC Act control is consistent with the definitions of those terms in the FDI Act and Title II of the Dodd-Frank Act. Specifically, Title II permits the FDIC, as receiver of a covered financial company or as receiver for its subsidiary, to enforce QFCs and other contracts of subsidiaries and affiliates, defined by reference to the BHC Act, notwithstanding cross-default rights based solely on the insolvency, financial condition, or receivership of the covered financial company.70 Therefore, maintaining consistent definitions of subsidiary and affiliate with Title II should better ensure that QFC stays may be effected in resolution under a U.S. Special Resolution Regime. As covered FSIs are subsidiaries of GSIBs that are already subject to the requirements of the BHC Act, they should already know all of their BHC Act controlled 68 See final rule § 382.2(b). final rule § 382.1. 70 12 U.S.C. 5390(c)(16). 69 See VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 subsidiaries and be familiar with BHC Act control principles. B. Covered QFCs (Section 382.2 of the Final Rule) General definition. The proposal applied to any ‘‘covered QFC,’’ generally defined as any QFC that a covered FSI enters into, executes, or otherwise becomes party to with the person or an affiliate of the same person.71 Under the proposal, ‘‘qualified financial contract’’ or ‘‘QFC’’ was defined as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and included swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, securities contracts, and forward agreements.72 The application of the rule’s requirements to a ‘‘covered QFC’’ was one of the most commented upon aspects of the proposal. Certain commenters argued that the definition of QFC in Title II of the Dodd-Frank Act was overly broad and imprecise and could include agreements that market participants may not expect to be subject to the stay-and-transfer provisions of the U.S. Special Resolution Regimes. More generally, commenters argued that the proposed definition of QFC was too broad and would capture contracts that do not present any obstacles to an orderly resolution. Commenters advocated for the exclusion of a variety of types of QFCs from the requirements of the final rule. In particular, a number of commenters requested the exclusion of QFCs that do not contain any transfer restrictions or default rights, because these types of QFCs do not give rise to the risk that counterparties will exercise their contractual rights in a manner that is inconsistent with the provisions of the U.S. Special Resolution Regimes. Commenters provided several examples of contracts that they asserted fall into this category, including cash market securities transactions, certain spot FX transactions (including securities conversion transactions), retail brokerage agreements, retirement/IRA account agreements, margin agreements, options agreements, FX forward master agreements, and delivery versus payment client agreements. Commenters contended that these types of QFCs number in the millions at some firms and that remediating these contracts to 71 See proposed rule §§ 382.1 and 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 the definition of ‘‘covered QFC.’’ 72 See proposed rule § 382.1. See also 12 U.S.C. 5390(c)(8)(D). PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 50237 include the express provisions required by the final rule would require an enormous client outreach effort that would be extremely burdensome and costly while providing no meaningful resolution benefits. For example, commenters indicated that for certain types of transactions, such as cash securities transactions, FX spot transactions, and retail QFCs, such a requirement could require an overhaul of existing market practice and documentation that affects hundreds of thousands, if not millions, of transactions occurring on a daily basis and significant education of the general market. Commenters also requested the exclusion of QFCs that do not contain any default or cross-default rights but that may contain transfer restrictions. Commenters contended that examples of these types of agreements included investment advisory account agreements with retail customers, which contain transfer restrictions as required by section 205(a)(2) of the Investment Advisers Act of 1940, but no direct default or cross-default rights; underwriting agreements; 73 and client onboarding agreements. A few commenters provided prime brokerage or margin loan agreements as examples of transactions that generally do not have default or cross-default rights but may have transfer restrictions. Another commenter also requested the exclusion of securities market transactions that generally settle in the short term, do not impose ongoing or continuing obligations on either party after settlement, and do not typically include default rights.74 In these cases, commenters contended that remediation of these agreements would be burdensome with no meaningful resolution benefits. Commenters also argued for the exclusion of a number of other types of contracts from the definition of covered QFC in the final rule. In particular, a number of commenters urged that contracts issued in the capital markets or related to a capital market issuance like warrants or a certificate representing a call option, typically on 73 However, certain commenters noted that underwriting, purchase, subscription or placement agency agreements may contain rights that could be construed as cross-default rights or default rights. 74 In the alternative, the commenter requested that such securities market transactions be excluded to the extent they are cleared, processed, and settled through (or subject to the rules of) FMUs through expansion of the proposed exemption for transactions with central counterparties. This aspect of the comment is addressed in the subsequent section discussing requests for expansion of the proposed exemption for transactions with central counterparties. E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50238 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations a security or a basket of securities be excluded. Although warrants issued in capital markets may contain direct default and cross-default rights as well as transfer restrictions, commenters argued that remediation of outstanding warrant agreements would be difficult, if not impossible, since remediation would require the affirmative vote of a substantial number of separate voting groups of holders to amend the terms of the instruments and that obtaining such consent could be expensive due to ‘‘hold-out’’ premiums. Commenters also argued that since these instruments are traded in the markets, it is not possible for an issuer to ascertain whether a particular investor in such instruments has also entered into other QFCs with the dealer or any of its affiliates (or vice versa) for purposes of complying with the proposed mechanism for remediation of existing QFCs. Commenters argued that issuers would be able to comply if the final rule’s requirements applied only on a prospective basis with respect to new issuances since new investors could be informed of the terms of the warrant at the time of purchase and no after-thefact consent would be required as is the case with existing outstanding warrants. Commenters expressed the view that prospective application of the final rule’s requirements to warrants would allow time for firms to develop new warrant agreements and warrant certificates, to engage in client outreach efforts, and to make any appropriate public disclosures. Commenters suggested that the requirements of the final rule should only apply to such instruments issued after the effective date of the final rule and that the compliance period for such new issuances be extended to allow time to establish new issuance programs that comply with the final rule’s requirements. Other examples of contracts in this category given by commenters include contracts with special purpose vehicles that are multiissuance note platforms, which commenters urged would be difficult to remediate for similar reasons to warrants other than on a prospective basis. Commenters also urged the exclusion of contracts for the purchase of commodities in the ordinary course of business (e.g., utility and gas energy supply contracts) or physical delivery commodity contracts more broadly.75 In 75 For example, some commenters urged the exclusion of all contracts requiring physical delivery between commercial entities in the course of regulatory business such as (i) contracts subject to a Federal Energy Regulatory Commission-filed tariff; (ii) contracts that are traded in markets VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 general, commenters argued that exempting these contracts would not increase systemic risk but would help ensure the smooth operation of utilities and the physical commodities markets.76 Commenters indicated that failure to make commodity deliveries on time can result in the accrual of damages and penalties beyond the accrual of interest (e.g., demurrage and other fines in shipping) and that counterparties may not be able to obtain appropriate compensation for amendment of default rights due to the difficulty of pricing the risk associated with an operational failure due to the failure to deliver a commodity on time. Commenters also contended that agreements with power operators governed by regulatory tariffs would be difficult, if not impossible, to remediate.77 The final rule applies to any ‘‘covered QFC,’’ which generally is defined as any ‘‘in-scope QFC’’ that a covered FSI enters into, executes, or to which the overseen by independent system operators or regional transmission operators; (iii) retail electric contracts; (iv) contracts for storage or transportation of commodities; (v) contracts for financial services with regulated financial entities (e.g., brokerage agreements and futures account agreements); and (vi) public utility contracts. 76 One commenter also argued that utility and gas supply contracts are covered sufficiently in section 366 of the U.S. Bankruptcy Code. This section of the U.S. Bankruptcy Code places restrictions on the ability of a utility to ‘‘alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under [the U.S. Bankruptcy Code] or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.’’ 11 U.S.C. 366. The purpose and effect of § 382.44 of the final rule and section 366 of the U.S. Bankruptcy Code are different and therefore do not serve as substitutes. Section 366 of the U.S. Bankruptcy Code does not address cross-defaults or provide additional clarity regarding the application of the U.S. Special Resolution Regimes. Similarly, § 382.4 of the final rule does not prevent a covered FSI from entering into a covered QFC that allows the counterparty to exercise default rights once a non-bank covered FSI that is a direct party enters bankruptcy or fails to pay or perform under the QFC. 77 One commenter also requested exclusion of overnight transactions, particularly overnight repurchase agreements, arguing that such transactions present little risk of creating negative liquidity effects and that an express exclusion for such transactions may increase the likelihood that such contracts would remain viable funding sources in times of liquidity stress. Although the final rule does not exempt overnight repo transactions, the final rule may have limited if any effect on such transactions. As described below, the final rule provides a number of exemptions that may apply to overnight repo and similar transactions. Moreover, the restrictions on default rights in § 382.4 of the final rule do not apply to 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. See final rule § 382.1 (defining ‘‘default right’’). Therefore, § 382.4 does not restrict the ability of QFCs, including overnight repos, to terminate at the end of the term of the contract. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 covered FSI otherwise becomes a party.78 As under the proposal, ‘‘qualified financial contract’’ or ‘‘QFC’’ is defined in the final rule as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and includes swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, and forward agreements.79 Parties that enter into contracts with covered FSIs have been potentially subject to the stay-andtransfer provisions of Title II of the Dodd-Frank Act since its enactment. Consistent with Title II of the DoddFrank Act, the final rule does not exempt QFCs involving physical commodities. However as explained below, the final rule responds to concerns regarding the smooth operation of physical commodities end users and markets by allowing counterparties to terminate QFCs based on the failure to pay or perform.80 In response to concerns raised by commenters, the final rule exempts QFCs that have no transfer restrictions or default rights, as these QFCs have no provisions that the rule is intended to address. The final rule effects this exemption by limiting the scope of QFCs potentially subject to the rule to those QFCs that explicitly restrict the transfer of a QFC from a covered FSI or explicitly provide default rights that may be exercised against a covered FSI (in-scope QFCs).81 This change addresses a major concern raised by commenters regarding the overbreadth of the definition of ‘‘covered QFC’’ in the proposal. The change also mitigates the burden of complying with the rule without undermining its purpose by not requiring covered FSIs to conform contracts that do not contain the types of default rights and transfer restrictions that the final rule is intended to address. The final rule does not, however, exclude QFCs that have transfer restrictions (but no default rights or cross-default rights) as requested by certain commenters, as such QFCs would have provisions (i.e., transfer restrictions) that are subject to the requirements of the final rule and could otherwise impede the orderly resolution of a covered FSI or its affiliate. The final rule provides that a covered FSI is not required to conform certain investment advisory contracts described 78 See final rule § 382.2(c). 12 U.S.C. 5390(c)(8)(D); final rule § 382.1. 80 However, those default rights remain subject to Title II and FDI Act. 81 See final rule § 382.2(d). The final rule includes as an in-scope QFC a QFC that contains a restriction on the transfer of a QFC from a covered FSI. This would include any QFC that restricts the transfer of that QFC or any other QFC. 79 See E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 by commenters (i.e., investment advisory contracts with retail advisory customers 82 of the covered FSI that only contain transfer restrictions necessary to comply with section 205(a) of the Investment Advisers Act). The final rule also exempts any existing warrant evidencing a right to subscribe or to otherwise acquire a security of a covered FSI or its affiliate.83 The final rule excludes these types of agreements because there is persuasive evidence that these types of contracts would be burdensome to conform and that it is unlikely that excluding such contracts from the requirements of the final rule would impair the orderly resolution of a GSIB.84 The final rule also provides the FDIC with authority to exempt one or more covered FSIs from conforming certain contracts or types of contracts to the final rule after considering, in addition to any other factor the FDIC deems relevant, the burden the exemption would relieve and the potential impact of the exemption on the resolvability of the covered FSI or its affiliates.85 Covered FSIs that request that the FDIC exempt additional contracts from the final rule should be prepared to provide information in support of their requests. The FDIC expects to consult as appropriate with the FRB and the OCC during its consideration of any such request. Definition of covered QFC. As noted above, the proposal applied to any ‘‘covered QFC,’’ generally defined as a QFC that a covered FSI enters into, after the effective date and a QFC entered earlier, but only if the covered FSI or its affiliate enters into a new QFC with the same person or an affiliate of the same person.86 ‘‘Affiliate’’ in the proposal was defined in the same manner as under the BHC Act to mean any company that controls, is controlled by, or is under common control with another company.87 As noted above, ‘‘control’’ under the BHC Act means the power to vote 25 percent or more of any class of 82 See final rule § 382.7(c)(1). The final rule defines retail customers or counterparty by reference to the FDIC’s rule relating to the liquidity coverage ratio, 12 CFR part 329. Covered FSIs should be familiar with this definition and its application. 83 See final rule § 382.7(c)(2). Warrants issued after the effective date of the final rule are not excluded from the requirements of the final rule. 84 The exclusions for investment advisory agreements and existing warrants set forth in the final rule are included to address commenters’ concerns as to the scope and potential compliance burden of the final rule. These exemptions are not interpretations of the definition of QFC and should not be construed as indicating that the FDIC has determined such contracts are necessarily QFCs. 85 See final rule § 382.7(d). 86 See proposed rule §§ 382. 3(a); 382.4(a). 87 See proposed rule § 382.1 (defining ‘‘affiliate’’). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 voting securities; control in any manner the election of a majority of the directors or trustees; or exercise of a controlling influence over the management or policies.88 Commenters argued that requiring remediation of existing QFCs of a person if the GSIB entered into a new QFC with an affiliate of the person would make compliance with the proposed rule overly burdensome.89 These arguments were similar to commenters’ arguments regarding the definition of ‘‘subsidiary’’ of a covered FSI, which were discussed above. Commenters asserted that this requirement would demand that the GSIB track each counterparty’s organizational structure by relying on information provided by counterparties, which would subject counterparties to enhanced tracking and reporting burdens. Commenters requested that the phrase ‘‘or affiliate of the same person’’ be deleted from the definition of covered QFC and argued that such a modification would not undermine the ultimate goals of the rule since existing QFCs with the counterparty’s affiliate would still have to be remediated if the covered FSI or its affiliate enters into a new QFC with that counterparty affiliate. In the alternative, commenters argued that an affiliate of a counterparty be established by reference to financial consolidation principles rather than BHC Act control since counterparties may not be familiar with BHC Act control. Commenters argued that many counterparties are not regulated bank holding companies and would be unfamiliar with BHC Act control. Certain commenters also argued that a new QFC with one fund in a fund family should not result in other funds in the fund family being required to conform their pre-existing QFCs with the covered FSI or an affiliate. The final rule’s definition of ‘‘covered QFC’’ has been modified to address the concerns raised by commenters. In particular, the final rule provides that a covered QFC includes a QFC that the covered FSI entered, executed, or otherwise became a party to before January 1, 2019, if the covered FSI or any affiliate that is a covered FSI, covered entity, or covered bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of the same 88 See 12 U.S.C. 1841(k). commenter believed that the burden of conforming contracts with all affiliates of a counterparty would be too great, whether defined in terms of BHC Act control or financial consolidation principles, even though the burden would be reduced by definition in terms of financial consolidation principles. 89 One PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 50239 person on or after January 1, 2019.90 The final rule defines ‘‘consolidated affiliate’’ by reference to financial consolidation principles.91 As commenters indicated, counterparties will already track and monitor financially consolidated affiliates. Moreover, exposures to a nonconsolidated affiliate may be captured as a separate counterparty (e.g., when the non-consolidated affiliate enters a new QFC with the covered FSI). As a consequence, modifying the coverage of affiliates in this manner addresses concerns raised by commenters regarding burden. The definition of ‘‘covered QFC’’ is intended to limit the restrictions of the final rule to those financial transactions whose disorderly unwind has substantial potential to frustrate the orderly resolution of a GSIB, as discussed above. By adopting the DoddFrank Act’s definition of QFC, with the modifications described above, the final rule generally extends stay-and-transfer protections to the same types of transactions as Title II of the DoddFrank Act. In this way, the final rule enhances the prospects for an orderly resolution in bankruptcy and under the U.S. Special Resolution Regimes. Exclusion of cleared QFCs. The proposal excluded from the definition of ‘‘covered QFC’’ all QFCs that are cleared through a central counterparty.92 Commenters generally expressed support for this exclusion but some commenters requested that the agencies broaden this exclusion in the final rule. In particular, a number of commenters urged the agencies to exclude the ‘‘client-facing leg’’ of a cleared swap where a clearing member faces a CCP on one leg of the transaction and faces the client on an otherwise identical offsetting transaction.93 One commenter 90 See final rule § 382.2(c). final rule § 382.1. 92 See proposed rule § 382.7(a). 93 Commenters argued that in the European-style principal-to-principal clearing model, the clearing member faces the CCP on one swap (the ‘‘CCPfacing leg’’), and the clearing member, frequently a GSIB, faces the client on an otherwise identical, offsetting swap (the ‘‘client-facing leg’’). Under the proposed rule, only the CCP-facing leg of the transaction was excluded even though the clientfacing leg relates to the mechanics of clearing and is only entered into by the clearing member to effectuate the cleared transaction. Commenters argued that the proposed rule thus treated two pieces of the same transaction differently, which could result in an imbalance in insolvency or resolution and that the possibility of such an imbalance for the clearing member could expose the clearing member to unnecessary and undesired market risk. Commenters urged the agencies to adopt the same approach taken under Section 2 of the Universal Protocol, which allows the clientfacing leg of the cleared swap with the clearing 91 See E:\FR\FM\30OCR2.SGM Continued 30OCR2 50240 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 requested the agencies confirm its understanding that ‘‘FCM agreements,’’ which the commenter defined as futures and cleared swaps agreements with a futures commission merchant, are excluded because FCM agreements ‘‘are only QFCs to the extent that they relate to futures and swaps and, since futures and cleared swaps are excluded, the FCM Agreements are also excluded.’’ 94 The commenter requested, in the alternative, that the final rule expressly exclude such agreements. A few commenters requested that the FDIC modify the definition of ‘‘central counterparty,’’ which was defined to mean ‘‘a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating trades’’ in the proposal.95 These commenters argued that a CCP does far more than ‘‘facilitate’’ or ‘‘guarantee’’ trades and that a CCP ‘‘interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.’’ 96 As an alternative definition of CCP, these commenters suggested the final rule should define central counterparty to mean: ‘‘an entity (for example, a clearinghouse or similar facility, system, or organization) that, with respect to an agreement, contract, or transaction: (i) Enables each party to the agreement, contract, or transaction to substitute, through novation or otherwise, the member that is a covered entity, covered bank or covered FSI to be closed out substantially contemporaneously with the CCP-facing leg in the event the CCP were to take action to close out the CCP-facing leg. Some commenters requested clarification that transactions between a covered entity, covered bank, or covered FSI client and its clearing member (as opposed to transactions where the covered entity, covered bank, or covered FSI is the clearing member) would be subject to the rule’s requirements, since this would be consistent with the Universal Protocol. As explained in this section, the exemption in the final rule regarding CCPs does not depend on whether the covered entity, covered bank, or covered FSI is a clearing member or a client. A covered QFC—generally a QFC to which a covered entity, covered bank, or covered FSI is a party—is exempted from the requirements of the final rule if a CCP is also a party. 94 Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from James M. Cain, Sutherland Asbill & Brennan LLP, writing on behalf of the eleven Federal Home Loan Banks, at 2 (Dec. 12, 2016). 95 12 CFR 324.2. 96 Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from Walt L. Lukken, President and CEO, Futures Industry Association, at 8–9 (Nov. 1, 2016) (citing Principles of Financial Market Infrastructures (Apr. 2012), published by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions, at 9). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 credit of the CCP for the credit of the parties; and (ii) arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, or transactions executed by participants in the CCP.’’ 97 Commenters also urged the FDIC to exclude from the requirements of the final rule all QFCs that are cleared, processed, or settled through the facilities of an FMU as defined in section 803(6) of the Dodd-Frank Act 98 or that are entered into subject to the rules of an FMU.99 For example, commenters argued that QFCs with FMUs such as the provision of an extension of credit by a central securities depositary (CSD) to a GSIB entity that is a member of the CSD in connection with the settlement of securities transactions, should be excluded from the requirements of the final rule. Commenters contended that, similar to CCPs, the relationship between a covered FSI and FMU is governed by the rules of the FMU and that there are no market alternatives to continuing to transact with FMUs. Commenters argued that FMUs generally should be excluded for the same reasons as CCPs and that a broader exemption to cover FMUs would serve to mitigate the systemic risk of a GSIB in distress, an underlying objective of the rule’s requirements. Commenters contended that such an exclusion would be consistent with the treatment of FMUs under U.K. regulations and German law. Some commenters also requested that related or underlying agreements to CCP-cleared QFCs and QFCs entered into with other FMUs also be excluded, since such agreements ‘‘form an integrated whole with [those] QFCs’’ and such an exemption would facilitate the continued expansion of the clearing and settlement framework and the benefits of such a framework.100 One commenter urged that the final rule should not in any manner restrict an 97 Id. at 9. U.S.C. 5462(6). In general, Title VIII of the Dodd-Frank Act defines ‘‘financial market utility’’ to mean any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person. Id. 99 As discussed above, one commenter who recommended an exclusion of securities market transactions that generally settle in the short term, do not impose ongoing or continuing obligations on either party after settlement, and do not typically include the default rights targeted by this rule, requested this treatment in the alternative. 100 Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from Larry E. Thompson, Vice Chairman and General Counsel, The Depository Trust & Clearing Corporation, at 6 (Dec. 12, 2016). 98 12 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 FMU’s ability to close out a defaulting clearing member’s portfolio, including potential liquidation of cleared contracts. The issues that the final rule is intended to address with respect to noncleared QFCs may also exist in the context of centrally cleared QFCs. However, clearing through a CCP provides unique benefits to the financial system while presenting unique issues related to the cancellation of cleared contracts. Accordingly, it is appropriate to exclude 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. The FDIC has not extended the exclusion for CCPs to the clientfacing leg of a cleared transaction because bilateral trades between a GSIB and a non-CCP counterparty are the types of transactions that the final rule intends to address and because nothing in the final rule would prohibit a covered FSI clearing member and a client from agreeing to terminate or novate a trade to balance the clearing member’s exposure. The final rule continues to define central counterparty as a counterparty that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating trades, which is a broad definition that should be familiar to market participants as it is used in the regulatory capital rules and does not sweep in entities that market participants would not normally recognize as clearing organizations.101 The final rule also makes clear that, if one or more FMUs are the only counterparties to a covered QFC, the covered FSI is not required to conform the covered QFC to the final rule.102 Therefore, an FMU’s default rights and transfer restrictions under the covered QFC are not affected by the final rule. However, this exclusion would not include a covered QFC with a non-FMU counterparty, even if the QFC is settled by an FMU or if the FMU is a party to such QFC, because the final rule is 101 See final rule § 382.1. See also 12 CFR 324.2. final rule § 382.7(a)(2). In response to commenters, the final rule uses the definition of FMU in Title VIII of the Dodd-Frank Act and may apply, for purposes of the final rule, to entities regardless of jurisdiction. The definition of FMU in the final rule includes a broader set of entities, in addition to CCPs. However, the definition in the final rule does not include depository institutions that are engaged in carrying out banking-related activities, including providing custodial services for tri-party repurchase agreements. The definition also explicitly excludes certain types of entities (e.g., registered futures associations, swap data repositories) and other types of entities that perform certain functions for or related to FMUs (e.g., futures commission merchants). 102 See E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations intended to address default rights of non-FMU parties. For example, if two covered FSIs engage in a bilateral QFC that is facilitated by an FMU and in the course of this facilitation each covered FSI maintains a QFC solely with the FMU then the final rule would not apply to each QFC between the FMU and each covered FSI but the requirements of the final rule would apply to the bilateral QFC between the two covered FSIs. This approach ensures that QFCs that are directly with FMUs are treated in a manner similar to transactions between covered FSIs and CCPs but also ensures that QFCs conducted by covered FSIs that are related to the direct QFC with the FMU remain subject to the final rule’s requirements. The final rule does not explicitly exclude futures and cleared swaps agreements with a futures commission merchant, as requested by a commenter. The nature and scope of the requested exclusion is unclear, and, therefore, it is unclear whether the exclusion would be necessary, on the one hand, or overbroad, on the other hand. However, the final rule makes a number of clarifications and exemptions that may help address the commenter’s concern regarding FCM agreements. QFCs with Central Banks and Sovereign Entities. The proposal included covered QFCs with sovereign entities and central banks, consistent with Title II of the Dodd-Frank Act and the FDI Act. Commenters urged the FDIC to exclude QFCs with central bank and sovereign counterparties from the final rule. Commenters argued that sovereign entities might not be willing to agree to limitations on their QFC default rights and noted that other countries’ measures such as those of the United Kingdom and Germany, consistent with their governing laws, exclude central banks and sovereign entities. Commenters contended that central banks and sovereign entities are sensitive to financial stability concerns and resolvability goals, thus reducing the concern that they would exercise default rights in a way that would undermine resolvability of a GSIB or financial stability. Commenters indicated it was unclear whether central banks or sovereign entities would be permitted under applicable statutes to enter into QFCs with limited default rights, but did not provide specific examples of such statutes.103 C. Definition of ‘‘Default Right’’ (Section 382.1 of the Final Rule) 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 nondefaulting 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.104 The phrase ‘‘default right’’ in the proposed rule was broadly defined to include these common rights as well as ‘‘any similar rights.’’ 105 Additionally, the definition included all such rights 103 These commenters argued that, to the extent central banks and sovereign entities are unable or unwilling to agree to limitations on their QFC default rights, application of the rule’s requirements to QFCs with these entities creates a significant disincentive for these entities to enter into QFCs with covered FSIs, resulting in the loss of valuable counterparties in a way that will hinder market liquidity and covered FSI risk management. 104 But see 12 U.S.C. 1821(e)(8)(G); 12 U.S.C. 5390(c)(8)(F). 105 See proposed rule § 382.1. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 Commenters further noted that these entities did not participate in the development of the Universal Protocol and that the Universal Protocol does not provide a viable mechanism for compliance with the final rule by these entities. The FDIC continues to believe that covering QFCs with sovereigns and central banks under the final rule is an important requirement and has not modified the final rule to address the requests made by commenters. Excluding QFCs with sovereigns and central banks would be inconsistent with Title II of the Dodd-Frank Act and the FDI Act. Moreover, the mass termination of such QFCs has the potential to undermine the resolution of a GSIB and the financial stability of the United States. The final rule provides covered FSIs two years to conform covered QFCs with central banks and sovereigns (as well as certain other counterparties, as discussed below). This additional time should provide covered FSIs sufficient time to develop separate conformance mechanisms for sovereigns and central banks, if necessary. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 50241 regardless of source, including rights existing under contract, statute, or common law. However, the proposed definition of default right excluded 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 was excluded from the definition of ‘‘default right.’’ 106 Second, contractual margin requirements that arise solely from the change in the value of the collateral or the amount of an economic exposure were also excluded from the definition.107 The reason for these exclusions was to leave such rights unaffected by the proposed rule. The proposal’s preamble explained that such exclusions were appropriate because the proposal was intended to improve resolvability by addressing default rights that could disrupt an orderly resolution, not to interrupt the parties’ business-as-usual interactions under a QFC.108 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 FSI could be similar to the impact of the liquidation and acceleration rights discussed above. Therefore, the proposed definition of ‘‘default right’’ included such rights (with the exception discussed in the previous paragraph for margin requirements based solely on the value of collateral or the amount of an economic exposure).109 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, were excluded from the definition of ‘‘default right’’ under the proposal for purposes of the proposed rule’s restrictions on cross-default rights.110 This exclusion was 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 FSI, while leaving other default rights unrestricted.111 106 See proposed rule § 382.1. id. These rights are nonetheless subject to the stay provisions of the FDIA and Title II. 108 See 81 FR 74333. 109 See id. 110 See proposed rule §§ 382.1, 382.4. 111 The definition of ‘‘default right’’ parallels the definition contained in the ISDA Protocol. 107 See E:\FR\FM\30OCR2.SGM Continued 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50242 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations Commenters expressed support for a number of aspects of the definition of default rights. For example, a number of commenters supported the proposed exclusion from the definition of ‘‘default right’’ of contractual rights to terminate without the need to show cause, noting that such rights exist for a variety of reasons and that reliance on these rights is unlikely to result in a fire sale of assets during a GSIB resolution. At least one commenter requested that this exclusion be expanded to include force majeure events. Commenters also expressed support for the exclusion for what commenters referred to as ‘‘business-as-usual’’ payments associated with a QFC. However, these commenters requested clarification that certain ‘‘business-as-usual’’ actions would not be included in the definition of default right, such as payment netting, posting and return of collateral, procedures for the substitution of collateral and modification to the terms of the QFC, and also requested clarification that the definition of ‘‘default right’’ would not include offsetting transactions to third parties by the non-defaulting counterparty. One commenter to the FRB and the OCC’s proposal urged that if the FRB’s and OCC’s goal is to provide that a party cannot enforce a provision that requires more margin because of a credit downgrade but may demand more margin for market price changes, the rule should state so explicitly. Another commenter expressed concern that the definition of default right in the proposal would permit a defaulting covered FSI to demand collateral from its QFC counterparty as margin due to a market price change, but would not allow the non-covered FSI to demand collateral from the covered FSI. The final rule retains the same definition of ‘‘default right’’ as that of the proposal. The FDIC believes that the definition of default right is sufficiently clear and that additional modifications are not needed to address the concerns raised by commenters. The final rule does not adopt a particular exclusion for force majeure events as requested by certain commenters as it is not clear without reference to particular contractual provisions what this term would encompass. Moreover, it should be clear that events typically considered to be captured by force majeure clauses (e.g., natural disasters) would not be However, certain rights not included as such ‘‘default rights’’ are nonetheless subject to the stay and other provisions of the FDI Act and the DoddFrank Act. The final 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. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 related, directly or indirectly, to the resolution of an affiliate.112 ‘‘Business as usual’’ rights regarding changes in collateral or margin would not be included within the definition of default right to the extent that the right or operation of a contractual provision arises solely from either a change in the value of collateral or margin or a change in the amount of an economic exposure.113 In response to commenters’ requests for clarification, this exception includes changes in margin due to changes in market price, but does not include changes due to counterparty credit risk (e.g., credit rating downgrades). Therefore, the right of either party to a covered QFC to require margin due to changes in market price would be unaffected by the definition of default right. Moreover, default rights that are exercised before a covered FSI or its affiliate enter resolution and that would not be affected by the stay-andtransfer provisions of the U.S. Special Resolution Regimes also would not be affected. Regarding transactions with third parties, the final rule, like the proposal, does not require covered FSIs to address default rights in QFCs solely between parties that are not covered FSIs (e.g., off-setting transactions to third parties by the non-GSIB counterparty, to the extent none are covered FSIs). D. Required Contractual Provisions Related to the U.S. Special Resolution Regimes (Section 382.3 of the Proposed Rule) The proposed rule generally would have required a covered QFC 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 FSI 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 FSI 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.114 The final rule contains these same provisions.115 A number of commenters noted that the wording of these requirements in 112 See final rule § 382.4(b). as noted previously, such rights are subject to the provisions of the FDI Act and Title II. 114 See proposed rule § 382.3. 115 See final rule § 382.3(b). 113 However, PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 proposed § 382.3(b) was confusing and could be read to be inconsistent with the intent of the section. In response to comments, the final rule makes clearer that the substantive restrictions apply only in the event the covered FSI (or, in the case of the requirement regarding default rights, its affiliate) becomes subject to a proceeding under a U.S. Special Resolution Regime.116 A number of commenters argued that QFCs should be exempt from the requirements of proposed § 382.3 if the QFC is governed by U.S. law. An example of such a QFC provided by commenters includes the standard form repurchase and securities lending agreement published by the Securities Industry and Financial Markets Association. These commenters argued that counterparties to such agreements are already required to observe the stayand-transfer provisions of the FDI Act and Title II of the Dodd-Frank Act, as mandatory provisions of U.S. Federal law, and that requiring an amendment of these types of QFCs to include the express provisions required under § 382.3 would be redundant and would not provide any material resolution benefit, but would significantly increase the remediation burden on covered FSIs. Other commenters proposed a threeprong test of ‘‘nexus with the United States’’ for purposes of recognizing an exclusion from the express acknowledgment of the requirements of proposed § 382.3. In particular, these commenters argued that the presence of two factors, in addition to the contract being governed by U.S. law, would provide greater certainty that courts would apply the stay-and-transfer provisions of the FDI Act and Title II of the Dodd-Frank Act: (1) If a contract is entered into between entities organized in the United States; and (2) to the extent the GSIB’s obligations under the QFC are collateralized, if the collateral is held with a U.S. custodian or depository pursuant to an account agreement governed by U.S. law.117 Other commenters contended that only whether the contract is under U.S. law, and not the location of the counterparty or the collateral, is relevant to the analysis of whether the FDI Act and the Dodd-Frank Act would govern the 116 See final rule § 382.3. The proposal defined the term ‘‘U.S. special resolution regimes’’ to mean the FDI Act and Title II of the Dodd-Frank Act, along with regulations issued under those statutes. 12 U.S.C. 1811–1835a; 12 U.S.C. 5381–5394. See final rule § 382.1. 117 These commenters stated that it would be unlikely that any court interpreting a QFC governed by U.S. law could have a reasonable basis for disregarding the stay-and-transfer provisions of the FDI Act or Title II of the Dodd-Frank Act. E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 contract. Commenters also requested that if the first additional factor (i.e., that the QFC be entered into between entities organized in the United States) were to be included within the exception, it should be broadened to include counterparties that have principal places of business or that are otherwise domiciled in the United States. The requirements of the final rule (in conjunction with those of the FRB FR and the expected OCC FR) seek to provide certainty that all covered QFCs would be treated the same way in the context of a resolution of a covered entity, covered bank or covered FSI 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 general, the requirement that the effect of the statutory stay-and-transfer provisions be incorporated directly into the QFC contractually helps to 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.118 Further, the knowledge that a court in a foreign jurisdiction would reject the purported exercise of default rights in violation of the required contractual provisions should deter covered FSIs’ counterparties from attempting to exercise such rights. In response to comments, the final rule exempts from the requirements of § 382.3 a covered QFC that meets two requirements.119 First, the covered QFC must state that it is governed by the laws of the United States or a State of the United States.120 It has long been 118 See generally Financial Stability Board, ‘‘Principles for Cross-border Effectiveness of Resolution Actions’’ (Nov. 3, 2015), available at https://www.fsb.org/wp-content/uploads/Principlesfor-Cross-border-Effectiveness-of-ResolutionActions.pdf. 119 See final rule § 382.3(a). 120 However, a contract that explicitly provides that one or both of the U.S. Special Resolution Regimes, including a broader set of laws that includes a U.S. special resolution regime, is excluded from the laws governing the QFC would not meet this exemption under the final rule. For example, a covered QFC would not meet this exemption if the contract stated that it was governed by the laws of the State of New York but also stated that it was not governed by U.S. Federal law. In contrast, a contract that stated that it was governed by the laws of the State of New York but opted out of a specific non-mandatory Federal law VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 clear that the laws of the United States and the laws of a State of the United States both include U.S. Federal law, such as the U.S. Special Resolution Regimes.121 Therefore, this requirement ensures that contracts that meet this exemption also contain language that helps ensure that foreign courts will enforce the stay-and-transfer provisions of the U.S. Special Resolution Regimes. Second, the counterparty to the covered FSI must be organized under the laws of the United States or a State,122 have its principal place of business 123 located in the United States, or be a U.S. branch or U.S. agency.124 Similarly, a counterparty that is an individual must be domiciled in the United States.125 This requirement helps ensure that the FDIC will be able to quickly and easily enforce the stay-and-transfer provisions of the U.S. Special Resolution Regimes.126 This exemption is expected to significantly reduce the burden associated with complying with the final rule while continuing to provide assurance that the stay-and-transfer provisions of the U.S. Special Resolution Regimes may be enforced. This section of the final rule is consistent with efforts by regulators in other jurisdictions to address similar risks by requiring that financial firms within their jurisdictions ensure that the effect of the similar provisions under these foreign jurisdictions’ respective special resolution regimes would be enforced by courts in other jurisdictions, including the United States. For example, the U.K.’s Prudential Regulation Authority (PRA) recently required certain financial firms (e.g., the Federal Arbitration Act) would meet this exemption. Cf. Volt Info. Scis. v. Bd. Of Trs., 489 U.S. 468 (1989). 121 Although many QFCs only explicitly state that the contract is governed by the laws of a specific State of the United States, it has been made clear on numerous occasions that the laws of each State include Federal law. See e.g., Hauenstain v. Lynham, 100 U.S. 483, 490 (1979) (stating that Federal law is ‘‘as much a part of the law of every State as its own local laws and the Constitution’’); Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 157 (1982) (same); Testa v. Katt, 330 U.S. 386, 393 (1947) (‘‘For the policy of the Federal Act is the prevailing policy in every state.’’). 122 For purposes of this requirement of the exemption, ‘‘State’’ means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands. 123 See Hertz Corp. v. Friend, 559 U.S. 77(2010) (describing the appropriate test for principal place of business). 124 See final rule § 382.3(a)(1)(ii). 125 See id. 126 See e.g., Daimler AG v. Bauman, 134 S. Ct. 746 (2014); Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011); Hertz Corp. v. Friend, 559 U.S. 77 (2010). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 50243 to ensure that their counterparties to newly created obligations agree to be subject to stays on early termination that are similar to those that would apply upon a U.K. firm’s entry into resolution if the financial arrangements were governed by U.K. law.127 Similarly, the German parliament passed a law in November 2015 requiring German financial institutions to have provisions in financial contracts that are subject to the law of a country outside of the European Union that acknowledge the provisions regarding the temporary suspension of termination rights and accept the exercise of the powers regarding such temporary suspension under the German special resolution regime.128 Additionally, the Swiss Federal Council requires that banks ‘‘ensure at both the individual institution and group level that new agreements or amendments to existing agreements which are subject to foreign law or envisage a foreign jurisdiction are agreed only if the counterparty recognises a postponement of the termination of agreements in accordance with’’ the Swiss special resolution regime.129 Japan’s Financial Services Agency also revised its supervisory guidelines for major banks to require those banks to ensure that the effect of the statutory stay decision and statutory special creditor protections under 127 See PRA Rulebook: CRR Firms and NonAuthorised Persons: Stay in Resolution Instrument 2015 (Nov. 12, 2015), available at https:// www.bankofengland.co.uk/pra/Documents/ publications/ps/2015/ps2515app1.pdf; see also Bank of England, Prudential Regulation Authority, ‘‘Contractual stays in financial contracts governed by third-country law’’ (PS25/15) (Nov. 2015), available at https://www.bankofengland.co.uk/pra/ Documents/publications/ps/2015/ps2515.pdf. These PRA rules apply to PRA-authorized banks, building societies, PRA-designated investment firms, and their qualifying parent undertakings, including UK financial holding companies and U.K. mixed financial holding companies. 128 See Gesetz zur Sanierung und Abwicklung von Instituten und Finanzgruppen, Sanierungs-und Abwicklungsgesetz [SAG] [German Act on the Reorganisation and Liquidation of Credit Institutions], Dec. 10, 2014, § 60a, https:// www.gesetze-im-internet.de/bundesrecht/sag/ gesamt.pdf, as amended by Gesetz zur Anpassung des nationalen Bankenabwicklungsrechts an den Einheitlichen Abwicklungsmechanismus und die europaeischen Vorgaben Zur Bankenabgabe, Nov. 2, 2015, Artikel 1(17). 129 See Verordnung uber die ¨ Finanzmarktinfrastrukturen und das Marktverhalten im Effekten- und Derivatehandel [FinfraV] [Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading] Nov. 25, 2015, amending Bankenverordnung vom 30. April 2014 [BankV] [Banking Ordinance of 30 April 2014] Apr. 30, 2014, SR 952.02, art. 12 paragraph 2bis, translation at https://www.news.admin.ch/NSBSubscriber/ message/attachments/42659.pdf; see also ¨ ¨ Erlauterungsbericht zur Verordnung uber die Finanzmarktinfrastrukturen und das Marktverhalten im Effekten- und Derivatehandel (Nov. 25, 2015) (providing commentary). E:\FR\FM\30OCR2.SGM 30OCR2 50244 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations Japanese resolution regimes extends to contracts governed by foreign laws.130 Commenters also argued that it would be more appropriate for Congress to act to obtain cross-border recognition of U.S. Special Resolution Regimes, rather than for the FDIC to do so through this final rule. The FDIC believes it is appropriate to adopt this final rule in order to ensure the safety and soundness of covered FSIs and, to that end, to improve the resolvability and resilience of U.S. GSIBs and foreign GSIB parents of covered FSIs. Because of the current risk that the stay-andtransfer provisions of U.S. Special Resolution Regimes may not be recognized by courts of other jurisdictions, § 382.3 of the final rule requires contractual recognition to help ensure that courts in foreign jurisdictions will recognize these provisions. This requirement would advance the goal of the final rule of removing QFCrelated 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. Congress recognized the importance of such restrictions when it enacted the stay-and-transfer provisions of the U.S. Special Resolution Regimes. As demonstrated by the 2007–2009 financial crisis, the modern financial system is global in scope, and covered FSIs and their affiliates are party to large volumes of QFCs with connections to foreign jurisdictions. The stay-andtransfer provisions of the U.S. Special Resolution Regimes would not achieve their purpose of facilitating orderly resolution in the context of the failure of a GSIB with large volumes of QFCs if such QFCs could escape the effect of those provisions. To remove doubt about the scope of coverage of these provisions, the requirements of § 382.3 of the final rule would ensure that the stay-and-transfer provisions apply as a matter of contract to all non-exempted covered QFCs, whatever the transaction. sradovich on DSK3GMQ082PROD with RULES2 E. Prohibited Cross-Default Rights (Section 382.4 of the Final Rule) Definitions. Section 382.4 of the final rule, like the proposal, applies in the context of insolvency proceedings 131 130 See section III–11 of Comprehensive Guidelines for Supervision of Major Banks, etc., available at https://www.fsa.go.jp/common/law/ guide/city.pdf. 131 See proposed rule § 382.4 (noting that section does not apply to proceedings under Title II of the Dodd-Frank Act). As noted in final rule § 382.4, the final rule 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 VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 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 of QFCs are themselves ‘‘qualified financial contracts’’ under the Dodd-Frank Act’s definition of that term (which this final rule adopts), the final rule includes the following additional definitions in order to facilitate a precise description of the relationships to which it would apply. These additional definitions are the same as under the proposal as no comments were received on these definitions. First, the final rule distinguishes between a credit enhancement and a ‘‘direct QFC,’’ defined as any QFC that is not a credit enhancement.132 The final rule 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.133 In addition, the final rule defines ‘‘affiliate credit enhancement’’ to mean ‘‘a credit enhancement that is provided by an affiliate of a 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.134 Moreover, the final rule 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 affiliate of the covered entity, covered bank, or covered FSI that provides the covered affiliate credit enhancement.135 Finally, the final rule defines the term ‘‘supported party’’ to mean any party that is the beneficiary of the covered affiliate support provider’s obligations under 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).136 General prohibitions. The final rule, like the proposal, prohibits 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, subject to receiver to enforce provisions of the FDI Act or Title II of the Dodd-Frank Act that limit the enforceability of certain contractual provisions. 132 See final rule § 382.4(c)(2). 133 See final rule § 382.4(c)(1). 134 See final rule § 382.4(c)(3). 135 See final rule §§ 382.4(e)(2) and (3). 136 See final rule § 382.4(e)(4). PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 the exceptions discussed below.137 The final rule also generally prohibits a covered FSI from being party to a covered QFC that would prohibit the transfer of any covered affiliate 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.138 One commenter expressed strong support for these provisions.139 Another commenter expressed support for this provision as currently limited in scope under the proposal to prohibited crossdefault rights and requested that the scope not be expanded. The FDIC’s final rule retains the same scope as the proposal. A number of commenters representing counterparties to covered FSIs objected to § 382.4 of the proposal and requested the elimination of this provision. These commenters expressed concern about limitations on counterparties’ exercise of default rights during insolvency proceedings and argued that rights should not be taken away from 137 See final rule § 382.4(b)(1). A few commenters requested that the FDIC clarify that covered QFCs that do not contain the cross-default rights or transfer restrictions on credit enhancement that are prohibited by § 382.4 would not be required to be remediated. This reading of § 382.4 of the final rule is correct. In addition, § 382.4(a) of the final rule provides the requested clarity. 138 See final rule § 382.4(b)(2). This prohibition is 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 Universal Protocol, which was added to address concerns expressed by asset managers during the drafting of the 2014 Protocol. One commenter requested that the exception be broadened to include transfers that would result in the supported party being unable, without further action, to satisfy the requirements of any law applicable to the supported party. As an example of a type of transfer that the commenter intended to be included within the broadened exception, the commenter stated that the supported party would be able to prevent the transfer if it would result in less favorable tax treatment. The exception would seem to also include filing requirements that may arise as a result of transfer or other requirements that could be satisfied with minimal ‘‘action’’ by, or cost to, the supported party. More generally, the scope of the laws that supported parties deem themselves to satisfy and the method of such satisfaction is unclear and potentially very broad. The final rule retains the exception as proposed. The requested exception would add uncertainty as to how the contractual provisions relate to transfers made during the stay period and potentially unduly limit the restrictions on transfer prohibitions. 139 This commenter also expressed support for parallel Congressional amendment of the U.S. Bankruptcy Code. E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 contracting parties other than where limitation of such rights is necessary for public policy reasons and the resolution process is controlled by a regulatory authority with particular expertise in the resolution of the type of entity subject to the proceedings. Certain commenters argued that eliminating cross-default termination rights undermines the ability of QFC counterparties to effectively manage and mitigate their exposure to market and credit risk to a GSIB and interferes with market forces. One commenter similarly argued that, unless the FDIC takes appropriate measures to strengthen the financial condition and creditworthiness of a failing GSIB during and after the temporary stay, the stay will only expose QFC counterparties to an additional 48 hours of credit risk exposure without achieving the orderly resolution goals of the rule. Another commenter argued that non-defaulting counterparties should not be prevented from filing proofs of claim or other pleadings in a bankruptcy case during the stay period, since bankruptcy deadlines might pass and leave the counterparty unable to collect the unsecured creditor dividend. Commenters contended that restrictions on cross-default rights may lead to procyclical behavior with asset managers moving funds away from covered entities, covered FSIs, or covered banks as soon as those entities show signs of distress, and perhaps even in normal situations, and would disadvantage nonGSIB parties (e.g., end users who rarely receive initial margin from GSIB counterparties and are less well protected against a GSIB default).140 Some commenters argued that if these rights must be restricted by law, Congress should impose such restrictions and that the requirements of the proposed rule circumvented the legislative process by creating a de facto amendment to the U.S. Bankruptcy Code that forecloses countless QFC counterparties from exercising their rights of cross-default protection under section 362 of the U.S. Bankruptcy Code. Some of these commenters argued that parties cannot by contract alter the U.S. Bankruptcy Code’s provisions, such as the administrative priority of a claim in bankruptcy, and one 140 One commenter stated that, to the extent the final rule prevents an insurer from terminating QFC transactions upon the credit rating downgrade of a GSIB counterparty, the insurer may be in violation of State insurance laws that typically impose strict counterparty credit rating guidelines and limits. This commenter did not give any specific examples of such laws. Counterparties including insurance companies should evaluate and comply with all relevant applicable requirements. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 commenter suggested that non-covered FSI counterparties may challenge the legality of contractual stays on the exercise of default rights if a GSIB becomes distressed. Other commenters, however, argued that the provisions of the proposed rule were necessary to address systemic risks posed by the exemption for QFCs in the U.S. Bankruptcy Code. As an alternative to eliminating these requirements, these commenters expressed the view that if the FDIC moves forward with these provisions, the final rule should include at least those minimum creditor protections established by the Universal Protocol. Certain commenters also argued that this provision was overly broad in that it covered not only U.S. Federal resolution and insolvency proceedings but also State and foreign resolution and insolvency proceedings.141 Certain commenters also urged the FDIC to provide a limited exception to these restrictions, if retained in the final rule, to help ensure the continued functioning of physical commodities markets.142 141 Certain commenters also indicated that these provisions should only apply to U.S. Special Resolution Regimes, which provide certain protections for counterparties, or, at most, to U.S. Special Resolution Regimes, resolution under the Securities Investor Protection Act, and insolvency under Chapter 11 of the U.S. Bankruptcy Code. That commenter noted that liquidation and insolvency under Chapter 7 of the Bankruptcy Code do not seek to preserve the GSIB as a viable entity, which is an objective of the final rule. As discussed later, among the goals of the rule is the facilitation of the resolution of a GSIB outside of U.S. Special Resolution Regimes, including under the U.S. Bankruptcy Code. Therefore, the final rule applies these provisions in the same way as the proposal. In addition, the additional creditor protections for supported parties under the final rule permit contractual requirements that any transferee not be in bankruptcy proceedings and that the credit support provider not be in bankruptcy proceedings other than a Chapter 11 proceeding. See final rule § 382.4(f). 142 In particular, these commenters requested that, when a covered FSI defaults on any physical delivery obligation to any counterparty following the insolvency of an affiliate of a covered FSI, its counterparties with obligations to deliver or take delivery of physical commodities within a short time frame after the default should be able to immediately terminate all trades (both physical and financial) with the covered FSI. The final rule, like the proposal, allows covered QFCs to permit a counterparty to exercise its default rights under a covered QFC if the covered FSI not subject to Title II or FDI Act proceedings has failed to pay or perform its obligations under the covered QFC. See final rule § 382.4(d). The final rule, like the proposal, also allows covered QFCs to permit a counterparty to exercise its default rights under a covered QFC if the covered FSI has failed to pay or perform on other contracts between the same parties and the failure gives rise to a default right in the covered QFC. See id. These exceptions should help reduce credit risk and ensure the smooth operation of the physical commodities markets without permitting one failure to pay or perform by a covered FSI to allow a potentially PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 50245 Some commenters argued that the FDIC should eliminate the stay on default rights that are related ‘‘indirectly’’ to an affiliate of the direct party becoming subject to insolvency proceedings, claiming it is unclear what constitutes a right related ‘‘indirectly’’ to insolvency and noting that any default right exercised by a counterparty after an affiliate of that counterparty enters resolution could arguably be motivated by the affiliate’s entry into resolution. A primary purpose of these restrictions is to facilitate the orderly resolution of a GSIB outside of Title II of the Dodd-Frank Act, including under the U.S. Bankruptcy Code. As discussed above, the potential for mass exercises of QFC default rights is one reason why a GSIB’s failure could cause 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 a GSIB affiliate if an otherwise performing GSIB entity is subject to having its QFCs terminated or accelerated as a result of the default of its affiliate. 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. The stay-and-transfer provisions of Title II of the Dodd-Frank Act would address both direct default rights and cross-default rights. But, as explained above, no similar statutory provisions apply in a resolution under the U.S. Bankruptcy Code. This final rule attempts to address these obstacles to orderly resolution by extending large number of its counterparties that are not directly affected by the failure to exercise their default rights and thereby endanger the viability of the covered FSI. E:\FR\FM\30OCR2.SGM 30OCR2 50246 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 provisions similar to the stay-andtransfer provisions to any type of resolution of an affiliate of a covered FSI that is not an insured depository institution. Similarly, the final rule would facilitate a transfer of the GSIB parent’s interests in its subsidiaries, along with any credit enhancements it provides for those subsidiaries, to a solvent financial company by prohibiting covered 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.143 The final rule 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.144 Similarly, the final rule, along with the FRB and OCC final rules, 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 final rules would also facilitate the resolution of an IHC 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 final rules will help to 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 final rule is intended to enhance the potential for orderly resolution of a GSIB under the U.S. Bankruptcy Code, the FDI Act, or a similar resolution regime. The risks to an orderly resolution under the U.S. Bankruptcy Code include separate resolution insolvency proceedings, including proceedings in non-U.S. jurisdictions. Therefore, by staying default rights arising from affiliates entering into such 143 See final rule § 382.4(b). discussed above, the FDI Act limits 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. The final rule would facilitate orderly resolution under the FDI Act by filling that gap. See final rule § 382.4(b). 144 As VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 proceedings, the final rule will advance the Dodd-Frank Act’s goal of making orderly GSIB resolution workable under the Bankruptcy Code.145 Likewise, the final rule retains the prohibition against contractual provisions that permit the exercise of default rights that are indirectly related to the resolution of an affiliate. QFCs may include a number of default rights triggered by an event that is not the resolution of an affiliate but is caused by the resolution, such as a credit rating downgrade in response to the resolution. A primary purpose of the final rule is to prevent early terminations caused by the resolution of an affiliate. A regulation that specifies each type of early termination provision that should be stayed would be overinclusive or under-inclusive, and easy to evade. Similarly, a stay of default rights that are only directly related to the resolution of an affiliate could increase the likelihood of litigation to determine the relationship between the default right and the affiliate resolution was sufficient to be considered ‘‘directly’’ related. The final rule attempts to decrease such uncertainty and litigation risk by including default rights that are related (i.e., directly or indirectly) to the resolution of an affiliate. Moreover, the final rule does not affect parties’ direct default rights under the U.S. Bankruptcy Code. As explained above, the regulation does not prohibit a covered QFC from permitting the exercise of default rights against a nonbank covered FSI that has entered bankruptcy proceedings.146 Therefore, counterparties to a non-bank covered FSI in bankruptcy would be able to exercise their existing default rights to the full extent permitted under any applicable safe harbor to the automatic stay of the U.S. Bankruptcy Code. The final rule should also benefit the counterparties of a subsidiary of a failed GSIB by preventing the severe stress or disorderly failure of an otherwisesolvent 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 final rule seeks to 145 See 146 See PO 00000 12 U.S.C. 5365(d). final rule § 382.4(d)(1). Frm 00020 Fmt 4701 Sfmt 4700 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 should further protect the financial stability of the United States. General creditor protections. While the restrictions of the final rule are intended to facilitate orderly resolution, they may also diminish the ability of covered FSI’s QFC counterparties to include certain protections for themselves in covered QFCs, as noted by certain commenters. In order to reduce this effect, the final rule like the proposal includes several substantive exceptions to the restrictions.147 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 prohibitions would apply only to crossdefault rights (and not direct default rights), the final rule provides that a covered QFC may permit the exercise of default rights based on the direct party’s entry into a resolution proceeding.148 147 See final rule § 382.4(d). final rule § 382.4(d)(1). The proposal exempted from this creditor protection provision proceedings under a U.S. or foreign special resolution regime. As explained in the proposal, special resolution regimes typically stay direct default rights, but may not stay crossdefault 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 the Dodd-Frank Act’s OLA stays direct default rights and cross-defaults arising from a parent’s receivership, see 12 U.S.C. 5390(c)(10)(B) and 5390(c)(16). The proposed exemption of special resolution regimes from the creditor protection provisions was intended to help ensure that special resolution regimes that do not stay cross-defaults, such as the FDI Act, would not disrupt the orderly resolution of a GSIB under the U.S. Bankruptcy Code or other ordinary insolvency proceedings. One commenter requested the FDIC revise this provision to clarify that default rights based on a covered FSI or an affiliate entering resolution under the FDI Act or Title II of the Dodd-Frank Act are not prohibited but instead are merely subject to the terms of such regimes. The commenter requested the FDIC clarify that such default rights are permitted so long as they are subject to the provisions of the FDI Act or Title II of the DoddFrank Act as required under § 385.3. The final rule eliminates this proposed exemption for special resolution regimes because the rule separately addresses cross-defaults arising from the FDI Act and because foreign special resolution regimes, along with efforts in other jurisdictions to contractually recognize stays of default rights under those regimes, should reduce the risk that such a regime should pose to the orderly resolution of a GSIB under the U.S. Bankruptcy Code or other ordinary insolvency proceedings. 148 See E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 This provision helps to ensure that, if the direct party to a QFC were to enter bankruptcy, its QFC counterparties could exercise any relevant direct default rights. Thus, direct QFC counterparties of a covered FSI’s subsidiaries 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 U.S. Bankruptcy Code’s safe harbor provisions. The final rule also allows, 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.149 Moreover, the final rule allows 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.150 This exception takes appropriate account of the interdependence that exists among the contracts in effect between the same counterparties. As explained in the proposal, the exceptions in the final rule for the creditor protections described above are intended to help ensure that the final rule 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 FSI’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 FSI’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. These exceptions also help to ensure that counterparties of a covered FSI’s 149 See final rule § 382.4(d)(1) through (3). These provisions should respond to comments requesting that the final rule confirm the ability of a covered FSI’s counterparty to exercise default rights arising from the failure of a direct party to satisfy a payment or delivery obligation during the stay period. But see final rule § 382.3(c). 150 See final rule § 382.4(d)(2). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 non-IDI subsidiaries or affiliates would not risk the delay and expense associated with becoming involved in a bankruptcy proceeding, since, unlike a typical creditor of an entity that enters bankruptcy, the QFC counterparty would retain its ability under the U.S. Bankruptcy Code’s safe harbors to exercise direct default rights. This should further reduce the counterparty’s incentive to run. Reducing incentives to run in the period leading up to resolution promotes orderly resolution, since a QFC creditor run (such as a mass withdrawal of repo funding) could lead to a disorderly resolution and pose a threat to financial stability. Additional creditor protections for supported QFCs. The final rule, like the proposal, allows the inclusion of 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.151 The final rule allows 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,152 the covered QFC and the credit enhancement are permitted to allow the exercise of default rights under the circumstances discussed below after the expiration of a stay period.153 Under the final rule, the applicable stay period would begin at the commencement of the proceeding and would end at the later of 5 p.m. (eastern time) on the next business day and 48 hours after the entry into resolution.154 This portion of the final rule is similar to the stay treatment provided in a resolution under Title II of the Dodd-Frank Act or the FDI Act.155 Under the final rule, contractual provisions may permit the exercise of default rights at the end of the stay period if the covered affiliate credit 151 See final rule § 382.4(f). that the exception in § 382.4(f) of the final 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, covered FSI, or covered bank under the proposal. See final rule § 382.4(e)(2) (defining ‘‘covered affiliate credit enhancement’’). 153 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). 154 See final rule § 382.4(g)(1). 155 See 12 U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i), 5390(c)(16)(A). While the final rule’s 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. 152 Note PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 50247 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 U.S. Bankruptcy Code or the FDI Act.156 QFCs may also permit the exercise of default rights 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.157 QFCs may also permit the exercise of default rights 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 covered affiliate credit enhancement (b) all other covered affiliate credit enhancements provided by the credit support provider on any other covered 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.158 Such creditor protections are 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 of the Dodd-Frank Act and the FDI Act also contain provisions to prevent cherry picking. Finally, if the covered affiliate credit enhancement is transferred to a transferee, the QFC may permit nondefaulting counterparty to exercise default rights at the end of the stay period unless either (a) all of the covered affiliate 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 covered affiliate support provider’s assets (or the net proceeds from the sale of those assets) will be transferred or sold to the 156 See final rule § 382.4(f)(1). Chapter 11 (11 U.S.C. 1101–1174) is the portion of the U.S. 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. 157 See final rule § 382.4(f)(2). 158 See final rule § 382.4(f)(3). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50248 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations transferee in a timely manner.159 These conditions will help to assure the supported party that the transferee would be providing substantively the same credit enhancement as the covered affiliate support provider.160 Title II of the Dodd-Frank Act also requires that certain conditions be met with respect to affiliate credit enhancements.161 Commenters generally expressed strong support for these exclusions but also requested that these exclusions be broadened in a number of ways. Certain commenters urged the FDIC to broaden the exclusions to permit, after the trigger of the stay-and-transfer provisions, the exercise of default rights by a counterparty against a direct counterparty or covered support provider with respect to any default right under the QFC (other than a default right explicitly based on the failure of an affiliate) and not just with respect to defaults resulting from payment or delivery failure or the direct party becoming subject to certain resolution or insolvency proceedings (e.g., failure to maintain a license or certain capital level, materially breaching its representations under the QFC). Certain commenters contended that at a minimum the final rule should provide for creditor protections that meet the minimum standards set forth by the Universal Protocol. One commenter specifically identified three creditor protections found in the Universal Protocol that it argued the FDIC should include in § 382.4: (1) Priority rights in a bankruptcy proceeding against the transferee or original credit support provider (if the QFC providing credit support was not transferred); (2) a right to submit claims in the insolvency proceeding of the insolvent credit support provider if the transferee becomes insolvent; and (3) the ability to declare a default and close out of both the original QFC with the direct counterparty as well as QFCs with the transferee if the transferee defaults under the transferred QFC or under any other QFC with the nondefaulting counterparty, subject to the contractual terms and consistent with applicable law. Another commenter argued for creditor protections not found in the Universal Protocol, including that the transferee be required to be a U.S. person and be registered with and licensed by the primary regulator of either the direct counterparty or transferor entity. Certain commenters also asked for the right to exercise direct default rights and general 159 See final rule § 382.4(f)(4). 12 U.S.C. 5390(c)(16)(A). 161 See 12 U.S.C. 5390(c)(16)(A). creditor protections even if the exercise occurs during the stay period. Commenters also asked the FDIC to delete the phrases ‘‘or after’’ in § 382.4(b) regarding the restrictions on transfers of affiliate credit enhancements, as neither the FRB’s nor the OCC’s rules have that phrase. These commenters asserted that, when coupled with the definition of ‘‘transferee’’ in § 382.4(g)(3), § 382.4(b) could be read as overriding transfers indefinitely, even with respect to subsequent transfers following the initial transfer to a bridge financial company or a third party transferee. The final rule does not include the additional creditor protections of the Universal Protocol or other creditor protections requested by commenters. As explained in the proposal and below, the additional creditor protections of the Universal Protocol do not appear to materially diminish the prospects for an orderly resolution of a GSIB because the Universal Protocol includes a number of desirable features that the final rule otherwise lacks.162 Providing additional circumstances under which default rights may be exercised during and immediately after the stay period, in the absence of any counterbalancing benefits to resolution, would increase the risk of a disorderly resolution of a GSIB in contravention of the purposes of the rule. Additionally, in response to commenters, the definition of ‘‘transferee’’ in § 382.4(g)(3) of the final rule has been changed to define a ‘‘transferee’’ as a person to whom a covered affiliate credit enhancement is transferred upon the covered affiliate credit support provider entering a receivership, insolvency, liquidation, resolution, or similar proceeding or thereafter as part of the resolution, restructuring or reorganization involving the covered affiliate support provider. The provisions of the FRB final rule are consistent with this final rule. One commenter also argued that transfer should be limited to a bridge bank under the FDI Act or a bridge financial company under Title II of the Dodd-Frank Act to ensure that the transferee is more likely to be able to satisfy the obligations of a credit support provider and is subject to regulatory oversight. Section 382.4 of the final rule does not apply in situations where the covered affiliate support provider is in Title II of the Dodd-Frank Act. Furthermore, this section is limited in its application to the FDI Act as well, limiting the 160 See VerDate Sep<11>2014 18:25 Oct 27, 2017 162 See Jkt 244001 PO 00000 81 FR 74326 (Oct. 26, 2016). Frm 00022 Fmt 4701 Sfmt 4700 exercise of cross-default rights as contemplated by § 382.4(h) of the final rule. Therefore, the FDIC is not adopting the proposed additional creditor protection because it would defeat in large part the purpose of § 382.4 and potentially create confusion regarding the requirements and purposes of §§ 382.3 and 382.4 of the final rule.163 A few commenters expressed concern that the additional creditor protections applied only to QFCs supported by a credit enhancement provided by a ‘‘covered affiliate support provider’’ (i.e., an affiliate that is a covered entity, covered bank, or covered FSI) and noted that foreign GSIBs often will have their QFCs supported by a non-U.S. affiliate that is not a covered entity, covered bank, or covered FSI. Such non-U.S. affiliate credit supporter providers would not be able to rely on the additional creditor protections for supported QFCs. Such credit enhancements are excluded in order to help ensure that the resolution of a nonU.S. entity would not negatively affect the financial stability of the United States.164 One commenter requested clarification that the creditors of a nonU.S. credit support provider are permitted to exercise any and all rights against that non-U.S. credit support provider that they could exercise under the non-U.S. resolution regime applicable to that non-U.S. credit support provider. The final rule, like the proposal, is limited to QFCs to which a covered FSI is a party. Section 382.4 of the final rule generally prohibits QFCs to which a covered FSI is a party from allowing the exercise of cross-default rights of the covered QFC, regardless of whether the affiliate entering resolution and/or the credit support provider is organized or operates in the United States. Another commenter expressed concern that the proposed § 382.4(g)(3) (§ 382.4(f)(3) of the final rule) would provide a right without a remedy because if the covered affiliate credit 163 To the extent the commenter’s reference to ‘‘bridge financial company’’ was not only to a bridge financial company under Title II of the Dodd-Frank Act, the requested amendment would not appear to provide a meaningful reduction in credit risk to counterparties compared to the creditor protections permitted under § 382.84 of the final rule and those available under the Universal Protocol and U.S. Protocol, discussed below. 164 See generally 81 FR 74326, 74335 (Oct. 26, 2016) (‘‘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.’’). See also final rule § 382.4(f). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations support provider is no longer obligated and no transferee has taken on the obligation, the non-covered FSI counterparty may have only a breach of contract claim against an entity that has transferred all of its assets to a third party. The creditor protections of § 382.4, if triggered, permit contractual provisions allowing the exercise of existing default rights against the direct party to the covered QFC, as well as any existing rights against the credit enhancement provider. Another commenter suggested revising § 382.4(g) (§ 382.4(f) of the final rule) to clarify that, for a covered direct QFC 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 after the stay period that is related, directly or indirectly, to the covered affiliate support provider entering into resolution proceedings. This reading is incorrect and revising the rule as requested would largely defeat the purpose of § 382.4 of the final rule by merely delaying QFC termination en masse. Some commenters also requested specific provisions related to physical commodity contracts, including a provision that would allow regulators to override a stay if necessary to avoid disruption of the supply or prevent exacerbation of price movements in a commodity or a provision that would allow the exercise of default rights of counterparties delivering or taking delivery of physical commodities if a GSIB entity defaults on any physical delivery obligation to any counterparty. As noted above, QFCs may permit a counterparty to exercise its default rights immediately, even during the stay period, if the direct party fails to pay or perform on the covered QFC with the counterparty (or another contract between the same parties that gives rise to a default under the covered QFC). Creditor protections related to FDI Act proceedings. 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 165 only under the following circumstances: (a) After the FDI Act stay period,166 if the credit enhancement is 165 As 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. 166 Under the FDI Act, the relevant stay period runs until 5 p.m. (eastern time) on the business day following the appointment of the FDIC as receiver. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 not transferred under the relevant provisions of the FDI Act 167 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.168 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.169 No comments were received on this aspect of the proposal and the final rule contains no substantive changes from the proposal. Prohibited terminations. In case of a legal dispute as to a party’s right to exercise a default right under a covered QFC, the final rule, like the proposal, requires 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,170 or a more demanding standard.171 The purpose of this requirement is to deter the QFC counterparty of a covered FSI from thwarting the purpose of the final rule 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. A few commenters requested guidance on how to satisfy the burden of proof of clear and convincing evidence so that they may avoid seeking such clarity through litigation. Other commenters urged that this standard was not appropriate and should be eliminated. In particular, a number of 12 U.S.C. 1821(e)(10)(B)(I). See also final rule § 382.1. 167 12 U.S.C. 1821(e)(9)–(10). 168 See final rule § 382.4(h). 169 See id. (noting that the general creditor protections in § 382.4(d), and the additional creditor protections for supported QFCs in § 382.4(f), are inapplicable to FDI Act proceedings). 170 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 is not permitted to provide for a lower standard. 171 See final rule § 382.4(i). PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 50249 commenters expressed concern that the burden of proof requirements, which are more stringent than the burden of proof requirements for typical contractual disputes adjudicated in a court, unduly hamper the creditor protections of counterparties and impose a burden directly on non-covered FSIs, who should be able to exercise default rights if it is commercially reasonable in the context. One commenter contended that this burden, combined with the stay on default rights related ‘‘indirectly’’ to an affiliate entering insolvency proceedings effectively prohibits counterparties from exercising any default rights during the stay period. These commenters argued that it is inappropriate for the rulemaking to alter the burden of proof for contractual disputes. One commenter suggested that, in a scenario involving a master agreement with some transactions out of the money and others in the money, the defaulting GSIB will have a lower burden of proof for demonstrating that it is owed money than for demonstrating that it owes money, should the non-GSIB counterparty exercise its termination rights. Certain commenters suggested instead that the final rule shift the burden and instead adopt a rebuttable presumption that the non-defaulting counterparty’s exercise of default rights is permitted under the QFC unless the defaulting covered FSI demonstrates otherwise. One commenter requested that the burden of proof not apply to the exercise of direct default rights. Another commenter suggested that the burden of proof provision imposes a higher burden of proof on counterparties affected by the rule than domestic and foreign GSIBs and that the requirements for satisfying this burden should be clarified and any case law or statutory standard that a Federal judge would apply in this instance be provided. The final rule retains the proposed burden of proof requirements. The requirement is based on a primary goal of the final rule—to avoid the disorderly termination of QFCs in response to the failure of an affiliate of a GSIB. The requirement accomplishes this goal by making clear that a party that exercises a default right when an affiliate of its direct party enters receivership or insolvency proceedings is unlikely to prevail in court unless there is clear and convincing evidence that the exercise of the default right against a covered FSI is not related to the insolvency or resolution proceeding. The requirement therefore should discourage the impermissible exercise of default rights without prohibiting the exercise of all default rights. Moreover, the burden of E:\FR\FM\30OCR2.SGM 30OCR2 50250 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 proof requirement should not discourage the exercise of default rights after or in response to a failure to satisfy a creditor protection provision (e.g., direct default rights); such a failure should be easily evidenced, even under a heightened burden of proof, such that clarification through court proceedings should not be necessary. 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.172 Similarly, a covered FSI may also enter into a QFC as agent acting on behalf of a principal. The proposal would have applied to a covered QFC regardless of whether the covered FSI was acting as a principal or as an agent. Sections 382.3 and 382.4 of the proposal did not distinguish between agents and principals with respect to default rights or transfer restrictions applicable to covered QFCs. Under the proposal, § 382.3 would have limited default rights and transfer restrictions that a counterparty may have against a covered FSI consistent with the U.S. Special Resolution Regimes.173 Section 382.4 of the proposed rule would have ensured 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.174 Commenters argued that the provisions of §§ 382.3 and 382.4 that relate to transactions entered into by the covered FSI as agent should exclude QFCs where the covered FSI or its affiliate does not have any liability (including contingent liability) under or in connection with the contract, or any payment or delivery obligations with respect thereto. Commenters also argued that the proposed agent provisions should not apply to circumstances 172 The definition of QFC under Title II of the Dodd-Frank Act, which is adopted in the final rule, includes security agreements and other credit enhancements as well as master agreements (including supplements). 12 U.S.C. 5390(c)(8)(D); see also final rule § 382.1. 173 See proposed rule § 382.3(a)(3). 174 See proposed rule § 382.4(a)(3) and (d). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 where the covered FSI acts as agent for a counterparty whose transactions are excluded from the requirements of the rule.175 Commenters provided as an example where an agent simply executes an agreement on behalf of the principal but bears no liability thereunder, such as where an investment manager signs an agreement on behalf of a client. Commenters noted that such agreements could contain events of default relating to the insolvency of the agent or an affiliate of the agent but that such default rights would be difficult to track and that close-out of such QFCs would not result in any loss or liquidity impact to the agent. Rather, early termination under the agreements would subject the cash and securities of the principals—not the agent—to realization and liquidation. Therefore, the agent would not be exposed to the liquidity and asset fire sale risks the proposal was intended to address. Commenters contended that the requirement to conform QFCs with all affiliates of a counterparty when an agent is acting on behalf of the counterparty would be particularly burdensome, as the agent may not have information about the counterparty’s affiliates or their contracts with covered FSIs, covered banks, or covered entities. Commenters also requested clarification that conformance is not required of contracts between a covered FSI as agent on behalf of a non-U.S. affiliate of a foreign GSIB that would not be a covered FSI under the proposal, since default rights related to the non-U.S. operations of foreign GSIBs are not the focus of the rule and do not bear a sufficient connection to U.S. financial stability to warrant the burden and cost of compliance. One commenter also urged that securities lending authorization agreements (SLAAs) should also be exempt from the rule. The commenter explained that SLAAs are banking services agreements that establish an agency relationship with the lender of securities and an agent and may be considered credit enhancements for securities lending transactions (and therefore QFCs) because the SLAAs typically require the agent to indemnify the lender for any shortfall between the value of the collateral and the value of the securities in the event of a borrower default. The commenter explained that SLAAs typically do not contain provisions that may impede the resolution of a GSIB, but may contain termination rights or contractual restrictions on assignability. However, the commenter argued that the beneficiaries under SLAAs lack the incentive to contest the transfer of the SLAA to a bridge institution in the event of GSIB insolvency. To respond to concerns raised by commenters, the agency provisions of the proposed rule have been modified in the final rule. The final rule provides that a covered FSI does not become a party to a QFC solely by acting as agent to a QFC.176 Therefore, an in-scope QFC would not be a covered QFC solely because a covered FSI was acting as agent for a principal for the QFC.177 For example, the final rule would not require a covered FSI to conform a master securities lending arrangement (or the transactions under the agreement) to the requirements of the final rule if the only obligations of the covered FSI under the agreement are to act as an agent on behalf of one or more principals. This modification should address many of the concerns raised by commenters. The final rule does not specifically exempt SLAAs because the agreements provide the beneficiaries with contractual rights that may hinder the orderly resolution of a GSIB and because it is unclear how such beneficiaries would act in response to the failure of their agent. More generally, the final rule does not exempt a QFC with respect to which an agent also acts in another capacity, such as guarantor. Continuing the example regarding the covered FSI acting as agent with respect to a master securities lending agreement, if the covered FSI also provided a SLAA that included the typical indemnification provision, discussed above, the agency exemption of the final rule would not exclude the SLAA but would still exclude the master securities lending agreement. This is because the covered FSI is acting solely as agent with respect to the master securities lending agreement but is acting as agent and guarantor with respect to the SLAA. However, SLAAs would be exempted under the final rule to the extent that they are not ‘‘in-scope QFCs’’ or otherwise meet the exemptions for covered QFCs of the final rule. Enforceability. Commenters also requested that the final rule should clarify that obligations under a QFC 176 See 175 Commenters argued this should be the case even where an agent has entered an umbrella master agreement on behalf of more than one principal, but only with respect to the contract of any principals that are excluded counterparties. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 final rule § 382.2(e)(1). a QFC would nonetheless be a covered QFC with respect to a principal that also was a covered FSI. In response to comments, the FDIC notes that covered FSIs do not include non-U.S. subsidiaries of a foreign GSIB. 177 Such E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations would still be enforceable even if its terms do not comply with the requirements of the final rule similar to assurances provided in respect of the UK rule and German legislation. The enforceability of a contract is beyond the scope of this rule. Interaction with Other Regulatory Requirements. Certain commenters requested clarification that amending covered QFCs as required by this final rule should not trigger other regulatory requirements for covered FSIs such as the swap margin requirements issued by the FDIC, other prudential regulators (the OCC, FRB, Farm Credit Administration and Federal Housing Financing Agency), and the U.S. Commodity Futures Trading Commission (CFTC). In particular, commenters urged that amending a swap to conform to this final rule should not jeopardize the status of the swap as a legacy swap for purposes of the swap margin requirements for noncleared swaps. These issues are outside the scope of this rule as they relate to the requirements of another rule issued by the FDIC jointly with the other prudential regulators as well as a rule issued by the CFTC. As commenters highlighted, addressing such issues may require consultation with the other prudential regulators as well as the CFTC and the U.S. Securities and Exchange Commission to determine the impact of the amendments required by this final rule for purposes of the regulatory requirements under Title VII. However, as the proposal noted, the FDIC is considering an amendment to the definition of ‘‘eligible master netting agreement’’ to account for the restrictions on covered QFCs and is consulting with the other prudential regulators and the CFTC on this aspect of the final rule.178 The FDIC does not expect that compliance with this final rule will trigger the swap margin requirements for non-cleared swaps. Compliance with the ISDA 2015 Resolution Stay Protocol. The final rule, like the proposal, allows covered FSIs to conform covered QFCs to the requirements of the rule through adherence to the Universal Protocol.179 The two primary operative provisions of the Universal Protocol are Section 1 and Section 2. Under Section 1, adhering parties essentially ‘‘opt in’’ to the U.S. Special Resolution Regimes and certain other special resolution regimes. Therefore, Section 1 is generally responsive to the concerns addressed in § 382.3 of the final rule. Under Section 2, adhering parties essentially forego, 178 See 179 See 81 FR 74326, 74340 (Oct. 26, 2016). final rule § 382.5(a). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 subject to the creditor protections of Section 2, cross-default rights and transfer restrictions on affiliate credit enhancements. Therefore, Section 2 is generally responsive to the concerns addressed in § 382.4 of the final rule. The proposal noted that, while the scope of the stay-and-transfer provisions of the Universal Protocol are narrower than the stay-and-transfer provisions that would have been required under the proposal and the Universal Protocol provides a number of creditor protection provisions that would not otherwise have been available under the proposal, the Universal Protocol includes a number of desirable features that the proposal lacked. When an entity (whether or not it is a covered FSI) adheres to the Universal Protocol, it necessarily adheres to the Universal Protocol with respect to all covered FSIs that have also adhered to the Protocol rather than one or a subset of covered FSIs (as the proposal would otherwise have permitted). This feature appears to allow the Universal Protocol to address impediments to resolution on an industry-wide basis and increase market certainty, transparency, and equitable treatment with respect to default rights of non-defaulting parties.180 This feature is referred to as ‘‘universal adherence.’’ Other favorable features of the Universal Protocol included that it amends all existing transactions of adhering parties, does not provide the counterparty with default rights in addition to those provided under the underlying QFC, applies to all QFCs, and includes resolution under bankruptcy as well as U.S. and certain non-U.S. Special Resolution Regimes. Because the features of the Universal Protocol, considered together, appeared to increase the likelihood that the resolution of a GSIB under a range of scenarios could be carried out in an orderly manner, the proposal stated that QFCs amended by the Universal Protocol would have been consistent with the proposal, notwithstanding § 382.4 of the proposal. Commenters generally supported the proposal’s provisions to allow covered FSIs to comply with the requirements of the proposed rule through adherence to the Universal Protocol. For the reasons discussed above and in the proposal, the final rule allows covered FSIs to comply with the rule through adherence to the Universal Protocol and makes other modifications to the proposal to address comments. A few commenters requested that the final rule clarify two technical aspects of adherence to the Universal Protocol. 180 See PO 00000 81 FR 74326. Frm 00025 Fmt 4701 Sfmt 4700 50251 These commenters requested confirmation that adherence to the Universal Protocol would also satisfy the requirements of § 382.3. The commenters also requested confirmation that QFCs that incorporate the terms of the Universal Protocol by reference also would be deemed to comply with the terms of the proposed alternative method of compliance.181 By clarifying § 382.5(a), the final rule confirms that adherence to the Universal Protocol is deemed to satisfy the requirements of § 382.3 of the final rule (as well as § 382.4) and that conformance of a covered QFC through the Universal Protocol includes incorporation of the terms of the Universal Protocol by reference by protocol adherents. This clarification also applies to the U.S. Protocol, discussed below. One commenter indicated that many non-covered FSI counterparties do not have ISDA master agreements for physically-settled forward and commodity contracts and, therefore, compliance with the rule’s requirements through adherence to the Universal Protocol would entail substantial time and educational effort. As in the proposal, the final rule simply permits adherence to the Universal Protocol as one method of compliance with the rule’s requirements, and parties may meet the rule’s requirements through bilateral negotiation, if they choose. Moreover, the Securities Financing Transaction Annex and Other Agreements Annex of the Universal Protocol, which are specifically identified in the proposed and final rule, are designed to amend QFCs that are not ISDA master agreements. Many commenters argued that the final rule should also allow compliance with the rule through a yet-to-be-created 181 ‘‘As between two Adhering Parties, the [Universal Protocol] only amends agreements between the Adhering Parties that have been entered into as of the date that the Adhering Parties adhere (as well as any subsequent transactions thereunder), but it does not amend agreements that Adhering Parties enter into after that date. . . . If Adhering Parties wish for their future agreements to be subject to the terms of the [Universal Protocol] or a Jurisdictional Module Protocol under the ISDA JMP, it is expected that they would incorporate the terms of the [relevant protocol] by reference into such agreements.’’ Letter to Robert deV. Frierson, Secretary, Board of Governors of the Federal Reserve System, from Katherine T. Darras, ISDA General Counsel, The International Swaps and Derivatives Association, Inc., at 8–9 (Aug. 5, 2016) This commenter noted that incorporation by reference was consistent with the proposal and asked that the text of the rule be clarified. Id. at 9. ISDA requested the FDIC to consider ISDA’s FRB comment letter in ISDA’s comment letter to the FDIC. See Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from Katherine T. Darras, ISDA General Counsel, The International Swaps and Derivatives Association, Inc., at 3 (Dec. 12, 2016). E:\FR\FM\30OCR2.SGM 30OCR2 50252 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 ‘‘U.S. Jurisdictional Module to the ISDA Resolution Stay Jurisdictional Modular Protocol’’ (an ‘‘approved U.S. JMP’’) that is generally the same but narrower in scope than the Universal Protocol.182 Many non-GSIB commenters argued that they were not involved with the drafting of the Universal Protocol and that an approved U.S. JMP would create a level playing field between those that were involved in the drafting and those that were not. In general, commenters identified two aspects of the Universal Protocol that they argued should be narrowed in the approved U.S. JMP: The scope of the special resolution regimes and the universal adherence feature of the Universal Protocol. Commenters also asked that the FDIC coordinate with the FRB and the OCC regarding treatment of the JMP and to ensure that any determinations made concerning the JMP are consistent. With respect to the scope of the special resolution regimes of the Universal Protocol, commenters’ concern focused on the special resolution regimes of ‘‘Protocol-eligible Regimes.’’ Some commenters also expressed concern with the scope of ‘‘Identified Regimes’’ of the Universal Protocol. The Universal Protocol defines ‘‘Identified Regimes’’ as the special resolution regimes of France, Germany, Japan, Switzerland, and the United Kingdom as well as the U.S. Special Resolution Regimes. The Universal Protocol defines ‘‘Protocol-eligible Regimes’’ as resolution regimes of other jurisdictions specified in the protocol that satisfies the requirements of the Universal Protocol. The Universal Protocol provides a ‘‘Country Annex,’’ which is a mechanism by which individual adherents to the Universal Protocol may agree that a specific jurisdiction satisfies the requirements of a ‘‘Protocol-eligible Regime.’’ The Universal Protocol referred to in the proposal did not include any Country Annex for any Protocol-eligible Regime.183 182 Commenters argued that approval of the approved U.S. JMP should not require satisfaction of the administrative requirements of proposed rule § 382.5(b)(3), since the FDIC has already conducted that analysis in deciding to provide a safe harbor for the Universal Protocol. 183 The proposal defined the Universal Protocol as 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.’’ See proposed rule § 382.5(a). As of May 3, 2016, ISDA had not published any Country Annex for a Protocol eligible Regime and such publication would not be a minor or technical amendment to the Universal Protocol. Consistent with the VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 Commenters requested the final rule include a safe harbor for an approved U.S. JMP that does not include Protocoleligible Regimes. Commenters argued that many counterparties may not be able to adhere to the Universal Protocol because they would not be able to adhere to a Protocol-eligible Regime in the absence of law or regulation mandating such adherence, as it would force counterparties to give up default rights in jurisdictions where that is not yet legally required.184 In support of their argument, commenters cited their fiduciary duties to act in the best interests of their clients or shareholders. Commenters also argued that an approved U.S. JMP should not include Identified Regimes and noted that the other Identified Regimes have already adopted measures to require contractual recognition of their special resolution regimes.185 With respect to the universal adherence feature of the Universal Protocol, commenters argued that universal adherence imposed significant monitoring burden since new adherents may join the Universal Protocol at any time. To address this concern, some commenters requested that an approved U.S. JMP allow a counterparty to adhere on a firm-by-firm or entity-by-entity basis. Other commenters suggested or supported approval of, an approved U.S. JMP in which a counterparty would adhere to all current covered FSIs under the final rule (to be identified on a ‘‘static list’’) and would adhere to new covered FSIs on an entity-by-entity basis. This static list, commenters argued, would retain the ‘‘universal adherence mechanics’’ of the Universal Protocol and allow market participants to fulfill due diligence obligations related to compliance. Commenters also argued that universal adherence would proposal, the final rule does not define the Universal Protocol to include any Country Annex. However, the final rule does not penalize adherence to any Country Annex. A covered QFC that is amended by the Universal Protocol—but not a Country Annex—will be deemed to conform to the requirements of the final rule. In addition, a covered QFC that is amended by the Universal Protocol—including one or more Country Annexes—is also deemed to conform to the requirements of the final rule. See final rule § 382.5(a)(2). 184 The Protocol-eligible Regime requirements of the Universal Protocol do not include a requirement that a law or regulation, such as the final rule, require parties to contractually opt in to the regime. 185 One commenter requested clarification that a QFC of a covered FSI with a non-U.S. credit support provider for the covered FSI complies with the requirements of the final rule to the extent the covered FSI has adhered to the relevant jurisdictional modular protocol for the jurisdiction of the non-U.S. credit support provider. The jurisdictional modular protocols for other countries do not satisfy the requirements of the final rule. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 be overbroad because the Universal Protocol could amend QFCs to which a covered FSI, covered bank, or covered entity was not a party. Certain commenters argued that adhering with respect to any counterparty would also be inconsistent with their fiduciary duties. In response to comments and to further facilitate compliance with the rule, the final rule provides that covered QFCs amended through adherence to the Universal Protocol or a new (and separate) protocol (the ‘‘U.S. Protocol’’) would be deemed to conform the covered QFCs to the requirements of the final rule.186 The U.S. Protocol may differ (and is required to differ) from the Universal Protocol in certain respects, as discussed below, but otherwise must be substantively identical to the Universal Protocol.187 Therefore, the reasons for deeming covered QFCs amended by the Universal Protocol to conform to the final rule, discussed above and in the proposal, apply to the U.S. Protocol. Consistent with the proposal 188 and requests by commenters, the U.S. Protocol may limit the application of the provisions the Universal Protocol identifies as Section 1 and Section 2 to only covered FSIs, covered banks, and covered entities.189 As requested by commenters, this limitation on the scope of the U.S. Protocol may ensure that the U.S. Protocol would only amend covered QFCs under this final rule or the substantially identical final rules expected to be issued by the OCC and already issued by the FRB and not also QFCs outside the scope of the agencies’ final rules (i.e., QFCs between 186 The final rule also provides that the FDIC may determine otherwise based on specific facts and circumstances. See final rule § 382.5(a). 187 Commenters expressed support for having the U.S. Protocol apply to both existing and future QFCs. One commenter requested that an approved U.S. JMP should apply only to QFCs governed by non-U.S. law because the U.S. Special Resolution Regimes already apply to QFCs governed by U.S. law. As discussed above, the final rule does not exempt a QFC solely because the QFC explicitly states that is governed by U.S. law. Moreover, such a limited application would reduce the desirable additional benefits of the Universal Protocol, discussed above. 188 The proposal explained that a ‘‘jurisdictional module for the United States that is substantively identical to the [Universal] 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.’’ 81 FR 74326, 74337, n. 91 (Oct. 26, 2016). 189 The final rule does not require the U.S. Protocol to retain the same section numbering as the Universal Protocol. The final rule allows the U.S. protocol to have minor and technical differences from the Universal Protocol. See final rule § 382.5(a)(3)(ii)(F). E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 parties that are not covered FSIs, covered banks, or covered entities). The final rule also provides that the U.S. Protocol is required to include the U.S. Special Resolution Regimes and the other Identified Regimes but is not required to include Protocol-eligible Regimes.190 As noted above, the Universal Protocol, as defined in the proposal, did not include any Country Annex for a Protocol-eligible Regime; the only special resolution regimes specifically identified in the Universal Protocol, as defined in the proposal, were the U.S. Special Resolution Regimes and the other Identified Regimes. The inclusion of the Identified Regimes should help facilitate the resolution of a GSIB across a broader range of circumstances. Inclusion of the Identified Regimes in the U.S. Protocol also should support laws and regulations similar to the final rule and help encourage GSIB entities in the United States to adhere to a protocol that includes all Identified Regimes. However, the final rule does not require the U.S. Protocol to include Protocoleligible Regimes, including definitions and adherence mechanisms related to Protocol-eligible Regimes.191 Inclusion of only the Identified Regimes in the U.S. Protocol, considered in light of the other benefits to the resolution of GSIBs provided by the Universal Protocol and U.S. Protocol as well as commenters’ concerns with potential adherence to Protocol-eligible Regimes, should sufficiently advance the objective of the final rule to increase the likelihood that a resolution of a GSIB could be carried out in an orderly manner under a range of scenarios. The U.S. Protocol does not permit parties to adhere on a firm-by-firm or entity-by-entity basis because such adherence mechanisms requested by commenters would obviate one of the primary benefits of the Universal Protocol: Universal adherence. Similarly, the final rule does not permit adherence to a ‘‘static list’’ of all current covered FSIs, which other commenters requested.192 Although the static list 190 See final rule § 382.5(a)(3)(ii)(A). The U.S. Protocol is likewise not required to include definitions and adherence mechanisms related to Protocol-eligible Regimes. The final rule allows the U.S. Protocol to include minor and technical differences from the Universal Protocol and, similarly, differences necessary to conform the U.S. Protocol to the substantive differences allowed or required from the Universal Protocol. See final rule § 382.5(a)(3)(ii)(F). 191 See final rule § 382.5(a)(3)(ii)(A). 192 The final rule, however, does not prohibit the creation of a dynamic list identifying of all current ‘‘Covered Parties,’’ as would be defined in the U.S. Protocol, to facilitate due diligence and provide additional clarity to the market. See final rule VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 would initially provide for universal adherence, the static list would not provide for universal adherence with respect to entities that became covered FSIs after the static list was finalized. To help ensure that the additional creditor protections of the Universal Protocol and U.S. Protocol continue to be justified, both protocols must ensure that the desirable features of the protocols, including universal adherence, continue to be present as GSIBs acquire subsidiaries with existing QFCs and existing organizations become designated as GSIBs. The final rule also addresses provisions that allow an adherent to elect that Section 1 and/or Section 2 of the Universal Protocol do not apply to the adherent’s contracts.193 The Universal Protocol refers to these provisions as ‘‘opt-outs.’’ The proposal explained that adherence to the Universal Protocol was an alternative method of compliance with the proposed rule and that covered QFCs that were not amended by the Universal Protocol must otherwise conform to the proposed rule. In other words, the proposal would have required that a covered QFC be conformed regardless of the method the covered FSI and counterparty choose to conform the QFC.194 Consistent with the basic purposes of the proposed and final rules, the U.S. Protocol requires that opt-outs exercised by its adherents will only be effective to the extent that the affected covered QFCs otherwise conform to the requirements of the final rule. Therefore, the U.S. Protocol allows counterparties to exercise available optout rights in a manner that also allows covered FSIs to ensure that their covered QFCs continue to conform to the requirements of the rule. The final rule also provides that, under the U.S. Protocol, the opt-out in Section 4(b)(i)(A) of the attachment to the Universal Protocol (Sunset Optout) 195 must not apply with respect to the U.S. Special Resolution Regimes, because the opt-out is no longer relevant with respect to the U.S. Special Resolution Regimes. This final rule, along with the substantially identical rules already issued by the FRB and § 382.5(a)(2)(ii)(F) (allowing minor and technical differences from the Universal Protocol). 193 Section 4(b) of the Universal Protocol. 194 Under the final rule, if an adherent to the Universal Protocol or U.S. Protocol exercises an available opt-out, covered FSIs with covered QFCs affected by the exercise would be required to otherwise conform the covered QFCs to the requirements of the final rule. 195 See Section 4(b)(i)(A) of the Universal Protocol. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 50253 expected to be issued by the OCC, should prevent exercise of the Sunset Opt-out provision with respect to the U.S. Special Resolution Regimes under the Universal Protocol. Inapplicability of this opt-out with respect to U.S. Special Resolution Regimes in the U.S. Protocol should provide additional clarity to adherents that the U.S. Protocol will continue to provide for universal adherence after January 1, 2018. The final rule also expressly addresses a provision in the Universal Protocol that concerns the client-facing leg of a cleared transaction. As discussed above, the final rule, like the proposal, does not include the exemption in Section 2 of the Universal Protocol regarding the client-facing leg of a cleared transaction. Therefore, the final rule provides that the U.S. Protocol must not exempt the client-facing leg of the transaction.196 F. Process for Approval of Enhanced Creditor Protections (Section 382.5 of the Proposed Rule) As discussed above, the restrictions of the final rule would leave many creditor protections that are commonly included in QFCs unaffected. The final rule 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.197 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 final rule and intended to facilitate the FDIC’s consideration of whether permitting the contractual terms would be consistent with the proposed restrictions.198 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. The first two factors concern the potential impact of the requested creditor protections on GSIB resilience and resolvability. The next four concern 196 Section 2 of the Universal Protocol provides an exemption for any client-facing leg of a cleared transaction. See Section 2(k) of the Universal Protocol and the definition of ‘‘Cleared Client Transaction.’’ The final rule does not amend the proposal’s treatment of QFCs that are ‘‘Cleared Client Transactions’’ under the Universal Protocol, but requires that the provisions of that section must not apply with respect to the U.S. Protocol. See final rule § 382.5(a)(3)(ii)(E). 197 See final rule § 382.5(b). 198 See final rule § 382.5(d)(1) through (10). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50254 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations the scope of the final rule: 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 chances 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 final rule 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.199 Under the final rule, the FDIC could approve a request for an alternative set of creditor protections if the terms of the QFC, as compared to a covered QFC containing only the limited creditor protections permitted by the final rule, would promote the safety and soundness of covered FSIs by mitigating the potential destabilizing effects of the resolution of a GSIB that is an affiliate of the covered FSI to at least the same extent.200 Once approved by the FDIC, enhanced creditor protections could be used by other covered FSIs (in addition to the covered FSI that submitted the request for FDIC approval), as appropriate. The request-and-approval process would improve flexibility by allowing for an industry-proposed alternative to the set of creditor protections permitted by the final rule while ensuring that any approved 199 See 200 See final rule § 382.5(b)(3)(ii) and (iii). final rule § 382.5(c). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 alternative would serve the final rule’s policy goals to at least the same extent as a covered QFC that complies fully with the final rule. Commenters requested that this approval process be made less burdensome and more flexible and urged for additional clarifications on the process for submitting and approving such requests (e.g., whether approvals would be published in the Federal Register). For example, commenters requested the final rule include a reasonable timeline (e.g., 180 days) by which the FDIC would approve or deny a request. Certain commenters urged that counterparties and trade groups, in addition to covered entities, covered FSIs, and covered banks, should be permitted to make such requests. One commenter noted that the proposal’s approval process would have created a free-rider problem, where parties that submit enhanced creditor protection conditions for FDIC approval bear the full cost of learning which remedies are available for creditors while other parties will gain that information for free. Commenters contended that the provision requiring a ‘‘written legal opinion verifying the proposed provisions and amendments would be valid and enforceable under applicable law of the relevant jurisdictions’’ should be eliminated as unnecessary.201 Additionally, commenters also urged that the provision should be broadened to allow approvals of provisions not directly related to enhanced creditor protections. Finally, commenters also urged the FDIC, FRB, and OCC to either harmonize their standards for approving enhanced creditor protections or otherwise be consistent in approving enhanced creditor protection conditions. Imposing different conditions or arriving at different outcomes would subject identical QFCs to different creditor protections, raise fairness issues, increase legal and operational complexity, and hence impede the goal of orderly resolution of a GSIB. The FDIC has clarified that the FDIC could approve an alternative proposal of additional creditor protections as compliant with §§ 382.3 and 382.4 of the final rule, but has not otherwise modified these provisions of the proposal in response to changes requested by commenters. The 201 One commenter also suggested permitting amendments to QFCs to be accomplished through a confirmation document for a new agreement or by email instead of a formal amendment of the QFC signed by the parties. The final rule does not prescribe a specific method for amending covered QFCs. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 provisions contain flexibility and guidance on the process for submitting and approving enhanced creditor protections. The final rule directly places requirements only on covered FSIs and thus only covered FSIs are eligible to submit requests pursuant to these provisions. In response to commenters’ concerns, the FDIC notes that the final rule does not prevent multiple covered FSIs from presenting one request and does not prevent covered FSIs from seeking the input of counterparties when developing a request. The final rule does not provide a maximum time to review proposals because proposals could vary greatly in complexity and novelty. The final rule also maintains the provision requiring a written legal opinion which helps ensure that proposed provisions are valid and enforceable under applicable law. The final rule does not expand the approval process beyond additional creditor protections; however, revisions to aspects of the final rule may be made through the rulemaking process. The FDIC intends to consult with the FRB and OCC with respect to any requests for approvals for additional creditor protections. Therefore, the FDIC does not expect that the agencies would arrive at different outcomes with respect to an identical application for approval for enhanced creditor protections based on the differences in standards for approval. III. Transition Periods Under the proposal, the rule would have required compliance on the first day of the first calendar quarter beginning at least one year after issuance of the final rule, which the proposal referred to as the effective date.202 A number of commenters urged the adoption of a phased-in approach to compliance that would extend the compliance deadline for covered QFCs with certain types of counterparties in order to allow time for necessary client outreach and education, especially for non-GSIB counterparties that may be unfamiliar with the Universal Protocol or the final rule’s requirements. These commenters contended that the original compliance period of one year should be limited to counterparties that are banks, broker-dealers, swap dealers, security-based swap dealers, major swap participants, and major security-based 202 See proposed rule § 382.2(b). Under section 302(b) of the Riegle Community Development and Regulatory Improvement Act of 1994, new FDIC 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). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations swap participants. These commenters urged that the compliance period for QFCs with asset managers, commodity pools, private funds, and other entities that are predominantly engaged in activities that are financial in nature within the meaning of section 4(k) of the BHC Act should be extended for six months after the date of the original compliance period identified in the proposed rule. Finally, these commenters argued that the compliance period for QFCs with all other counterparties should be extended for 12 months after the date of the original compliance period identified in the proposed rule as these counterparties are likely to be least familiar with the requirements of the final rule. One commenter suggested that the rule should take effect no sooner than one year from the date that an approved U.S. JMP is published and available for adherence, including any additional time it might take for the agencies to approve it. Certain commenters requested that the compliance deadline for covered QFCs entered into by an agent on behalf of a principal be extended by six months as well. Other commenters, however, cautioned against an approach that would impose different deadlines with respect to different classes of QFCs, as opposed to counterparty types, since the main challenge in connection with the remediation is the need for outreach to and education of counterparties. These commenters contended that once a counterparty has become familiar with the requirements of the rule and the terms of the required amendments, it would be more efficient to remediate all covered QFCs with the counterparty at the same time. A number of commenters also requested that the FDIC confirm that entities newly acquired by a GSIB, and thereby become new covered FSIs have until the first day of the first calendar quarter immediately following one year after becoming covered FSIs to conform their existing QFCs. Commenters argued that this would allow the GSIB to conform existing QFCs in an orderly fashion without impairing the ability of covered FSIs to engage in corporate activities. These commenters also requested clarification that, during that conformance period, affiliates of covered FSIs would not be prohibited from entering into new transactions or QFCs with counterparties of the newly acquired entity if the existing covered FSIs otherwise comply with the rule’s requirements. Some commenters urged the FDIC to exclude existing contracts from the final rule’s requirements and only apply the rule on a prospective VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 basis. Additionally, commenters asked for harmonized compliance dates across the different agencies’ rules. The effective date for the final rule is January 1, 2018, more than 60 days following publication in the Federal Register. However, in order to reduce the compliance burden of the final rule, the FDIC has adopted a phased-in compliance schedule as requested by commenters. The final rule provides that a covered FSI must conform a covered QFC to the requirements of this final rule by the first day of the calendar quarter immediately following one year from the effective date of this subpart with respect to covered QFCs with other covered FSIs, covered entities, and covered banks (referred to in this discussion as the ‘‘first compliance date’’).203 This provision allows the counterparties that should be the most familiar with the requirements of the final rule over one year to comply with the rule’s requirements. Moreover, this is a relatively small number of counterparties that would need to modify their QFCs in the first year following the effective date of the final rule and many covered FSIs, covered entities, and covered banks with covered QFCs have already adhered to the Universal Protocol. The final rule provides additional time for compliance with the requirements for other types of counterparties. In particular, for other types of financial counterparties 204 (other than small financial institutions) 205 the final rule provides 18 months from the effective date of the final rule for compliance with its requirements as requested by commenters.206 For smaller banks and other non-financial counterparties, the final rule provides approximately two years from the effective date of the final rule for compliance with its requirements, as requested by 203 See final rule § 382.2(f)(1)(i). The definition of covered QFC of the final rule has been revised to make clear that, consistent with the proposal, a covered QFC is a QFC that the covered FSI becomes a party to on or after the first day of the calendar quarter immediately following one year from the effective date of this part. See final rule § 382.2(c). As discussed above, a covered FSI’s in-scope QFC that is entered into before this date may also be a covered QFC if the covered FSI or any affiliate that is a covered entity, covered FSI, or covered bank also becomes a party to a QFC with the same counterparty or a consolidated affiliate of the same counterparty on or after the first compliance date. See id. 204 See final rule § 382.1 (defining ‘‘financial counterparty’’). 205 The final rule defines small financial institution as an insured bank, insured savings association, farm credit system institution, or credit union with assets of $10,000,000,000 or less. See final rule § 382.1. 206 See final rule § 382.2(f)(1)(ii). PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 50255 commenters.207 Adopting a phased-in compliance approach based on the type (and, in some cases, size) of the counterparty will allow market participants time to adjust to the new requirements and make required changes to QFCs in an orderly manner. It will also give time for development of the U.S. Protocol or any other protocol that would meet the requirements of the final rule. The FDIC is giving this additional time for compliance to respond to concerns raised by commenters. The FDIC encourages covered FSIs to start planning and outreach efforts early in order to come into compliance with the rule on the time frames provided. The FDIC believes that this additional time for compliance should also address concerns raised by commenters regarding the burden of conforming existing contracts by allowing firms additional time to conform all covered QFCs to the requirements of the final rule. Although the phased-in compliance period does not contain special rules related to acting as an agent as requested by certain commenters, the rule has been modified as described above to clarify that a covered FSI does not become a party to a QFC solely by acting as agent with respect to the QFC.208 Entities that are covered FSIs when the final rule is effective would be required to comply with the requirements of the final rule beginning on the first compliance date, but would be given more time to conform such covered QFCs with entities that are not covered FSIs, covered entities, or covered banks.209 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.210 Moreover, a covered FSI would be required to bring an inscope QFC entered into prior to the first compliance date into compliance with the rule no later than the applicable date of the tiered compliance dates (discussed above) if 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 pre-existing covered QFC or a consolidated affiliate of the counterparty on or after the first compliance date.211 (Thus, a covered FSI would not be required to conform a pre-existing QFC if that covered FSI and its covered FSI, covered entity or 207 See final rule § 382.2(f)(1)(iii). final rule § 382.2(e)(1). 209 See final rule § 382.2(c)(1) and (f)(1). 210 See id. 211 See final rule § 382.2(c)(1). 208 See E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50256 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations covered bank affiliates do not enter into any new QFCs with the same counterparty or its consolidated affiliates on or after the compliance date.) In addition, an entity that becomes a covered FSI after the effective date of the final rule (a ‘‘new covered FSI’’ for purposes of this preamble) generally has the same period of time to comply as an entity that is a covered FSI on the effective date (i.e., compliance will phase in over a two-year period based on the type of counterparty).212 The final rule also clarifies that a covered QFC, with respect to a new covered FSI, means an in-scope QFC that the new covered FSI becomes a party to (1) on the date the covered FSI first becomes a covered FSI, and (2) before that date, if the covered FSI or one of its affiliates that is a covered FSI, covered entity, or covered bank also enters, executes, or otherwise becomes a party to a QFC with the same counterparty or a consolidated affiliate of the counterparty after that date.213 Under the final rule, a company that is a covered FSI on the effective date of the final rule (an ‘‘existing covered FSI’’ for purposes of this preamble) and becomes an affiliate of a new covered FSI, covered bank, or covered entity generally must conform any existing but non-conformed in-scope QFC that the existing covered FSI continues to have with a counterparty after the applicable initial compliance date by the date the new covered FSI enters a QFC with the same counterparty or any of its consolidated affiliates. Acquisitions of new entities are planned in advance and should include preparing to comply with applicable laws and regulations. Certain commenters opposed application of the requirements of the rule to existing QFCs, requesting instead that the final rule only apply to QFCs entered into after the effective date of any final rule and that all pre-existing QFCs not be subject to the rule’s requirements. Commenters suggested that end users of QFCs with GSIB affiliates might not have entered into existing contracts without the default rights prohibited in the proposed rule and that revising existing QFCs would be time-consuming and expensive. Commenters asserted that this treatment would be consistent with the final rules in the United Kingdom and the statutory requirements adopted by Germany. The FDIC does not believe it is appropriate to exclude all pre-existing QFCs because of the current and future risk that existing covered QFCs pose to 212 See 213 See final rule § 382.2(f)(2). final rule § 382.2(c)(2). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 the orderly resolution of a covered FSI. Moreover, application of different default rights to existing and future transactions within a netting set could cause the netting set to be broken, which commenters noted could increase burden to both parties to the netting set.214 Therefore, the final rule requires an existing QFC between a covered FSI and a counterparty to be conformed to the requirements of the final rule if the covered FSI (or an affiliate that is a covered FSI, covered entity, or covered bank) enters into another QFC with the counterparty or its consolidated affiliate on or after the first day of the calendar quarter immediately following one year from the effective date of the final rule.215 By permitting a covered FSI to remain a party to noncompliant QFCs entered 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 consolidated affiliates, the final rule strikes a balance between ensuring QFC continuity if the GSIB were to fail and ensuring that covered FSIs and their existing counterparties can manage 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 consolidated 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 consolidated 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 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 consolidated affiliates, do not enter into new covered QFCs with the GSIB on or after the first day of the calendar quarter that is one year from the effective date of the final 214 The requirements of the final rule, particularly those of § 382.4, may have a different impact on netting, including close-out netting, than the UK and German requirements cited by commenters. 215 Subject to any compliance date applicable to the covered FSI, the FDIC expects a covered FSI to conform existing QFCs that become covered QFCs within a reasonable period. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 rule, it would be appropriate to permit a limited number of noncompliant QFCs to remain outstanding, in keeping with the terms described above. Moreover, the final rule also excludes existing warrants and retail investment advisory agreements to address concerns raised by commenters and mitigate burden.216 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. IV. Expected Effects The final 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 final rule will help meet this policy objective by more effectively and efficiently managing the exercise of cross default rights and transfer restrictions contained in QFCs. It will therefore help mitigate the risk of future financial crises and imposition of substantial costs on the U.S. economy.217 The final 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) the primary Federal supervisor for State nonmember banks and State savings associations; (ii) the insurer of deposits and manager of the DIF; and (iii) the resolution authority for all FDIC-insured institutions under the FDI Act and, if appointed by the Secretary of the Treasury in accordance with the requirements of Title II of the DoddFrank Act, for large complex financial institutions. The final rule only applies to FDICsupervised institutions that are subsidiaries or affiliates of a GSIB. Of the 3,717 institutions that the FDIC supervises,218 eleven are subsidiaries or affiliates of GSIBs.219 Out of those eleven institutions, eight had QFC contracts at some point over the past five years. Those eight institutions had an average of $39 billion worth of QFC contracts, as measured by notional value, over the same time period 216 See final rule § 382.7(c). 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, available at https://dallasfed.org/assets/ documents/research/staff/staff1301.pdf. 218 Call Report data, June 2017. 219 FFIEC National Information Center. 217 A E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations compared to an average of over $200 trillion in notional value for all FDICinsured GSIB affiliates.220 Therefore, the final rule applies only to a small number of institutions and to a small portion of total QFC activity. sradovich on DSK3GMQ082PROD with RULES2 Benefits The final rule will likely benefit the counterparties of covered FSIs by preventing the disorderly failure of the GSIB subsidiary and enabling it to continue to meet its obligations. The mass exercise of default rights against an otherwise healthy covered FSI resulting from the failure of an affiliate may cause it to weaken or fail. Therefore, 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 will be able to meet their obligations to QFC counterparties. Moreover, the creditor protections permitted under the rule will 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 of future financial crises create substantial economic benefits.221 QFCs play a large role in the financial markets and are a major source of financial interconnectedness. Therefore, they can pose a threat to financial stability in times of market stress. The final rule will materially reduce 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 reduce the probability and severity of financial crises in the future. The final rule will also likely benefit the DIF. Mass exercise of QFC default rights by the counterparties at the time the parent or other affiliate of an FDICinsured institution enters resolution could lead to severe losses for, or possibly the failure of, FDIC-insured subsidiaries of failed GSIBs. Those losses and/or failures could result in considerable losses to the DIF. Costs The costs of the final rule are likely to be relatively small and only affect eleven covered FSIs. Only eight of the eleven affected institutions had QFC contracts over the past 5 years. The QFC 220 Call Report data, June 2012—June 2017. Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis,’’ Staff Paper No. 20, Federal Reserve Bank of Dallas, July 2013. 221 ‘‘How VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 activity of those eight firms represented less than .02 percent of QFC activity among all FDIC-insured GSIB subsidiaries.222 Covered FSIs and their counterparties may incur administrative costs associated with drafting and negotiating compliant QFCs. However, the rule only limits the execution of default rights for a brief time period in the event that a GSIB or GSIB affiliate enters a resolution process. Further, the rule only affects QFC contracts that contain default rights or transfer restrictions, so not all QFC activity will be affected by the rule. Affected institutions also have the option of adhering to the Universal Protocol or the U.S. Protocol as an alternative to amending QFC contracts, and they have a phase-in compliance period of up to two years to become fully compliant with the rule. The flexibility that the final rule allows for affected institutions and their counterparties further reduces the expected costs associated with this rule. Therefore, costs associated with drafting compliant QFCs are likely to be low. In addition, the FDIC anticipates that covered FSIs would likely share resources with their 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 Universal Protocol is already partially effective for the 25 existing GSIB adherents. The partial effectiveness of the Universal 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 Universal Protocol, some implementation costs will likely be reduced. The final rule could potentially impose costs on covered FSIs to the extent that they may need to provide their QFC counterparties with better contractual terms in order to compensate those parties for the loss of their ability to exercise default rights. 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 credit protection for counterparties. The final rule could also create economic costs by causing a marginal 222 See PO 00000 Call Report data, June 2012–June 2017. Frm 00031 Fmt 4701 Sfmt 4700 50257 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 rule. Therefore, economic activity that would have been associated with that QFC absent the rule (such as economic activity that would have otherwise been hedged with a derivatives contract or funded through a repo transaction) might not occur. The FDIC does not expect any significant reduction in QFC activity to result from this rule because the restrictions on default rights in covered QFCs that the rule requires 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 final rule. V. Revisions to Certain Definitions in the FDIC’s Capital and Liquidity Rules This final rule also amends several definitions in the FDIC’s capital and liquidity rules to help ensure that the final rule does not have unintended effects for the treatment of covered FSIs’ netting agreements under those rules, consistent with the amendments contained in the FRB FR and the OCC FR.223 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.224 The FDIC 223 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). 224 See 12 CFR 324.34(a)(2). E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50258 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 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.225 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 final rule would impose on the QFCs of covered FSIs. Thus, a master netting agreement that is compliant with this final rule 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 final rule. Accordingly, the final rule would amend the definition of ‘‘qualifying master netting agreement’’ so that a master netting agreement could qualify for such treatment 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 final rule. This revision maintains the existing treatment for these contracts under the FDIC’s capital and liquidity rules by accounting for the restrictions that the final rule, or the substantively identical rules of issued by the FRB and expected from the OCC, 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 the 225 See the definition of ‘‘qualifying master netting agreement’’ in 12 CFR 324.2 (capital rules) and 329.3 (liquidity rules). VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 absence of this amendment 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 final rule would similarly revise certain other definitions in the regulatory capital rules to make analogous conforming changes designed to account for this final rule’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 final rule 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 final rule 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.’’ 226 Thus, it may also be appropriate to amend the definition of ‘‘eligible master netting agreement’’ to account for the restrictions on covered FSIs’ QFCs. Because the FDIC issued the swap margin rule jointly with other U.S. regulatory agencies, however, the FDIC is consulting with the other agencies before proposing amendments to that rule’s definition of ‘‘eligible master netting agreement.’’ Certain commenters requested technical modifications to the proposed modifications to the definitions to better distinguish the requirements of § 382.4 and the provisions of Section 2 of the Universal Protocol from provisions regarding ‘‘opt in’’ to special resolution regimes. In response to this comment, the final rule establishes an independent exception addressing the requirements of § 382.4 and the provisions of Section 2 of the Universal Protocol and makes other minor clarifying edits. One commenter requested that the definitions of the terms ‘‘collateral agreement,’’ ‘‘eligible margin loan,’’ ‘‘qualifying master netting agreement,’’ and ‘‘repo-style transaction’’ include 226 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. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 references to stays in State resolution regimes (such as insurance receiverships). The commenters did not identify, and the FDIC is not aware of, any State resolution regime that currently includes QFC stays similar to those of the U.S. Special Resolution Regimes. Neither the nature of the potential laws nor the extent of their effect on the regulatory capital requirements of FDIC-regulated institutions is known. Therefore, the final rule does not reference State resolution regimes. One commenter argued that neither the current nor the proposed definition of qualifying master netting agreement comports with section 302(a) of the Business Risk Mitigation and Price Stabilization Act of 2015, which exempts certain types of counterparties from initial and variation margin requirements, and that the proposed amendments to the definition add unnecessary complexity to the existing rules and therefore make compliance more difficult. Section 302(a) of that act is not relevant to the definition of qualifying master netting agreement because the definition does not require initial or variation margin. Rather, the definition of qualifying master netting agreement requires that margin provided under the agreement, if any, be able to be promptly liquidated or set off under the circumstances specified in the definition. The FDIC continues to believe that the amendments are necessary and do not substantially add to the complexity of the FDIC’s rules. Effective date for the definition of ‘‘covered bank’’: The FDIC is delaying the effective date of the definition of ‘‘covered bank’’ until the OCC adopts 12 CFR part 47. VI. Regulatory Analysis A. Paperwork Reduction Act 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. OMB has assigned the following control numbers to this information collection: 3064–AE46. 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). E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations Section 382.5(b) of the final rule would require a covered FSI to request the FDIC to approve as compliant with the requirements of §§ 382.3 and 382.4, 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. A covered FSI making a request must provide (1) an analysis of the proposal under each consideration of § 382.5(d); (2) a written legal opinion 50259 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 § 382.5 are as follows: 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 relevant information that the FDIC requests. Covered FSIs would also have recordkeeping associated with proposed amendments to their covered QFCs. Total burden hours Times/year Paperwork for proposed revisions .................. On occasion ................................................... 6 40 240 Total Burden ............................................ ......................................................................... ........................ ........................ 240 The FDIC received no comments on the PRA section of the proposal or the burden estimates. However, the FDIC has an ongoing interest in public comments on its burden estimates. Any such comments should be sent to the Paperwork Reduction Act Officer, FDIC Legal Division, 550 17th Street NW., Washington, DC 20503. Written comments should address the accuracy of the burden estimates and ways to minimize burden, as well as other relevant aspects of the information collection request. sradovich on DSK3GMQ082PROD with RULES2 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.227 For the reasons provided below, the FDIC hereby certifies pursuant to 5 U.S.C. 605(b) that the final rule will not have a significant economic impact on a substantial number of small entities. The final 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 227 See 5 U.S.C. 603, 605. VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 Respondents Hours per response Title proposal: To reduce the execution risk of an orderly GSIB resolution. The FDIC estimates that the final rule would apply to approximately eleven FSIs. As of June 30, 2017, only eight of the eleven covered FSIs have derivatives portfolios that could be affected. None of these eight banking organizations would qualify as a small entity for the purposes of the RFA.228 In addition, the FDIC anticipates that any small subsidiary of a GSIB that could be affected by the final 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.229 The final rule complements the FRB FR and the expected OCC FR. It is not designed to duplicate, overlap with, or conflict with any other Federal regulation. This 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.230 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, subject to certain exceptions, new regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions 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. In accordance with these provisions and as discussed above, the FDIC considered any administrative burdens, as well as benefits, that the final rule would place on depository institutions and their customers in determining the effective date and administrative compliance requirements of the final rule. The final rule will be effective no earlier than the first day of a calendar quarter that begins on or after the date on which the final rule is published. 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 the FDIC, 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 D. Solicitation of Comments on the Use of Plain Language 228 Under regulations issued by the Small Business Administration, small entities include banking organizations with total assets of $550 million or less. 229 See FRB FR, 82 FR 42882 (Sept. 12, 2017) and OCC NPRM, 81 FR 55381 (August 19, 2016). 230 5 U.S.C. 605. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 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 has presented the final rule in a simple and straightforward manner. E. Small Business Regulatory Enforcement Fairness Act The Office of Management and Budget has determined that this final rule is a ‘‘major rule’’ within the meaning of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801, et seq.) (‘‘SBREFA’’). As required by the E:\FR\FM\30OCR2.SGM 30OCR2 50260 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations SBREFA, the FDIC will file the appropriate reports with Congress and the Government Accountability Office so that the Final Rule may be reviewed. 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 amends 12 CFR chapter III as follows: PART 324—CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS 1. The authority citation for part 324 continues to read as follows: ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note). 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. sradovich on DSK3GMQ082PROD with RULES2 * * * * * 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, first- VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 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. (1) 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 4 to the U.S. laws referenced in this paragraph (1)(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 (1)(i) of this definition; or (2) Other than to the extent necessary for the counterparty to comply with the requirements of part 382 of this title, subpart I of part 252 of this title or part 47 of this title, 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, (A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than 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. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 (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,5 or laws of foreign jurisdictions that are substantially similar 6 to the U.S. laws referenced in this paragraph (1)(iii)(A)(1) in order to facilitate the orderly resolution of the defaulting counterparty; or (2) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of this definition; and (B) The agreement may limit 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 to the extent necessary for the counterparty to comply with the requirements of part 382 of this title, subpart I of part 252 of this title or part 47 of this title, 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, 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 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, 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. E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations (i) 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, or laws of foreign jurisdictions that are substantially similar 7 to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or (B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and (ii) The agreement may limit 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 to the extent necessary for the counterparty to comply with the requirements of part 382 of this title, subpart I of part 252 of this title or part 47 of this title, 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 § 324.3(d) with respect to that agreement. * * * * * Repo-style transaction means a repurchase or reverse repurchase transaction, or a securities borrowing or securities lending transaction, including a transaction in which the 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, (1) 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 8 to the U.S. laws referenced in this paragraph (3)(ii)(A)(1)(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 (3)(ii)(A)(1)(i) of this definition; and (2) The agreement may limit 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 to the extent necessary for the counterparty to comply with the requirements of part 382 of this title, subpart I of part 252 of this title or part 47 of this title, 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 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. 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 18:25 Oct 27, 2017 Jkt 244001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 50261 (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) of this part 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. 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. * * * * * 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 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, (i) 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, or laws of foreign jurisdictions that are substantially similar 1 to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; (B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and (ii) The agreement may limit the right to accelerate, terminate, and close-out 1 The FDIC expects to evaluate jointly with the Federal Reserve and the OCC whether foreign special resolution regimes meet the requirements of this paragraph. E:\FR\FM\30OCR2.SGM 30OCR2 50262 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 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 to the extent necessary for the counterparty to comply with the requirements of part 382 of this title, subpart I of part 252 of this title or part 47 of this title, 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. * * * * * ■ 5. 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. sradovich on DSK3GMQ082PROD with RULES2 § 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 § 324.2 of this chapter. Chapter 11 proceeding means a proceeding under Chapter 11 of Title 11, United States Code (11 U.S.C. 1101–74). Consolidated affiliate means an affiliate of another company that: (1) Either consolidates the other company, or is consolidated by the other company, on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards; (2) Is, along with the other company, consolidated with a third company on a financial statement prepared in accordance with principles or standards referenced in paragraph (1) of this definition; or VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 (3) For a company that is not subject to principles or standards referenced in paragraph (1), if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such principles or standards had applied. Control has the same meaning as in section 3(w) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)). Covered entity means a covered entity as defined by the Federal Reserve Board in 12 CFR 252.82. Covered QFC means a QFC as defined in § 382.2 of this part. Credit enhancement means a QFC of the type set forth in sections 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 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)). Default right means: (1) 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 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 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 § 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 proceeding means a proceeding in which the Federal Deposit Insurance Corporation is appointed as conservator or receiver under section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821). 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. Financial counterparty means a person that is: (1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company that is established or designated for purposes of compliance with 12 CFR 252.153; or a nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323); (ii) A depository institution as defined, in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or State credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841 (c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H)); (iii) An entity that is State-licensed or registered as; (A) A credit or lending entity, including a finance company; money E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers; (B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer; (iv) A regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4502(20)) or any entity for which the Federal Housing Finance Agency or its successor is the primary Federal regulator; (v) Any institution chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. 2001 et seq. that is regulated by the Farm Credit Administration; (vi) Any entity registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a securitybased swap dealer or a major securitybased swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); (vii) A securities holding company within the meaning specified in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(45); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–53(a)); (viii) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b– 2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3) but for section 3(c)(5)(C); or an entity that is deemed VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a–7 (17 CFR 270.3a–7) of the U.S. Securities and Exchange Commission; (ix) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in section 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); (x) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002); (xi) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator; or (xii) An entity that would be a financial counterparty described in paragraphs (1)(i) through (xi) of this definition, if the entity were organized under the laws of the United States or any State thereof. (2) The term ‘‘financial counterparty’’ does not include any counterparty that is: (i) A sovereign entity; (ii) A multilateral development bank; or (iii) The Bank for International Settlements. Financial market utility (FMU) means any person, regardless of the jurisdiction in which the person is located or organized, that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person, but does not include: (1) Designated contract markets, registered futures associations, swap data repositories, and swap execution facilities registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities exchanges, national securities associations, alternative trading systems, securitybased swap data repositories, and swap execution facilities registered under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), solely by reason of PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 50263 their providing facilities for comparison of data respecting the terms of settlement of securities or futures transactions effected on such exchange or by means of any electronic system operated or controlled by such entities, provided that the exclusions in this clause apply only with respect to the activities that require the entity to be so registered; or (2) Any broker, dealer, transfer agent, or investment company, or any futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator, solely by reason of functions performed by such institution as part of brokerage, dealing, transfer agency, or investment company activities, or solely by reason of acting on behalf of a FMU or a participant therein in connection with the furnishing by the FMU of services to its participants or the use of services of the FMU by its participants, provided that services performed by such institution do not constitute critical risk management or processing functions of the FMU. Investment advisory contract means any contract or agreement whereby a person agrees to act as investment adviser to or to manage any investment or trading account of another person. Master agreement means a QFC of the type set forth in sections 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 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)). Person has the same meaning as in 12 CFR 225.2. 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)). Retail customer or counterparty has the same meaning as in § 329.3 of this chapter. Small financial institution means a company that: (1) Is organized as a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a savings association, as defined in section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a farm credit system institution chartered under the Farm Credit Act of E:\FR\FM\30OCR2.SGM 30OCR2 50264 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 1971; or an insured Federal credit union or State-chartered credit union under the Federal Credit Union Act; and (2) Has total assets of $10,000,000,000 or less on the last day of the company’s most recent fiscal year. State means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands. Subsidiary of a covered FSI means any subsidiary of a covered FSI as defined in 12 U.S.C. 1813(w). U.S. agency has the same meaning as the term ‘‘agency’’ in 12 U.S.C. 3101. U.S. branch has the same meaning as the term ‘‘branch’’ in 12 U.S.C. 3101. 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. sradovich on DSK3GMQ082PROD with RULES2 § 382.2 Applicability. (a) General requirement. A covered FSI must ensure that each covered QFC conforms to the requirements of §§ 382.3 and 382.4 of this part. (b) Covered FSI. For purposes of this part a covered FSI means (1) 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 § 252.82(a)(1) of the Federal Reserve Board’s Regulation YY (12 CFR 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 (2) Any subsidiary of a covered FSI other than: (i) A subsidiary that is owned in satisfaction of debt previously contracted in good faith; (ii) A portfolio concern that is a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), or that has received from the Small Business Administration notice to proceed to qualify for a license as a Small Business Investment Company, which notice or license has not been revoked; or (iii) A subsidiary designed to promote the public welfare, of the type permitted VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- to moderate-income communities or families (such as providing housing, services, or jobs). (c) Covered QFCs. For purposes of this part, a covered QFC is: (1) With respect to a covered FSI that is a covered FSI on January 1, 2018, an in-scope QFC that the covered FSI: (i) Enters, executes, or otherwise becomes a party to on or after January 1, 2019; or (ii) Entered, executed, or otherwise became a party to before January 19, 2019, 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 a consolidated affiliate of the same person on or after January 1, 2019. (2) With respect to a covered FSI that becomes a covered FSI after January 1, 2018, an in-scope QFC that the covered FSI: (i) Enters, executes, or otherwise becomes a party to on or after the later of the date the covered FSI first becomes a covered FSI and January 1, 2019; or (ii) Entered, executed, or otherwise became a party to before the date identified in paragraph (c)(2)(i) of this section with respect to the covered FSI, 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 consolidated affiliate of the same person on or after the date identified in paragraph (c)(2)(i) of this section with respect to the covered FSI. (d) In-scope QFCs. An in-scope QFC is a QFC that explicitly: (1) Restricts the transfer of a QFC (or any interest or obligation in or under, or any property securing, the QFC) from a covered FSI; or (2) Provides one or more default rights with respect to a QFC that may be exercised against a covered FSI. (e) Rules of construction. For purposes of this part, (1) A covered FSI does not become a party to a QFC solely by acting as agent with respect to the QFC; and (2) 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. (f) Initial applicability of requirements for covered QFCs. (1) With respect to each of its covered QFCs, a covered FSI that is a covered FSI on January 1, 2018 must conform the covered QFC to the requirements of this part by: PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 (i) January 1, 2019, if each party to the covered QFC is a covered entity, covered bank, or covered FSI. (ii) July 1, 2019, if each party to the covered QFC (other than the covered FSI) is a financial counterparty that is not a covered entity, covered bank or covered FSI; or (iii) January 1, 2020, if a party to the covered QFC (other than the covered FSI) is not described in paragraph (f)(1)(i) or (ii) of this section or if, notwithstanding paragraph (f)(1)(ii), a party to the covered QFC (other than the covered FSI) is a small financial institution. (2) With respect to each of its covered QFCs, a covered FSI that is not a covered FSI on January 1, 2018 must conform the covered QFC to the requirements of this part by: (i) The first day of the calendar quarter immediately following 1 year after the date the covered FSI first becomes a covered FSI if each party to the covered QFC is a covered entity, covered bank, or covered FSI; (ii) The first day of the calendar quarter immediately following 18 months from the date the covered FSI first becomes a covered FSI if each party to the covered QFC (other than the covered FSI) is a financial counterparty that is not a covered entity, covered bank or covered FSI; or (iii) The first day of the calendar quarter immediately following 2 years from the date the covered FSI first becomes a covered FSI if a party to the covered QFC (other than the covered FSI) is not described in paragraph (f)(2)(i) or (ii) of this section or if, notwithstanding paragraph (f)(2)(ii), a party to the covered QFC (other than the covered FSI) is a small financial institution. (g) Rights of receiver unaffected. Nothing in this part shall in any manner limit or modify the rights and powers of the FDIC as receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Act, including, without limitation, the rights of the receiver to enforce provisions of the Federal Deposit Insurance 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) Covered QFCs not required to be conformed. (1) Notwithstanding § 382.2 of this part, a covered FSI is not required to conform a covered QFC to the requirements of this section if: (i) The covered QFC designates, in the manner described in paragraph (a)(2) of this section, the U.S. special resolution E:\FR\FM\30OCR2.SGM 30OCR2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 regimes as part of the law governing the QFC; and (ii) Each party to the covered QFC, other than the covered FSI, is (A) An individual that is domiciled in the United States, including any State; (B) A company that is incorporated in or organized under the laws of the United States or any State; (C) A company the principal place of business of which is located in the United States, including any State; or (D) A U.S. branch or U.S. agency. (2) A covered QFC designates the U.S. special resolution regimes as part of the law governing the QFC if the covered QFC: (i) Explicitly provides that the covered QFC is governed by the laws of the United States or a State of the United States; and (ii) Does not explicitly provide that one or both of the U.S. special resolution regimes, or a broader set of laws that includes a U.S. special resolution regime, is excluded from the laws governing the covered QFC. (b) Provisions required. A covered QFC must explicitly provide that: (1) In the event the covered FSI becomes subject to a proceeding under a U.S. special resolution regime, 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 regime 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 (2) In the event the covered FSI or an affiliate of the covered FSI becomes subject to a proceeding under a U.S. special resolution regime, 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 regime if the covered QFC were governed by the laws of the United States or a State of the United States. (c) Relevance of creditor protection provisions. The requirements of this section apply notwithstanding § 382.4(d), (f), and (h) of this part. § 382.4 Insolvency proceedings. This section does not apply to proceedings under Title II of the DoddFrank Act. (a) Covered QFCs not required to be conformed. Notwithstanding § 382.2 of this part, a covered FSI is not required VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 to conform a covered QFC to the requirements of this section if the covered QFC: (1) Does not explicitly provide 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; and (2) Does not explicitly 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 following an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding or would prohibit such a transfer only if 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. (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 following 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 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. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 50265 (d) 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; (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. (e) 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 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 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. (f) 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 after the stay period that is related, directly or indirectly, to the covered affiliate support provider becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding 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 E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 50266 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations similar proceeding other than a Chapter 11 proceeding; (2) Subject to paragraph (h) 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 (f)(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 (f)(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. (g) 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 p.m. (EST) 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 VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 business (including dealings in foreign exchange and foreign currency deposits). (3) Transferee. Transferee means a person to whom a covered affiliate credit enhancement is transferred upon the covered affiliate support provider entering a receivership, insolvency, liquidation, resolution, or similar proceeding or thereafter as part of the resolution, restructuring, or reorganization involving the covered affiliate support provider. (h) Creditor protections related to FDI Act proceedings. Notwithstanding paragraphs (d) and (f) 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 only in the following circumstances: (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)–(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. (i) 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. § 382.5 Approval of enhanced creditor protection conditions. (a) Protocol compliance. (1) Unless the FDIC determines otherwise based on the specific facts and circumstances, a covered QFC is deemed to comply with this part if it is amended by the universal protocol or the U.S. protocol. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 (2) A covered QFC will be deemed to be amended by the universal protocol for purposes of paragraph (a)(1) of this section notwithstanding the covered QFC being amended by one or more Country Annexes, as the term is defined in the universal protocol. (3) For purposes of paragraphs (a)(1) and (2) of this section: (i) The universal protocol means 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; (ii) The U.S. protocol means a protocol that is the same as the universal protocol other than as provided in paragraphs (a)(3)(ii)(A) through (F) of this section. (A) The provisions of Section 1 of the attachment to the universal protocol may be limited in their application to covered entities, covered banks, and covered FSIs and may be limited with respect to resolutions under the Identified Regimes, as those regimes are identified by the universal protocol; (B) The provisions of Section 2 of the attachment to the universal protocol may be limited in their application to covered entities, covered banks, and covered FSIs; (C) The provisions of Section 4(b)(i)(A) of the attachment to the universal protocol must not apply with respect to U.S. special resolution regimes; (D) The provisions of Section 4(b) of the attachment to the universal protocol may only be effective to the extent that the covered QFCs affected by an adherent’s election thereunder would continue to meet the requirements of this part; (E) The provisions of Section 2(k) of the attachment to the universal protocol must not apply; and (F) The U.S. protocol may include minor and technical differences from the universal protocol and differences necessary to conform the U.S. protocol to the differences described in paragraphs (a)(3)(ii)(A) through (E) of this section. (iii) Amended by the universal protocol or the U.S. protocol, with respect to covered QFCs between adherents to the protocol, includes amendments through incorporation of the terms of the protocol (by reference or otherwise) into the covered QFC; and (iv) The attachment to the universal protocol means the attachment that the universal protocol identifies as ‘‘ATTACHMENT to the ISDA 2015 E:\FR\FM\30OCR2.SGM 30OCR2 sradovich on DSK3GMQ082PROD with RULES2 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations UNIVERSAL RESOLUTION STAY PROTOCOL.’’ (b) Proposal of enhanced creditor protection conditions. (1) A covered FSI may request that the FDIC approve as compliant with the requirements of §§ 382.3 and 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 part that is different than that of § 382.4(d), (f), and (h). (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 § 382.4(d), (f), and (h) 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; VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 (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 (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 QFCs with FMUs. Notwithstanding § 382.2 of this part, a covered FSI is not required to conform to the requirements of this part a covered QFC to which: (1) A CCP is party; or (2) Each party (other than the covered FSI) is an FMU. (b) Exclusion of certain covered entity and covered bank QFCs. If a covered QFC is also a covered QFC under part 252 or part 47 of this title that an affiliate of the covered FSI is also required to conform pursuant to part 252 or part 47 and the covered FSI is: PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 50267 (1) The affiliate credit enhancement provider with respect to the covered QFC, then the covered FSI is required to conform the credit enhancement to the requirements of this part but is not required to conform the direct QFC to the requirements of this part; or (2) The direct party to which the covered entity or covered bank is the affiliate credit enhancement provider, then the covered FSI is required to conform the direct QFC to the requirements of this part but is not required to conform the credit enhancement to the requirements of this part. (c) Exclusion of certain contracts. Notwithstanding § 382.2 of this part, a covered FSI is not required to conform the following types of contracts or agreements to the requirements of this part: (1) An investment advisory contract that: (i) Is with a retail customer or counterparty; (ii) Does not explicitly restrict the transfer of the contract (or any QFC entered into pursuant thereto or governed thereby, or any interest or obligation in or under, or any property securing, any such QFC or the contract) from the covered FSI except as necessary to comply with section 205(a)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–5(a)(2)); and (iii) Does not explicitly provide a default right with respect to the contract or any QFC entered pursuant thereto or governed thereby. (2) A warrant that: (i) Evidences a right to subscribe to or otherwise acquire a security of the covered FSI or an affiliate of the covered FSI; and (ii) Was issued prior to January 1, 2018. (d) Exemption by order. The FDIC may exempt by order one or more covered FSI(s) from conforming one or more contracts or types of contracts to one or more of the requirements of this part after considering: (1) The potential impact of the exemption on the ability of the covered FSI(s), or affiliates of the covered FSI(s), 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; (2) The burden the exemption would relieve; and (3) Any other factor the FDIC deems relevant. ■ 6. Amend 382.1 by adding the definition of ‘‘covered bank’’ to read as follows: § 382.1 * E:\FR\FM\30OCR2.SGM Definitions. * * 30OCR2 * * 50268 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations sradovich on DSK3GMQ082PROD with RULES2 Covered bank means a covered bank as defined by the Office of the Comptroller of the Currency in 12 CFR part 47. * * * * * VerDate Sep<11>2014 18:25 Oct 27, 2017 Jkt 244001 Dated at Washington, DC, this 27th day of September 2017. By order of the Board of Directors. PO 00000 Federal Deposit Insurance Corporation. Valerie J. Best, Assistant Executive Secretary. [FR Doc. 2017–21951 Filed 10–27–17; 8:45 am] BILLING CODE P Frm 00042 Fmt 4701 Sfmt 9990 E:\FR\FM\30OCR2.SGM 30OCR2

Agencies

FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 82, Number 208 (Monday, October 30, 2017)]
[Rules and Regulations]
[Pages 50228-50268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21951]



[[Page 50227]]

Vol. 82

Monday,

No. 208

October 30, 2017

Part II





Federal Deposit Insurance Corporation





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12 CFR Parts 324, 329, and 382





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

Federal Register / Vol. 82 , No. 208 / Monday, October 30, 2017 / 
Rules and Regulations

[[Page 50228]]


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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: Final rule.

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SUMMARY: The FDIC is adding regulations 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''). This final rule requires that FSIs and their 
subsidiaries (``covered FSIs'') 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 are generally 
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 final rule also 
amends 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 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 restrictions on such QFCs.

DATES: The final rule is effective on January 1, 2018, except for 
amendatory instruction #6 which is delayed indefinitely. Once OCC 
adopts its related final rule, FDIC will publish a document announcing 
the effective date of the amendatory instruction.

FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate 
Director, [email protected], Capital Markets Branch, Division of 
Risk Management and Supervision; Alexandra Steinberg Barrage, Senior 
Resolution Policy Specialist, Office of Complex Financial Institutions, 
[email protected]; David N. Wall, Assistant General Counsel, 
[email protected], Cristina Regojo, Counsel, [email protected], Phillip 
Sloan, Counsel, [email protected], Michael Phillips, Counsel, 
[email protected], Greg Feder, Counsel, [email protected], or Francis 
Kuo, Counsel, [email protected], Legal Division, Federal Deposit Insurance 
Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. Background
    B. Notice of Proposed Rulemaking and General Summary of Comments
    C. Overview of the Final Rule
    D. Consultation With U.S. Financial Regulators
    E. Overview of Statutory Authority and Purpose
II. Restrictions on QFCs of Covered FSIs
    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
    E. Small Business Regulatory Enforcement Fairness Act

I. Introduction

A. Background

    This final 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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The 2016 Notices of Proposed Rulemaking
    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 entities'').\5\ Subsequent to 
the FRB NPRM, the OCC issued the OCC Notice of Proposed Rulemaking (OCC 
NPRM),\6\ which applies the same QFC

[[Page 50229]]

requirements to ``covered banks'' within the OCC's jurisdiction. The 
FDIC issued a parallel proposal (FDIC NPRM, also referred to as ``the 
proposal'' or ``the 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'').\7\ After 
considering the comments received on the FDIC NPRM, the FDIC is now 
finalizing its rule (``FDIC FR''). The final rule is intended to work 
in tandem with the FRB's final rule adopted on September 1, 2017 (``FRB 
FR'') and the OCC's expected final rule (``OCC FR'').
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    \3\ 81 FR 29169 (May 11, 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.  252.82(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 Sec.  252.82 (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 its final rule, the FRB also excluded entities supervised by the 
FDIC from the definition of a ``covered entity.'' 82 FR 42882 
(September 12, 2017).
    \6\ 81 FR 55,381 (Aug. 19, 2016).
    \7\ 81 FR 74,326 (Oct. 26, 2016).
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    The policy objective of this final rule is to improve the orderly 
resolution of a GSIB by limiting disruptions to a failed GSIB through 
its FSI subsidiaries' financial contracts with other companies. The FRB 
FR, the OCC FR, and FDIC FR complement the ongoing work of the FRB and 
the FDIC on resolution planning requirements for GSIBs.
    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; 
\8\ (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.\9\
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    \8\ 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 June 30, 
2017, the FDIC had primary supervisory responsibility for 3,711 
SNMBs and State-chartered savings associations.
    \9\ See https://www.fdic.gov/about/strategic/strategic/supervision.html.
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    The final 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. 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.\10\
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    \10\ For additional background regarding the interconnectivity 
of the largest financial firms, see FRB NPRM, 81 FR 29175-29176 (May 
11, 2016).
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    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 final 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.
    The FDIC received a total of 14 comment letters in response to the 
FDIC NPRM from trade groups representing GSIBs or GSIB groups, buy-side 
and end-users of derivatives, individuals and community advocates. 
There was substantial overlap in the comments received by the FRB, OCC 
and FDIC regarding the NPRMs. Notably, a copy of comments the commenter 
had already sent to the FRB or the OCC generally accompanied the 
comments received by the FDIC and were incorporate therein by 
reference. Commenters requested that the agencies coordinate in 
developing final rules and consider comments submitted to the other 
agencies regarding their NPRMs.
    All comments were considered in developing the final rule. Comments 
are discussed in the relevant sections that follow. The FDIC consulted 
with the FRB and the OCC in developing the final rule.
    Qualified financial contracts, default rights, and financial 
stability. Like the FDIC NPRM, this final rule pertains to several 
important classes of financial transactions that are collectively known 
as QFCs.\11\ QFCs include swaps, other derivatives contracts, 
repurchase agreements (also known as ``repos'') and reverse repos, and 
securities lending and borrowing agreements.\12\ Financial institutions 
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.
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    \11\ The final rule adopts the definition of ``qualified 
financial contract'' set out in section 210(c)(8)(D) of the Dodd-
Frank Act, 12 U.S.C. 5390(c)(8)(D). See final rule Sec.  382.1.
    \12\ 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. See final rule Sec.  382.1.
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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. The final rule focuses on a 
context in which that threat is especially great: The failure of a GSIB 
that is an affiliate of a covered FSI that is party to large volumes of 
QFCs, which are likely to include 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,\13\ 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.'' \14\ More recently, in April 2016,\15\ 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.\16\
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    \13\ 12 U.S.C. 5365(d).
    \14\ FRB and FDIC, ``Agencies Provide Feedback on Second Round 
Resolution Plans of `First-Wave' Filers'' (Aug. 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'' (Mar. 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 (Apr. 15, 2013), available at https://www.fdic.gov/news/news/press/2013/pr13027.html.
    \15\ See https://www.fdic.gov/news/news/press/2016/pr16031a.pdf, 
at 13.
    \16\ 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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[[Page 50230]]

    Direct defaults and cross-defaults. This rule focuses on two 
distinct scenarios in which a 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 \17\ to the 
QFC or an affiliate of that entity enters a resolution proceeding.\18\ 
The first scenario occurs when a GSIB entity that is itself a direct 
party to the QFC enters a resolution proceeding and such event gives 
rise to default rights under the QFC it is a party to; 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 and such event 
gives rise to default rights under the QFC it is a party to; 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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    \17\ 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.
    \18\ 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 proceedings 
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 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, the final rule does not affect all types of default 
rights, and, where it affects a default right, the rule 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 or to transfer the QFC. Moreover, the final rule 
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 final rule does 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 
and their affiliates often enter into large volumes of QFCs. 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. 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 of a GSIB. 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 final rule, by limiting such cross-default 
rights in covered QFCs 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 final rule is also 
intended to 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, the final rule should help support the 
continued operation of one or more affiliates of an entity that has 
entered 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 U.S. Bankruptcy Code, if a bank holding 
company were to fail, it would likely be resolved under the U.S. 
Bankruptcy Code. When an entity goes into resolution under the U.S. 
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.\19\ 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,

[[Page 50231]]

collectively cause a value-destroying disorderly liquidation of the 
debtor.\20\
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    \19\ See 11 U.S.C. 362.
    \20\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d 
876, 879 (7th Cir. 2001).
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    However, the U.S. Bankruptcy Code largely exempts QFC.\21\ 
counterparties of the debtor from the automatic stay through special 
``safe harbor'' provisions.\22\ Under these provisions, any rights that 
a QFC counterparty has to terminate the contract, set-off obligations, 
or 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 U.S. 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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    \21\ The U.S. 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 final rule.
    \22\ 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 
559, 560, 561. The U.S. 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 U.S. 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,\23\ 
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.
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    \23\ See 11 U.S.C. 362(a).
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    Title II of the Dodd-Frank Act and the Orderly Liquidation 
Authority. Title II of the Dodd-Frank Act (Title II) imposes stay 
requirements on QFCs of financial 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 U.S. Bankruptcy Code. With Title II 
of the Dodd-Frank Act, 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.\24\ Title II of the Dodd-Frank Act 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.\25\
---------------------------------------------------------------------------

    \24\ Section 204(a) of the Dodd-Frank Act, codified at 12 U.S.C. 
5384(a).
    \25\ See section 203 of the Dodd-Frank Act, codified at 12 
U.S.C. 5383.
---------------------------------------------------------------------------

    Title II of the Dodd-Frank Act 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.\26\ To give the FDIC time to effect this 
transfer, Title II of the Dodd-Frank Act 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.\27\ Once the QFCs are 
transferred in accordance with the statute, Title II of the Dodd-Frank 
Act permanently stays the exercise of default rights for those 
reasons.\28\
---------------------------------------------------------------------------

    \26\ See 12 U.S.C. 5390(c)(9).
    \27\ 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay 
generally lasts until 5 p.m. eastern time on the business day 
following the appointment of the FDIC as receiver.
    \28\ 12 U.S.C. 5390(c)(10)(B)(i)(II).
---------------------------------------------------------------------------

    Title II of the Dodd-Frank Act 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, if such contracts are guaranteed 
or otherwise supported by the covered financial company, 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.\29\
---------------------------------------------------------------------------

    \29\ 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 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. 
Further, 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.\30\
---------------------------------------------------------------------------

    \30\ See id.
---------------------------------------------------------------------------

    The Federal Deposit Insurance Act. Under the FDI Act, a failing 
insured depository institution would generally enter a receivership 
administered by the FDIC.\31\ 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.\32\ 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, or liquidate QFCs with such 
affiliates 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.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1821(c).
    \32\ See 12 U.S.C. 1821(e)(8)-(10).
---------------------------------------------------------------------------

B. Notice of Proposed Rulemaking and General Summary of Comments

    The proposal was intended to increase GSIB resolvability and 
resiliency by addressing two QFC-related issues. First, the proposal 
sought 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. Second, the proposal sought to address the 
potential disruptions 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 provided cross-default rights.
    Scope of application. The proposal's requirements would have 
applied 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 Sec.  252.82(a)(1) of the 
FRB's

[[Page 50232]]

Regulation YY (12 CFR 252.82); or (ii) a global systemically important 
foreign banking organization \33\ that has been designated pursuant to 
Sec.  252.87 of the FRB's Regulation YY (12 CFR 252.87). This final 
rule also makes clear that the mandatory contractual stay requirements 
apply to the subsidiaries of any covered FSI. Under the final 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.
---------------------------------------------------------------------------

    \33\ 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 FRB 
FR. Therefore, unlike the FRB FR, the FDIC is not including in the 
rule any special provisions relating to multi-branch netting 
arrangements.
---------------------------------------------------------------------------

    In the proposal, ``qualified financial contract'' or ``QFC'' was 
defined to have the same meaning as in section 210(c)(8)(D) of the 
Dodd-Frank Act,\34\ and included, among other arrangements, 
derivatives, repos, and securities borrowing and lending agreements. 
Subject to the exceptions discussed below, the proposal's requirements 
would have applied to any QFC to which a covered FSI is party (covered 
QFC).\35\ Under the proposal, a covered FSI would have been required to 
conform pre-existing QFCs if a covered FSI entered into a new QFC with 
a counterparty or its affiliate.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec.  382.1.
    \35\ 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, as a basis for 
termination of a QFC on account of the appointment of the FDIC as 
receiver (or the insolvency or financial condition of the company) 
remains unenforceable. This provision is retained in the final rule.
---------------------------------------------------------------------------

    Required contractual provisions related to the U.S. special 
resolution regimes. Under the proposal, covered FSIs would have been 
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 at least the same extent as they 
would be pursuant to the U.S. Special Resolution Regimes--that is, 
Title II and the FDI Act.\36\ The proposed requirements were 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 would be treated the same way in the context of an FDIC 
receivership under the Dodd-Frank Act or the FDI Act. This section of 
the proposal was also consistent with analogous legal requirements that 
have been imposed in other national jurisdictions \37\ and with the 
Financial Stability Board's ``Principles for Cross-border Effectiveness 
of Resolution Actions.'' \38\
---------------------------------------------------------------------------

    \36\ See proposed rule Sec.  382.3.
    \37\ See, e.g., Bank of England Prudential Regulation Authority, 
Policy Statement, ``Contractual stays in financial contracts 
governed by third-country law'' (Nov. 2015), available at https://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf.
    \38\ Financial Stability Board, ``Principles for Cross-border 
Effectiveness of Resolution Actions'' (Nov. 3, 2015), available at 
https://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
---------------------------------------------------------------------------

    Prohibited cross-default rights. Under the proposal, a covered FSI 
would generally have been 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.\39\ Covered FSIs would 
generally have been similarly prohibited from entering into covered 
QFCs that included 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.
---------------------------------------------------------------------------

    \39\ See proposed rule Sec.  382.4(b).
---------------------------------------------------------------------------

    The FDIC did not propose to prohibit covered FSIs from entering 
into QFCs that allow its counterparties to exercise direct default 
rights against the covered FSI.\40\ Under the proposal, a covered FSI 
also could, to the extent not inconsistent with Title II or the FDI 
Act, enter into a QFC that grants its counterparty the right to 
terminate the QFC if the covered FSI fails to perform its obligations 
under the QFC.
---------------------------------------------------------------------------

    \40\ However, those default rights would nonetheless have been 
subject to Title II and FDI Act.
---------------------------------------------------------------------------

    As an alternative to bringing their covered QFCs into compliance 
with the requirements set out in the proposed rule, covered FSIs would 
have been permitted to comply by adhering to the International Swaps 
and Derivatives Association (ISDA) 2015 Universal Resolution Stay 
Protocol, including the Securities Financing Transaction Annex and the 
Other Agreements Annex (together, the ``Universal Protocol'').\41\ The 
preamble to the proposal explained that the FDIC viewed the Universal 
Protocol as achieving an outcome consistent with the outcome intended 
by the requirements of the proposed rule by similarly limiting direct 
default rights and cross-default rights.
---------------------------------------------------------------------------

    \41\ ISDA, ``Attachment to the ISDA 2015 Universal Resolution 
Stay Protocol,'' (Nov. 4, 2015), available at https://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/. See proposed rule 
Sec.  382.5(a).
---------------------------------------------------------------------------

    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 would have 
generally restricted the exercise of cross-default rights by 
counterparties against a covered FSI. The proposal also would have 
allowed the FDIC, at the request of a covered FSI, to approve as 
compliant with the requirements of Sec.  382.5 proposed creditor 
protection provisions for covered QFCs.\42\
---------------------------------------------------------------------------

    \42\ See proposed rule Sec.  382.5(c).
---------------------------------------------------------------------------

    The FDIC would have been permitted to approve such a request if, in 
light of several enumerated considerations,\43\ the alternative 
creditor protections 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.\44\
---------------------------------------------------------------------------

    \43\ See proposed rule Sec.  382.5(c).
    \44\ This provision is retained in the final rule and 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 have amended 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 would not be affected by the proposed restrictions on such 
QFCs. Specifically, the proposal would have amended the definition of 
``qualifying master netting agreement'' in the FDIC's regulatory 
capital and liquidity rules and would have similarly amended the 
definitions of the terms ``collateral agreement,'' ``eligible margin 
loan,'' and ``repo-style transaction'' in the FDIC's regulatory capital 
rules.\45\
---------------------------------------------------------------------------

    \45\ See proposed rule Sec. Sec.  324.2 and 329.3.
---------------------------------------------------------------------------

    Comments on the Proposal. The FDIC received 14 comments on the 
proposed rule from banking organizations, trade associations, public 
interest advocacy groups, and private individuals. FDIC staff also met 
with some commenters at

[[Page 50233]]

their request to discuss their comments on the proposal, and summaries 
of these meetings may be found on the FDIC's public Web site.
    A number of commenters including GSIBs that would be subject to the 
proposed requirements included in the proposal expressed strong support 
for the proposed rule as a well-considered effort to reduce systemic 
risk with minimal burden and as an important step to ensure a more 
efficient and orderly resolution process for GSIB entities and thereby 
to protect the stability of the U.S. financial system. Other 
commenters, however, expressed concern with the proposed rule. These 
commenters generally argued that the proposal should not restrict 
contractual rights of GSIB counterparties and contended that the 
proposal would have shifted the costs of resolving the covered FSIs, 
covered entities, and covered banks to non-defaulting counterparties. 
Some commenters argued that the proposal would not assuredly mitigate 
systemic risk, as the requirements could result in increased market and 
credit risk for QFC counterparties of a GSIB. Commenters also argued 
that it would be more appropriate for Congress to impose the proposal's 
restrictions on contractual rights through the legislative process 
rather than through a regulation.
    As described above, the proposal applied to ``covered FSIs.'' A 
covered FSI included any subsidiary of a covered FSI. The proposal 
defined ``subsidiary of a covered FSI'' as an entity owned or 
controlled directly or indirectly by a covered FSI. ``Control'' was 
defined by reference to the Bank Holding Company Act of 1956, as 
amended (``BHC Act''). The other NPRMs similarly used the definition of 
control from the BHC Act for purposes of determining the entities that 
would have been subject to the requirements of the NPRMs. Commenters 
urged the agencies to move to a financial consolidation standard to 
define the subsidiaries of covered FSIs, arguing that the concept of 
control under the BHC Act includes entities (1) that are not under the 
operational control of the GSIB entity and (2) over whom the GSIB may 
not have the practical ability to require remediation. Furthermore, 
commenters urged that non-financial consolidated subsidiaries are 
unlikely to raise the types of concerns for the orderly resolution of 
GSIBs targeted by the proposal. For similar reasons, these commenters 
argued that, for purposes of the requirement that a covered FSI conform 
existing QFCs if a covered FSI enters into a new QFC with a 
counterparty or its affiliate, a counterparty's ``affiliate'' should 
also be defined by reference to financial consolidation rather than BHC 
Act control. Commenters also expressed concern that the definition of 
``covered QFCs'' under the proposal was overly broad. The proposal 
required a covered QFC to explicitly provide that it is subject to the 
stay-and-transfer provisions of Title II and the FDI Act and generally 
prohibited a covered FSI from being a party to a QFC that would allow 
the exercise of cross-default rights. Commenters argued that the final 
rule should exclude QFCs that do not contain any contractual transfer 
restrictions, direct default rights, or cross-default rights, as these 
QFCs do not give rise to the risk that counterparties will exercise 
their contractual rights in a manner that is inconsistent with the 
provisions of the U.S. Special Resolution Regimes. Commenters also 
urged the FDIC to exclude QFCs governed by U.S. law from the 
requirement that QFCs explicitly ``opt in'' to the U.S. Special 
Resolution Regimes since it is already clear that such QFCs are subject 
to the stay-and-transfer provisions of Title II and the FDI Act. With 
respect to the proposal's prohibition against provisions that would 
allow the exercise of cross-default rights in covered QFCs of a GSIB, 
commenters argued that the final rule should clarify that QFCs that do 
not contain such cross-default rights or transfer restrictions 
regarding related credit enhancements are not within the scope of the 
prohibition.
    Commenters also requested that certain types of contracts that may 
include transfer or default rights subject to the proposal's 
requirements (e.g., warrants; certain commodity contracts including 
commodity swaps; certain utility and gas supply contracts; certain 
retail customer and investment advisory agreements; securities 
underwriting agreements; securities lending authorization agreements) 
be excluded from all requirements of the final rule because these types 
of contracts do not raise the risks to the resolution of a covered FSI 
or financial stability that are the target of this final rule and 
because certain existing contracts of these types would be difficult, 
if not impossible, to amend. Commenters also requested that securities 
contracts that typically settle in the short term or that typically 
include only transfer restrictions and not default rights similarly be 
excluded from all requirements of the final rule because they do not 
impose ongoing or continuing obligations on either party after 
settlement. In all of the above cases, commenters argued that 
remediation of such outstanding contracts would be burdensome with no 
meaningful resolution benefits. Certain commenters also urged that the 
final rule apply only to contracts entered into after the final rule's 
effective date and not to contracts existing as of the final rule's 
effective date.
    As noted above, the proposal would have deemed compliant covered 
QFCs amended by the existing Universal Protocol (which allows for 
creditor protections in addition to those otherwise permitted by the 
proposed rule). Commenters generally supported this aspect of the 
proposal, although they requested express clarification that adherence 
to the existing Universal Protocol would satisfy all of the 
requirements of the final rule. Commenters urged that the final rule 
should also provide a safe harbor for a future ISDA protocol that would 
be substantially similar to the existing Universal Protocol except that 
it would seek to address the specific needs of buy-side market 
participants, such as asset managers, insurance companies, and pension 
funds who are counterparties to QFCs with GSIBs, to allow, for example, 
entity-by-entity adherence and the exclusion of certain foreign special 
resolution regimes.
    Commenters expressed support for the exemption in the proposal for 
cleared QFCs but requested that this exemption be broadened to extend 
to the client leg of a cleared back-to-back transaction and also to 
exclude any contract cleared, processed, or settled on a financial 
market utility (FMU) as well as any QFC conducted according to the 
rules of an FMU. Commenters also requested an exemption for QFCs with 
sovereign entities and central banks. Commenters further requested a 
longer period of time for covered FSIs, entities, and banks to conform 
covered QFCs with certain types of counterparties to the requirements 
of the final rule. Commenters also requested that the FDIC coordinate 
with other regulatory agencies, consider comments submitted to the OCC 
and the FRB regarding their proposals and from entities not regulated 
by the FDIC, and finalize a rule with conformance periods consistent 
with the OCC's and FRB's final rules. In addition, commenters requested 
confirmation that modifications to contracts to comply with this rule 
would not trigger other regulatory requirements (e.g., margin 
requirements for non-cleared swaps) or impact the enforceability of 
QFCs. The FDIC has considered the comments received on the proposal, 
including those of entities not regulated by the

[[Page 50234]]

FDIC, as well as the comments submitted to the OCC and FRB regarding 
their respective proposals, and these comments and any corresponding 
changes in the final rule are described in more detail throughout the 
remainder of this SUPPLEMENTARY INFORMATION.

C. Overview of Final Rule

    The FDIC is adopting this final rule to improve the resolvability 
of GSIBs and thereby furthering financial stability and enhancing the 
resilience, and the safety and soundness of covered FSIs. The FDIC has 
made a number of changes to the proposal in response to concerns raised 
by commenters, as further described below.
    The final rule is intended to protect covered FSIs and to 
facilitate the orderly resolution of the most systemically important 
banking firms--GSIBs--by limiting the ability of the counterparties of 
the firms' FSI subsidiaries to terminate qualified financial contracts 
upon the entry of the GSIB or one or more of its affiliates into 
resolution. The rule requires the inclusion of contractual restrictions 
on the exercise of certain default rights in those QFCs. In particular, 
the final rule requires the QFCs of covered FSIs to contain contractual 
provisions that opt into the stay-and-transfer provisions of the FDI 
Act and the Dodd-Frank Act to reduce the risk that the stay-and-
transfer related actions by the receiver would be successfully 
challenged by a QFC counterparty or a court in a foreign jurisdiction. 
The final rule also prohibits covered FSIs from entering into QFCs that 
contain cross-default rights, subject to certain creditor protection 
exceptions that would not be expected to interfere with an orderly 
resolution.
    The final rule also furthers the implementation of the Universal 
Protocol, which extends, through contractual agreement, the application 
of the resolution frameworks of the FDI Act and the Dodd-Frank Act to 
all QFCs entered into by an adhering GSIB and its adhering 
subsidiaries, including QFCs entered into outside of the United States, 
and establishes restrictions on cross-default rights that are similar 
to those in the final rule. The final rule is necessary to implement 
the Universal Protocol provisions regarding the resolution of a GSIB 
under the U.S. Bankruptcy Code, as these provisions do not become 
effective until implemented by U.S. regulations. To support further 
adherence to the Universal Protocol, the final rule creates a safe 
harbor allowing covered FSIs to sign up to the Universal Protocol and 
thereby amend their QFCs pursuant to the Universal Protocol as an 
alternative to implementing the restrictions of the final rule on a 
counterparty-by-counterparty basis. In addition, the final rule 
provides that covered QFCs amended pursuant to adherence of a covered 
FSI to a new protocol (the ``U.S. Protocol'') would be deemed to 
conform to the requirements of the final rule. The U.S. Protocol may 
differ (and is required to differ) from the Universal Protocol in 
certain respects discussed below, but otherwise must be substantively 
identical to the Universal Protocol.
    The final rule requires covered FSIs to conform certain covered 
QFCs to the requirements of the final rule beginning one year after the 
effective date of the final rule (first compliance date) and phases in 
conformance requirements with respect to all covered QFCs over a two-
year period depending on the type of counterparty. As explained below, 
a covered FSI generally is required to conform pre-existing QFCs only 
if the covered FSI or an affiliate of the covered FSI enters into a new 
QFC with the same counterparty or a consolidated affiliate of the 
counterparty on or after the first compliance date.
Covered FSIs
    The final rule, like the proposal, applies to ``covered FSIs,'' 
which generally are State savings associations and State non-member 
banks and their subsidiaries. ``Subsidiary'' continues to be defined in 
the final rule by reference to BHC Act control. As discussed below, 
certain other types of subsidiaries, including a subsidiary that is 
owned in satisfaction of debt previously contracted in good faith, a 
portfolio concern controlled by a small business investment company, or 
a subsidiary that promotes the public welfare, are excluded from the 
definition of covered FSI and therefore not required to conform any 
QFCs.
Covered Qualified Financial Contracts
    The final rule like the proposal defines ``qualified financial 
contract'' or ``QFC'' to have the same meaning as in section 
210(c)(8)(D) of the Dodd-Frank Act \46\ and would include, among other 
things, derivatives, repos, and securities lending agreements.\47\ 
Subject to the exceptions discussed below, the final rule's 
requirements apply to any QFC to which a covered FSI is party (covered 
QFC). The final rule makes clear that covered FSIs do not need to 
conform QFCs that have no transfer restrictions, direct default rights, 
or cross-default rights as these QFCs have no provisions that the rule 
is intended to address.\48\ The final rule also excludes certain retail 
investment advisory agreements, and certain existing warrants. It also 
provides the FDIC with authority to exempt one or more covered FSIs 
from conforming certain contracts or types of contracts to the one or 
more of the requirements of the final rule after considering, in 
addition to any other factor the FDIC deems relevant, the burden the 
exemption would relieve and the potential impact of the exemption on 
the resolvability of the covered FSI or its affiliates.\49\
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec.  382.1.
    \47\ See final rule Sec.  382.1.
    \48\ See final rule Sec.  382.2.
    \49\ See final rule Sec.  382.7.
---------------------------------------------------------------------------

    The final rule also makes clear that a covered FSI must conform 
existing QFCs with a counterparty if the GSIB group (i.e., the covered 
FSI or its affiliates that are covered FSIs or covered banks or covered 
entities) enters into a new QFC with that counterparty or its 
consolidated affiliate, defined by reference to financial consolidation 
principles. In particular, the final rule provides that a covered QFC 
includes a QFC that the covered FSI entered, executed, or otherwise 
became a party to before the first compliance date of this final rule 
if the covered FSI or any affiliate that is a covered FSI, covered 
entity or covered bank also enters, executes, or otherwise becomes a 
party to a QFC with the same person or a consolidated affiliate of that 
person on or after the first compliance date.\50\ ``Consolidated 
affiliate'' is a defined term in the final rule that is defined by 
reference to financial consolidation principles.\51\
---------------------------------------------------------------------------

    \50\ See final rule Sec.  382.2(c).
    \51\ See final rule Sec.  382.1.
---------------------------------------------------------------------------

Required Contractual Provisions Related to the U.S. Special Resolution 
Regimes
    Under the final rule, covered FSIs are 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.\52\ However, any covered QFC that is governed under 
U.S. law and involves only parties (other than the covered FSI) that 
are domiciled (in the case of individuals), incorporated in, organized 
under, the laws of the United States or any State, or whose principal 
place of business is located in the United States, including any State, 
or that is a U.S. branch or U.S. agency (U.S. counterparties) is also

[[Page 50235]]

excluded from the requirements of the final rule relating to Title II 
of the Dodd-Frank Act and the FDI Act because it is clear that in these 
circumstances the stay-and-transfer provisions of those acts would be 
enforceable in a U.S. forum.\53\
---------------------------------------------------------------------------

    \52\ See final rule Sec.  382.3.
    \53\ See final rule Sec.  382.3.
---------------------------------------------------------------------------

Prohibited Cross-Default Rights
    Under the final rule, a covered FSI is 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.\54\ Covered FSIs are similarly prohibited from entering into 
covered QFCs that would restrict the transfer of a credit enhancement 
supporting the QFC from the covered FSI's affiliate to a transferee 
upon the entry into resolution of the affiliate.\55\
---------------------------------------------------------------------------

    \54\ See final rule Sec.  382.4(b).
    \55\ See id.
---------------------------------------------------------------------------

    The final rule does not prohibit covered FSIs from entering into 
QFCs that provide their counterparties with direct default rights 
against the covered FSI. Under the final rule, a covered FSI may be a 
party to a QFC that provides the counterparty with the right to 
terminate the QFC if the covered FSI fails to perform its obligations 
under the QFC.\56\
---------------------------------------------------------------------------

    \56\ These rights may nonetheless be subject to limitations 
governing their exercise in a resolution under Title II or the FDI 
Act.
---------------------------------------------------------------------------

Industry-Developed Protocol
    As an alternative to bringing their covered QFCs into compliance 
with the requirements of the final rule, the final rule allows covered 
FSIs to comply with the rule by adhering to the Universal Protocol.\57\ 
The final rule also permits compliance with the final rule through 
adherence to a new protocol (the U.S. Protocol) that is the same as the 
existing Universal Protocol but for minor changes intended to encourage 
a broader range of QFC counterparties to adhere only with respect to 
covered FSIs, covered entities, and covered banks. The Universal 
Protocol and the U.S. Protocol differ from the requirements of this 
final rule in certain respects. Nevertheless, as described in greater 
detail below, the final rule allows compliance through adherence to 
these protocols in light of the fact that the protocols contain certain 
desirable features that the final rule lacks and produce outcomes 
substantially similar to this final rule.
---------------------------------------------------------------------------

    \57\ See final rule Sec.  382.5(a).
---------------------------------------------------------------------------

Process for Approval of Enhanced Creditor Protection Conditions
    The final rule also allows the FDIC, at the request of a covered 
FSI, to approve as compliant with the final rule covered QFCs with 
creditor protections other than those that would otherwise be permitted 
under Sec.  382.4 of the final rule.\58\ The FDIC could approve such a 
request if, in light of several enumerated considerations, the 
alternative approach would prevent or mitigate risks to the financial 
stability of the United States presented by a GSIB's failure and would 
protect the safety and soundness of covered FSIs to at least the same 
extent as the final rule's requirements.\59\
---------------------------------------------------------------------------

    \58\ See final rule Sec.  382.5(c).
    \59\ See final rule Sec.  382.5(c) and (d).
---------------------------------------------------------------------------

Amendments to Certain Definitions in the FDIC's Capital and Liquidity 
Rules
    The final rule also amends 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 
final rule amends the definition of ``qualifying master netting 
agreement'' in the FDIC's regulatory capital and liquidity rules and 
similarly amends the definitions of the terms ``collateral agreement,'' 
``eligible margin loan,'' and ``repo-style transaction'' in the FDIC's 
regulatory capital rules.

D. Consultation With U.S. Financial Regulators

    In developing this final rule, the FDIC consulted with the FRB and 
the OCC as a means of promoting alignment across regulations and 
avoiding redundancy. Furthermore, the FDIC has consulted with and 
expects to continue to consult with foreign financial regulatory 
authorities regarding the implementation of this final rule 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.\60\
---------------------------------------------------------------------------

    \60\ Several commenters requested that the FDIC consult with the 
FRB and the OCC in developing its final rule and coordinate its 
final rule with that of the FRB and OCC. Certain commenters also 
requested that the FDIC consult with foreign regulatory authorities 
in developing its final rule.
---------------------------------------------------------------------------

    The FRB has finalized a rulemaking that would subject entities to 
requirements substantially identical to those finalized here for 
covered FSIs. Similarly, the OCC is expected to finalize a rulemaking 
that would subject covered banks, including the national banks of 
GSIBs, to requirements substantially identical to those proposed here 
for covered FSIs. The FDIC has consulted with the OCC and the FRB in 
the development of their respective final rules. The banking agencies 
have endeavored to harmonize their respective rules to the extent 
possible and to provide specificity and clarity in the final rule to 
minimize the possibility of conflicting interpretations or uncertainty 
in their application. Moreover, the banking agencies intend to consult 
with each other and coordinate as needed regarding implementation of 
the final rule.

E. Overview of Statutory Authority and Purpose

    The FDIC is issuing this final rule under its authorities under the 
FDI Act (12 U.S.C. 1811 et seq.), including its general rulemaking 
authorities.\61\ The FDIC views the final rule as consistent with its 
overall statutory mandate.\62\ An overarching purpose of the final 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.
---------------------------------------------------------------------------

    \61\ See 12 U.S.C. 1819.
    \62\ The FDIC is (i) the primary Federal supervisor for SNMBs 
and State savings associations; (ii) insurer of deposits and manager 
of the 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, 
1831u, 5301 et seq.
---------------------------------------------------------------------------

    As discussed above, 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 could stress the DIF, which is 
managed by the FDIC.
    While a 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 GSIB. 
Additionally, the application of the final rule to the QFCs of covered 
FSIs should avoid creating what may otherwise be

[[Page 50236]]

an incentive for GSIBs and their counterparties to concentrate QFCs in 
entities that are subject to fewer counterparty restrictions.

II. Restrictions on QFCs of Covered FSIs

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

    The proposed rule applied to ``covered FSIs.'' The term ``covered 
FSI'' included: 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 Sec.  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 Sec.  252.87 of the 
FRB's Regulation YY (12 CFR 252.87). Under the proposed rule, the term 
``covered FSI'' included any ``subsidiary of covered FSI.''
    The definition of ``subsidiary'' under the proposal included any 
company that is owned or controlled directly or indirectly by another 
company where the term ``control'' was defined by reference to the BHC 
Act.\63\ The BHC Act definition of control includes ownership, control 
or the power to vote 25 percent of any class of voting securities; 
control in any manner of the election of a majority of the directors or 
trustees of; or exercise of a controlling influence over the management 
or policies.\64\
---------------------------------------------------------------------------

    \63\ See 12 CFR 252.2.
    \64\ 12 U.S.C. 1841(a).
---------------------------------------------------------------------------

    Commenters noted that covered FSIs are not excluded from the 
definition of covered entities in the FRB NPRM. They urged the FDIC to 
coordinate with the FRB and the OCC to ensure that only a single set of 
rules applies to a GSIB entity. As discussed above, the banking 
agencies have coordinated and the FRB final rule excludes covered FSIs 
from the scope of entities covered by that rule.\65\
---------------------------------------------------------------------------

    \65\ Commenters requested further clarification on the 
interaction between the final rules of the banking agencies to avoid 
legal uncertainty. As noted above, each banking agency either has 
already or is in the process of finalizing rules that are 
substantially identical to this final rule, and the banking agencies 
are expected to coordinate in the interpretation of the rules. 
Section 382.7(b) of the final rule, which addresses potential 
overlap between the agencies' final rules, has been clarified in 
response to commenters' requests. Section 382.7(b) is discussed in 
more detail below.
---------------------------------------------------------------------------

    A number of commenters urged the agencies to move to a financial 
consolidation standard to define a ``subsidiary'' of a covered entity, 
covered bank or covered FSI instead of by reference to BHC Act 
control.\66\ These commenters argued that, under Generally Accepted 
Accounting Principles, a company generally would consolidate an entity 
in which it holds a majority voting interest or over which it has the 
power to direct the most significant economic activities, to the extent 
it also holds a variable interest in the entity. In addition, 
commenters asserted that financially consolidated subsidiaries are 
often subject to operational control and generally fully integrated 
into the parent's enterprise-wide governance, policies, procedures, 
control frameworks, business strategies, information technology 
systems, and management systems. These commenters noted that the 
concept of BHC Act control was designed to serve other policy purposes 
(e.g., separation between banking and commercial activities). A number 
of commenters argued that BHC Act control may include an entity that is 
not under the day-to-day operational control of the GSIB and over whom 
the GSIB does not have the practical ability to require remediation of 
that entity's QFCs to comply with the proposed rule. Moreover, 
commenters contended that entities that are not consolidated with a 
GSIB for financial reporting purposes are unlikely to raise the types 
of concerns for the orderly resolution of GSIBs targeted by the 
proposal. Commenters also noted that the Universal Protocol and, 
generally, the standard forms of ISDA master agreements define 
``affiliate'' by reference to ownership of a majority of the voting 
power of an entity or person. For these reasons, commenters urged that 
the term ``subsidiary'' of a covered FSI should be based on financial 
consolidation under the final rule.
---------------------------------------------------------------------------

    \66\ Commenters generally expressed a similar view with respect 
to the definition of ``affiliate'' of a covered FSI as the term is 
used in Sec. Sec.  382.3 and 382.4 of the proposed rule. That term 
which was similarly defined by reference to BHC Act control under 
the proposal.
---------------------------------------------------------------------------

    Commenters urged that regardless of whether financial consolidation 
standard is adopted for the purpose of defining ``subsidiary,'' the 
final rule should exclude from the definition of ``covered FSI, covered 
bank, or covered entity'' entities over which the GSIB does not 
exercise operational control, such as merchant banking portfolio 
companies, section 2(h)(2) companies, joint ventures, sponsored funds 
as distinct from their sponsors or investment advisors, securitization 
vehicles, entities in which the GSIB holds only a minority interest and 
does not exert a controlling influence, and subsidiaries held pursuant 
to provisions for debt previously contracted in good faith (DPC 
subsidiaries).\67\ Further, commenters asked the FDIC to coordinate 
with the FRB and the OCC to ensure the scope of entities covered under 
the terms ``subsidiary'' and ``affiliate'' is consistent. Consistent 
with the FRB and the OCC, the FDIC is excluding from the definition of 
``covered FSI'' subsidiaries that are portfolio concerns, as defined 
under 13 CFR 107.50, that is controlled by a small business investment 
company, as defined in section 103(3) of the Small Business Investment 
Act of 1958 (15 U.S.C. 662), or that is owned pursuant to paragraph 
(11) of section 5136 of the Revised Statutes of the United States (12 
U.S.C. 24) and designed to promote the public welfare, and companies 
owned in satisfaction of debt previously contracted in good faith.
---------------------------------------------------------------------------

    \67\ See, e.g., 12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 CFR 
225.12(b), 225.22(d)(1).
---------------------------------------------------------------------------

    Certain commenters requested other exclusions from the definition 
of ``covered entity'' that are not applicable to the FDIC's final rule. 
For example, certain commenters argued that subsidiaries of foreign 
GSIBs for which the foreign GSIB has been given special relief by an 
FRB order not to hold the subsidiary under an intermediate holding 
company (IHC) should not be included in the definition of covered 
entity, even if such entities would be consolidated under financial 
consolidation principles. The FDIC is not addressing these comments.
    Under the final rule, a ``covered FSI'' is generally 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 Sec.  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 Sec.  252.87 of the FRB's Regulation YY (12 CFR 252.87), 
and any subsidiary of a covered FSI, other than a portfolio concern, as 
defined under 13 CFR 107.50 that is controlled by a small business 
investment company as defined in section 103(3) of the Small Business 
Investment Act of 1958 (15 U.S.C. 662) or owned pursuant to paragraph 
(11) of section 5136 of the Revised Statutes of the United States (12 
U.S.C. 24).
    U.S. GSIB subsidiaries. Covered FSI would also generally include 
all subsidiaries of a covered FSI other than

[[Page 50237]]

the exceptions noted above.\68\ Therefore, in order to increase the 
resilience and resolvability of the FSI and the entire GSIB entity of 
which it is a part by addressing the potential obstacles to orderly 
resolution posed by QFCs, it is necessary to apply the restrictions to 
the subsidiaries. In particular, to facilitate the resolution of a GSIB 
under an SPOE strategy, in which only the top-tier holding company 
would enter a resolution proceeding while its subsidiaries would 
continue to meet their financial obligations, or an MPOE strategy where 
an affiliate of an entity that is otherwise performing under a QFC 
enters resolution, it is necessary to ensure that those subsidiaries or 
affiliates do not enter into QFCs that contain cross-default rights 
that the counterparty could exercise based on the holding company's or 
an affiliate's entry into resolution (or that any such cross-default 
rights are stayed when the holding company enters resolution). 
Moreover, including U.S. and non-U.S. entities as covered FSIs should 
help ensure that such cross-default rights do not affect the ability of 
performing and solvent entities--regardless of jurisdiction--to remain 
outside of resolution proceedings.
---------------------------------------------------------------------------

    \68\ See final rule Sec.  382.2(b).
---------------------------------------------------------------------------

    ``Subsidiary'' in the final rule continues to be defined by 
reference to BHC Act control as does the definition of ``affiliate.'' 
\69\ The final rule does not limit the definition of covered FSIs to 
only those subsidiaries of GSIBs that are financially consolidated as 
requested by certain commenters. Defining ``subsidiary'' and 
``affiliate'' by reference to BHC Act control is consistent with the 
definitions of those terms in the FDI Act and Title II of the Dodd-
Frank Act. Specifically, Title II permits the FDIC, as receiver of a 
covered financial company or as receiver for its subsidiary, to enforce 
QFCs and other contracts of subsidiaries and affiliates, defined by 
reference to the BHC Act, notwithstanding cross-default rights based 
solely on the insolvency, financial condition, or receivership of the 
covered financial company.\70\ Therefore, maintaining consistent 
definitions of subsidiary and affiliate with Title II should better 
ensure that QFC stays may be effected in resolution under a U.S. 
Special Resolution Regime. As covered FSIs are subsidiaries of GSIBs 
that are already subject to the requirements of the BHC Act, they 
should already know all of their BHC Act controlled subsidiaries and be 
familiar with BHC Act control principles.
---------------------------------------------------------------------------

    \69\ See final rule Sec.  382.1.
    \70\ 12 U.S.C. 5390(c)(16).
---------------------------------------------------------------------------

B. Covered QFCs (Section 382.2 of the Final Rule)

    General definition. The proposal applied to any ``covered QFC,'' 
generally defined as any QFC that a covered FSI enters into, executes, 
or otherwise becomes party to with the person or an affiliate of the 
same person.\71\ Under the proposal, ``qualified financial contract'' 
or ``QFC'' was defined as in section 210(c)(8)(D) of Title II of the 
Dodd-Frank Act and included swaps, repo and reverse repo transactions, 
securities lending and borrowing transactions, commodity contracts, 
securities contracts, and forward agreements.\72\
---------------------------------------------------------------------------

    \71\ See proposed rule Sec. Sec.  382.1 and 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 the definition of ``covered QFC.''
    \72\ See proposed rule Sec.  382.1. See also 12 U.S.C. 
5390(c)(8)(D).
---------------------------------------------------------------------------

    The application of the rule's requirements to a ``covered QFC'' was 
one of the most commented upon aspects of the proposal. Certain 
commenters argued that the definition of QFC in Title II of the Dodd-
Frank Act was overly broad and imprecise and could include agreements 
that market participants may not expect to be subject to the stay-and-
transfer provisions of the U.S. Special Resolution Regimes. More 
generally, commenters argued that the proposed definition of QFC was 
too broad and would capture contracts that do not present any obstacles 
to an orderly resolution. Commenters advocated for the exclusion of a 
variety of types of QFCs from the requirements of the final rule. In 
particular, a number of commenters requested the exclusion of QFCs that 
do not contain any transfer restrictions or default rights, because 
these types of QFCs do not give rise to the risk that counterparties 
will exercise their contractual rights in a manner that is inconsistent 
with the provisions of the U.S. Special Resolution Regimes. Commenters 
provided several examples of contracts that they asserted fall into 
this category, including cash market securities transactions, certain 
spot FX transactions (including securities conversion transactions), 
retail brokerage agreements, retirement/IRA account agreements, margin 
agreements, options agreements, FX forward master agreements, and 
delivery versus payment client agreements. Commenters contended that 
these types of QFCs number in the millions at some firms and that 
remediating these contracts to include the express provisions required 
by the final rule would require an enormous client outreach effort that 
would be extremely burdensome and costly while providing no meaningful 
resolution benefits. For example, commenters indicated that for certain 
types of transactions, such as cash securities transactions, FX spot 
transactions, and retail QFCs, such a requirement could require an 
overhaul of existing market practice and documentation that affects 
hundreds of thousands, if not millions, of transactions occurring on a 
daily basis and significant education of the general market.
    Commenters also requested the exclusion of QFCs that do not contain 
any default or cross-default rights but that may contain transfer 
restrictions. Commenters contended that examples of these types of 
agreements included investment advisory account agreements with retail 
customers, which contain transfer restrictions as required by section 
205(a)(2) of the Investment Advisers Act of 1940, but no direct default 
or cross-default rights; underwriting agreements; \73\ and client 
onboarding agreements. A few commenters provided prime brokerage or 
margin loan agreements as examples of transactions that generally do 
not have default or cross-default rights but may have transfer 
restrictions. Another commenter also requested the exclusion of 
securities market transactions that generally settle in the short term, 
do not impose ongoing or continuing obligations on either party after 
settlement, and do not typically include default rights.\74\ In these 
cases, commenters contended that remediation of these agreements would 
be burdensome with no meaningful resolution benefits.
---------------------------------------------------------------------------

    \73\ However, certain commenters noted that underwriting, 
purchase, subscription or placement agency agreements may contain 
rights that could be construed as cross-default rights or default 
rights.
    \74\ In the alternative, the commenter requested that such 
securities market transactions be excluded to the extent they are 
cleared, processed, and settled through (or subject to the rules of) 
FMUs through expansion of the proposed exemption for transactions 
with central counterparties. This aspect of the comment is addressed 
in the subsequent section discussing requests for expansion of the 
proposed exemption for transactions with central counterparties.
---------------------------------------------------------------------------

    Commenters also argued for the exclusion of a number of other types 
of contracts from the definition of covered QFC in the final rule. In 
particular, a number of commenters urged that contracts issued in the 
capital markets or related to a capital market issuance like warrants 
or a certificate representing a call option, typically on

[[Page 50238]]

a security or a basket of securities be excluded. Although warrants 
issued in capital markets may contain direct default and cross-default 
rights as well as transfer restrictions, commenters argued that 
remediation of outstanding warrant agreements would be difficult, if 
not impossible, since remediation would require the affirmative vote of 
a substantial number of separate voting groups of holders to amend the 
terms of the instruments and that obtaining such consent could be 
expensive due to ``hold-out'' premiums. Commenters also argued that 
since these instruments are traded in the markets, it is not possible 
for an issuer to ascertain whether a particular investor in such 
instruments has also entered into other QFCs with the dealer or any of 
its affiliates (or vice versa) for purposes of complying with the 
proposed mechanism for remediation of existing QFCs. Commenters argued 
that issuers would be able to comply if the final rule's requirements 
applied only on a prospective basis with respect to new issuances since 
new investors could be informed of the terms of the warrant at the time 
of purchase and no after-the-fact consent would be required as is the 
case with existing outstanding warrants. Commenters expressed the view 
that prospective application of the final rule's requirements to 
warrants would allow time for firms to develop new warrant agreements 
and warrant certificates, to engage in client outreach efforts, and to 
make any appropriate public disclosures. Commenters suggested that the 
requirements of the final rule should only apply to such instruments 
issued after the effective date of the final rule and that the 
compliance period for such new issuances be extended to allow time to 
establish new issuance programs that comply with the final rule's 
requirements. Other examples of contracts in this category given by 
commenters include contracts with special purpose vehicles that are 
multi-issuance note platforms, which commenters urged would be 
difficult to remediate for similar reasons to warrants other than on a 
prospective basis.
    Commenters also urged the exclusion of contracts for the purchase 
of commodities in the ordinary course of business (e.g., utility and 
gas energy supply contracts) or physical delivery commodity contracts 
more broadly.\75\ In general, commenters argued that exempting these 
contracts would not increase systemic risk but would help ensure the 
smooth operation of utilities and the physical commodities markets.\76\ 
Commenters indicated that failure to make commodity deliveries on time 
can result in the accrual of damages and penalties beyond the accrual 
of interest (e.g., demurrage and other fines in shipping) and that 
counterparties may not be able to obtain appropriate compensation for 
amendment of default rights due to the difficulty of pricing the risk 
associated with an operational failure due to the failure to deliver a 
commodity on time. Commenters also contended that agreements with power 
operators governed by regulatory tariffs would be difficult, if not 
impossible, to remediate.\77\
---------------------------------------------------------------------------

    \75\ For example, some commenters urged the exclusion of all 
contracts requiring physical delivery between commercial entities in 
the course of regulatory business such as (i) contracts subject to a 
Federal Energy Regulatory Commission-filed tariff; (ii) contracts 
that are traded in markets overseen by independent system operators 
or regional transmission operators; (iii) retail electric contracts; 
(iv) contracts for storage or transportation of commodities; (v) 
contracts for financial services with regulated financial entities 
(e.g., brokerage agreements and futures account agreements); and 
(vi) public utility contracts.
    \76\ One commenter also argued that utility and gas supply 
contracts are covered sufficiently in section 366 of the U.S. 
Bankruptcy Code. This section of the U.S. Bankruptcy Code places 
restrictions on the ability of a utility to ``alter, refuse, or 
discontinue service to, or discriminate against, the trustee or the 
debtor solely on the basis of the commencement of a case under [the 
U.S. Bankruptcy Code] or that a debt owed by the debtor to such 
utility for service rendered before the order for relief was not 
paid when due.'' 11 U.S.C. 366. The purpose and effect of Sec.  
382.44 of the final rule and section 366 of the U.S. Bankruptcy Code 
are different and therefore do not serve as substitutes. Section 366 
of the U.S. Bankruptcy Code does not address cross-defaults or 
provide additional clarity regarding the application of the U.S. 
Special Resolution Regimes. Similarly, Sec.  382.4 of the final rule 
does not prevent a covered FSI from entering into a covered QFC that 
allows the counterparty to exercise default rights once a non-bank 
covered FSI that is a direct party enters bankruptcy or fails to pay 
or perform under the QFC.
    \77\ One commenter also requested exclusion of overnight 
transactions, particularly overnight repurchase agreements, arguing 
that such transactions present little risk of creating negative 
liquidity effects and that an express exclusion for such 
transactions may increase the likelihood that such contracts would 
remain viable funding sources in times of liquidity stress. Although 
the final rule does not exempt overnight repo transactions, the 
final rule may have limited if any effect on such transactions. As 
described below, the final rule provides a number of exemptions that 
may apply to overnight repo and similar transactions. Moreover, the 
restrictions on default rights in Sec.  382.4 of the final rule do 
not apply to 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. See 
final rule Sec.  382.1 (defining ``default right''). Therefore, 
Sec.  382.4 does not restrict the ability of QFCs, including 
overnight repos, to terminate at the end of the term of the 
contract.
---------------------------------------------------------------------------

    The final rule applies to any ``covered QFC,'' which generally is 
defined as any ``in-scope QFC'' that a covered FSI enters into, 
executes, or to which the covered FSI otherwise becomes a party.\78\ As 
under the proposal, ``qualified financial contract'' or ``QFC'' is 
defined in the final rule as in section 210(c)(8)(D) of Title II of the 
Dodd-Frank Act and includes swaps, repo and reverse repo transactions, 
securities lending and borrowing transactions, commodity contracts, and 
forward agreements.\79\ Parties that enter into contracts with covered 
FSIs have been potentially subject to the stay-and-transfer provisions 
of Title II of the Dodd-Frank Act since its enactment. Consistent with 
Title II of the Dodd-Frank Act, the final rule does not exempt QFCs 
involving physical commodities. However as explained below, the final 
rule responds to concerns regarding the smooth operation of physical 
commodities end users and markets by allowing counterparties to 
terminate QFCs based on the failure to pay or perform.\80\
---------------------------------------------------------------------------

    \78\ See final rule Sec.  382.2(c).
    \79\ See 12 U.S.C. 5390(c)(8)(D); final rule Sec.  382.1.
    \80\ However, those default rights remain subject to Title II 
and FDI Act.
---------------------------------------------------------------------------

    In response to concerns raised by commenters, the final rule 
exempts QFCs that have no transfer restrictions or default rights, as 
these QFCs have no provisions that the rule is intended to address. The 
final rule effects this exemption by limiting the scope of QFCs 
potentially subject to the rule to those QFCs that explicitly restrict 
the transfer of a QFC from a covered FSI or explicitly provide default 
rights that may be exercised against a covered FSI (in-scope QFCs).\81\ 
This change addresses a major concern raised by commenters regarding 
the overbreadth of the definition of ``covered QFC'' in the proposal. 
The change also mitigates the burden of complying with the rule without 
undermining its purpose by not requiring covered FSIs to conform 
contracts that do not contain the types of default rights and transfer 
restrictions that the final rule is intended to address. The final rule 
does not, however, exclude QFCs that have transfer restrictions (but no 
default rights or cross-default rights) as requested by certain 
commenters, as such QFCs would have provisions (i.e., transfer 
restrictions) that are subject to the requirements of the final rule 
and could otherwise impede the orderly resolution of a covered FSI or 
its affiliate.
---------------------------------------------------------------------------

    \81\ See final rule Sec.  382.2(d). The final rule includes as 
an in-scope QFC a QFC that contains a restriction on the transfer of 
a QFC from a covered FSI. This would include any QFC that restricts 
the transfer of that QFC or any other QFC.
---------------------------------------------------------------------------

    The final rule provides that a covered FSI is not required to 
conform certain investment advisory contracts described

[[Page 50239]]

by commenters (i.e., investment advisory contracts with retail advisory 
customers \82\ of the covered FSI that only contain transfer 
restrictions necessary to comply with section 205(a) of the Investment 
Advisers Act). The final rule also exempts any existing warrant 
evidencing a right to subscribe or to otherwise acquire a security of a 
covered FSI or its affiliate.\83\ The final rule excludes these types 
of agreements because there is persuasive evidence that these types of 
contracts would be burdensome to conform and that it is unlikely that 
excluding such contracts from the requirements of the final rule would 
impair the orderly resolution of a GSIB.\84\ The final rule also 
provides the FDIC with authority to exempt one or more covered FSIs 
from conforming certain contracts or types of contracts to the final 
rule after considering, in addition to any other factor the FDIC deems 
relevant, the burden the exemption would relieve and the potential 
impact of the exemption on the resolvability of the covered FSI or its 
affiliates.\85\ Covered FSIs that request that the FDIC exempt 
additional contracts from the final rule should be prepared to provide 
information in support of their requests. The FDIC expects to consult 
as appropriate with the FRB and the OCC during its consideration of any 
such request.
---------------------------------------------------------------------------

    \82\ See final rule Sec.  382.7(c)(1). The final rule defines 
retail customers or counterparty by reference to the FDIC's rule 
relating to the liquidity coverage ratio, 12 CFR part 329. Covered 
FSIs should be familiar with this definition and its application.
    \83\ See final rule Sec.  382.7(c)(2). Warrants issued after the 
effective date of the final rule are not excluded from the 
requirements of the final rule.
    \84\ The exclusions for investment advisory agreements and 
existing warrants set forth in the final rule are included to 
address commenters' concerns as to the scope and potential 
compliance burden of the final rule. These exemptions are not 
interpretations of the definition of QFC and should not be construed 
as indicating that the FDIC has determined such contracts are 
necessarily QFCs.
    \85\ See final rule Sec.  382.7(d).
---------------------------------------------------------------------------

    Definition of covered QFC. As noted above, the proposal applied to 
any ``covered QFC,'' generally defined as a QFC that a covered FSI 
enters into, after the effective date and a QFC entered earlier, but 
only if the covered FSI or its affiliate enters into a new QFC with the 
same person or an affiliate of the same person.\86\ ``Affiliate'' in 
the proposal was defined in the same manner as under the BHC Act to 
mean any company that controls, is controlled by, or is under common 
control with another company.\87\ As noted above, ``control'' under the 
BHC Act means the power to vote 25 percent or more of any class of 
voting securities; control in any manner the election of a majority of 
the directors or trustees; or exercise of a controlling influence over 
the management or policies.\88\
---------------------------------------------------------------------------

    \86\ See proposed rule Sec. Sec.  382. 3(a); 382.4(a).
    \87\ See proposed rule Sec.  382.1 (defining ``affiliate'').
    \88\ See 12 U.S.C. 1841(k).
---------------------------------------------------------------------------

    Commenters argued that requiring remediation of existing QFCs of a 
person if the GSIB entered into a new QFC with an affiliate of the 
person would make compliance with the proposed rule overly 
burdensome.\89\ These arguments were similar to commenters' arguments 
regarding the definition of ``subsidiary'' of a covered FSI, which were 
discussed above. Commenters asserted that this requirement would demand 
that the GSIB track each counterparty's organizational structure by 
relying on information provided by counterparties, which would subject 
counterparties to enhanced tracking and reporting burdens. Commenters 
requested that the phrase ``or affiliate of the same person'' be 
deleted from the definition of covered QFC and argued that such a 
modification would not undermine the ultimate goals of the rule since 
existing QFCs with the counterparty's affiliate would still have to be 
remediated if the covered FSI or its affiliate enters into a new QFC 
with that counterparty affiliate. In the alternative, commenters argued 
that an affiliate of a counterparty be established by reference to 
financial consolidation principles rather than BHC Act control since 
counterparties may not be familiar with BHC Act control. Commenters 
argued that many counterparties are not regulated bank holding 
companies and would be unfamiliar with BHC Act control. Certain 
commenters also argued that a new QFC with one fund in a fund family 
should not result in other funds in the fund family being required to 
conform their pre-existing QFCs with the covered FSI or an affiliate.
---------------------------------------------------------------------------

    \89\ One commenter believed that the burden of conforming 
contracts with all affiliates of a counterparty would be too great, 
whether defined in terms of BHC Act control or financial 
consolidation principles, even though the burden would be reduced by 
definition in terms of financial consolidation principles.
---------------------------------------------------------------------------

    The final rule's definition of ``covered QFC'' has been modified to 
address the concerns raised by commenters. In particular, the final 
rule provides that a covered QFC includes a QFC that the covered FSI 
entered, executed, or otherwise became a party to before January 1, 
2019, if the covered FSI or any affiliate that is a covered FSI, 
covered entity, or covered bank also enters, executes, or otherwise 
becomes a party to a QFC with the same person or a consolidated 
affiliate of the same person on or after January 1, 2019.\90\ The final 
rule defines ``consolidated affiliate'' by reference to financial 
consolidation principles.\91\ As commenters indicated, counterparties 
will already track and monitor financially consolidated affiliates. 
Moreover, exposures to a non-consolidated affiliate may be captured as 
a separate counterparty (e.g., when the non-consolidated affiliate 
enters a new QFC with the covered FSI). As a consequence, modifying the 
coverage of affiliates in this manner addresses concerns raised by 
commenters regarding burden.
---------------------------------------------------------------------------

    \90\ See final rule Sec.  382.2(c).
    \91\ See final rule Sec.  382.1.
---------------------------------------------------------------------------

    The definition of ``covered QFC'' is intended to limit the 
restrictions of the final rule to those financial transactions whose 
disorderly unwind has substantial potential to frustrate the orderly 
resolution of a GSIB, as discussed above. By adopting the Dodd-Frank 
Act's definition of QFC, with the modifications described above, the 
final rule generally extends stay-and-transfer protections to the same 
types of transactions as Title II of the Dodd-Frank Act. In this way, 
the final rule enhances the prospects for an orderly resolution in 
bankruptcy and under the U.S. Special Resolution Regimes.
    Exclusion of cleared QFCs. The proposal excluded from the 
definition of ``covered QFC'' all QFCs that are cleared through a 
central counterparty.\92\ Commenters generally expressed support for 
this exclusion but some commenters requested that the agencies broaden 
this exclusion in the final rule. In particular, a number of commenters 
urged the agencies to exclude the ``client-facing leg'' of a cleared 
swap where a clearing member faces a CCP on one leg of the transaction 
and faces the client on an otherwise identical offsetting 
transaction.\93\ One commenter

[[Page 50240]]

requested the agencies confirm its understanding that ``FCM 
agreements,'' which the commenter defined as futures and cleared swaps 
agreements with a futures commission merchant, are excluded because FCM 
agreements ``are only QFCs to the extent that they relate to futures 
and swaps and, since futures and cleared swaps are excluded, the FCM 
Agreements are also excluded.'' \94\ The commenter requested, in the 
alternative, that the final rule expressly exclude such agreements.
---------------------------------------------------------------------------

    \92\ See proposed rule Sec.  382.7(a).
    \93\ Commenters argued that in the European-style principal-to-
principal clearing model, the clearing member faces the CCP on one 
swap (the ``CCP-facing leg''), and the clearing member, frequently a 
GSIB, faces the client on an otherwise identical, offsetting swap 
(the ``client-facing leg''). Under the proposed rule, only the CCP-
facing leg of the transaction was excluded even though the client-
facing leg relates to the mechanics of clearing and is only entered 
into by the clearing member to effectuate the cleared transaction. 
Commenters argued that the proposed rule thus treated two pieces of 
the same transaction differently, which could result in an imbalance 
in insolvency or resolution and that the possibility of such an 
imbalance for the clearing member could expose the clearing member 
to unnecessary and undesired market risk. Commenters urged the 
agencies to adopt the same approach taken under Section 2 of the 
Universal Protocol, which allows the client-facing leg of the 
cleared swap with the clearing member that is a covered entity, 
covered bank or covered FSI to be closed out substantially 
contemporaneously with the CCP-facing leg in the event the CCP were 
to take action to close out the CCP-facing leg.
    Some commenters requested clarification that transactions 
between a covered entity, covered bank, or covered FSI client and 
its clearing member (as opposed to transactions where the covered 
entity, covered bank, or covered FSI is the clearing member) would 
be subject to the rule's requirements, since this would be 
consistent with the Universal Protocol. As explained in this 
section, the exemption in the final rule regarding CCPs does not 
depend on whether the covered entity, covered bank, or covered FSI 
is a clearing member or a client. A covered QFC--generally a QFC to 
which a covered entity, covered bank, or covered FSI is a party--is 
exempted from the requirements of the final rule if a CCP is also a 
party.
    \94\ Letter to Robert E. Feldman, Executive Secretary, Federal 
Deposit Insurance Corporation, from James M. Cain, Sutherland Asbill 
& Brennan LLP, writing on behalf of the eleven Federal Home Loan 
Banks, at 2 (Dec. 12, 2016).
---------------------------------------------------------------------------

    A few commenters requested that the FDIC modify the definition of 
``central counterparty,'' which was defined to mean ``a counterparty 
(for example, a clearing house) that facilitates trades between 
counterparties in one or more financial markets by either guaranteeing 
trades or novating trades'' in the proposal.\95\ These commenters 
argued that a CCP does far more than ``facilitate'' or ``guarantee'' 
trades and that a CCP ``interposes itself between counterparties to 
contracts traded in one or more financial markets, becoming the buyer 
to every seller and the seller to every buyer and thereby ensuring the 
performance of open contracts.'' \96\ As an alternative definition of 
CCP, these commenters suggested the final rule should define central 
counterparty to mean: ``an entity (for example, a clearinghouse or 
similar facility, system, or organization) that, with respect to an 
agreement, contract, or transaction: (i) Enables each party to the 
agreement, contract, or transaction to substitute, through novation or 
otherwise, the credit of the CCP for the credit of the parties; and 
(ii) arranges or provides, on a multilateral basis, for the settlement 
or netting of obligations resulting from such agreements, contracts, or 
transactions executed by participants in the CCP.'' \97\
---------------------------------------------------------------------------

    \95\ 12 CFR 324.2.
    \96\ Letter to Robert E. Feldman, Executive Secretary, Federal 
Deposit Insurance Corporation, from Walt L. Lukken, President and 
CEO, Futures Industry Association, at 8-9 (Nov. 1, 2016) (citing 
Principles of Financial Market Infrastructures (Apr. 2012), 
published by the Committee on Payment and Settlement Systems and the 
International Organization of Securities Commissions, at 9).
    \97\ Id. at 9.
---------------------------------------------------------------------------

    Commenters also urged the FDIC to exclude from the requirements of 
the final rule all QFCs that are cleared, processed, or settled through 
the facilities of an FMU as defined in section 803(6) of the Dodd-Frank 
Act \98\ or that are entered into subject to the rules of an FMU.\99\ 
For example, commenters argued that QFCs with FMUs such as the 
provision of an extension of credit by a central securities depositary 
(CSD) to a GSIB entity that is a member of the CSD in connection with 
the settlement of securities transactions, should be excluded from the 
requirements of the final rule. Commenters contended that, similar to 
CCPs, the relationship between a covered FSI and FMU is governed by the 
rules of the FMU and that there are no market alternatives to 
continuing to transact with FMUs. Commenters argued that FMUs generally 
should be excluded for the same reasons as CCPs and that a broader 
exemption to cover FMUs would serve to mitigate the systemic risk of a 
GSIB in distress, an underlying objective of the rule's requirements. 
Commenters contended that such an exclusion would be consistent with 
the treatment of FMUs under U.K. regulations and German law. Some 
commenters also requested that related or underlying agreements to CCP-
cleared QFCs and QFCs entered into with other FMUs also be excluded, 
since such agreements ``form an integrated whole with [those] QFCs'' 
and such an exemption would facilitate the continued expansion of the 
clearing and settlement framework and the benefits of such a 
framework.\100\ One commenter urged that the final rule should not in 
any manner restrict an FMU's ability to close out a defaulting clearing 
member's portfolio, including potential liquidation of cleared 
contracts.
---------------------------------------------------------------------------

    \98\ 12 U.S.C. 5462(6). In general, Title VIII of the Dodd-Frank 
Act defines ``financial market utility'' to mean any person that 
manages or operates a multilateral system for the purpose of 
transferring, clearing, or settling payments, securities, or other 
financial transactions among financial institutions or between 
financial institutions and the person. Id.
    \99\ As discussed above, one commenter who recommended an 
exclusion of securities market transactions that generally settle in 
the short term, do not impose ongoing or continuing obligations on 
either party after settlement, and do not typically include the 
default rights targeted by this rule, requested this treatment in 
the alternative.
    \100\ Letter to Robert E. Feldman, Executive Secretary, Federal 
Deposit Insurance Corporation, from Larry E. Thompson, Vice Chairman 
and General Counsel, The Depository Trust & Clearing Corporation, at 
6 (Dec. 12, 2016).
---------------------------------------------------------------------------

    The issues that the final rule is intended to address with respect 
to non-cleared QFCs may also exist in the context of centrally cleared 
QFCs. However, clearing through a CCP provides unique benefits to the 
financial system while presenting unique issues related to the 
cancellation of cleared contracts. Accordingly, it is appropriate to 
exclude 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. The FDIC 
has not extended the exclusion for CCPs to the client-facing leg of a 
cleared transaction because bilateral trades between a GSIB and a non-
CCP counterparty are the types of transactions that the final rule 
intends to address and because nothing in the final rule would prohibit 
a covered FSI clearing member and a client from agreeing to terminate 
or novate a trade to balance the clearing member's exposure. The final 
rule continues to define central counterparty as a counterparty that 
facilitates trades between counterparties in one or more financial 
markets by either guaranteeing trades or novating trades, which is a 
broad definition that should be familiar to market participants as it 
is used in the regulatory capital rules and does not sweep in entities 
that market participants would not normally recognize as clearing 
organizations.\101\
---------------------------------------------------------------------------

    \101\ See final rule Sec.  382.1. See also 12 CFR 324.2.
---------------------------------------------------------------------------

    The final rule also makes clear that, if one or more FMUs are the 
only counterparties to a covered QFC, the covered FSI is not required 
to conform the covered QFC to the final rule.\102\ Therefore, an FMU's 
default rights and transfer restrictions under the covered QFC are not 
affected by the final rule. However, this exclusion would not include a 
covered QFC with a non-FMU counterparty, even if the QFC is settled by 
an FMU or if the FMU is a party to such QFC, because the final rule is

[[Page 50241]]

intended to address default rights of non-FMU parties. For example, if 
two covered FSIs engage in a bilateral QFC that is facilitated by an 
FMU and in the course of this facilitation each covered FSI maintains a 
QFC solely with the FMU then the final rule would not apply to each QFC 
between the FMU and each covered FSI but the requirements of the final 
rule would apply to the bilateral QFC between the two covered FSIs. 
This approach ensures that QFCs that are directly with FMUs are treated 
in a manner similar to transactions between covered FSIs and CCPs but 
also ensures that QFCs conducted by covered FSIs that are related to 
the direct QFC with the FMU remain subject to the final rule's 
requirements.
---------------------------------------------------------------------------

    \102\ See final rule Sec.  382.7(a)(2). In response to 
commenters, the final rule uses the definition of FMU in Title VIII 
of the Dodd-Frank Act and may apply, for purposes of the final rule, 
to entities regardless of jurisdiction. The definition of FMU in the 
final rule includes a broader set of entities, in addition to CCPs. 
However, the definition in the final rule does not include 
depository institutions that are engaged in carrying out banking-
related activities, including providing custodial services for tri-
party repurchase agreements. The definition also explicitly excludes 
certain types of entities (e.g., registered futures associations, 
swap data repositories) and other types of entities that perform 
certain functions for or related to FMUs (e.g., futures commission 
merchants).
---------------------------------------------------------------------------

    The final rule does not explicitly exclude futures and cleared 
swaps agreements with a futures commission merchant, as requested by a 
commenter. The nature and scope of the requested exclusion is unclear, 
and, therefore, it is unclear whether the exclusion would be necessary, 
on the one hand, or overbroad, on the other hand. However, the final 
rule makes a number of clarifications and exemptions that may help 
address the commenter's concern regarding FCM agreements.
    QFCs with Central Banks and Sovereign Entities. The proposal 
included covered QFCs with sovereign entities and central banks, 
consistent with Title II of the Dodd-Frank Act and the FDI Act. 
Commenters urged the FDIC to exclude QFCs with central bank and 
sovereign counterparties from the final rule. Commenters argued that 
sovereign entities might not be willing to agree to limitations on 
their QFC default rights and noted that other countries' measures such 
as those of the United Kingdom and Germany, consistent with their 
governing laws, exclude central banks and sovereign entities. 
Commenters contended that central banks and sovereign entities are 
sensitive to financial stability concerns and resolvability goals, thus 
reducing the concern that they would exercise default rights in a way 
that would undermine resolvability of a GSIB or financial stability. 
Commenters indicated it was unclear whether central banks or sovereign 
entities would be permitted under applicable statutes to enter into 
QFCs with limited default rights, but did not provide specific examples 
of such statutes.\103\ Commenters further noted that these entities did 
not participate in the development of the Universal Protocol and that 
the Universal Protocol does not provide a viable mechanism for 
compliance with the final rule by these entities.
---------------------------------------------------------------------------

    \103\ These commenters argued that, to the extent central banks 
and sovereign entities are unable or unwilling to agree to 
limitations on their QFC default rights, application of the rule's 
requirements to QFCs with these entities creates a significant 
disincentive for these entities to enter into QFCs with covered 
FSIs, resulting in the loss of valuable counterparties in a way that 
will hinder market liquidity and covered FSI risk management.
---------------------------------------------------------------------------

    The FDIC continues to believe that covering QFCs with sovereigns 
and central banks under the final rule is an important requirement and 
has not modified the final rule to address the requests made by 
commenters. Excluding QFCs with sovereigns and central banks would be 
inconsistent with Title II of the Dodd-Frank Act and the FDI Act. 
Moreover, the mass termination of such QFCs has the potential to 
undermine the resolution of a GSIB and the financial stability of the 
United States. The final rule provides covered FSIs two years to 
conform covered QFCs with central banks and sovereigns (as well as 
certain other counterparties, as discussed below). This additional time 
should provide covered FSIs sufficient time to develop separate 
conformance mechanisms for sovereigns and central banks, if necessary.

C. Definition of ``Default Right'' (Section 382.1 of the Final Rule)

    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.\104\ The phrase ``default right'' in the proposed rule was 
broadly defined to include these common rights as well as ``any similar 
rights.'' \105\ Additionally, the definition included all such rights 
regardless of source, including rights existing under contract, 
statute, or common law.
---------------------------------------------------------------------------

    \104\ But see 12 U.S.C. 1821(e)(8)(G); 12 U.S.C. 5390(c)(8)(F).
    \105\ See proposed rule Sec.  382.1.
---------------------------------------------------------------------------

    However, the proposed definition of default right excluded 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 was excluded from the definition of ``default 
right.'' \106\ Second, contractual margin requirements that arise 
solely from the change in the value of the collateral or the amount of 
an economic exposure were also excluded from the definition.\107\ The 
reason for these exclusions was to leave such rights unaffected by the 
proposed rule. The proposal's preamble explained that such exclusions 
were appropriate because the proposal was intended to improve 
resolvability by addressing default rights that could disrupt an 
orderly resolution, not to interrupt the parties' business-as-usual 
interactions under a QFC.\108\
---------------------------------------------------------------------------

    \106\ See proposed rule Sec.  382.1.
    \107\ See id. These rights are nonetheless subject to the stay 
provisions of the FDIA and Title II.
    \108\ See 81 FR 74333.
---------------------------------------------------------------------------

    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 FSI could be 
similar to the impact of the liquidation and acceleration rights 
discussed above. Therefore, the proposed definition of ``default 
right'' included such rights (with the exception discussed in the 
previous paragraph for margin requirements based solely on the value of 
collateral or the amount of an economic exposure).\109\
---------------------------------------------------------------------------

    \109\ 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, were excluded from the definition 
of ``default right'' under the proposal for purposes of the proposed 
rule's restrictions on cross-default rights.\110\ This exclusion was 
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 FSI, while leaving other 
default rights unrestricted.\111\
---------------------------------------------------------------------------

    \110\ See proposed rule Sec. Sec.  382.1, 382.4.
    \111\ The definition of ``default right'' parallels the 
definition contained in the ISDA Protocol. However, certain rights 
not included as such ``default rights'' are nonetheless subject to 
the stay and other provisions of the FDI Act and the Dodd-Frank Act. 
The final 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.

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

[[Page 50242]]

    Commenters expressed support for a number of aspects of the 
definition of default rights. For example, a number of commenters 
supported the proposed exclusion from the definition of ``default 
right'' of contractual rights to terminate without the need to show 
cause, noting that such rights exist for a variety of reasons and that 
reliance on these rights is unlikely to result in a fire sale of assets 
during a GSIB resolution. At least one commenter requested that this 
exclusion be expanded to include force majeure events. Commenters also 
expressed support for the exclusion for what commenters referred to as 
``business-as-usual'' payments associated with a QFC. However, these 
commenters requested clarification that certain ``business-as-usual'' 
actions would not be included in the definition of default right, such 
as payment netting, posting and return of collateral, procedures for 
the substitution of collateral and modification to the terms of the 
QFC, and also requested clarification that the definition of ``default 
right'' would not include off-setting transactions to third parties by 
the non-defaulting counterparty. One commenter to the FRB and the OCC's 
proposal urged that if the FRB's and OCC's goal is to provide that a 
party cannot enforce a provision that requires more margin because of a 
credit downgrade but may demand more margin for market price changes, 
the rule should state so explicitly. Another commenter expressed 
concern that the definition of default right in the proposal would 
permit a defaulting covered FSI to demand collateral from its QFC 
counterparty as margin due to a market price change, but would not 
allow the non-covered FSI to demand collateral from the covered FSI.
    The final rule retains the same definition of ``default right'' as 
that of the proposal. The FDIC believes that the definition of default 
right is sufficiently clear and that additional modifications are not 
needed to address the concerns raised by commenters. The final rule 
does not adopt a particular exclusion for force majeure events as 
requested by certain commenters as it is not clear without reference to 
particular contractual provisions what this term would encompass. 
Moreover, it should be clear that events typically considered to be 
captured by force majeure clauses (e.g., natural disasters) would not 
be related, directly or indirectly, to the resolution of an 
affiliate.\112\
---------------------------------------------------------------------------

    \112\ See final rule Sec.  382.4(b).
---------------------------------------------------------------------------

    ``Business as usual'' rights regarding changes in collateral or 
margin would not be included within the definition of default right to 
the extent that the right or operation of a contractual provision 
arises solely from either a change in the value of collateral or margin 
or a change in the amount of an economic exposure.\113\ In response to 
commenters' requests for clarification, this exception includes changes 
in margin due to changes in market price, but does not include changes 
due to counterparty credit risk (e.g., credit rating downgrades). 
Therefore, the right of either party to a covered QFC to require margin 
due to changes in market price would be unaffected by the definition of 
default right. Moreover, default rights that are exercised before a 
covered FSI or its affiliate enter resolution and that would not be 
affected by the stay-and-transfer provisions of the U.S. Special 
Resolution Regimes also would not be affected.
---------------------------------------------------------------------------

    \113\ However, as noted previously, such rights are subject to 
the provisions of the FDI Act and Title II.
---------------------------------------------------------------------------

    Regarding transactions with third parties, the final rule, like the 
proposal, does not require covered FSIs to address default rights in 
QFCs solely between parties that are not covered FSIs (e.g., off-
setting transactions to third parties by the non-GSIB counterparty, to 
the extent none are covered FSIs).

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

    The proposed rule generally would have required a covered QFC 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 FSI 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 FSI 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.\114\ The 
final rule contains these same provisions.\115\
---------------------------------------------------------------------------

    \114\ See proposed rule Sec.  382.3.
    \115\ See final rule Sec.  382.3(b).
---------------------------------------------------------------------------

    A number of commenters noted that the wording of these requirements 
in proposed Sec.  382.3(b) was confusing and could be read to be 
inconsistent with the intent of the section. In response to comments, 
the final rule makes clearer that the substantive restrictions apply 
only in the event the covered FSI (or, in the case of the requirement 
regarding default rights, its affiliate) becomes subject to a 
proceeding under a U.S. Special Resolution Regime.\116\
---------------------------------------------------------------------------

    \116\ See final rule Sec.  382.3. The proposal defined the term 
``U.S. special resolution regimes'' to mean the FDI Act and Title II 
of the Dodd-Frank Act, along with regulations issued under those 
statutes. 12 U.S.C. 1811-1835a; 12 U.S.C. 5381-5394. See final rule 
Sec.  382.1.
---------------------------------------------------------------------------

    A number of commenters argued that QFCs should be exempt from the 
requirements of proposed Sec.  382.3 if the QFC is governed by U.S. 
law. An example of such a QFC provided by commenters includes the 
standard form repurchase and securities lending agreement published by 
the Securities Industry and Financial Markets Association. These 
commenters argued that counterparties to such agreements are already 
required to observe the stay-and-transfer provisions of the FDI Act and 
Title II of the Dodd-Frank Act, as mandatory provisions of U.S. Federal 
law, and that requiring an amendment of these types of QFCs to include 
the express provisions required under Sec.  382.3 would be redundant 
and would not provide any material resolution benefit, but would 
significantly increase the remediation burden on covered FSIs.
    Other commenters proposed a three-prong test of ``nexus with the 
United States'' for purposes of recognizing an exclusion from the 
express acknowledgment of the requirements of proposed Sec.  382.3. In 
particular, these commenters argued that the presence of two factors, 
in addition to the contract being governed by U.S. law, would provide 
greater certainty that courts would apply the stay-and-transfer 
provisions of the FDI Act and Title II of the Dodd-Frank Act: (1) If a 
contract is entered into between entities organized in the United 
States; and (2) to the extent the GSIB's obligations under the QFC are 
collateralized, if the collateral is held with a U.S. custodian or 
depository pursuant to an account agreement governed by U.S. law.\117\ 
Other commenters contended that only whether the contract is under U.S. 
law, and not the location of the counterparty or the collateral, is 
relevant to the analysis of whether the FDI Act and the Dodd-Frank Act 
would govern the

[[Page 50243]]

contract. Commenters also requested that if the first additional factor 
(i.e., that the QFC be entered into between entities organized in the 
United States) were to be included within the exception, it should be 
broadened to include counterparties that have principal places of 
business or that are otherwise domiciled in the United States.
---------------------------------------------------------------------------

    \117\ These commenters stated that it would be unlikely that any 
court interpreting a QFC governed by U.S. law could have a 
reasonable basis for disregarding the stay-and-transfer provisions 
of the FDI Act or Title II of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The requirements of the final rule (in conjunction with those of 
the FRB FR and the expected OCC FR) seek to provide certainty that all 
covered QFCs would be treated the same way in the context of a 
resolution of a covered entity, covered bank or covered FSI 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 general, the requirement that the effect of the 
statutory stay-and-transfer provisions be incorporated directly into 
the QFC contractually helps to 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.\118\ Further, the knowledge that a court in a 
foreign jurisdiction would reject the purported exercise of default 
rights in violation of the required contractual provisions should deter 
covered FSIs' counterparties from attempting to exercise such rights.
---------------------------------------------------------------------------

    \118\ See generally Financial Stability Board, ``Principles for 
Cross-border Effectiveness of Resolution Actions'' (Nov. 3, 2015), 
available at https://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
---------------------------------------------------------------------------

    In response to comments, the final rule exempts from the 
requirements of Sec.  382.3 a covered QFC that meets two 
requirements.\119\ First, the covered QFC must state that it is 
governed by the laws of the United States or a State of the United 
States.\120\ It has long been clear that the laws of the United States 
and the laws of a State of the United States both include U.S. Federal 
law, such as the U.S. Special Resolution Regimes.\121\ Therefore, this 
requirement ensures that contracts that meet this exemption also 
contain language that helps ensure that foreign courts will enforce the 
stay-and-transfer provisions of the U.S. Special Resolution Regimes. 
Second, the counterparty to the covered FSI must be organized under the 
laws of the United States or a State,\122\ have its principal place of 
business \123\ located in the United States, or be a U.S. branch or 
U.S. agency.\124\ Similarly, a counterparty that is an individual must 
be domiciled in the United States.\125\ This requirement helps ensure 
that the FDIC will be able to quickly and easily enforce the stay-and-
transfer provisions of the U.S. Special Resolution Regimes.\126\ This 
exemption is expected to significantly reduce the burden associated 
with complying with the final rule while continuing to provide 
assurance that the stay-and-transfer provisions of the U.S. Special 
Resolution Regimes may be enforced.
---------------------------------------------------------------------------

    \119\ See final rule Sec.  382.3(a).
    \120\ However, a contract that explicitly provides that one or 
both of the U.S. Special Resolution Regimes, including a broader set 
of laws that includes a U.S. special resolution regime, is excluded 
from the laws governing the QFC would not meet this exemption under 
the final rule. For example, a covered QFC would not meet this 
exemption if the contract stated that it was governed by the laws of 
the State of New York but also stated that it was not governed by 
U.S. Federal law. In contrast, a contract that stated that it was 
governed by the laws of the State of New York but opted out of a 
specific non-mandatory Federal law (e.g., the Federal Arbitration 
Act) would meet this exemption. Cf. Volt Info. Scis. v. Bd. Of Trs., 
489 U.S. 468 (1989).
    \121\ Although many QFCs only explicitly state that the contract 
is governed by the laws of a specific State of the United States, it 
has been made clear on numerous occasions that the laws of each 
State include Federal law. See e.g., Hauenstain v. Lynham, 100 U.S. 
483, 490 (1979) (stating that Federal law is ``as much a part of the 
law of every State as its own local laws and the Constitution''); 
Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 157 
(1982) (same); Testa v. Katt, 330 U.S. 386, 393 (1947) (``For the 
policy of the Federal Act is the prevailing policy in every 
state.'').
    \122\ For purposes of this requirement of the exemption, 
``State'' means any State, commonwealth, territory, or possession of 
the United States, the District of Columbia, the Commonwealth of 
Puerto Rico, the Commonwealth of the Northern Mariana Islands, 
American Samoa, Guam, or the United States Virgin Islands.
    \123\ See Hertz Corp. v. Friend, 559 U.S. 77(2010) (describing 
the appropriate test for principal place of business).
    \124\ See final rule Sec.  382.3(a)(1)(ii).
    \125\ See id.
    \126\ See e.g., Daimler AG v. Bauman, 134 S. Ct. 746 (2014); 
Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 
(2011); Hertz Corp. v. Friend, 559 U.S. 77 (2010).
---------------------------------------------------------------------------

    This section of the final rule is consistent with efforts by 
regulators in other jurisdictions to address similar risks by requiring 
that financial firms within their jurisdictions ensure that the effect 
of the similar provisions under these foreign jurisdictions' respective 
special resolution regimes would be enforced by courts in other 
jurisdictions, including the United States. For example, the U.K.'s 
Prudential Regulation Authority (PRA) recently required certain 
financial firms to ensure that their counterparties to newly created 
obligations agree to be subject to stays on early termination that are 
similar to those that would apply upon a U.K. firm's entry into 
resolution if the financial arrangements were governed by U.K. 
law.\127\ Similarly, the German parliament passed a law in November 
2015 requiring German financial institutions to have provisions in 
financial contracts that are subject to the law of a country outside of 
the European Union that acknowledge the provisions regarding the 
temporary suspension of termination rights and accept the exercise of 
the powers regarding such temporary suspension under the German special 
resolution regime.\128\ Additionally, the Swiss Federal Council 
requires that banks ``ensure at both the individual institution and 
group level that new agreements or amendments to existing agreements 
which are subject to foreign law or envisage a foreign jurisdiction are 
agreed only if the counterparty recognises a postponement of the 
termination of agreements in accordance with'' the Swiss special 
resolution regime.\129\ Japan's Financial Services Agency also revised 
its supervisory guidelines for major banks to require those banks to 
ensure that the effect of the statutory stay decision and statutory 
special creditor protections under

[[Page 50244]]

Japanese resolution regimes extends to contracts governed by foreign 
laws.\130\
---------------------------------------------------------------------------

    \127\ See PRA Rulebook: CRR Firms and Non-Authorised Persons: 
Stay in Resolution Instrument 2015 (Nov. 12, 2015), available at 
https://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf; see also Bank of England, Prudential Regulation 
Authority, ``Contractual stays in financial contracts governed by 
third-country law'' (PS25/15) (Nov. 2015), available at https://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf. These PRA rules apply to PRA-authorized banks, building 
societies, PRA-designated investment firms, and their qualifying 
parent undertakings, including UK financial holding companies and 
U.K. mixed financial holding companies.
    \128\ See Gesetz zur Sanierung und Abwicklung von Instituten und 
Finanzgruppen, Sanierungs-und Abwicklungsgesetz [SAG] [German Act on 
the Reorganisation and Liquidation of Credit Institutions], Dec. 10, 
2014, Sec.  60a, https://www.gesetze-im-internet.de/bundesrecht/sag/gesamt.pdf, as amended by Gesetz zur Anpassung des nationalen 
Bankenabwicklungsrechts an den Einheitlichen Abwicklungsmechanismus 
und die europaeischen Vorgaben Zur Bankenabgabe, Nov. 2, 2015, 
Artikel 1(17).
    \129\ See Verordnung [uuml]ber die Finanzmarktinfrastrukturen 
und das Marktverhalten im Effekten- und Derivatehandel [FinfraV] 
[Ordinance on Financial Market Infrastructures and Market Conduct in 
Securities and Derivatives Trading] Nov. 25, 2015, amending 
Bankenverordnung vom 30. April 2014 [BankV] [Banking Ordinance of 30 
April 2014] Apr. 30, 2014, SR 952.02, art. 12 paragraph 2\bis\, 
translation at https://www.news.admin.ch/NSBSubscriber/message/attachments/42659.pdf; see also Erl[auml]uterungsbericht zur 
Verordnung [uuml]ber die Finanzmarktinfrastrukturen und das 
Marktverhalten im Effekten- und Derivatehandel (Nov. 25, 2015) 
(providing commentary).
    \130\ See section III-11 of Comprehensive Guidelines for 
Supervision of Major Banks, etc., available at https://www.fsa.go.jp/common/law/guide/city.pdf.
---------------------------------------------------------------------------

    Commenters also argued that it would be more appropriate for 
Congress to act to obtain cross-border recognition of U.S. Special 
Resolution Regimes, rather than for the FDIC to do so through this 
final rule. The FDIC believes it is appropriate to adopt this final 
rule in order to ensure the safety and soundness of covered FSIs and, 
to that end, to improve the resolvability and resilience of U.S. GSIBs 
and foreign GSIB parents of covered FSIs. Because of the current risk 
that the stay-and-transfer provisions of U.S. Special Resolution 
Regimes may not be recognized by courts of other jurisdictions, Sec.  
382.3 of the final rule requires contractual recognition to help ensure 
that courts in foreign jurisdictions will recognize these provisions.
    This requirement would advance the goal of the final rule 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. Congress 
recognized the importance of such restrictions when it enacted the 
stay-and-transfer provisions of the U.S. Special Resolution Regimes. As 
demonstrated by the 2007-2009 financial crisis, the modern financial 
system is global in scope, and covered FSIs and their affiliates are 
party to large volumes of QFCs with connections to foreign 
jurisdictions. The stay-and-transfer provisions of the U.S. Special 
Resolution Regimes would not achieve their purpose of facilitating 
orderly resolution in the context of the failure of a GSIB with large 
volumes of QFCs if such QFCs could escape the effect of those 
provisions. To remove doubt about the scope of coverage of these 
provisions, the requirements of Sec.  382.3 of the final rule would 
ensure that the stay-and-transfer provisions apply as a matter of 
contract to all non-exempted covered QFCs, whatever the transaction.

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

    Definitions. Section 382.4 of the final rule, like the proposal, 
applies in the context of insolvency proceedings \131\ 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 of QFCs are themselves ``qualified financial 
contracts'' under the Dodd-Frank Act's definition of that term (which 
this final rule adopts), the final rule includes the following 
additional definitions in order to facilitate a precise description of 
the relationships to which it would apply. These additional definitions 
are the same as under the proposal as no comments were received on 
these definitions.
---------------------------------------------------------------------------

    \131\ See proposed rule Sec.  382.4 (noting that section does 
not apply to proceedings under Title II of the Dodd-Frank Act). As 
noted in final rule Sec.  382.4, the final rule 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. 
---------------------------------------------------------------------------

    First, the final rule distinguishes between a credit enhancement 
and a ``direct QFC,'' defined as any QFC that is not a credit 
enhancement.\132\ The final rule 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.\133\ In addition, 
the final rule defines ``affiliate credit enhancement'' to mean ``a 
credit enhancement that is provided by an affiliate of a 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.\134\ Moreover, the final rule 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 affiliate of the 
covered entity, covered bank, or covered FSI that provides the covered 
affiliate credit enhancement.\135\ Finally, the final rule defines the 
term ``supported party'' to mean any party that is the beneficiary of 
the covered affiliate support provider's obligations under 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).\136\
---------------------------------------------------------------------------

    \132\ See final rule Sec.  382.4(c)(2).
    \133\ See final rule Sec.  382.4(c)(1).
    \134\ See final rule Sec.  382.4(c)(3).
    \135\ See final rule Sec. Sec.  382.4(e)(2) and (3).
    \136\ See final rule Sec.  382.4(e)(4).
---------------------------------------------------------------------------

    General prohibitions. The final rule, like the proposal, prohibits 
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, 
subject to the exceptions discussed below.\137\ The final rule also 
generally prohibits a covered FSI from being party to a covered QFC 
that would prohibit the transfer of any covered affiliate 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.\138\
---------------------------------------------------------------------------

    \137\ See final rule Sec.  382.4(b)(1). A few commenters 
requested that the FDIC clarify that covered QFCs that do not 
contain the cross-default rights or transfer restrictions on credit 
enhancement that are prohibited by Sec.  382.4 would not be required 
to be remediated. This reading of Sec.  382.4 of the final rule is 
correct. In addition, Sec.  382.4(a) of the final rule provides the 
requested clarity.
    \138\ See final rule Sec.  382.4(b)(2). This prohibition is 
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 
Universal Protocol, which was added to address concerns expressed by 
asset managers during the drafting of the 2014 Protocol.
    One commenter requested that the exception be broadened to 
include transfers that would result in the supported party being 
unable, without further action, to satisfy the requirements of any 
law applicable to the supported party. As an example of a type of 
transfer that the commenter intended to be included within the 
broadened exception, the commenter stated that the supported party 
would be able to prevent the transfer if it would result in less 
favorable tax treatment. The exception would seem to also include 
filing requirements that may arise as a result of transfer or other 
requirements that could be satisfied with minimal ``action'' by, or 
cost to, the supported party. More generally, the scope of the laws 
that supported parties deem themselves to satisfy and the method of 
such satisfaction is unclear and potentially very broad.
    The final rule retains the exception as proposed. The requested 
exception would add uncertainty as to how the contractual provisions 
relate to transfers made during the stay period and potentially 
unduly limit the restrictions on transfer prohibitions.
---------------------------------------------------------------------------

    One commenter expressed strong support for these provisions.\139\ 
Another commenter expressed support for this provision as currently 
limited in scope under the proposal to prohibited cross-default rights 
and requested that the scope not be expanded. The FDIC's final rule 
retains the same scope as the proposal.
---------------------------------------------------------------------------

    \139\ This commenter also expressed support for parallel 
Congressional amendment of the U.S. Bankruptcy Code.
---------------------------------------------------------------------------

    A number of commenters representing counterparties to covered FSIs 
objected to Sec.  382.4 of the proposal and requested the elimination 
of this provision. These commenters expressed concern about limitations 
on counterparties' exercise of default rights during insolvency 
proceedings and argued that rights should not be taken away from

[[Page 50245]]

contracting parties other than where limitation of such rights is 
necessary for public policy reasons and the resolution process is 
controlled by a regulatory authority with particular expertise in the 
resolution of the type of entity subject to the proceedings. Certain 
commenters argued that eliminating cross-default termination rights 
undermines the ability of QFC counterparties to effectively manage and 
mitigate their exposure to market and credit risk to a GSIB and 
interferes with market forces. One commenter similarly argued that, 
unless the FDIC takes appropriate measures to strengthen the financial 
condition and creditworthiness of a failing GSIB during and after the 
temporary stay, the stay will only expose QFC counterparties to an 
additional 48 hours of credit risk exposure without achieving the 
orderly resolution goals of the rule. Another commenter argued that 
non-defaulting counterparties should not be prevented from filing 
proofs of claim or other pleadings in a bankruptcy case during the stay 
period, since bankruptcy deadlines might pass and leave the 
counterparty unable to collect the unsecured creditor dividend. 
Commenters contended that restrictions on cross-default rights may lead 
to pro-cyclical behavior with asset managers moving funds away from 
covered entities, covered FSIs, or covered banks as soon as those 
entities show signs of distress, and perhaps even in normal situations, 
and would disadvantage non-GSIB parties (e.g., end users who rarely 
receive initial margin from GSIB counterparties and are less well 
protected against a GSIB default).\140\
---------------------------------------------------------------------------

    \140\ One commenter stated that, to the extent the final rule 
prevents an insurer from terminating QFC transactions upon the 
credit rating downgrade of a GSIB counterparty, the insurer may be 
in violation of State insurance laws that typically impose strict 
counterparty credit rating guidelines and limits. This commenter did 
not give any specific examples of such laws. Counterparties 
including insurance companies should evaluate and comply with all 
relevant applicable requirements.
---------------------------------------------------------------------------

    Some commenters argued that if these rights must be restricted by 
law, Congress should impose such restrictions and that the requirements 
of the proposed rule circumvented the legislative process by creating a 
de facto amendment to the U.S. Bankruptcy Code that forecloses 
countless QFC counterparties from exercising their rights of cross-
default protection under section 362 of the U.S. Bankruptcy Code. Some 
of these commenters argued that parties cannot by contract alter the 
U.S. Bankruptcy Code's provisions, such as the administrative priority 
of a claim in bankruptcy, and one commenter suggested that non-covered 
FSI counterparties may challenge the legality of contractual stays on 
the exercise of default rights if a GSIB becomes distressed. Other 
commenters, however, argued that the provisions of the proposed rule 
were necessary to address systemic risks posed by the exemption for 
QFCs in the U.S. Bankruptcy Code.
    As an alternative to eliminating these requirements, these 
commenters expressed the view that if the FDIC moves forward with these 
provisions, the final rule should include at least those minimum 
creditor protections established by the Universal Protocol. Certain 
commenters also argued that this provision was overly broad in that it 
covered not only U.S. Federal resolution and insolvency proceedings but 
also State and foreign resolution and insolvency proceedings.\141\ 
Certain commenters also urged the FDIC to provide a limited exception 
to these restrictions, if retained in the final rule, to help ensure 
the continued functioning of physical commodities markets.\142\
---------------------------------------------------------------------------

    \141\ Certain commenters also indicated that these provisions 
should only apply to U.S. Special Resolution Regimes, which provide 
certain protections for counterparties, or, at most, to U.S. Special 
Resolution Regimes, resolution under the Securities Investor 
Protection Act, and insolvency under Chapter 11 of the U.S. 
Bankruptcy Code. That commenter noted that liquidation and 
insolvency under Chapter 7 of the Bankruptcy Code do not seek to 
preserve the GSIB as a viable entity, which is an objective of the 
final rule. As discussed later, among the goals of the rule is the 
facilitation of the resolution of a GSIB outside of U.S. Special 
Resolution Regimes, including under the U.S. Bankruptcy Code. 
Therefore, the final rule applies these provisions in the same way 
as the proposal. In addition, the additional creditor protections 
for supported parties under the final rule permit contractual 
requirements that any transferee not be in bankruptcy proceedings 
and that the credit support provider not be in bankruptcy 
proceedings other than a Chapter 11 proceeding. See final rule Sec.  
382.4(f).
    \142\ In particular, these commenters requested that, when a 
covered FSI defaults on any physical delivery obligation to any 
counterparty following the insolvency of an affiliate of a covered 
FSI, its counterparties with obligations to deliver or take delivery 
of physical commodities within a short time frame after the default 
should be able to immediately terminate all trades (both physical 
and financial) with the covered FSI. The final rule, like the 
proposal, allows covered QFCs to permit a counterparty to exercise 
its default rights under a covered QFC if the covered FSI not 
subject to Title II or FDI Act proceedings has failed to pay or 
perform its obligations under the covered QFC. See final rule Sec.  
382.4(d). The final rule, like the proposal, also allows covered 
QFCs to permit a counterparty to exercise its default rights under a 
covered QFC if the covered FSI has failed to pay or perform on other 
contracts between the same parties and the failure gives rise to a 
default right in the covered QFC. See id. These exceptions should 
help reduce credit risk and ensure the smooth operation of the 
physical commodities markets without permitting one failure to pay 
or perform by a covered FSI to allow a potentially large number of 
its counterparties that are not directly affected by the failure to 
exercise their default rights and thereby endanger the viability of 
the covered FSI.
---------------------------------------------------------------------------

    Some commenters argued that the FDIC should eliminate the stay on 
default rights that are related ``indirectly'' to an affiliate of the 
direct party becoming subject to insolvency proceedings, claiming it is 
unclear what constitutes a right related ``indirectly'' to insolvency 
and noting that any default right exercised by a counterparty after an 
affiliate of that counterparty enters resolution could arguably be 
motivated by the affiliate's entry into resolution.
    A primary purpose of these restrictions is to facilitate the 
orderly resolution of a GSIB outside of Title II of the Dodd-Frank Act, 
including under the U.S. Bankruptcy Code. As discussed above, the 
potential for mass exercises of QFC default rights is one reason why a 
GSIB's failure could cause 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 a GSIB affiliate if an otherwise performing GSIB entity is subject 
to having its QFCs terminated or accelerated as a result of the default 
of its affiliate.
    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.
    The stay-and-transfer provisions of Title II of the Dodd-Frank Act 
would address both direct default rights and cross-default rights. But, 
as explained above, no similar statutory provisions apply in a 
resolution under the U.S. Bankruptcy Code. This final rule attempts to 
address these obstacles to orderly resolution by extending

[[Page 50246]]

provisions similar to 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 final rule would facilitate a 
transfer of the GSIB parent's interests in its subsidiaries, along with 
any credit enhancements it provides for those subsidiaries, to a 
solvent financial company by prohibiting covered 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.\143\
---------------------------------------------------------------------------

    \143\ See final rule Sec.  382.4(b).
---------------------------------------------------------------------------

    The final rule 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.\144\ Similarly, 
the final rule, along with the FRB and OCC final rules, 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 final 
rules would also facilitate the resolution of an IHC 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 final rules will help to 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.
---------------------------------------------------------------------------

    \144\ As discussed above, the FDI Act limits 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. The final rule would facilitate orderly resolution 
under the FDI Act by filling that gap. See final rule Sec.  
382.4(b).
---------------------------------------------------------------------------

    The final rule is intended to enhance the potential for orderly 
resolution of a GSIB under the U.S. Bankruptcy Code, the FDI Act, or a 
similar resolution regime. The risks to an orderly resolution under the 
U.S. Bankruptcy Code include separate resolution insolvency 
proceedings, including proceedings in non-U.S. jurisdictions. 
Therefore, by staying default rights arising from affiliates entering 
into such proceedings, the final rule will advance the Dodd-Frank Act's 
goal of making orderly GSIB resolution workable under the Bankruptcy 
Code.\145\
---------------------------------------------------------------------------

    \145\ See 12 U.S.C. 5365(d).
---------------------------------------------------------------------------

    Likewise, the final rule retains the prohibition against 
contractual provisions that permit the exercise of default rights that 
are indirectly related to the resolution of an affiliate. QFCs may 
include a number of default rights triggered by an event that is not 
the resolution of an affiliate but is caused by the resolution, such as 
a credit rating downgrade in response to the resolution. A primary 
purpose of the final rule is to prevent early terminations caused by 
the resolution of an affiliate. A regulation that specifies each type 
of early termination provision that should be stayed would be over-
inclusive or under-inclusive, and easy to evade. Similarly, a stay of 
default rights that are only directly related to the resolution of an 
affiliate could increase the likelihood of litigation to determine the 
relationship between the default right and the affiliate resolution was 
sufficient to be considered ``directly'' related. The final rule 
attempts to decrease such uncertainty and litigation risk by including 
default rights that are related (i.e., directly or indirectly) to the 
resolution of an affiliate.
    Moreover, the final rule does not affect parties' direct default 
rights under the U.S. Bankruptcy Code. As explained above, the 
regulation does not prohibit a covered QFC from permitting the exercise 
of default rights against a non-bank covered FSI that has entered 
bankruptcy proceedings.\146\ Therefore, counterparties to a non-bank 
covered FSI in bankruptcy would be able to exercise their existing 
default rights to the full extent permitted under any applicable safe 
harbor to the automatic stay of the U.S. Bankruptcy Code.
---------------------------------------------------------------------------

    \146\ See final rule Sec.  382.4(d)(1).
---------------------------------------------------------------------------

    The final rule should also benefit the counterparties of a 
subsidiary of a failed GSIB by preventing the severe stress or 
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 
final rule seeks to 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 should 
further protect the financial stability of the United States.
    General creditor protections. While the restrictions of the final 
rule are intended to facilitate orderly resolution, they may also 
diminish the ability of covered FSI's QFC counterparties to include 
certain protections for themselves in covered QFCs, as noted by certain 
commenters. In order to reduce this effect, the final rule like the 
proposal includes several substantive exceptions to the 
restrictions.\147\ 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.
---------------------------------------------------------------------------

    \147\ See final rule Sec.  382.4(d).
---------------------------------------------------------------------------

    First, in order to ensure that the prohibitions would apply only to 
cross-default rights (and not direct default rights), the final rule 
provides that a covered QFC may permit the exercise of default rights 
based on the direct party's entry into a resolution proceeding.\148\

[[Page 50247]]

This provision helps to ensure that, if the direct party to a QFC were 
to enter bankruptcy, its QFC counterparties could exercise any relevant 
direct default rights. Thus, direct QFC counterparties of a covered 
FSI's subsidiaries 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 U.S. Bankruptcy 
Code's safe harbor provisions.
---------------------------------------------------------------------------

    \148\ See final rule Sec.  382.4(d)(1).
    The proposal exempted from this creditor protection provision 
proceedings under a U.S. or foreign special resolution regime. As 
explained in the proposal, 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 the Dodd-Frank Act's OLA stays direct 
default rights and cross-defaults arising from a parent's 
receivership, see 12 U.S.C. 5390(c)(10)(B) and 5390(c)(16). The 
proposed exemption of special resolution regimes from the creditor 
protection provisions was intended to help ensure that special 
resolution regimes that do not stay cross-defaults, such as the FDI 
Act, would not disrupt the orderly resolution of a GSIB under the 
U.S. Bankruptcy Code or other ordinary insolvency proceedings.
    One commenter requested the FDIC revise this provision to 
clarify that default rights based on a covered FSI or an affiliate 
entering resolution under the FDI Act or Title II of the Dodd-Frank 
Act are not prohibited but instead are merely subject to the terms 
of such regimes. The commenter requested the FDIC clarify that such 
default rights are permitted so long as they are subject to the 
provisions of the FDI Act or Title II of the Dodd-Frank Act as 
required under Sec.  385.3. The final rule eliminates this proposed 
exemption for special resolution regimes because the rule separately 
addresses cross-defaults arising from the FDI Act and because 
foreign special resolution regimes, along with efforts in other 
jurisdictions to contractually recognize stays of default rights 
under those regimes, should reduce the risk that such a regime 
should pose to the orderly resolution of a GSIB under the U.S. 
Bankruptcy Code or other ordinary insolvency proceedings.
---------------------------------------------------------------------------

    The final rule also allows, 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.\149\ 
Moreover, the final rule allows 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.\150\ This exception takes 
appropriate account of the interdependence that exists among the 
contracts in effect between the same counterparties.
---------------------------------------------------------------------------

    \149\ See final rule Sec.  382.4(d)(1) through (3). These 
provisions should respond to comments requesting that the final rule 
confirm the ability of a covered FSI's counterparty to exercise 
default rights arising from the failure of a direct party to satisfy 
a payment or delivery obligation during the stay period. But see 
final rule Sec.  382.3(c).
    \150\ See final rule Sec.  382.4(d)(2).
---------------------------------------------------------------------------

    As explained in the proposal, the exceptions in the final rule for 
the creditor protections described above are intended to help ensure 
that the final rule 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 
FSI'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 FSI'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.
    These exceptions also help to ensure that counterparties of a 
covered FSI's non-IDI subsidiaries or affiliates would not risk the 
delay and expense associated with becoming involved in a bankruptcy 
proceeding, since, unlike a typical creditor of an entity that enters 
bankruptcy, the QFC counterparty would retain its ability under the 
U.S. Bankruptcy Code's safe harbors to exercise direct default rights. 
This should further reduce the counterparty's incentive to run. 
Reducing incentives to run in the period leading up to resolution 
promotes orderly resolution, since a QFC creditor run (such as a mass 
withdrawal of repo funding) could lead to a disorderly resolution and 
pose a threat to financial stability.
    Additional creditor protections for supported QFCs. The final rule, 
like the proposal, allows the inclusion of 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.\151\ The final rule 
allows these creditor protections in recognition of the supported 
party's interest in receiving the benefit of its credit enhancement.
---------------------------------------------------------------------------

    \151\ See final rule Sec.  382.4(f).
---------------------------------------------------------------------------

    Where a covered QFC is supported by a covered affiliate credit 
enhancement,\152\ the covered QFC and the credit enhancement are 
permitted to allow the exercise of default rights under the 
circumstances discussed below after the expiration of a stay 
period.\153\ Under the final rule, the applicable stay period would 
begin at the commencement of the proceeding and would end at the later 
of 5 p.m. (eastern time) on the next business day and 48 hours after 
the entry into resolution.\154\ This portion of the final rule is 
similar to the stay treatment provided in a resolution under Title II 
of the Dodd-Frank Act or the FDI Act.\155\
---------------------------------------------------------------------------

    \152\ Note that the exception in Sec.  382.4(f) of the final 
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, 
covered FSI, or covered bank under the proposal. See final rule 
Sec.  382.4(e)(2) (defining ``covered affiliate credit 
enhancement'').
    \153\ 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).
    \154\ See final rule Sec.  382.4(g)(1).
    \155\ See 12 U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i), 
5390(c)(16)(A). While the final rule's 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 final rule, contractual provisions may permit the 
exercise of default rights 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 U.S. Bankruptcy Code or the FDI Act.\156\ QFCs may 
also permit the exercise of default rights 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.\157\
---------------------------------------------------------------------------

    \156\ See final rule Sec.  382.4(f)(1). Chapter 11 (11 U.S.C. 
1101-1174) is the portion of the U.S. 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.
    \157\ See final rule Sec.  382.4(f)(2).
---------------------------------------------------------------------------

    QFCs may also permit the exercise of default rights 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 covered 
affiliate credit enhancement (b) all other covered affiliate credit 
enhancements provided by the credit support provider on any other 
covered 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.\158\ Such creditor 
protections are 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 of the Dodd-Frank Act and the FDI Act also contain 
provisions to prevent cherry picking.
---------------------------------------------------------------------------

    \158\ See final rule Sec.  382.4(f)(3).
---------------------------------------------------------------------------

    Finally, if the covered affiliate credit enhancement is transferred 
to a transferee, the QFC may permit non-defaulting counterparty to 
exercise default rights at the end of the stay period unless either (a) 
all of the covered affiliate 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 covered 
affiliate support provider's assets (or the net proceeds from the sale 
of those assets) will be transferred or sold to the

[[Page 50248]]

transferee in a timely manner.\159\ These conditions will help to 
assure the supported party that the transferee would be providing 
substantively the same credit enhancement as the covered affiliate 
support provider.\160\ Title II of the Dodd-Frank Act also requires 
that certain conditions be met with respect to affiliate credit 
enhancements.\161\
---------------------------------------------------------------------------

    \159\ See final rule Sec.  382.4(f)(4).
    \160\ See 12 U.S.C. 5390(c)(16)(A).
    \161\ See 12 U.S.C. 5390(c)(16)(A).
---------------------------------------------------------------------------

    Commenters generally expressed strong support for these exclusions 
but also requested that these exclusions be broadened in a number of 
ways. Certain commenters urged the FDIC to broaden the exclusions to 
permit, after the trigger of the stay-and-transfer provisions, the 
exercise of default rights by a counterparty against a direct 
counterparty or covered support provider with respect to any default 
right under the QFC (other than a default right explicitly based on the 
failure of an affiliate) and not just with respect to defaults 
resulting from payment or delivery failure or the direct party becoming 
subject to certain resolution or insolvency proceedings (e.g., failure 
to maintain a license or certain capital level, materially breaching 
its representations under the QFC). Certain commenters contended that 
at a minimum the final rule should provide for creditor protections 
that meet the minimum standards set forth by the Universal Protocol. 
One commenter specifically identified three creditor protections found 
in the Universal Protocol that it argued the FDIC should include in 
Sec.  382.4: (1) Priority rights in a bankruptcy proceeding against the 
transferee or original credit support provider (if the QFC providing 
credit support was not transferred); (2) a right to submit claims in 
the insolvency proceeding of the insolvent credit support provider if 
the transferee becomes insolvent; and (3) the ability to declare a 
default and close out of both the original QFC with the direct 
counterparty as well as QFCs with the transferee if the transferee 
defaults under the transferred QFC or under any other QFC with the non-
defaulting counterparty, subject to the contractual terms and 
consistent with applicable law. Another commenter argued for creditor 
protections not found in the Universal Protocol, including that the 
transferee be required to be a U.S. person and be registered with and 
licensed by the primary regulator of either the direct counterparty or 
transferor entity. Certain commenters also asked for the right to 
exercise direct default rights and general creditor protections even if 
the exercise occurs during the stay period. Commenters also asked the 
FDIC to delete the phrases ``or after'' in Sec.  382.4(b) regarding the 
restrictions on transfers of affiliate credit enhancements, as neither 
the FRB's nor the OCC's rules have that phrase. These commenters 
asserted that, when coupled with the definition of ``transferee'' in 
Sec.  382.4(g)(3), Sec.  382.4(b) could be read as overriding transfers 
indefinitely, even with respect to subsequent transfers following the 
initial transfer to a bridge financial company or a third party 
transferee.
    The final rule does not include the additional creditor protections 
of the Universal Protocol or other creditor protections requested by 
commenters. As explained in the proposal and below, the additional 
creditor protections of the Universal Protocol do not appear to 
materially diminish the prospects for an orderly resolution of a GSIB 
because the Universal Protocol includes a number of desirable features 
that the final rule otherwise lacks.\162\ Providing additional 
circumstances under which default rights may be exercised during and 
immediately after the stay period, in the absence of any 
counterbalancing benefits to resolution, would increase the risk of a 
disorderly resolution of a GSIB in contravention of the purposes of the 
rule.
---------------------------------------------------------------------------

    \162\ See 81 FR 74326 (Oct. 26, 2016).
---------------------------------------------------------------------------

    Additionally, in response to commenters, the definition of 
``transferee'' in Sec.  382.4(g)(3) of the final rule has been changed 
to define a ``transferee'' as a person to whom a covered affiliate 
credit enhancement is transferred upon the covered affiliate credit 
support provider entering a receivership, insolvency, liquidation, 
resolution, or similar proceeding or thereafter as part of the 
resolution, restructuring or reorganization involving the covered 
affiliate support provider. The provisions of the FRB final rule are 
consistent with this final rule.
    One commenter also argued that transfer should be limited to a 
bridge bank under the FDI Act or a bridge financial company under Title 
II of the Dodd-Frank Act to ensure that the transferee is more likely 
to be able to satisfy the obligations of a credit support provider and 
is subject to regulatory oversight. Section 382.4 of the final rule 
does not apply in situations where the covered affiliate support 
provider is in Title II of the Dodd-Frank Act. Furthermore, this 
section is limited in its application to the FDI Act as well, limiting 
the exercise of cross-default rights as contemplated by Sec.  382.4(h) 
of the final rule. Therefore, the FDIC is not adopting the proposed 
additional creditor protection because it would defeat in large part 
the purpose of Sec.  382.4 and potentially create confusion regarding 
the requirements and purposes of Sec. Sec.  382.3 and 382.4 of the 
final rule.\163\
---------------------------------------------------------------------------

    \163\ To the extent the commenter's reference to ``bridge 
financial company'' was not only to a bridge financial company under 
Title II of the Dodd-Frank Act, the requested amendment would not 
appear to provide a meaningful reduction in credit risk to 
counterparties compared to the creditor protections permitted under 
Sec.  382.84 of the final rule and those available under the 
Universal Protocol and U.S. Protocol, discussed below.
---------------------------------------------------------------------------

    A few commenters expressed concern that the additional creditor 
protections applied only to QFCs supported by a credit enhancement 
provided by a ``covered affiliate support provider'' (i.e., an 
affiliate that is a covered entity, covered bank, or covered FSI) and 
noted that foreign GSIBs often will have their QFCs supported by a non-
U.S. affiliate that is not a covered entity, covered bank, or covered 
FSI. Such non-U.S. affiliate credit supporter providers would not be 
able to rely on the additional creditor protections for supported QFCs. 
Such credit enhancements are excluded in order to help ensure that the 
resolution of a non-U.S. entity would not negatively affect the 
financial stability of the United States.\164\
---------------------------------------------------------------------------

    \164\ See generally 81 FR 74326, 74335 (Oct. 26, 2016) (``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.''). See also final rule Sec.  382.4(f).
---------------------------------------------------------------------------

    One commenter requested clarification that the creditors of a non-
U.S. credit support provider are permitted to exercise any and all 
rights against that non-U.S. credit support provider that they could 
exercise under the non-U.S. resolution regime applicable to that non-
U.S. credit support provider. The final rule, like the proposal, is 
limited to QFCs to which a covered FSI is a party. Section 382.4 of the 
final rule generally prohibits QFCs to which a covered FSI is a party 
from allowing the exercise of cross-default rights of the covered QFC, 
regardless of whether the affiliate entering resolution and/or the 
credit support provider is organized or operates in the United States.
    Another commenter expressed concern that the proposed Sec.  
382.4(g)(3) (Sec.  382.4(f)(3) of the final rule) would provide a right 
without a remedy because if the covered affiliate credit

[[Page 50249]]

support provider is no longer obligated and no transferee has taken on 
the obligation, the non-covered FSI counterparty may have only a breach 
of contract claim against an entity that has transferred all of its 
assets to a third party. The creditor protections of Sec.  382.4, if 
triggered, permit contractual provisions allowing the exercise of 
existing default rights against the direct party to the covered QFC, as 
well as any existing rights against the credit enhancement provider.
    Another commenter suggested revising Sec.  382.4(g) (Sec.  382.4(f) 
of the final rule) to clarify that, for a covered direct QFC 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 after the stay period that is related, directly or 
indirectly, to the covered affiliate support provider entering into 
resolution proceedings. This reading is incorrect and revising the rule 
as requested would largely defeat the purpose of Sec.  382.4 of the 
final rule by merely delaying QFC termination en masse.
    Some commenters also requested specific provisions related to 
physical commodity contracts, including a provision that would allow 
regulators to override a stay if necessary to avoid disruption of the 
supply or prevent exacerbation of price movements in a commodity or a 
provision that would allow the exercise of default rights of 
counterparties delivering or taking delivery of physical commodities if 
a GSIB entity defaults on any physical delivery obligation to any 
counterparty. As noted above, QFCs may permit a counterparty to 
exercise its default rights immediately, even during the stay period, 
if the direct party fails to pay or perform on the covered QFC with the 
counterparty (or another contract between the same parties that gives 
rise to a default under the covered QFC).
    Creditor protections related to FDI Act proceedings. 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 
\165\ only under the following circumstances: (a) After the FDI Act 
stay period,\166\ if the credit enhancement is not transferred under 
the relevant provisions of the FDI Act \167\ 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.\168\ 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.\169\ 
No comments were received on this aspect of the proposal and the final 
rule contains no substantive changes from the proposal.
---------------------------------------------------------------------------

    \165\ 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.
    \166\ Under the FDI Act, the relevant stay period runs until 5 
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). See also final 
rule Sec.  382.1.
    \167\ 12 U.S.C. 1821(e)(9)-(10).
    \168\ See final rule Sec.  382.4(h).
    \169\ See id. (noting that the general creditor protections in 
Sec.  382.4(d), and the additional creditor protections for 
supported QFCs in Sec.  382.4(f), 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 final rule, 
like the proposal, requires 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,\170\ or a more demanding standard.\171\
---------------------------------------------------------------------------

    \170\ 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 is not 
permitted to provide for a lower standard.
    \171\ See final rule Sec.  382.4(i).
---------------------------------------------------------------------------

    The purpose of this requirement is to deter the QFC counterparty of 
a covered FSI from thwarting the purpose of the final rule 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.
    A few commenters requested guidance on how to satisfy the burden of 
proof of clear and convincing evidence so that they may avoid seeking 
such clarity through litigation. Other commenters urged that this 
standard was not appropriate and should be eliminated. In particular, a 
number of commenters expressed concern that the burden of proof 
requirements, which are more stringent than the burden of proof 
requirements for typical contractual disputes adjudicated in a court, 
unduly hamper the creditor protections of counterparties and impose a 
burden directly on non-covered FSIs, who should be able to exercise 
default rights if it is commercially reasonable in the context. One 
commenter contended that this burden, combined with the stay on default 
rights related ``indirectly'' to an affiliate entering insolvency 
proceedings effectively prohibits counterparties from exercising any 
default rights during the stay period. These commenters argued that it 
is inappropriate for the rulemaking to alter the burden of proof for 
contractual disputes. One commenter suggested that, in a scenario 
involving a master agreement with some transactions out of the money 
and others in the money, the defaulting GSIB will have a lower burden 
of proof for demonstrating that it is owed money than for demonstrating 
that it owes money, should the non-GSIB counterparty exercise its 
termination rights. Certain commenters suggested instead that the final 
rule shift the burden and instead adopt a rebuttable presumption that 
the non-defaulting counterparty's exercise of default rights is 
permitted under the QFC unless the defaulting covered FSI demonstrates 
otherwise. One commenter requested that the burden of proof not apply 
to the exercise of direct default rights. Another commenter suggested 
that the burden of proof provision imposes a higher burden of proof on 
counterparties affected by the rule than domestic and foreign GSIBs and 
that the requirements for satisfying this burden should be clarified 
and any case law or statutory standard that a Federal judge would apply 
in this instance be provided.
    The final rule retains the proposed burden of proof requirements. 
The requirement is based on a primary goal of the final rule--to avoid 
the disorderly termination of QFCs in response to the failure of an 
affiliate of a GSIB. The requirement accomplishes this goal by making 
clear that a party that exercises a default right when an affiliate of 
its direct party enters receivership or insolvency proceedings is 
unlikely to prevail in court unless there is clear and convincing 
evidence that the exercise of the default right against a covered FSI 
is not related to the insolvency or resolution proceeding. The 
requirement therefore should discourage the impermissible exercise of 
default rights without prohibiting the exercise of all default rights. 
Moreover, the burden of

[[Page 50250]]

proof requirement should not discourage the exercise of default rights 
after or in response to a failure to satisfy a creditor protection 
provision (e.g., direct default rights); such a failure should be 
easily evidenced, even under a heightened burden of proof, such that 
clarification through court proceedings should not be necessary.
    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.\172\ 
Similarly, a covered FSI may also enter into a QFC as agent acting on 
behalf of a principal.
---------------------------------------------------------------------------

    \172\ The definition of QFC under Title II of the Dodd-Frank 
Act, which is adopted in the final rule, includes security 
agreements and other credit enhancements as well as master 
agreements (including supplements). 12 U.S.C. 5390(c)(8)(D); see 
also final rule Sec.  382.1.
---------------------------------------------------------------------------

    The proposal would have applied to a covered QFC regardless of 
whether the covered FSI was acting as a principal or as an agent. 
Sections 382.3 and 382.4 of the proposal did not distinguish between 
agents and principals with respect to default rights or transfer 
restrictions applicable to covered QFCs. Under the proposal, Sec.  
382.3 would have limited default rights and transfer restrictions that 
a counterparty may have against a covered FSI consistent with the U.S. 
Special Resolution Regimes.\173\ Section 382.4 of the proposed rule 
would have ensured 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.\174\
---------------------------------------------------------------------------

    \173\ See proposed rule Sec.  382.3(a)(3).
    \174\ See proposed rule Sec.  382.4(a)(3) and (d).
---------------------------------------------------------------------------

    Commenters argued that the provisions of Sec. Sec.  382.3 and 382.4 
that relate to transactions entered into by the covered FSI as agent 
should exclude QFCs where the covered FSI or its affiliate does not 
have any liability (including contingent liability) under or in 
connection with the contract, or any payment or delivery obligations 
with respect thereto. Commenters also argued that the proposed agent 
provisions should not apply to circumstances where the covered FSI acts 
as agent for a counterparty whose transactions are excluded from the 
requirements of the rule.\175\ Commenters provided as an example where 
an agent simply executes an agreement on behalf of the principal but 
bears no liability thereunder, such as where an investment manager 
signs an agreement on behalf of a client. Commenters noted that such 
agreements could contain events of default relating to the insolvency 
of the agent or an affiliate of the agent but that such default rights 
would be difficult to track and that close-out of such QFCs would not 
result in any loss or liquidity impact to the agent. Rather, early 
termination under the agreements would subject the cash and securities 
of the principals--not the agent--to realization and liquidation. 
Therefore, the agent would not be exposed to the liquidity and asset 
fire sale risks the proposal was intended to address.
---------------------------------------------------------------------------

    \175\ Commenters argued this should be the case even where an 
agent has entered an umbrella master agreement on behalf of more 
than one principal, but only with respect to the contract of any 
principals that are excluded counterparties.
---------------------------------------------------------------------------

    Commenters contended that the requirement to conform QFCs with all 
affiliates of a counterparty when an agent is acting on behalf of the 
counterparty would be particularly burdensome, as the agent may not 
have information about the counterparty's affiliates or their contracts 
with covered FSIs, covered banks, or covered entities. Commenters also 
requested clarification that conformance is not required of contracts 
between a covered FSI as agent on behalf of a non-U.S. affiliate of a 
foreign GSIB that would not be a covered FSI under the proposal, since 
default rights related to the non-U.S. operations of foreign GSIBs are 
not the focus of the rule and do not bear a sufficient connection to 
U.S. financial stability to warrant the burden and cost of compliance.
    One commenter also urged that securities lending authorization 
agreements (SLAAs) should also be exempt from the rule. The commenter 
explained that SLAAs are banking services agreements that establish an 
agency relationship with the lender of securities and an agent and may 
be considered credit enhancements for securities lending transactions 
(and therefore QFCs) because the SLAAs typically require the agent to 
indemnify the lender for any shortfall between the value of the 
collateral and the value of the securities in the event of a borrower 
default. The commenter explained that SLAAs typically do not contain 
provisions that may impede the resolution of a GSIB, but may contain 
termination rights or contractual restrictions on assignability. 
However, the commenter argued that the beneficiaries under SLAAs lack 
the incentive to contest the transfer of the SLAA to a bridge 
institution in the event of GSIB insolvency.
    To respond to concerns raised by commenters, the agency provisions 
of the proposed rule have been modified in the final rule. The final 
rule provides that a covered FSI does not become a party to a QFC 
solely by acting as agent to a QFC.\176\ Therefore, an in-scope QFC 
would not be a covered QFC solely because a covered FSI was acting as 
agent for a principal for the QFC.\177\ For example, the final rule 
would not require a covered FSI to conform a master securities lending 
arrangement (or the transactions under the agreement) to the 
requirements of the final rule if the only obligations of the covered 
FSI under the agreement are to act as an agent on behalf of one or more 
principals. This modification should address many of the concerns 
raised by commenters.
---------------------------------------------------------------------------

    \176\ See final rule Sec.  382.2(e)(1).
    \177\ Such a QFC would nonetheless be a covered QFC with respect 
to a principal that also was a covered FSI. In response to comments, 
the FDIC notes that covered FSIs do not include non-U.S. 
subsidiaries of a foreign GSIB.
---------------------------------------------------------------------------

    The final rule does not specifically exempt SLAAs because the 
agreements provide the beneficiaries with contractual rights that may 
hinder the orderly resolution of a GSIB and because it is unclear how 
such beneficiaries would act in response to the failure of their agent. 
More generally, the final rule does not exempt a QFC with respect to 
which an agent also acts in another capacity, such as guarantor. 
Continuing the example regarding the covered FSI acting as agent with 
respect to a master securities lending agreement, if the covered FSI 
also provided a SLAA that included the typical indemnification 
provision, discussed above, the agency exemption of the final rule 
would not exclude the SLAA but would still exclude the master 
securities lending agreement. This is because the covered FSI is acting 
solely as agent with respect to the master securities lending agreement 
but is acting as agent and guarantor with respect to the SLAA. However, 
SLAAs would be exempted under the final rule to the extent that they 
are not ``in-scope QFCs'' or otherwise meet the exemptions for covered 
QFCs of the final rule.
    Enforceability. Commenters also requested that the final rule 
should clarify that obligations under a QFC

[[Page 50251]]

would still be enforceable even if its terms do not comply with the 
requirements of the final rule similar to assurances provided in 
respect of the UK rule and German legislation. The enforceability of a 
contract is beyond the scope of this rule.
    Interaction with Other Regulatory Requirements. Certain commenters 
requested clarification that amending covered QFCs as required by this 
final rule should not trigger other regulatory requirements for covered 
FSIs such as the swap margin requirements issued by the FDIC, other 
prudential regulators (the OCC, FRB, Farm Credit Administration and 
Federal Housing Financing Agency), and the U.S. Commodity Futures 
Trading Commission (CFTC). In particular, commenters urged that 
amending a swap to conform to this final rule should not jeopardize the 
status of the swap as a legacy swap for purposes of the swap margin 
requirements for non-cleared swaps. These issues are outside the scope 
of this rule as they relate to the requirements of another rule issued 
by the FDIC jointly with the other prudential regulators as well as a 
rule issued by the CFTC. As commenters highlighted, addressing such 
issues may require consultation with the other prudential regulators as 
well as the CFTC and the U.S. Securities and Exchange Commission to 
determine the impact of the amendments required by this final rule for 
purposes of the regulatory requirements under Title VII. However, as 
the proposal noted, the FDIC is considering an amendment to the 
definition of ``eligible master netting agreement'' to account for the 
restrictions on covered QFCs and is consulting with the other 
prudential regulators and the CFTC on this aspect of the final 
rule.\178\ The FDIC does not expect that compliance with this final 
rule will trigger the swap margin requirements for non-cleared swaps.
---------------------------------------------------------------------------

    \178\ See 81 FR 74326, 74340 (Oct. 26, 2016).
---------------------------------------------------------------------------

    Compliance with the ISDA 2015 Resolution Stay Protocol. The final 
rule, like the proposal, allows covered FSIs to conform covered QFCs to 
the requirements of the rule through adherence to the Universal 
Protocol.\179\ The two primary operative provisions of the Universal 
Protocol are Section 1 and Section 2. Under Section 1, adhering parties 
essentially ``opt in'' to the U.S. Special Resolution Regimes and 
certain other special resolution regimes. Therefore, Section 1 is 
generally responsive to the concerns addressed in Sec.  382.3 of the 
final rule. Under Section 2, adhering parties essentially forego, 
subject to the creditor protections of Section 2, cross-default rights 
and transfer restrictions on affiliate credit enhancements. Therefore, 
Section 2 is generally responsive to the concerns addressed in Sec.  
382.4 of the final rule.
---------------------------------------------------------------------------

    \179\ See final rule Sec.  382.5(a).
---------------------------------------------------------------------------

    The proposal noted that, while the scope of the stay-and-transfer 
provisions of the Universal Protocol are narrower than the stay-and-
transfer provisions that would have been required under the proposal 
and the Universal Protocol provides a number of creditor protection 
provisions that would not otherwise have been available under the 
proposal, the Universal Protocol includes a number of desirable 
features that the proposal lacked. When an entity (whether or not it is 
a covered FSI) adheres to the Universal Protocol, it necessarily 
adheres to the Universal Protocol with respect to all covered FSIs that 
have also adhered to the Protocol rather than one or a subset of 
covered FSIs (as the proposal would otherwise have permitted). This 
feature appears to allow the Universal Protocol to address impediments 
to resolution on an industry-wide basis and increase market certainty, 
transparency, and equitable treatment with respect to default rights of 
non-defaulting parties.\180\ This feature is referred to as ``universal 
adherence.'' Other favorable features of the Universal Protocol 
included that it amends all existing transactions of adhering parties, 
does not provide the counterparty with default rights in addition to 
those provided under the underlying QFC, applies to all QFCs, and 
includes resolution under bankruptcy as well as U.S. and certain non-
U.S. Special Resolution Regimes. Because the features of the Universal 
Protocol, considered together, appeared to increase the likelihood that 
the resolution of a GSIB under a range of scenarios could be carried 
out in an orderly manner, the proposal stated that QFCs amended by the 
Universal Protocol would have been consistent with the proposal, 
notwithstanding Sec.  382.4 of the proposal.
---------------------------------------------------------------------------

    \180\ See 81 FR 74326.
---------------------------------------------------------------------------

    Commenters generally supported the proposal's provisions to allow 
covered FSIs to comply with the requirements of the proposed rule 
through adherence to the Universal Protocol. For the reasons discussed 
above and in the proposal, the final rule allows covered FSIs to comply 
with the rule through adherence to the Universal Protocol and makes 
other modifications to the proposal to address comments.
    A few commenters requested that the final rule clarify two 
technical aspects of adherence to the Universal Protocol. These 
commenters requested confirmation that adherence to the Universal 
Protocol would also satisfy the requirements of Sec.  382.3. The 
commenters also requested confirmation that QFCs that incorporate the 
terms of the Universal Protocol by reference also would be deemed to 
comply with the terms of the proposed alternative method of 
compliance.\181\ By clarifying Sec.  382.5(a), the final rule confirms 
that adherence to the Universal Protocol is deemed to satisfy the 
requirements of Sec.  382.3 of the final rule (as well as Sec.  382.4) 
and that conformance of a covered QFC through the Universal Protocol 
includes incorporation of the terms of the Universal Protocol by 
reference by protocol adherents. This clarification also applies to the 
U.S. Protocol, discussed below.
---------------------------------------------------------------------------

    \181\ ``As between two Adhering Parties, the [Universal 
Protocol] only amends agreements between the Adhering Parties that 
have been entered into as of the date that the Adhering Parties 
adhere (as well as any subsequent transactions thereunder), but it 
does not amend agreements that Adhering Parties enter into after 
that date. . . . If Adhering Parties wish for their future 
agreements to be subject to the terms of the [Universal Protocol] or 
a Jurisdictional Module Protocol under the ISDA JMP, it is expected 
that they would incorporate the terms of the [relevant protocol] by 
reference into such agreements.'' Letter to Robert deV. Frierson, 
Secretary, Board of Governors of the Federal Reserve System, from 
Katherine T. Darras, ISDA General Counsel, The International Swaps 
and Derivatives Association, Inc., at 8-9 (Aug. 5, 2016) This 
commenter noted that incorporation by reference was consistent with 
the proposal and asked that the text of the rule be clarified. Id. 
at 9. ISDA requested the FDIC to consider ISDA's FRB comment letter 
in ISDA's comment letter to the FDIC. See Letter to Robert E. 
Feldman, Executive Secretary, Federal Deposit Insurance Corporation, 
from Katherine T. Darras, ISDA General Counsel, The International 
Swaps and Derivatives Association, Inc., at 3 (Dec. 12, 2016).
---------------------------------------------------------------------------

    One commenter indicated that many non-covered FSI counterparties do 
not have ISDA master agreements for physically-settled forward and 
commodity contracts and, therefore, compliance with the rule's 
requirements through adherence to the Universal Protocol would entail 
substantial time and educational effort. As in the proposal, the final 
rule simply permits adherence to the Universal Protocol as one method 
of compliance with the rule's requirements, and parties may meet the 
rule's requirements through bilateral negotiation, if they choose. 
Moreover, the Securities Financing Transaction Annex and Other 
Agreements Annex of the Universal Protocol, which are specifically 
identified in the proposed and final rule, are designed to amend QFCs 
that are not ISDA master agreements.
    Many commenters argued that the final rule should also allow 
compliance with the rule through a yet-to-be-created

[[Page 50252]]

``U.S. Jurisdictional Module to the ISDA Resolution Stay Jurisdictional 
Modular Protocol'' (an ``approved U.S. JMP'') that is generally the 
same but narrower in scope than the Universal Protocol.\182\ Many non-
GSIB commenters argued that they were not involved with the drafting of 
the Universal Protocol and that an approved U.S. JMP would create a 
level playing field between those that were involved in the drafting 
and those that were not. In general, commenters identified two aspects 
of the Universal Protocol that they argued should be narrowed in the 
approved U.S. JMP: The scope of the special resolution regimes and the 
universal adherence feature of the Universal Protocol. Commenters also 
asked that the FDIC coordinate with the FRB and the OCC regarding 
treatment of the JMP and to ensure that any determinations made 
concerning the JMP are consistent.
---------------------------------------------------------------------------

    \182\ Commenters argued that approval of the approved U.S. JMP 
should not require satisfaction of the administrative requirements 
of proposed rule Sec.  382.5(b)(3), since the FDIC has already 
conducted that analysis in deciding to provide a safe harbor for the 
Universal Protocol.
---------------------------------------------------------------------------

    With respect to the scope of the special resolution regimes of the 
Universal Protocol, commenters' concern focused on the special 
resolution regimes of ``Protocol-eligible Regimes.'' Some commenters 
also expressed concern with the scope of ``Identified Regimes'' of the 
Universal Protocol.
    The Universal Protocol defines ``Identified Regimes'' as the 
special resolution regimes of France, Germany, Japan, Switzerland, and 
the United Kingdom as well as the U.S. Special Resolution Regimes. The 
Universal Protocol defines ``Protocol-eligible Regimes'' as resolution 
regimes of other jurisdictions specified in the protocol that satisfies 
the requirements of the Universal Protocol. The Universal Protocol 
provides a ``Country Annex,'' which is a mechanism by which individual 
adherents to the Universal Protocol may agree that a specific 
jurisdiction satisfies the requirements of a ``Protocol-eligible 
Regime.'' The Universal Protocol referred to in the proposal did not 
include any Country Annex for any Protocol-eligible Regime.\183\
---------------------------------------------------------------------------

    \183\ The proposal defined the Universal Protocol as 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.'' See proposed 
rule Sec.  382.5(a). As of May 3, 2016, ISDA had not published any 
Country Annex for a Protocol eligible Regime and such publication 
would not be a minor or technical amendment to the Universal 
Protocol. Consistent with the proposal, the final rule does not 
define the Universal Protocol to include any Country Annex. However, 
the final rule does not penalize adherence to any Country Annex. A 
covered QFC that is amended by the Universal Protocol--but not a 
Country Annex--will be deemed to conform to the requirements of the 
final rule. In addition, a covered QFC that is amended by the 
Universal Protocol--including one or more Country Annexes--is also 
deemed to conform to the requirements of the final rule. See final 
rule Sec.  382.5(a)(2).
---------------------------------------------------------------------------

    Commenters requested the final rule include a safe harbor for an 
approved U.S. JMP that does not include Protocol-eligible Regimes. 
Commenters argued that many counterparties may not be able to adhere to 
the Universal Protocol because they would not be able to adhere to a 
Protocol-eligible Regime in the absence of law or regulation mandating 
such adherence, as it would force counterparties to give up default 
rights in jurisdictions where that is not yet legally required.\184\ In 
support of their argument, commenters cited their fiduciary duties to 
act in the best interests of their clients or shareholders. Commenters 
also argued that an approved U.S. JMP should not include Identified 
Regimes and noted that the other Identified Regimes have already 
adopted measures to require contractual recognition of their special 
resolution regimes.\185\
---------------------------------------------------------------------------

    \184\ The Protocol-eligible Regime requirements of the Universal 
Protocol do not include a requirement that a law or regulation, such 
as the final rule, require parties to contractually opt in to the 
regime.
    \185\ One commenter requested clarification that a QFC of a 
covered FSI with a non-U.S. credit support provider for the covered 
FSI complies with the requirements of the final rule to the extent 
the covered FSI has adhered to the relevant jurisdictional modular 
protocol for the jurisdiction of the non-U.S. credit support 
provider. The jurisdictional modular protocols for other countries 
do not satisfy the requirements of the final rule.
---------------------------------------------------------------------------

    With respect to the universal adherence feature of the Universal 
Protocol, commenters argued that universal adherence imposed 
significant monitoring burden since new adherents may join the 
Universal Protocol at any time. To address this concern, some 
commenters requested that an approved U.S. JMP allow a counterparty to 
adhere on a firm-by-firm or entity-by-entity basis. Other commenters 
suggested or supported approval of, an approved U.S. JMP in which a 
counterparty would adhere to all current covered FSIs under the final 
rule (to be identified on a ``static list'') and would adhere to new 
covered FSIs on an entity-by-entity basis. This static list, commenters 
argued, would retain the ``universal adherence mechanics'' of the 
Universal Protocol and allow market participants to fulfill due 
diligence obligations related to compliance. Commenters also argued 
that universal adherence would be overbroad because the Universal 
Protocol could amend QFCs to which a covered FSI, covered bank, or 
covered entity was not a party. Certain commenters argued that adhering 
with respect to any counterparty would also be inconsistent with their 
fiduciary duties.
    In response to comments and to further facilitate compliance with 
the rule, the final rule provides that covered QFCs amended through 
adherence to the Universal Protocol or a new (and separate) protocol 
(the ``U.S. Protocol'') would be deemed to conform the covered QFCs to 
the requirements of the final rule.\186\ The U.S. Protocol may differ 
(and is required to differ) from the Universal Protocol in certain 
respects, as discussed below, but otherwise must be substantively 
identical to the Universal Protocol.\187\ Therefore, the reasons for 
deeming covered QFCs amended by the Universal Protocol to conform to 
the final rule, discussed above and in the proposal, apply to the U.S. 
Protocol.
---------------------------------------------------------------------------

    \186\ The final rule also provides that the FDIC may determine 
otherwise based on specific facts and circumstances. See final rule 
Sec.  382.5(a).
    \187\ Commenters expressed support for having the U.S. Protocol 
apply to both existing and future QFCs. One commenter requested that 
an approved U.S. JMP should apply only to QFCs governed by non-U.S. 
law because the U.S. Special Resolution Regimes already apply to 
QFCs governed by U.S. law. As discussed above, the final rule does 
not exempt a QFC solely because the QFC explicitly states that is 
governed by U.S. law. Moreover, such a limited application would 
reduce the desirable additional benefits of the Universal Protocol, 
discussed above.
---------------------------------------------------------------------------

    Consistent with the proposal \188\ and requests by commenters, the 
U.S. Protocol may limit the application of the provisions the Universal 
Protocol identifies as Section 1 and Section 2 to only covered FSIs, 
covered banks, and covered entities.\189\ As requested by commenters, 
this limitation on the scope of the U.S. Protocol may ensure that the 
U.S. Protocol would only amend covered QFCs under this final rule or 
the substantially identical final rules expected to be issued by the 
OCC and already issued by the FRB and not also QFCs outside the scope 
of the agencies' final rules (i.e., QFCs between

[[Page 50253]]

parties that are not covered FSIs, covered banks, or covered entities).
---------------------------------------------------------------------------

    \188\ The proposal explained that a ``jurisdictional module for 
the United States that is substantively identical to the [Universal] 
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.'' 81 FR 74326, 74337, n. 91 
(Oct. 26, 2016).
    \189\ The final rule does not require the U.S. Protocol to 
retain the same section numbering as the Universal Protocol. The 
final rule allows the U.S. protocol to have minor and technical 
differences from the Universal Protocol. See final rule Sec.  
382.5(a)(3)(ii)(F).
---------------------------------------------------------------------------

    The final rule also provides that the U.S. Protocol is required to 
include the U.S. Special Resolution Regimes and the other Identified 
Regimes but is not required to include Protocol-eligible Regimes.\190\ 
As noted above, the Universal Protocol, as defined in the proposal, did 
not include any Country Annex for a Protocol-eligible Regime; the only 
special resolution regimes specifically identified in the Universal 
Protocol, as defined in the proposal, were the U.S. Special Resolution 
Regimes and the other Identified Regimes. The inclusion of the 
Identified Regimes should help facilitate the resolution of a GSIB 
across a broader range of circumstances. Inclusion of the Identified 
Regimes in the U.S. Protocol also should support laws and regulations 
similar to the final rule and help encourage GSIB entities in the 
United States to adhere to a protocol that includes all Identified 
Regimes. However, the final rule does not require the U.S. Protocol to 
include Protocol-eligible Regimes, including definitions and adherence 
mechanisms related to Protocol-eligible Regimes.\191\ Inclusion of only 
the Identified Regimes in the U.S. Protocol, considered in light of the 
other benefits to the resolution of GSIBs provided by the Universal 
Protocol and U.S. Protocol as well as commenters' concerns with 
potential adherence to Protocol-eligible Regimes, should sufficiently 
advance the objective of the final rule to increase the likelihood that 
a resolution of a GSIB could be carried out in an orderly manner under 
a range of scenarios.
---------------------------------------------------------------------------

    \190\ See final rule Sec.  382.5(a)(3)(ii)(A). The U.S. Protocol 
is likewise not required to include definitions and adherence 
mechanisms related to Protocol-eligible Regimes. The final rule 
allows the U.S. Protocol to include minor and technical differences 
from the Universal Protocol and, similarly, differences necessary to 
conform the U.S. Protocol to the substantive differences allowed or 
required from the Universal Protocol. See final rule Sec.  
382.5(a)(3)(ii)(F).
    \191\ See final rule Sec.  382.5(a)(3)(ii)(A).
---------------------------------------------------------------------------

    The U.S. Protocol does not permit parties to adhere on a firm-by-
firm or entity-by-entity basis because such adherence mechanisms 
requested by commenters would obviate one of the primary benefits of 
the Universal Protocol: Universal adherence. Similarly, the final rule 
does not permit adherence to a ``static list'' of all current covered 
FSIs, which other commenters requested.\192\ Although the static list 
would initially provide for universal adherence, the static list would 
not provide for universal adherence with respect to entities that 
became covered FSIs after the static list was finalized. To help ensure 
that the additional creditor protections of the Universal Protocol and 
U.S. Protocol continue to be justified, both protocols must ensure that 
the desirable features of the protocols, including universal adherence, 
continue to be present as GSIBs acquire subsidiaries with existing QFCs 
and existing organizations become designated as GSIBs.
---------------------------------------------------------------------------

    \192\ The final rule, however, does not prohibit the creation of 
a dynamic list identifying of all current ``Covered Parties,'' as 
would be defined in the U.S. Protocol, to facilitate due diligence 
and provide additional clarity to the market. See final rule Sec.  
382.5(a)(2)(ii)(F) (allowing minor and technical differences from 
the Universal Protocol).
---------------------------------------------------------------------------

    The final rule also addresses provisions that allow an adherent to 
elect that Section 1 and/or Section 2 of the Universal Protocol do not 
apply to the adherent's contracts.\193\ The Universal Protocol refers 
to these provisions as ``opt-outs.'' The proposal explained that 
adherence to the Universal Protocol was an alternative method of 
compliance with the proposed rule and that covered QFCs that were not 
amended by the Universal Protocol must otherwise conform to the 
proposed rule. In other words, the proposal would have required that a 
covered QFC be conformed regardless of the method the covered FSI and 
counterparty choose to conform the QFC.\194\
---------------------------------------------------------------------------

    \193\ Section 4(b) of the Universal Protocol.
    \194\ Under the final rule, if an adherent to the Universal 
Protocol or U.S. Protocol exercises an available opt-out, covered 
FSIs with covered QFCs affected by the exercise would be required to 
otherwise conform the covered QFCs to the requirements of the final 
rule.
---------------------------------------------------------------------------

    Consistent with the basic purposes of the proposed and final rules, 
the U.S. Protocol requires that opt-outs exercised by its adherents 
will only be effective to the extent that the affected covered QFCs 
otherwise conform to the requirements of the final rule. Therefore, the 
U.S. Protocol allows counterparties to exercise available opt-out 
rights in a manner that also allows covered FSIs to ensure that their 
covered QFCs continue to conform to the requirements of the rule.
    The final rule also provides that, under the U.S. Protocol, the 
opt-out in Section 4(b)(i)(A) of the attachment to the Universal 
Protocol (Sunset Opt-out) \195\ must not apply with respect to the U.S. 
Special Resolution Regimes, because the opt-out is no longer relevant 
with respect to the U.S. Special Resolution Regimes. This final rule, 
along with the substantially identical rules already issued by the FRB 
and expected to be issued by the OCC, should prevent exercise of the 
Sunset Opt-out provision with respect to the U.S. Special Resolution 
Regimes under the Universal Protocol. Inapplicability of this opt-out 
with respect to U.S. Special Resolution Regimes in the U.S. Protocol 
should provide additional clarity to adherents that the U.S. Protocol 
will continue to provide for universal adherence after January 1, 2018.
---------------------------------------------------------------------------

    \195\ See Section 4(b)(i)(A) of the Universal Protocol.
---------------------------------------------------------------------------

    The final rule also expressly addresses a provision in the 
Universal Protocol that concerns the client-facing leg of a cleared 
transaction. As discussed above, the final rule, like the proposal, 
does not include the exemption in Section 2 of the Universal Protocol 
regarding the client-facing leg of a cleared transaction. Therefore, 
the final rule provides that the U.S. Protocol must not exempt the 
client-facing leg of the transaction.\196\
---------------------------------------------------------------------------

    \196\ Section 2 of the Universal Protocol provides an exemption 
for any client-facing leg of a cleared transaction. See Section 2(k) 
of the Universal Protocol and the definition of ``Cleared Client 
Transaction.'' The final rule does not amend the proposal's 
treatment of QFCs that are ``Cleared Client Transactions'' under the 
Universal Protocol, but requires that the provisions of that section 
must not apply with respect to the U.S. Protocol. See final rule 
Sec.  382.5(a)(3)(ii)(E).
---------------------------------------------------------------------------

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

    As discussed above, the restrictions of the final rule would leave 
many creditor protections that are commonly included in QFCs 
unaffected. The final rule 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.\197\ 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 
final rule and intended to facilitate the FDIC's consideration of 
whether permitting the contractual terms would be consistent with the 
proposed restrictions.\198\ 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.
---------------------------------------------------------------------------

    \197\ See final rule Sec.  382.5(b).
    \198\ See final rule Sec.  382.5(d)(1) through (10).
---------------------------------------------------------------------------

    The first two factors concern the potential impact of the requested 
creditor protections on GSIB resilience and resolvability. The next 
four concern

[[Page 50254]]

the scope of the final rule: 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 chances 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 final rule 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.\199\
---------------------------------------------------------------------------

    \199\ See final rule Sec.  382.5(b)(3)(ii) and (iii).
---------------------------------------------------------------------------

    Under the final rule, the FDIC could approve a request for an 
alternative set of creditor protections if the terms of the QFC, as 
compared to a covered QFC containing only the limited creditor 
protections permitted by the final rule, would promote the safety and 
soundness of covered FSIs by mitigating the potential destabilizing 
effects of the resolution of a GSIB that is an affiliate of the covered 
FSI to at least the same extent.\200\ Once approved by the FDIC, 
enhanced creditor protections could be used by other covered FSIs (in 
addition to the covered FSI that submitted the request for FDIC 
approval), as appropriate. The request-and-approval process would 
improve flexibility by allowing for an industry-proposed alternative to 
the set of creditor protections permitted by the final rule while 
ensuring that any approved alternative would serve the final rule's 
policy goals to at least the same extent as a covered QFC that complies 
fully with the final rule.
---------------------------------------------------------------------------

    \200\ See final rule Sec.  382.5(c).
---------------------------------------------------------------------------

    Commenters requested that this approval process be made less 
burdensome and more flexible and urged for additional clarifications on 
the process for submitting and approving such requests (e.g., whether 
approvals would be published in the Federal Register). For example, 
commenters requested the final rule include a reasonable timeline 
(e.g., 180 days) by which the FDIC would approve or deny a request. 
Certain commenters urged that counterparties and trade groups, in 
addition to covered entities, covered FSIs, and covered banks, should 
be permitted to make such requests. One commenter noted that the 
proposal's approval process would have created a free-rider problem, 
where parties that submit enhanced creditor protection conditions for 
FDIC approval bear the full cost of learning which remedies are 
available for creditors while other parties will gain that information 
for free. Commenters contended that the provision requiring a ``written 
legal opinion verifying the proposed provisions and amendments would be 
valid and enforceable under applicable law of the relevant 
jurisdictions'' should be eliminated as unnecessary.\201\ Additionally, 
commenters also urged that the provision should be broadened to allow 
approvals of provisions not directly related to enhanced creditor 
protections.
---------------------------------------------------------------------------

    \201\ One commenter also suggested permitting amendments to QFCs 
to be accomplished through a confirmation document for a new 
agreement or by email instead of a formal amendment of the QFC 
signed by the parties. The final rule does not prescribe a specific 
method for amending covered QFCs.
---------------------------------------------------------------------------

    Finally, commenters also urged the FDIC, FRB, and OCC to either 
harmonize their standards for approving enhanced creditor protections 
or otherwise be consistent in approving enhanced creditor protection 
conditions. Imposing different conditions or arriving at different 
outcomes would subject identical QFCs to different creditor 
protections, raise fairness issues, increase legal and operational 
complexity, and hence impede the goal of orderly resolution of a GSIB.
    The FDIC has clarified that the FDIC could approve an alternative 
proposal of additional creditor protections as compliant with 
Sec. Sec.  382.3 and 382.4 of the final rule, but has not otherwise 
modified these provisions of the proposal in response to changes 
requested by commenters. The provisions contain flexibility and 
guidance on the process for submitting and approving enhanced creditor 
protections. The final rule directly places requirements only on 
covered FSIs and thus only covered FSIs are eligible to submit requests 
pursuant to these provisions. In response to commenters' concerns, the 
FDIC notes that the final rule does not prevent multiple covered FSIs 
from presenting one request and does not prevent covered FSIs from 
seeking the input of counterparties when developing a request. The 
final rule does not provide a maximum time to review proposals because 
proposals could vary greatly in complexity and novelty. The final rule 
also maintains the provision requiring a written legal opinion which 
helps ensure that proposed provisions are valid and enforceable under 
applicable law. The final rule does not expand the approval process 
beyond additional creditor protections; however, revisions to aspects 
of the final rule may be made through the rulemaking process. The FDIC 
intends to consult with the FRB and OCC with respect to any requests 
for approvals for additional creditor protections. Therefore, the FDIC 
does not expect that the agencies would arrive at different outcomes 
with respect to an identical application for approval for enhanced 
creditor protections based on the differences in standards for 
approval.

III. Transition Periods

    Under the proposal, the rule would have required compliance on the 
first day of the first calendar quarter beginning at least one year 
after issuance of the final rule, which the proposal referred to as the 
effective date.\202\ A number of commenters urged the adoption of a 
phased-in approach to compliance that would extend the compliance 
deadline for covered QFCs with certain types of counterparties in order 
to allow time for necessary client outreach and education, especially 
for non-GSIB counterparties that may be unfamiliar with the Universal 
Protocol or the final rule's requirements. These commenters contended 
that the original compliance period of one year should be limited to 
counterparties that are banks, broker-dealers, swap dealers, security-
based swap dealers, major swap participants, and major security-based

[[Page 50255]]

swap participants. These commenters urged that the compliance period 
for QFCs with asset managers, commodity pools, private funds, and other 
entities that are predominantly engaged in activities that are 
financial in nature within the meaning of section 4(k) of the BHC Act 
should be extended for six months after the date of the original 
compliance period identified in the proposed rule. Finally, these 
commenters argued that the compliance period for QFCs with all other 
counterparties should be extended for 12 months after the date of the 
original compliance period identified in the proposed rule as these 
counterparties are likely to be least familiar with the requirements of 
the final rule.
---------------------------------------------------------------------------

    \202\ See proposed rule Sec.  382.2(b). Under section 302(b) of 
the Riegle Community Development and Regulatory Improvement Act of 
1994, new FDIC 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).
---------------------------------------------------------------------------

    One commenter suggested that the rule should take effect no sooner 
than one year from the date that an approved U.S. JMP is published and 
available for adherence, including any additional time it might take 
for the agencies to approve it. Certain commenters requested that the 
compliance deadline for covered QFCs entered into by an agent on behalf 
of a principal be extended by six months as well. Other commenters, 
however, cautioned against an approach that would impose different 
deadlines with respect to different classes of QFCs, as opposed to 
counterparty types, since the main challenge in connection with the 
remediation is the need for outreach to and education of 
counterparties. These commenters contended that once a counterparty has 
become familiar with the requirements of the rule and the terms of the 
required amendments, it would be more efficient to remediate all 
covered QFCs with the counterparty at the same time.
    A number of commenters also requested that the FDIC confirm that 
entities newly acquired by a GSIB, and thereby become new covered FSIs 
have until the first day of the first calendar quarter immediately 
following one year after becoming covered FSIs to conform their 
existing QFCs. Commenters argued that this would allow the GSIB to 
conform existing QFCs in an orderly fashion without impairing the 
ability of covered FSIs to engage in corporate activities. These 
commenters also requested clarification that, during that conformance 
period, affiliates of covered FSIs would not be prohibited from 
entering into new transactions or QFCs with counterparties of the newly 
acquired entity if the existing covered FSIs otherwise comply with the 
rule's requirements. Some commenters urged the FDIC to exclude existing 
contracts from the final rule's requirements and only apply the rule on 
a prospective basis. Additionally, commenters asked for harmonized 
compliance dates across the different agencies' rules.
    The effective date for the final rule is January 1, 2018, more than 
60 days following publication in the Federal Register. However, in 
order to reduce the compliance burden of the final rule, the FDIC has 
adopted a phased-in compliance schedule as requested by commenters. The 
final rule provides that a covered FSI must conform a covered QFC to 
the requirements of this final rule by the first day of the calendar 
quarter immediately following one year from the effective date of this 
subpart with respect to covered QFCs with other covered FSIs, covered 
entities, and covered banks (referred to in this discussion as the 
``first compliance date'').\203\ This provision allows the 
counterparties that should be the most familiar with the requirements 
of the final rule over one year to comply with the rule's requirements. 
Moreover, this is a relatively small number of counterparties that 
would need to modify their QFCs in the first year following the 
effective date of the final rule and many covered FSIs, covered 
entities, and covered banks with covered QFCs have already adhered to 
the Universal Protocol.
---------------------------------------------------------------------------

    \203\ See final rule Sec.  382.2(f)(1)(i). The definition of 
covered QFC of the final rule has been revised to make clear that, 
consistent with the proposal, a covered QFC is a QFC that the 
covered FSI becomes a party to on or after the first day of the 
calendar quarter immediately following one year from the effective 
date of this part. See final rule Sec.  382.2(c). As discussed 
above, a covered FSI's in-scope QFC that is entered into before this 
date may also be a covered QFC if the covered FSI or any affiliate 
that is a covered entity, covered FSI, or covered bank also becomes 
a party to a QFC with the same counterparty or a consolidated 
affiliate of the same counterparty on or after the first compliance 
date. See id.
---------------------------------------------------------------------------

    The final rule provides additional time for compliance with the 
requirements for other types of counterparties. In particular, for 
other types of financial counterparties \204\ (other than small 
financial institutions) \205\ the final rule provides 18 months from 
the effective date of the final rule for compliance with its 
requirements as requested by commenters.\206\ For smaller banks and 
other non-financial counterparties, the final rule provides 
approximately two years from the effective date of the final rule for 
compliance with its requirements, as requested by commenters.\207\ 
Adopting a phased-in compliance approach based on the type (and, in 
some cases, size) of the counterparty will allow market participants 
time to adjust to the new requirements and make required changes to 
QFCs in an orderly manner. It will also give time for development of 
the U.S. Protocol or any other protocol that would meet the 
requirements of the final rule.
---------------------------------------------------------------------------

    \204\ See final rule Sec.  382.1 (defining ``financial 
counterparty'').
    \205\ The final rule defines small financial institution as an 
insured bank, insured savings association, farm credit system 
institution, or credit union with assets of $10,000,000,000 or less. 
See final rule Sec.  382.1.
    \206\ See final rule Sec.  382.2(f)(1)(ii).
    \207\ See final rule Sec.  382.2(f)(1)(iii).
---------------------------------------------------------------------------

    The FDIC is giving this additional time for compliance to respond 
to concerns raised by commenters. The FDIC encourages covered FSIs to 
start planning and outreach efforts early in order to come into 
compliance with the rule on the time frames provided. The FDIC believes 
that this additional time for compliance should also address concerns 
raised by commenters regarding the burden of conforming existing 
contracts by allowing firms additional time to conform all covered QFCs 
to the requirements of the final rule.
    Although the phased-in compliance period does not contain special 
rules related to acting as an agent as requested by certain commenters, 
the rule has been modified as described above to clarify that a covered 
FSI does not become a party to a QFC solely by acting as agent with 
respect to the QFC.\208\
---------------------------------------------------------------------------

    \208\ See final rule Sec.  382.2(e)(1).
---------------------------------------------------------------------------

    Entities that are covered FSIs when the final rule is effective 
would be required to comply with the requirements of the final rule 
beginning on the first compliance date, but would be given more time to 
conform such covered QFCs with entities that are not covered FSIs, 
covered entities, or covered banks.\209\ 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.\210\ Moreover, a 
covered FSI would be required to bring an in-scope QFC entered into 
prior to the first compliance date into compliance with the rule no 
later than the applicable date of the tiered compliance dates 
(discussed above) if 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 pre-existing covered QFC or a 
consolidated affiliate of the counterparty on or after the first 
compliance date.\211\ (Thus, a covered FSI would not be required to 
conform a pre-existing QFC if that covered FSI and its covered FSI, 
covered entity or

[[Page 50256]]

covered bank affiliates do not enter into any new QFCs with the same 
counterparty or its consolidated affiliates on or after the compliance 
date.)
---------------------------------------------------------------------------

    \209\ See final rule Sec.  382.2(c)(1) and (f)(1).
    \210\ See id.
    \211\ See final rule Sec.  382.2(c)(1).
---------------------------------------------------------------------------

    In addition, an entity that becomes a covered FSI after the 
effective date of the final rule (a ``new covered FSI'' for purposes of 
this preamble) generally has the same period of time to comply as an 
entity that is a covered FSI on the effective date (i.e., compliance 
will phase in over a two-year period based on the type of 
counterparty).\212\ The final rule also clarifies that a covered QFC, 
with respect to a new covered FSI, means an in-scope QFC that the new 
covered FSI becomes a party to (1) on the date the covered FSI first 
becomes a covered FSI, and (2) before that date, if the covered FSI or 
one of its affiliates that is a covered FSI, covered entity, or covered 
bank also enters, executes, or otherwise becomes a party to a QFC with 
the same counterparty or a consolidated affiliate of the counterparty 
after that date.\213\ Under the final rule, a company that is a covered 
FSI on the effective date of the final rule (an ``existing covered 
FSI'' for purposes of this preamble) and becomes an affiliate of a new 
covered FSI, covered bank, or covered entity generally must conform any 
existing but non-conformed in-scope QFC that the existing covered FSI 
continues to have with a counterparty after the applicable initial 
compliance date by the date the new covered FSI enters a QFC with the 
same counterparty or any of its consolidated affiliates. Acquisitions 
of new entities are planned in advance and should include preparing to 
comply with applicable laws and regulations.
---------------------------------------------------------------------------

    \212\ See final rule Sec.  382.2(f)(2).
    \213\ See final rule Sec.  382.2(c)(2).
---------------------------------------------------------------------------

    Certain commenters opposed application of the requirements of the 
rule to existing QFCs, requesting instead that the final rule only 
apply to QFCs entered into after the effective date of any final rule 
and that all pre-existing QFCs not be subject to the rule's 
requirements. Commenters suggested that end users of QFCs with GSIB 
affiliates might not have entered into existing contracts without the 
default rights prohibited in the proposed rule and that revising 
existing QFCs would be time-consuming and expensive. Commenters 
asserted that this treatment would be consistent with the final rules 
in the United Kingdom and the statutory requirements adopted by 
Germany.
    The FDIC does not believe it is appropriate to exclude all pre-
existing QFCs because of the current and future risk that existing 
covered QFCs pose to the orderly resolution of a covered FSI. Moreover, 
application of different default rights to existing and future 
transactions within a netting set could cause the netting set to be 
broken, which commenters noted could increase burden to both parties to 
the netting set.\214\ Therefore, the final rule requires an existing 
QFC between a covered FSI and a counterparty to be conformed to the 
requirements of the final rule if the covered FSI (or an affiliate that 
is a covered FSI, covered entity, or covered bank) enters into another 
QFC with the counterparty or its consolidated affiliate on or after the 
first day of the calendar quarter immediately following one year from 
the effective date of the final rule.\215\
---------------------------------------------------------------------------

    \214\ The requirements of the final rule, particularly those of 
Sec.  382.4, may have a different impact on netting, including 
close-out netting, than the UK and German requirements cited by 
commenters.
    \215\ Subject to any compliance date applicable to the covered 
FSI, the FDIC expects a covered FSI to conform existing QFCs that 
become covered QFCs within a reasonable period.
---------------------------------------------------------------------------

    By permitting a covered FSI to remain a party to noncompliant QFCs 
entered 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 consolidated 
affiliates, the final rule strikes a balance between ensuring QFC 
continuity if the GSIB were to fail and ensuring that covered FSIs and 
their existing counterparties can manage 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 consolidated 
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 consolidated 
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 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 consolidated affiliates, do not enter into 
new covered QFCs with the GSIB on or after the first day of the 
calendar quarter that is one year from the effective date of the final 
rule, it would be appropriate to permit a limited number of 
noncompliant QFCs to remain outstanding, in keeping with the terms 
described above. Moreover, the final rule also excludes existing 
warrants and retail investment advisory agreements to address concerns 
raised by commenters and mitigate burden.\216\ 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.
---------------------------------------------------------------------------

    \216\ See final rule Sec.  382.7(c).
---------------------------------------------------------------------------

IV. Expected Effects

    The final 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 final rule 
will help meet this policy objective by more effectively and 
efficiently managing the exercise of cross default rights and transfer 
restrictions contained in QFCs. It will therefore help mitigate the 
risk of future financial crises and imposition of substantial costs on 
the U.S. economy.\217\ The final 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) the primary Federal supervisor for State non-member banks 
and State savings associations; (ii) the insurer of deposits and 
manager of the DIF; and (iii) the resolution authority for all FDIC-
insured institutions under the FDI Act and, if appointed by the 
Secretary of the Treasury in accordance with the requirements of Title 
II of the Dodd-Frank Act, for large complex financial institutions.
---------------------------------------------------------------------------

    \217\ 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, available at https://dallasfed.org/assets/documents/research/staff/staff1301.pdf.
---------------------------------------------------------------------------

    The final rule only applies to FDIC-supervised institutions that 
are subsidiaries or affiliates of a GSIB. Of the 3,717 institutions 
that the FDIC supervises,\218\ eleven are subsidiaries or affiliates of 
GSIBs.\219\ Out of those eleven institutions, eight had QFC contracts 
at some point over the past five years. Those eight institutions had an 
average of $39 billion worth of QFC contracts, as measured by notional 
value, over the same time period

[[Page 50257]]

compared to an average of over $200 trillion in notional value for all 
FDIC-insured GSIB affiliates.\220\ Therefore, the final rule applies 
only to a small number of institutions and to a small portion of total 
QFC activity.
---------------------------------------------------------------------------

    \218\ Call Report data, June 2017.
    \219\ FFIEC National Information Center.
    \220\ Call Report data, June 2012--June 2017.
---------------------------------------------------------------------------

Benefits

    The final rule will likely benefit the counterparties of covered 
FSIs by preventing the disorderly failure of the GSIB subsidiary and 
enabling it to continue to meet its obligations. The mass exercise of 
default rights against an otherwise healthy covered FSI resulting from 
the failure of an affiliate may cause it to weaken or fail. Therefore, 
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 will be able to meet their obligations to 
QFC counterparties. Moreover, the creditor protections permitted under 
the rule will 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 of future financial 
crises create substantial economic benefits.\221\ QFCs play a large 
role in the financial markets and are a major source of financial 
interconnectedness. Therefore, they can pose a threat to financial 
stability in times of market stress. The final rule will materially 
reduce 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 reduce the 
probability and severity of financial crises in the future.
---------------------------------------------------------------------------

    \221\ ``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.
---------------------------------------------------------------------------

    The final rule will also likely benefit the DIF. Mass exercise of 
QFC default rights by the counterparties at the time the parent or 
other affiliate of an FDIC-insured institution enters resolution could 
lead to severe losses for, or possibly the failure of, FDIC-insured 
subsidiaries of failed GSIBs. Those losses and/or failures could result 
in considerable losses to the DIF.

Costs

    The costs of the final rule are likely to be relatively small and 
only affect eleven covered FSIs. Only eight of the eleven affected 
institutions had QFC contracts over the past 5 years. The QFC activity 
of those eight firms represented less than .02 percent of QFC activity 
among all FDIC-insured GSIB subsidiaries.\222\ Covered FSIs and their 
counterparties may incur administrative costs associated with drafting 
and negotiating compliant QFCs. However, the rule only limits the 
execution of default rights for a brief time period in the event that a 
GSIB or GSIB affiliate enters a resolution process. Further, the rule 
only affects QFC contracts that contain default rights or transfer 
restrictions, so not all QFC activity will be affected by the rule. 
Affected institutions also have the option of adhering to the Universal 
Protocol or the U.S. Protocol as an alternative to amending QFC 
contracts, and they have a phase-in compliance period of up to two 
years to become fully compliant with the rule. The flexibility that the 
final rule allows for affected institutions and their counterparties 
further reduces the expected costs associated with this rule. 
Therefore, costs associated with drafting compliant QFCs are likely to 
be low.
---------------------------------------------------------------------------

    \222\ See Call Report data, June 2012-June 2017.
---------------------------------------------------------------------------

    In addition, the FDIC anticipates that covered FSIs would likely 
share resources with their 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 Universal Protocol is already partially 
effective for the 25 existing GSIB adherents. The partial effectiveness 
of the Universal 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 
Universal Protocol, some implementation costs will likely be reduced.
    The final rule could potentially impose costs on covered FSIs to 
the extent that they may need to provide their QFC counterparties with 
better contractual terms in order to compensate those parties for the 
loss of their ability to exercise default rights. 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 credit 
protection for counterparties.
    The final rule 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 rule. Therefore, economic activity 
that would have been associated with that QFC absent the rule (such as 
economic activity that would have otherwise been hedged with a 
derivatives contract or funded through a repo transaction) might not 
occur. The FDIC does not expect any significant reduction in QFC 
activity to result from this rule because the restrictions on default 
rights in covered QFCs that the rule requires 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 final rule.

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

    This final rule also amends several definitions in the FDIC's 
capital and liquidity rules to help ensure that the final rule does not 
have unintended effects for the treatment of covered FSIs' netting 
agreements under those rules, consistent with the amendments contained 
in the FRB FR and the OCC FR.\223\
---------------------------------------------------------------------------

    \223\ 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.\224\ The FDIC

[[Page 50258]]

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.\225\ 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.
---------------------------------------------------------------------------

    \224\ See 12 CFR 324.34(a)(2).
    \225\ 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 final rule 
would impose on the QFCs of covered FSIs. Thus, a master netting 
agreement that is compliant with this final rule 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 final rule.
    Accordingly, the final rule would amend the definition of 
``qualifying master netting agreement'' so that a master netting 
agreement could qualify for such treatment 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 final rule. This 
revision maintains the existing treatment for these contracts under the 
FDIC's capital and liquidity rules by accounting for the restrictions 
that the final rule, or the substantively identical rules of issued by 
the FRB and expected from the OCC, 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 the 
absence of this amendment 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 final rule would similarly revise certain other definitions in 
the regulatory capital rules to make analogous conforming changes 
designed to account for this final rule'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 final rule 
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 final 
rule 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.'' \226\ Thus, it 
may also be appropriate to amend the definition of ``eligible master 
netting agreement'' to account for the restrictions on covered FSIs' 
QFCs. Because the FDIC issued the swap margin rule jointly with other 
U.S. regulatory agencies, however, the FDIC is consulting with the 
other agencies before proposing amendments to that rule's definition of 
``eligible master netting agreement.''
---------------------------------------------------------------------------

    \226\ 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.
---------------------------------------------------------------------------

    Certain commenters requested technical modifications to the 
proposed modifications to the definitions to better distinguish the 
requirements of Sec.  382.4 and the provisions of Section 2 of the 
Universal Protocol from provisions regarding ``opt in'' to special 
resolution regimes. In response to this comment, the final rule 
establishes an independent exception addressing the requirements of 
Sec.  382.4 and the provisions of Section 2 of the Universal Protocol 
and makes other minor clarifying edits.
    One commenter requested that the definitions of the terms 
``collateral agreement,'' ``eligible margin loan,'' ``qualifying master 
netting agreement,'' and ``repo-style transaction'' include references 
to stays in State resolution regimes (such as insurance receiverships). 
The commenters did not identify, and the FDIC is not aware of, any 
State resolution regime that currently includes QFC stays similar to 
those of the U.S. Special Resolution Regimes. Neither the nature of the 
potential laws nor the extent of their effect on the regulatory capital 
requirements of FDIC-regulated institutions is known. Therefore, the 
final rule does not reference State resolution regimes.
    One commenter argued that neither the current nor the proposed 
definition of qualifying master netting agreement comports with section 
302(a) of the Business Risk Mitigation and Price Stabilization Act of 
2015, which exempts certain types of counterparties from initial and 
variation margin requirements, and that the proposed amendments to the 
definition add unnecessary complexity to the existing rules and 
therefore make compliance more difficult. Section 302(a) of that act is 
not relevant to the definition of qualifying master netting agreement 
because the definition does not require initial or variation margin. 
Rather, the definition of qualifying master netting agreement requires 
that margin provided under the agreement, if any, be able to be 
promptly liquidated or set off under the circumstances specified in the 
definition. The FDIC continues to believe that the amendments are 
necessary and do not substantially add to the complexity of the FDIC's 
rules.
    Effective date for the definition of ``covered bank'': The FDIC is 
delaying the effective date of the definition of ``covered bank'' until 
the OCC adopts 12 CFR part 47.

VI. Regulatory Analysis

A. Paperwork Reduction Act

    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. OMB has 
assigned the following control numbers to this information collection: 
3064-AE46.
    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).

[[Page 50259]]

Section 382.5(b) of the final rule would require a covered FSI to 
request the FDIC to approve as compliant with the requirements of 
Sec. Sec.  382.3 and 382.4, 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. A covered FSI making a request 
must provide (1) an analysis of the proposal under each consideration 
of Sec.  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 relevant information 
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 Sec.  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
----------------------------------------------------------------------------------------------------------------

    The FDIC received no comments on the PRA section of the proposal or 
the burden estimates. However, the FDIC has an ongoing interest in 
public comments on its burden estimates. Any such comments should be 
sent to the Paperwork Reduction Act Officer, FDIC Legal Division, 550 
17th Street NW., Washington, DC 20503. Written comments should address 
the accuracy of the burden estimates and ways to minimize burden, as 
well as other relevant aspects of the information collection request.

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.\227\ For the reasons provided below, the FDIC hereby 
certifies pursuant to 5 U.S.C. 605(b) that the final rule will not have 
a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \227\ See 5 U.S.C. 603, 605.
---------------------------------------------------------------------------

    The final 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 final rule would apply to approximately 
eleven FSIs. As of June 30, 2017, only eight of the eleven covered FSIs 
have derivatives portfolios that could be affected. None of these eight 
banking organizations would qualify as a small entity for the purposes 
of the RFA.\228\ In addition, the FDIC anticipates that any small 
subsidiary of a GSIB that could be affected by the final 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.\229\ The final rule 
complements the FRB FR and the expected OCC FR. It is not designed to 
duplicate, overlap with, or conflict with any other Federal regulation.
---------------------------------------------------------------------------

    \228\ Under regulations issued by the Small Business 
Administration, small entities include banking organizations with 
total assets of $550 million or less.
    \229\ See FRB FR, 82 FR 42882 (Sept. 12, 2017) and OCC NPRM, 81 
FR 55381 (August 19, 2016).
---------------------------------------------------------------------------

    This 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.\230\
---------------------------------------------------------------------------

    \230\ 5 U.S.C. 605.
---------------------------------------------------------------------------

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 the FDIC, 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, subject to certain exceptions, new regulations that impose 
additional reporting, disclosures, or other new requirements on insured 
depository institutions 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. In accordance with these provisions and as 
discussed above, the FDIC considered any administrative burdens, as 
well as benefits, that the final rule would place on depository 
institutions and their customers in determining the effective date and 
administrative compliance requirements of the final rule. The final 
rule will be effective no earlier than the first day of a calendar 
quarter that begins on or after the date on which the final rule is 
published.

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 has presented the final rule 
in a simple and straightforward manner.

E. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that this final 
rule is a ``major rule'' within the meaning of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801, et seq.) 
(``SBREFA''). As required by the

[[Page 50260]]

SBREFA, the FDIC will file the appropriate reports with Congress and 
the Government Accountability Office so that the Final Rule may be 
reviewed.

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 amends 12 CFR chapter III 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.
    (1) 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 \4\ to the U.S. laws 
referenced in this paragraph (1)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty;
---------------------------------------------------------------------------

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

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (1)(i) of this 
definition; or
    (2) Other than to the extent necessary for the counterparty to 
comply with the requirements of part 382 of this title, subpart I of 
part 252 of this title or part 47 of this title, 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,
    (A) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs,\5\ or laws of foreign 
jurisdictions that are substantially similar \6\ to the U.S. laws 
referenced in this paragraph (1)(iii)(A)(1) 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.
---------------------------------------------------------------------------

    (2) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of 
this definition; and
    (B) The agreement may limit 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 to the extent necessary for the counterparty to comply 
with the requirements of part 382 of this title, subpart I of part 252 
of this title or part 47 of this title, 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, 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,

[[Page 50261]]

    (i) 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, or laws of foreign 
jurisdictions that are substantially similar \7\ to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

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

    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit 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 to the extent necessary for the counterparty to comply 
with the requirements of part 382 of this title, subpart I of part 252 
of this title or part 47 of this title, 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) 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,
    (1) 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 \8\ to the U.S. laws 
referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate 
the orderly resolution of the defaulting counterparty;
---------------------------------------------------------------------------

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

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i) 
of this definition; and
    (2) The agreement may limit 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 to the extent necessary for the counterparty to comply 
with the requirements of part 382 of this title, subpart I of part 252 
of this title or part 47 of this title, 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 Sec.  324.3(e) of this part 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. 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,
    (i) 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, or laws of foreign 
jurisdictions that are substantially similar \1\ to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty;
---------------------------------------------------------------------------

    \1\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
---------------------------------------------------------------------------

    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit the right to accelerate, terminate, 
and close-out

[[Page 50262]]

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 to the extent necessary for the counterparty to comply 
with the requirements of part 382 of this title, subpart I of part 252 
of this title or part 47 of this title, 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.  329.4(a) with 
respect to that agreement.
* * * * *

0
5. 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.


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 Sec.  324.2 
of this chapter.
    Chapter 11 proceeding means a proceeding under Chapter 11 of Title 
11, United States Code (11 U.S.C. 1101-74).
    Consolidated affiliate means an affiliate of another company that:
    (1) Either consolidates the other company, or is consolidated by 
the other company, on financial statements prepared in accordance with 
U.S. Generally Accepted Accounting Principles, the International 
Financial Reporting Standards, or other similar standards;
    (2) Is, along with the other company, consolidated with a third 
company on a financial statement prepared in accordance with principles 
or standards referenced in paragraph (1) of this definition; or
    (3) For a company that is not subject to principles or standards 
referenced in paragraph (1), if consolidation as described in paragraph 
(1) or (2) of this definition would have occurred if such principles or 
standards had applied.
    Control has the same meaning as in section 3(w) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(w)).
    Covered entity means a covered entity as defined by the Federal 
Reserve Board in 12 CFR 252.82.
    Covered QFC means a QFC as defined in Sec.  382.2 of this part.
    Credit enhancement means a QFC of the type set forth in sections 
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 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)).
    Default right means:
    (1) 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 Sec.  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 proceeding means a proceeding in which the Federal Deposit 
Insurance Corporation is appointed as conservator or receiver under 
section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821).
    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.
    Financial counterparty means a person that is:
    (1)(i) A bank holding company or an affiliate thereof; a savings 
and loan holding company as defined in section 10(n) of the Home 
Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding 
company that is established or designated for purposes of compliance 
with 12 CFR 252.153; or a nonbank financial institution supervised by 
the Board of Governors of the Federal Reserve System under Title I of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 5323);
    (ii) A depository institution as defined, in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that 
is organized under the laws of a foreign country and that engages 
directly in the business of banking outside the United States; a 
Federal credit union or State credit union as defined in section 2 of 
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); an 
institution that functions solely in a trust or fiduciary capacity as 
described in section 2(c)(2)(D) of the Bank Holding Company Act (12 
U.S.C. 1841 (c)(2)(D)); an industrial loan company, an industrial bank, 
or other similar institution described in section 2(c)(2)(H) of the 
Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
    (iii) An entity that is State-licensed or registered as;
    (A) A credit or lending entity, including a finance company; money

[[Page 50263]]

lender; installment lender; consumer lender or lending company; 
mortgage lender, broker, or bank; motor vehicle title pledge lender; 
payday or deferred deposit lender; premium finance company; commercial 
finance or lending company; or commercial mortgage company; except 
entities registered or licensed solely on account of financing the 
entity's direct sales of goods or services to customers;
    (B) A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
    (iv) A regulated entity as defined in section 1303(20) of the 
Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 
as amended (12 U.S.C. 4502(20)) or any entity for which the Federal 
Housing Finance Agency or its successor is the primary Federal 
regulator;
    (v) Any institution chartered in accordance with the Farm Credit 
Act of 1971, as amended, 12 U.S.C. 2001 et seq. that is regulated by 
the Farm Credit Administration;
    (vi) Any entity registered with the Commodity Futures Trading 
Commission as a swap dealer or major swap participant pursuant to the 
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that 
is registered with the U.S. Securities and Exchange Commission as a 
security-based swap dealer or a major security-based swap participant 
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.);
    (vii) A securities holding company within the meaning specified in 
section 618 of the Dodd-Frank Wall Street Reform and Consumer 
Protection act (12 U.S.C. 1850a); a broker or dealer as defined in 
sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(45); an investment adviser as defined in section 202(a) 
of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an 
investment company registered with the U.S. Securities and Exchange 
Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
seq.); or a company that has elected to be regulated as a business 
development company pursuant to section 54(a) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-53(a));
    (viii) A private fund as defined in section 202(a) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that 
would be an investment company under section 3 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an 
entity that is deemed not to be an investment company under section 3 
of the Investment Company Act of 1940 pursuant to Investment Company 
Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange 
Commission;
    (ix) A commodity pool, a commodity pool operator, or a commodity 
trading advisor as defined, respectively, in section 1a(10), 1a(11), 
and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 
1a(11), and 1a(12)); a floor broker, a floor trader, or introducing 
broker as defined, respectively, in 1a(22), 1a(23) and 1a(31) of the 
Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); 
or a futures commission merchant as defined in 1a(28) of the Commodity 
Exchange Act of 1936 (7 U.S.C. 1a(28));
    (x) An employee benefit plan as defined in paragraphs (3) and (32) 
of section 3 of the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1002);
    (xi) An entity that is organized as an insurance company, primarily 
engaged in writing insurance or reinsuring risks underwritten by 
insurance companies, or is subject to supervision as such by a State 
insurance regulator or foreign insurance regulator; or
    (xii) An entity that would be a financial counterparty described in 
paragraphs (1)(i) through (xi) of this definition, if the entity were 
organized under the laws of the United States or any State thereof.
    (2) The term ``financial counterparty'' does not include any 
counterparty that is:
    (i) A sovereign entity;
    (ii) A multilateral development bank; or
    (iii) The Bank for International Settlements.
    Financial market utility (FMU) means any person, regardless of the 
jurisdiction in which the person is located or organized, that manages 
or operates a multilateral system for the purpose of transferring, 
clearing, or settling payments, securities, or other financial 
transactions among financial institutions or between financial 
institutions and the person, but does not include:
    (1) Designated contract markets, registered futures associations, 
swap data repositories, and swap execution facilities registered under 
the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities 
exchanges, national securities associations, alternative trading 
systems, security-based swap data repositories, and swap execution 
facilities registered under the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.), solely by reason of their providing facilities for 
comparison of data respecting the terms of settlement of securities or 
futures transactions effected on such exchange or by means of any 
electronic system operated or controlled by such entities, provided 
that the exclusions in this clause apply only with respect to the 
activities that require the entity to be so registered; or
    (2) Any broker, dealer, transfer agent, or investment company, or 
any futures commission merchant, introducing broker, commodity trading 
advisor, or commodity pool operator, solely by reason of functions 
performed by such institution as part of brokerage, dealing, transfer 
agency, or investment company activities, or solely by reason of acting 
on behalf of a FMU or a participant therein in connection with the 
furnishing by the FMU of services to its participants or the use of 
services of the FMU by its participants, provided that services 
performed by such institution do not constitute critical risk 
management or processing functions of the FMU.
    Investment advisory contract means any contract or agreement 
whereby a person agrees to act as investment adviser to or to manage 
any investment or trading account of another person.
    Master agreement means a QFC of the type set forth in sections 
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 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)).
    Person has the same meaning as in 12 CFR 225.2.
    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)).
    Retail customer or counterparty has the same meaning as in Sec.  
329.3 of this chapter.
    Small financial institution means a company that:
    (1) Is organized as a bank, as defined in section 3(a) of the 
Federal Deposit Insurance Act, the deposits of which are insured by the 
Federal Deposit Insurance Corporation; a savings association, as 
defined in section 3(b) of the Federal Deposit Insurance Act, the 
deposits of which are insured by the Federal Deposit Insurance 
Corporation; a farm credit system institution chartered under the Farm 
Credit Act of

[[Page 50264]]

1971; or an insured Federal credit union or State-chartered credit 
union under the Federal Credit Union Act; and
    (2) Has total assets of $10,000,000,000 or less on the last day of 
the company's most recent fiscal year.
    State means any State, commonwealth, territory, or possession of 
the United States, the District of Columbia, the Commonwealth of Puerto 
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, 
Guam, or the United States Virgin Islands.
    Subsidiary of a covered FSI means any subsidiary of a covered FSI 
as defined in 12 U.S.C. 1813(w).
    U.S. agency has the same meaning as the term ``agency'' in 12 
U.S.C. 3101.
    U.S. branch has the same meaning as the term ``branch'' in 12 
U.S.C. 3101.
    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) General requirement. A covered FSI must ensure that each 
covered QFC conforms to the requirements of Sec. Sec.  382.3 and 382.4 
of this part.
    (b) Covered FSI. For purposes of this part a covered FSI means
    (1) 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 Sec.  252.82(a)(1) of the Federal Reserve 
Board's Regulation YY (12 CFR 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
    (2) Any subsidiary of a covered FSI other than:
    (i) A subsidiary that is owned in satisfaction of debt previously 
contracted in good faith;
    (ii) A portfolio concern that is a small business investment 
company, as defined in section 103(3) of the Small Business Investment 
Act of 1958 (15 U.S.C. 662), or that has received from the Small 
Business Administration notice to proceed to qualify for a license as a 
Small Business Investment Company, which notice or license has not been 
revoked; or
    (iii) A subsidiary designed to promote the public welfare, of the 
type permitted under paragraph (11) of section 5136 of the Revised 
Statutes of the United States (12 U.S.C. 24), including the welfare of 
low- to moderate-income communities or families (such as providing 
housing, services, or jobs).
    (c) Covered QFCs. For purposes of this part, a covered QFC is:
    (1) With respect to a covered FSI that is a covered FSI on January 
1, 2018, an in-scope QFC that the covered FSI:
    (i) Enters, executes, or otherwise becomes a party to on or after 
January 1, 2019; or
    (ii) Entered, executed, or otherwise became a party to before 
January 19, 2019, 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 a 
consolidated affiliate of the same person on or after January 1, 2019.
    (2) With respect to a covered FSI that becomes a covered FSI after 
January 1, 2018, an in-scope QFC that the covered FSI:
    (i) Enters, executes, or otherwise becomes a party to on or after 
the later of the date the covered FSI first becomes a covered FSI and 
January 1, 2019; or
    (ii) Entered, executed, or otherwise became a party to before the 
date identified in paragraph (c)(2)(i) of this section with respect to 
the covered FSI, 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 consolidated affiliate 
of the same person on or after the date identified in paragraph 
(c)(2)(i) of this section with respect to the covered FSI.
    (d) In-scope QFCs. An in-scope QFC is a QFC that explicitly:
    (1) Restricts the transfer of a QFC (or any interest or obligation 
in or under, or any property securing, the QFC) from a covered FSI; or
    (2) Provides one or more default rights with respect to a QFC that 
may be exercised against a covered FSI.
    (e) Rules of construction. For purposes of this part,
    (1) A covered FSI does not become a party to a QFC solely by acting 
as agent with respect to the QFC; and
    (2) 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.
    (f) Initial applicability of requirements for covered QFCs. (1) 
With respect to each of its covered QFCs, a covered FSI that is a 
covered FSI on January 1, 2018 must conform the covered QFC to the 
requirements of this part by:
    (i) January 1, 2019, if each party to the covered QFC is a covered 
entity, covered bank, or covered FSI.
    (ii) July 1, 2019, if each party to the covered QFC (other than the 
covered FSI) is a financial counterparty that is not a covered entity, 
covered bank or covered FSI; or
    (iii) January 1, 2020, if a party to the covered QFC (other than 
the covered FSI) is not described in paragraph (f)(1)(i) or (ii) of 
this section or if, notwithstanding paragraph (f)(1)(ii), a party to 
the covered QFC (other than the covered FSI) is a small financial 
institution.
    (2) With respect to each of its covered QFCs, a covered FSI that is 
not a covered FSI on January 1, 2018 must conform the covered QFC to 
the requirements of this part by:
    (i) The first day of the calendar quarter immediately following 1 
year after the date the covered FSI first becomes a covered FSI if each 
party to the covered QFC is a covered entity, covered bank, or covered 
FSI;
    (ii) The first day of the calendar quarter immediately following 18 
months from the date the covered FSI first becomes a covered FSI if 
each party to the covered QFC (other than the covered FSI) is a 
financial counterparty that is not a covered entity, covered bank or 
covered FSI; or
    (iii) The first day of the calendar quarter immediately following 2 
years from the date the covered FSI first becomes a covered FSI if a 
party to the covered QFC (other than the covered FSI) is not described 
in paragraph (f)(2)(i) or (ii) of this section or if, notwithstanding 
paragraph (f)(2)(ii), a party to the covered QFC (other than the 
covered FSI) is a small financial institution.
    (g) Rights of receiver unaffected. Nothing in this part shall in 
any manner limit or modify the rights and powers of the FDIC as 
receiver under the Federal Deposit Insurance Act or Title II of the 
Dodd-Frank Act, including, without limitation, the rights of the 
receiver to enforce provisions of the Federal Deposit Insurance 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) Covered QFCs not required to be conformed. (1) Notwithstanding 
Sec.  382.2 of this part, a covered FSI is not required to conform a 
covered QFC to the requirements of this section if:
    (i) The covered QFC designates, in the manner described in 
paragraph (a)(2) of this section, the U.S. special resolution

[[Page 50265]]

regimes as part of the law governing the QFC; and
    (ii) Each party to the covered QFC, other than the covered FSI, is
    (A) An individual that is domiciled in the United States, including 
any State;
    (B) A company that is incorporated in or organized under the laws 
of the United States or any State;
    (C) A company the principal place of business of which is located 
in the United States, including any State; or
    (D) A U.S. branch or U.S. agency.
    (2) A covered QFC designates the U.S. special resolution regimes as 
part of the law governing the QFC if the covered QFC:
    (i) Explicitly provides that the covered QFC is governed by the 
laws of the United States or a State of the United States; and
    (ii) Does not explicitly provide that one or both of the U.S. 
special resolution regimes, or a broader set of laws that includes a 
U.S. special resolution regime, is excluded from the laws governing the 
covered QFC.
    (b) Provisions required. A covered QFC must explicitly provide 
that:
    (1) In the event the covered FSI becomes subject to a proceeding 
under a U.S. special resolution regime, 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 regime 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
    (2) In the event the covered FSI or an affiliate of the covered FSI 
becomes subject to a proceeding under a U.S. special resolution regime, 
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 regime if the covered QFC were governed by the laws 
of the United States or a State of the United States.
    (c) Relevance of creditor protection provisions. The requirements 
of this section apply notwithstanding Sec.  382.4(d), (f), and (h) of 
this part.


Sec.  382.4  Insolvency proceedings.

    This section does not apply to proceedings under Title II of the 
Dodd-Frank Act.
    (a) Covered QFCs not required to be conformed. Notwithstanding 
Sec.  382.2 of this part, a covered FSI is not required to conform a 
covered QFC to the requirements of this section if the covered QFC:
    (1) Does not explicitly provide 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; and
    (2) Does not explicitly 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 following 
an affiliate of the direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding or would 
prohibit such a transfer only if 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.
    (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 following 
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 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) 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;
    (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.
    (e) 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 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 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.
    (f) 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 after the stay 
period that is related, directly or indirectly, to the covered 
affiliate support provider becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding 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

[[Page 50266]]

similar proceeding other than a Chapter 11 proceeding;
    (2) Subject to paragraph (h) 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 (f)(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 (f)(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.
    (g) 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 p.m. (EST) on the business day 
following the date of the commencement of the proceeding and 48 hours 
after the commencement of the proceeding.
    (2) Business day. Business day means a day on which commercial 
banks in the jurisdiction the proceeding is commenced are open for 
general business (including dealings in foreign exchange and foreign 
currency deposits).
    (3) Transferee. Transferee means a person to whom a covered 
affiliate credit enhancement is transferred upon the covered affiliate 
support provider entering a receivership, insolvency, liquidation, 
resolution, or similar proceeding or thereafter as part of the 
resolution, restructuring, or reorganization involving the covered 
affiliate support provider.
    (h) Creditor protections related to FDI Act proceedings. 
Notwithstanding paragraphs (d) and (f) 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 only 
in the following circumstances:
    (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)-(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.
    (i) 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. (1) Unless the FDIC determines otherwise 
based on the specific facts and circumstances, a covered QFC is deemed 
to comply with this part if it is amended by the universal protocol or 
the U.S. protocol.
    (2) A covered QFC will be deemed to be amended by the universal 
protocol for purposes of paragraph (a)(1) of this section 
notwithstanding the covered QFC being amended by one or more Country 
Annexes, as the term is defined in the universal protocol.
    (3) For purposes of paragraphs (a)(1) and (2) of this section:
    (i) The universal protocol means 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;
    (ii) The U.S. protocol means a protocol that is the same as the 
universal protocol other than as provided in paragraphs (a)(3)(ii)(A) 
through (F) of this section.
    (A) The provisions of Section 1 of the attachment to the universal 
protocol may be limited in their application to covered entities, 
covered banks, and covered FSIs and may be limited with respect to 
resolutions under the Identified Regimes, as those regimes are 
identified by the universal protocol;
    (B) The provisions of Section 2 of the attachment to the universal 
protocol may be limited in their application to covered entities, 
covered banks, and covered FSIs;
    (C) The provisions of Section 4(b)(i)(A) of the attachment to the 
universal protocol must not apply with respect to U.S. special 
resolution regimes;
    (D) The provisions of Section 4(b) of the attachment to the 
universal protocol may only be effective to the extent that the covered 
QFCs affected by an adherent's election thereunder would continue to 
meet the requirements of this part;
    (E) The provisions of Section 2(k) of the attachment to the 
universal protocol must not apply; and
    (F) The U.S. protocol may include minor and technical differences 
from the universal protocol and differences necessary to conform the 
U.S. protocol to the differences described in paragraphs (a)(3)(ii)(A) 
through (E) of this section.
    (iii) Amended by the universal protocol or the U.S. protocol, with 
respect to covered QFCs between adherents to the protocol, includes 
amendments through incorporation of the terms of the protocol (by 
reference or otherwise) into the covered QFC; and
    (iv) The attachment to the universal protocol means the attachment 
that the universal protocol identifies as ``ATTACHMENT to the ISDA 2015

[[Page 50267]]

UNIVERSAL RESOLUTION STAY PROTOCOL.''
    (b) Proposal of enhanced creditor protection conditions. (1) A 
covered FSI may request that the FDIC approve as compliant with the 
requirements of Sec. Sec.  382.3 and 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 part that is 
different than that of Sec.  382.4(d), (f), and (h).
    (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 Sec.  382.4(d), (f), 
and (h) 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
    (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 QFCs with FMUs. Notwithstanding Sec.  382.2 of 
this part, a covered FSI is not required to conform to the requirements 
of this part a covered QFC to which:
    (1) A CCP is party; or
    (2) Each party (other than the covered FSI) is an FMU.
    (b) Exclusion of certain covered entity and covered bank QFCs. If a 
covered QFC is also a covered QFC under part 252 or part 47 of this 
title that an affiliate of the covered FSI is also required to conform 
pursuant to part 252 or part 47 and the covered FSI is:
    (1) The affiliate credit enhancement provider with respect to the 
covered QFC, then the covered FSI is required to conform the credit 
enhancement to the requirements of this part but is not required to 
conform the direct QFC to the requirements of this part; or
    (2) The direct party to which the covered entity or covered bank is 
the affiliate credit enhancement provider, then the covered FSI is 
required to conform the direct QFC to the requirements of this part but 
is not required to conform the credit enhancement to the requirements 
of this part.
    (c) Exclusion of certain contracts. Notwithstanding Sec.  382.2 of 
this part, a covered FSI is not required to conform the following types 
of contracts or agreements to the requirements of this part:
    (1) An investment advisory contract that:
    (i) Is with a retail customer or counterparty;
    (ii) Does not explicitly restrict the transfer of the contract (or 
any QFC entered into pursuant thereto or governed thereby, or any 
interest or obligation in or under, or any property securing, any such 
QFC or the contract) from the covered FSI except as necessary to comply 
with section 205(a)(2) of the Investment Advisers Act of 1940 (15 
U.S.C. 80b-5(a)(2)); and
    (iii) Does not explicitly provide a default right with respect to 
the contract or any QFC entered pursuant thereto or governed thereby.
    (2) A warrant that:
    (i) Evidences a right to subscribe to or otherwise acquire a 
security of the covered FSI or an affiliate of the covered FSI; and
    (ii) Was issued prior to January 1, 2018.
    (d) Exemption by order. The FDIC may exempt by order one or more 
covered FSI(s) from conforming one or more contracts or types of 
contracts to one or more of the requirements of this part after 
considering:
    (1) The potential impact of the exemption on the ability of the 
covered FSI(s), or affiliates of the covered FSI(s), 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;
    (2) The burden the exemption would relieve; and
    (3) Any other factor the FDIC deems relevant.
0
6. Amend 382.1 by adding the definition of ``covered bank'' to read as 
follows:


Sec.  382.1  Definitions.

* * * * *

[[Page 50268]]

    Covered bank means a covered bank as defined by the Office of the 
Comptroller of the Currency in 12 CFR part 47.
* * * * *

    Dated at Washington, DC, this 27th day of September 2017.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2017-21951 Filed 10-27-17; 8:45 am]
 BILLING CODE P

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