Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority, 271-274 [2021-27733]
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Federal Register / Vol. 87, No. 2 / Tuesday, January 4, 2022 / Notices
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
Notice of Opportunity for Public
Comment on Surplus Property Release
at Columbia Metropolitan Airport,
Columbia, South Carolina
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice.
AGENCY:
Notice is given that the
Federal Aviation Administration (FAA)
is considering a request from the
Richland-Lexington Airport District to
waive the requirement that 74 acres of
surplus property, located at the
Columbia Metropolitan Airport be used
for aeronautical purposes. Currently,
ownership of the property provides for
protection of FAR Part 77 surfaces and
compatible land use which would
continue to be protected with deed
restrictions required in the transfer of
land ownership.
DATES: Comments must be received on
or before February 3, 2022.
ADDRESSES: Documents are available for
review by prior appointment at the
following location: Atlanta Airports
District Office, Attn: Joseph Robinson,
South Carolina Planner, 1701 Columbia
Ave., Suite 220, College Park, Georgia
30337–2747, Telephone: (404) 305–
6749.
Comments on this notice may be
mailed or delivered in triplicate to the
FAA at the following address: Atlanta
Airports District Office, Attn: Joseph
Robinson, South Carolina Planner, 1701
Columbia Ave., Suite 220, College Park,
Georgia 30337–2747.
In addition, one copy of any
comments submitted to the FAA must
be mailed or delivered to Mike Gula,
Executive Director, Richland-Lexington
Airport District at the following address:
Columbia Metropolitan Airport, 3250
Airport Blvd.—Suite 10, West
Columbia, South Carolina 29170.
FOR FURTHER INFORMATION CONTACT:
Joseph Robinson, Airport Planner,
Atlanta Airports District Office, 1701
Columbia Ave., Suite 220, College Park,
Georgia 30337–2747, (404)305–6749.
The application may be reviewed in
person at this same location.
SUPPLEMENTARY INFORMATION: Under the
provisions of Title 49, U.S.C. 47151(d),
the FAA is reviewing a request by the
Richland-Lexington Airport District to
release 74 of surplus property at the
Columbia Metropolitan Airport. This
singular parcel was originally conveyed
to the County of Lexington on April 7,
1947 under the powers and authority
contained in the provisions of the
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SUMMARY:
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Surplus Property Act of 1944 and
subsequently transferred to the
Richland-Lextington Airport District on
July 12, 1962. Currently, this surplus
property is located within the Columbia
Metropolitan Airport Foreign Trade
Zone #124.
Any person may inspect the request
in person at the FAA office listed above
under FOR FURTHER INFORMATION
CONTACT.
In addition, any person may, upon
request, inspect the request, notice and
other documents germane to the request
in person at the Columbia Metropolitan
Airport.
Issued in Atlanta, Georgia on December 22,
2021.
Joseph Parks Preston,
Assistant Manager, Atlanta Airports District
Office, Southern Region.
[FR Doc. 2021–28185 Filed 1–3–22; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
Qualified Financial Contracts
Recordkeeping Related to Orderly
Liquidation Authority
Department of the Treasury.
Notice of exemption.
AGENCY:
ACTION:
The Secretary of the Treasury
(the ‘‘Secretary’’), as Chairperson of the
Financial Stability Oversight Council,
after consultation with the Federal
Deposit Insurance Corporation (the
‘‘FDIC’’), is issuing a determination
regarding a request for an exemption
from certain requirements of the rule
implementing the qualified financial
contracts (‘‘QFC’’) recordkeeping
requirements of Title II of the DoddFrank Wall Street Reform and Consumer
Protection Act (the ‘‘Dodd-Frank Act’’ or
the ‘‘Act’’).
DATES: The exemption granted is
applicable January 4, 2022.
FOR FURTHER INFORMATION CONTACT:
Daniel Harty, Director, Office of Capital
Markets, (202) 622–0509; Peter
Nickoloff, Financial Economist, Office
of Capital Markets, (202) 622–1692; or
Stephen T. Milligan, Deputy Assistant
General Counsel (Banking & Finance),
(202) 622–4051.
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
On October 31, 2016, the Secretary
published a final rule pursuant to
section 210(c)(8)(H) of the Dodd-Frank
Act requiring certain financial
companies to maintain records with
respect to their QFC positions,
counterparties, legal documentation,
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271
and collateral that would assist the FDIC
as receiver in exercising its rights and
fulfilling its obligations under Title II of
the Act (the ‘‘rule’’).1
Section 148.3(c)(3) of the rule
provides that one or more records
entities may request an exemption from
one or more of the requirements of the
rule by writing to the Department of the
Treasury (‘‘Treasury’’), the FDIC, and
the applicable primary financial
regulatory agency or agencies, if any.2
The written request for an exemption
must: (i) Identify the records entity or
records entities or the types of records
entities to which the exemption would
apply; (ii) specify the requirements from
which the records entities would be
exempt; (iii) provide details as to the
size, risk, complexity, leverage,
frequency and dollar amount of QFCs,
and interconnectedness to the financial
system of each records entity, to the
extent appropriate, and any other
relevant factors; and (iv) specify the
reasons why granting the exemption
will not impair or impede the FDIC’s
ability to exercise its rights or fulfill its
statutory obligations under sections
210(c)(8), (9), and (10) of the Act.3
The rule provides that, upon receipt
of a written recommendation from the
FDIC, prepared in consultation with the
primary financial regulatory agency or
agencies for the applicable records
entity or entities, that takes into
consideration each of the factors
referenced in section 210(c)(8)(H)(iv) of
the Act 4 and any other factors the FDIC
considers appropriate, the Secretary
may grant, in whole or in part, a
conditional or unconditional exemption
from compliance with one or more of
the requirements of the rule to one or
more records entities.5 The rule further
provides that, in determining whether to
grant an exemption, the Secretary will
consider any factors deemed
appropriate by the Secretary, including
whether application of one or more
requirements of the rule is not necessary
to achieve the purpose of the rule.
Request for Exemption
On January 7, 2020, RBC US Group
Holdings LLC (‘‘RIHC’’) submitted, on
behalf of its subsidiary City National
Securities Inc. (‘‘CNS’’), a request for an
exemption from the rule to the Treasury,
the FDIC, and, as the primary financial
regulatory agency for CNS, the
Securities and Exchange Commission
1 31
CFR part 148; 81 FR 75624 (Oct. 31, 2016).
CFR 148.3(c)(3). The term ‘‘records entity’’ is
defined at 31 CFR 148.2(n).
3 12 U.S.C. 5390(c)(8), (9), and (10).
4 Id. Sec. 5390(c)(8)(H)(iv).
5 31 CFR 148.3(c)(4)(i).
2 31
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(‘‘SEC’’), which RIHC supplemented
with information provided on March 18,
2020.6 RIHC requested an exemption for
CNS from compliance with sections
148.3 and 148.4 of the rule for the
current and any future QFC portfolio of
CNS. Such an exemption would in
effect cover all QFCs that CNS may
enter into, without any limitation as to
the type of QFC, the nature of the
counterparty, or any other factor. The
request stated that CNS’s current and
anticipated future QFC portfolio
consists predominantly of client activity
QFCs, meaning cash market transactions
CNS enters into on behalf of its retail
customers and that are executed on
standardized terms. Without an
exemption, RIHC stated that CNS’s cost
of recordkeeping would impose an
undue burden relative to the
characteristics of its QFC portfolio, and
submitted that, in the event the FDIC
was appointed receiver of CNS under
Title II of the Act, the records that CNS
already maintains under current law
and regulatory requirements should be
sufficient to permit the FDIC to exercise
its rights and fulfill its statutory
obligations pursuant to its resolution
authority under the Act. Further, RIHC
stated that all of CNS’s clients are
‘‘customers’’ as defined under the
Securities Investor Protection Act of
1970 (‘‘SIPA’’). As such, RIHC stated
that granting the requested exemption
would not impair or impede the FDIC
from exercising its rights or fulfilling its
responsibilities under the Act and
would be consistent with exemptions
Treasury previously granted with
respect to Morgan Stanley Smith Barney
LLC (‘‘MSSB’’) 7 as well as with respect
to Wells Fargo Clearing Services, LLC
(‘‘WFCS’’) and Wells Fargo Advisors
Financial Network, LLC (‘‘FiNet,’’ and
together with WFCS, ‘‘WFCS–FiNet’’).8
In support of its request, RIHC
submitted information pertaining to the
QFCs to which CNS is a party. RIHC
represented that CNS’s QFC portfolio is
relatively small, poses low risk, has
little complexity, has low trading
frequency, has no leverage, and entails
limited interconnectedness with the
financial system. The request stated that
CNS’s QFC portfolio consists primarily
of three types of QFCs to which it is a
party, each of which is analogous to a
type of QFC covered by the previous
exemptions with respect to MSSB and
6 RIHC is a U.S. intermediate holding company
subsidiary of Royal Bank of Canada, and is a
records entity under the rule. CNS is registered with
the SEC as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser
under the Investment Advisers Act of 1940.
7 See 83 FR 66618 (Dec. 27, 2018).
8 See 85 FR 1 (Jan. 2, 2020).
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WFCS–FiNet. Specifically, CNS
primarily engages in client brokerage
agreements, cash market QFCs governed
by the client brokerage agreements and
entered into on behalf of retail
customers, and a master clearing
agreement with CNS’s clearing firm, an
unaffiliated broker-dealer. RIHC
represented that the cash market QFCs
offered by CNS are limited to standard
cash products, including common and
preferred stocks, municipal, corporate,
and agency bonds, U.S. Treasuries,
commercial paper, structured notes,
brokered certificates of deposit, mutual
funds, and options. The request stated
that CNS does not offer as part of its
brokerage investment options or
otherwise make available to its
brokerage clients the types of QFCs that
would exclude its clients from meeting
the SIPA definition of ‘‘customer,’’
namely, currency contracts, commodity
or related contracts, futures contracts, or
any warrants or rights to purchase or
subscribe to such contracts. Similar to
MSSB and WFCS–FiNet, CNS is not
registered with the Commodity Futures
Trading Commission (‘‘CFTC’’) as a
swap dealer or futures commission
merchant, thus restricting its ability to
transact in certain types of QFCs.
Finally, RIHC represented that CNS’s
interconnectedness to the rest of the
financial system is limited based on its
relatively small size and, like MSSB and
WFCS–FiNet, its focus on noninstitutional clients.
Evaluation of the Exemption Request
In evaluating the exemption request,
Treasury considered the representations
made by RIHC with respect to CNS’s
QFC portfolio in terms of its size, risk,
and complexity; trading frequency and
leverage; and interconnectedness to the
financial system. Treasury also
considered RIHC’s statement that
granting an exemption to CNS from the
recordkeeping requirements of the rule
would not impair or impede the ability
of the FDIC to exercise its rights or
fulfill its statutory obligations under
Title II of the Act. RIHC’s views in this
regard centered on its representation
that all of CNS’s clients are ‘‘customers’’
as that term is defined under SIPA, and
an assertion of how such customers and
their QFCs would be handled by the
FDIC in the event of a Title II resolution
of CNS.
As discussed more fully in the
preamble to the final rule,9 as well as in
the determinations of exemption
Treasury provided to MSSB and WFCS–
FiNet, if the FDIC is appointed receiver
of a covered financial company that is
9 See
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a broker-dealer and the FDIC establishes
a bridge financial company to assist
with the resolution of that broker-dealer,
the FDIC must, pursuant to section
210(a)(1)(O) of the Act,10 unless certain
conditions are met,11 transfer to the
bridge financial company all ‘‘customer
accounts’’ of the broker-dealer and all
associated ‘‘customer name securities’’
and ‘‘customer property,’’ as those terms
are defined by reference to SIPA.12
Treasury further discussed that the
requirements of section 210(a)(1)(O) of
the Act in combination with the ‘‘all or
none rule’’ 13 mean that, if the FDIC
were to transfer a customer account that
held QFCs between a covered brokerdealer and its client, the FDIC would be
required to transfer (i) all QFCs between
the broker-dealer and the client and, if
the client is a non-natural person, (ii) all
QFCs between the broker-dealer and any
affiliates of such client. In the case of
either (i) or (ii), the transfer would
include, due to the all or none rule, any
QFCs of the type that would not make
the client a customer under SIPA, such
as an FX spot agreement.
However, RIHC stated that CNS does
not engage in the types of QFCs that
would exclude its clients from the SIPA
definition of customer. RIHC stated that
CNS offers its retail customers only
standard cash products as described
above. Further, as CNS is not registered
with the CFTC as a swap dealer or
futures commission merchant, its ability
to transact in certain types of QFCs is
restricted. As represented by RIHC,
CNS’s QFCs with its retail customers are
10 12
U.S.C. 5390(a)(1)(O).
210(a)(1)(O)(i) of the Act stipulates two
conditions under which the FDIC is permitted not
to transfer all such customer accounts, customer
name securities, and customer property to the
bridge financial company: (i) If the FDIC
determines, after consulting with the Securities
Investor Protection Corporation and the SEC, that
such customer accounts, customer securities, and
customer property are likely to be promptly
transferred to another registered broker-dealer; or
(ii) if the transfer would materially interfere with
the ability of the FDIC to avoid or mitigate serious
adverse effects on financial stability or economic
conditions in the United States. If neither such
condition is met, the FDIC must transfer to a bridge
financial company any QFCs entered into by the
broker-dealer with its clients who are customers
under SIPA.
12 15 U.S.C. 78aaa et seq. See also section
201(a)(10) of the Dodd-Frank Act (12 U.S.C.
5381(a)(10)) (providing that the terms ‘‘customer,’’
‘‘customer name securities,’’ and ‘‘customer
property’’ as used in Title II shall have the same
meaning as provided in SIPA).
13 Under the ‘‘all or none rule’’ of the Act, if the
FDIC determines to transfer, disaffirm or repudiate
any QFC with a particular counterparty, it must
transfer, disaffirm or repudiate (i) all QFCs between
the covered financial company and such
counterparty and (ii) all QFCs between the covered
financial company and any affiliate of such
counterparty. See, 12 U.S.C. 5390(c)(9)(A) and
5390(c)(11).
11 Section
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of a small size, present little complexity
and leverage, have low trading
frequency, and impose little risk.
Treasury received a final
recommendation from the FDIC
regarding the exemption request,
prepared in consultation with the SEC,
and, after consultation with the FDIC,
Treasury is making the determinations
discussed below.14
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Determination of Exemption
Given the above-discussed restrictions
on the FDIC’s discretion as to whether
or not to transfer QFCs 15 from a brokerdealer, the limited nature of CNS’s
business, and the limited types of QFCs
entered into by CNS with its clients,
Treasury has determined to grant CNS
an exemption from the recordkeeping
requirements of the rule with respect to
any QFCs of CNS with clients that are
customers 16 of CNS under SIPA with
respect to any transactions or accounts
they have with CNS, subject to the terms
and conditions stipulated below.
Treasury does not expect that granting
this conditional exemption will unduly
hinder the FDIC as receiver in
exercising its rights and fulfilling its
obligations under the Act or interfere
with the FDIC’s ability to avoid or
mitigate serious adverse effects on
financial stability or economic
conditions in the United States. In
CNS’s case, the size, risk, complexity,
and leverage of its QFCs with its
customers do not present a high
likelihood that the financial stability
exception to the transfer requirement of
section 210(a)(1)(O) of the Act would be
met. If the financial stability exception
is not met, the FDIC would likely either
transfer, pursuant to section
210(a)(1)(O), all of a broker-dealer’s
customer accounts, customer name
securities, and customer property
included in such customer accounts and
any other QFCs with such customer to
the bridge financial company or transfer
14 All exemptions to the recordkeeping
requirements of the rule are made at the discretion
of the Secretary and the Secretary’s discretion is not
limited by any recommendations received from
other governmental agencies. Exemptions to the
FDIC’s recordkeeping rules under 12 CFR part 371
(Recordkeeping Requirements for Qualified
Financial Contracts) are at the discretion of the
board of directors of the FDIC and entail a separate
request, process, and policy considerations.
References to the FDIC in this notice should not be
taken to imply that the FDIC has determined that
similar exemptions under Part 371 would be
available.
15 As used in the remainder of this notice of
exemption, the term ‘‘QFC’’ means a qualified
financial contract as defined for purposes of Title
II of the Act. See, 12 U.S.C. 5390(c)(8)(D).
16 As used in the remainder of this notice of
exemption, the term ‘‘customer’’ means a person
who is a customer as defined in SIPA with respect
to any transaction or account it has with CNS.
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all such accounts, securities, and
property to another broker-dealer. In
either case, the FDIC would not need
the detailed records required by the rule
with respect to QFCs to accomplish the
transfer.
For the avoidance of doubt, Treasury
is not granting the exemption request as
presented in the RIHC request letter.
There, RIHC requested an exemption for
CNS from compliance with the rule for
the current and any future QFC portfolio
of CNS; that is, RIHC did not limit the
exemption request only to QFCs with
SIPA customers. If granted as requested,
such an exemption would allow CNS to
avoid recordkeeping for any and all
QFCs that it may enter into now or in
the future, without any limitation as to
the type of QFC, the nature of the
counterparty, or any other factor,
including QFCs for its own account
with counterparties who may be other
broker-dealers or who may not
otherwise qualify as customers under
SIPA. Treasury is granting a narrower,
limited and conditional exemption that
applies only to QFCs with CNS
customers; except as described in the
next paragraph, CNS’s QFCs for its own
account or with non-customers, whether
or not affiliated with CNS, are not
covered by this exemption and remain
subject to the recordkeeping
requirements of the rule. Consistent
with the determinations of exemption
Treasury provided to MSSB and WFCS–
FiNet, Treasury has determined not to
provide an exemption with respect to
CNS’s QFCs for its own account or with
non-customers because the FDIC would
retain discretion as to whether to
transfer or retain such QFCs and
because the size and risks of such QFCs
at the time could be such that the FDIC
would need the records required by the
rule to make a transfer determination.
Treasury is also granting an
exemption for any QFC entered into by
CNS as introducing broker with another
broker-dealer as clearing broker and that
relates to the clearing of any exempted
QFCs with CNS customers as discussed
above, subject to the terms and
conditions stipulated below, and
provided that CNS maintains
documentation of any agreement
between CNS and each such clearing
broker. This exemption would cover
QFCs, such as a master clearing
agreement, between CNS and its
clearing broker that relate to the clearing
of any CNS customer QFCs. For
purposes of this exemption, the term
‘‘clearing broker’’ means an SECregistered broker-dealer that is a
member of the Financial Industry
Regulatory Authority (FINRA) and has
authority to execute, settle, and clear
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273
transactions and carry accounts on a
fully disclosed basis on behalf of CNS
and CNS’s customers pursuant to a
master clearing agreement or similar
agreement. If the FDIC were to transfer
the customer QFCs to a bridge financial
company or other financial institution,
it would presumably also transfer any
master clearing agreement or similar
agreement entered into with a clearing
broker that facilitates the clearance or
settlement of such customer QFCs.
Therefore, the records required by the
rule regarding such QFCs with a
clearing broker should not be needed by
the FDIC to address the clearance of
CNS’s exempted customer QFCs.
Conditions of the Exemption
The exemption granted below is based
on the factual representations made by
RIHC on behalf of CNS to Treasury, the
FDIC, and the SEC, in its submissions,
including the factual representations
regarding CNS’s registration as a brokerdealer and investment adviser, the
limitations on its business lines, the
limitations on the types of clients it
serves and the types of products and
services it offers its clients, the
frequency, size, and dollar amounts of
QFCs with clients, the lack of
complexity of the QFCs it has with
clients, the number of client accounts it
maintains, and the description of its
activities as introducing broker on
behalf of its customers with its clearing
brokers.
Treasury reserves the right to rescind
or modify the exemption at any time.
Further, Treasury intends to reassess the
exemption in five years. At that time,
Treasury, in consultation with the FDIC
and the SEC, would evaluate any
material changes in the nature of CNS’s
business as well as any relevant changes
to market structure or applicable law or
other relevant factors that might affect
the reasons for granting the exemptions.
Treasury may request an updated
submission from CNS as to its business
at that time. Treasury expects that it
would provide notice to CNS prior to
any modification or rescission of the
exemption and that, in the event of a
rescission or modification, Treasury
would grant CNS a limited period of
time in which to come into compliance
with the applicable recordkeeping
requirements of the rule.
Terms and Conditions of the Exemption
CNS is hereby granted an exemption
from the requirements of 31 CFR 148.3
and 148.4 for (i) any QFC entered into
by CNS with or on behalf of any
customer of CNS that is booked and
carried in accounts at CNS maintained
for the benefit of such customer; and (ii)
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any QFC entered into by CNS with a
clearing broker that relates to the
clearing of any QFC referenced in clause
(i), provided that CNS maintains
documentation of any agreement
between CNS and each such clearing
broker. For purposes of the exemption,
‘‘customer’’ means a person who is a
customer as defined in 15 U.S.C. 78lll(2)
with respect to any transactions or
accounts it has with CNS, and ‘‘clearing
broker’’ means an SEC-registered broker-
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dealer that is a member of FINRA and
has authority to execute, settle, and
clear transactions and carry accounts on
a fully disclosed basis on behalf of CNS
and CNS’s customers pursuant to a
master clearing agreement or similar
agreement.
This exemption is subject to
modification or revocation at any time
the Secretary determines that such
action is necessary or appropriate in
order to assist the FDIC as receiver for
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a covered financial company in being
able to exercise its rights and fulfill its
obligations under sections 210(c)(8), (9),
or (10) of the Act. The exemption
extends only to CNS and to no other
entities.
Nandini Ajmani,
Deputy Assistant Secretary for Capital
Markets.
[FR Doc. 2021–27733 Filed 1–3–22; 8:45 am]
BILLING CODE 4810–AK–P
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Agencies
[Federal Register Volume 87, Number 2 (Tuesday, January 4, 2022)]
[Notices]
[Pages 271-274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27733]
=======================================================================
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DEPARTMENT OF THE TREASURY
Qualified Financial Contracts Recordkeeping Related to Orderly
Liquidation Authority
AGENCY: Department of the Treasury.
ACTION: Notice of exemption.
-----------------------------------------------------------------------
SUMMARY: The Secretary of the Treasury (the ``Secretary''), as
Chairperson of the Financial Stability Oversight Council, after
consultation with the Federal Deposit Insurance Corporation (the
``FDIC''), is issuing a determination regarding a request for an
exemption from certain requirements of the rule implementing the
qualified financial contracts (``QFC'') recordkeeping requirements of
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the ``Dodd-Frank Act'' or the ``Act'').
DATES: The exemption granted is applicable January 4, 2022.
FOR FURTHER INFORMATION CONTACT: Daniel Harty, Director, Office of
Capital Markets, (202) 622-0509; Peter Nickoloff, Financial Economist,
Office of Capital Markets, (202) 622-1692; or Stephen T. Milligan,
Deputy Assistant General Counsel (Banking & Finance), (202) 622-4051.
SUPPLEMENTARY INFORMATION:
Background
On October 31, 2016, the Secretary published a final rule pursuant
to section 210(c)(8)(H) of the Dodd-Frank Act requiring certain
financial companies to maintain records with respect to their QFC
positions, counterparties, legal documentation, and collateral that
would assist the FDIC as receiver in exercising its rights and
fulfilling its obligations under Title II of the Act (the ``rule'').\1\
---------------------------------------------------------------------------
\1\ 31 CFR part 148; 81 FR 75624 (Oct. 31, 2016).
---------------------------------------------------------------------------
Section 148.3(c)(3) of the rule provides that one or more records
entities may request an exemption from one or more of the requirements
of the rule by writing to the Department of the Treasury
(``Treasury''), the FDIC, and the applicable primary financial
regulatory agency or agencies, if any.\2\ The written request for an
exemption must: (i) Identify the records entity or records entities or
the types of records entities to which the exemption would apply; (ii)
specify the requirements from which the records entities would be
exempt; (iii) provide details as to the size, risk, complexity,
leverage, frequency and dollar amount of QFCs, and interconnectedness
to the financial system of each records entity, to the extent
appropriate, and any other relevant factors; and (iv) specify the
reasons why granting the exemption will not impair or impede the FDIC's
ability to exercise its rights or fulfill its statutory obligations
under sections 210(c)(8), (9), and (10) of the Act.\3\
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\2\ 31 CFR 148.3(c)(3). The term ``records entity'' is defined
at 31 CFR 148.2(n).
\3\ 12 U.S.C. 5390(c)(8), (9), and (10).
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The rule provides that, upon receipt of a written recommendation
from the FDIC, prepared in consultation with the primary financial
regulatory agency or agencies for the applicable records entity or
entities, that takes into consideration each of the factors referenced
in section 210(c)(8)(H)(iv) of the Act \4\ and any other factors the
FDIC considers appropriate, the Secretary may grant, in whole or in
part, a conditional or unconditional exemption from compliance with one
or more of the requirements of the rule to one or more records
entities.\5\ The rule further provides that, in determining whether to
grant an exemption, the Secretary will consider any factors deemed
appropriate by the Secretary, including whether application of one or
more requirements of the rule is not necessary to achieve the purpose
of the rule.
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\4\ Id. Sec. 5390(c)(8)(H)(iv).
\5\ 31 CFR 148.3(c)(4)(i).
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Request for Exemption
On January 7, 2020, RBC US Group Holdings LLC (``RIHC'') submitted,
on behalf of its subsidiary City National Securities Inc. (``CNS''), a
request for an exemption from the rule to the Treasury, the FDIC, and,
as the primary financial regulatory agency for CNS, the Securities and
Exchange Commission
[[Page 272]]
(``SEC''), which RIHC supplemented with information provided on March
18, 2020.\6\ RIHC requested an exemption for CNS from compliance with
sections 148.3 and 148.4 of the rule for the current and any future QFC
portfolio of CNS. Such an exemption would in effect cover all QFCs that
CNS may enter into, without any limitation as to the type of QFC, the
nature of the counterparty, or any other factor. The request stated
that CNS's current and anticipated future QFC portfolio consists
predominantly of client activity QFCs, meaning cash market transactions
CNS enters into on behalf of its retail customers and that are executed
on standardized terms. Without an exemption, RIHC stated that CNS's
cost of recordkeeping would impose an undue burden relative to the
characteristics of its QFC portfolio, and submitted that, in the event
the FDIC was appointed receiver of CNS under Title II of the Act, the
records that CNS already maintains under current law and regulatory
requirements should be sufficient to permit the FDIC to exercise its
rights and fulfill its statutory obligations pursuant to its resolution
authority under the Act. Further, RIHC stated that all of CNS's clients
are ``customers'' as defined under the Securities Investor Protection
Act of 1970 (``SIPA''). As such, RIHC stated that granting the
requested exemption would not impair or impede the FDIC from exercising
its rights or fulfilling its responsibilities under the Act and would
be consistent with exemptions Treasury previously granted with respect
to Morgan Stanley Smith Barney LLC (``MSSB'') \7\ as well as with
respect to Wells Fargo Clearing Services, LLC (``WFCS'') and Wells
Fargo Advisors Financial Network, LLC (``FiNet,'' and together with
WFCS, ``WFCS-FiNet'').\8\
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\6\ RIHC is a U.S. intermediate holding company subsidiary of
Royal Bank of Canada, and is a records entity under the rule. CNS is
registered with the SEC as a broker-dealer under the Securities
Exchange Act of 1934 and as an investment adviser under the
Investment Advisers Act of 1940.
\7\ See 83 FR 66618 (Dec. 27, 2018).
\8\ See 85 FR 1 (Jan. 2, 2020).
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In support of its request, RIHC submitted information pertaining to
the QFCs to which CNS is a party. RIHC represented that CNS's QFC
portfolio is relatively small, poses low risk, has little complexity,
has low trading frequency, has no leverage, and entails limited
interconnectedness with the financial system. The request stated that
CNS's QFC portfolio consists primarily of three types of QFCs to which
it is a party, each of which is analogous to a type of QFC covered by
the previous exemptions with respect to MSSB and WFCS-FiNet.
Specifically, CNS primarily engages in client brokerage agreements,
cash market QFCs governed by the client brokerage agreements and
entered into on behalf of retail customers, and a master clearing
agreement with CNS's clearing firm, an unaffiliated broker-dealer. RIHC
represented that the cash market QFCs offered by CNS are limited to
standard cash products, including common and preferred stocks,
municipal, corporate, and agency bonds, U.S. Treasuries, commercial
paper, structured notes, brokered certificates of deposit, mutual
funds, and options. The request stated that CNS does not offer as part
of its brokerage investment options or otherwise make available to its
brokerage clients the types of QFCs that would exclude its clients from
meeting the SIPA definition of ``customer,'' namely, currency
contracts, commodity or related contracts, futures contracts, or any
warrants or rights to purchase or subscribe to such contracts. Similar
to MSSB and WFCS-FiNet, CNS is not registered with the Commodity
Futures Trading Commission (``CFTC'') as a swap dealer or futures
commission merchant, thus restricting its ability to transact in
certain types of QFCs. Finally, RIHC represented that CNS's
interconnectedness to the rest of the financial system is limited based
on its relatively small size and, like MSSB and WFCS-FiNet, its focus
on non-institutional clients.
Evaluation of the Exemption Request
In evaluating the exemption request, Treasury considered the
representations made by RIHC with respect to CNS's QFC portfolio in
terms of its size, risk, and complexity; trading frequency and
leverage; and interconnectedness to the financial system. Treasury also
considered RIHC's statement that granting an exemption to CNS from the
recordkeeping requirements of the rule would not impair or impede the
ability of the FDIC to exercise its rights or fulfill its statutory
obligations under Title II of the Act. RIHC's views in this regard
centered on its representation that all of CNS's clients are
``customers'' as that term is defined under SIPA, and an assertion of
how such customers and their QFCs would be handled by the FDIC in the
event of a Title II resolution of CNS.
As discussed more fully in the preamble to the final rule,\9\ as
well as in the determinations of exemption Treasury provided to MSSB
and WFCS-FiNet, if the FDIC is appointed receiver of a covered
financial company that is a broker-dealer and the FDIC establishes a
bridge financial company to assist with the resolution of that broker-
dealer, the FDIC must, pursuant to section 210(a)(1)(O) of the Act,\10\
unless certain conditions are met,\11\ transfer to the bridge financial
company all ``customer accounts'' of the broker-dealer and all
associated ``customer name securities'' and ``customer property,'' as
those terms are defined by reference to SIPA.\12\ Treasury further
discussed that the requirements of section 210(a)(1)(O) of the Act in
combination with the ``all or none rule'' \13\ mean that, if the FDIC
were to transfer a customer account that held QFCs between a covered
broker-dealer and its client, the FDIC would be required to transfer
(i) all QFCs between the broker-dealer and the client and, if the
client is a non-natural person, (ii) all QFCs between the broker-dealer
and any affiliates of such client. In the case of either (i) or (ii),
the transfer would include, due to the all or none rule, any QFCs of
the type that would not make the client a customer under SIPA, such as
an FX spot agreement.
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\9\ See 81 FR at 75624-25.
\10\ 12 U.S.C. 5390(a)(1)(O).
\11\ Section 210(a)(1)(O)(i) of the Act stipulates two
conditions under which the FDIC is permitted not to transfer all
such customer accounts, customer name securities, and customer
property to the bridge financial company: (i) If the FDIC
determines, after consulting with the Securities Investor Protection
Corporation and the SEC, that such customer accounts, customer
securities, and customer property are likely to be promptly
transferred to another registered broker-dealer; or (ii) if the
transfer would materially interfere with the ability of the FDIC to
avoid or mitigate serious adverse effects on financial stability or
economic conditions in the United States. If neither such condition
is met, the FDIC must transfer to a bridge financial company any
QFCs entered into by the broker-dealer with its clients who are
customers under SIPA.
\12\ 15 U.S.C. 78aaa et seq. See also section 201(a)(10) of the
Dodd-Frank Act (12 U.S.C. 5381(a)(10)) (providing that the terms
``customer,'' ``customer name securities,'' and ``customer
property'' as used in Title II shall have the same meaning as
provided in SIPA).
\13\ Under the ``all or none rule'' of the Act, if the FDIC
determines to transfer, disaffirm or repudiate any QFC with a
particular counterparty, it must transfer, disaffirm or repudiate
(i) all QFCs between the covered financial company and such
counterparty and (ii) all QFCs between the covered financial company
and any affiliate of such counterparty. See, 12 U.S.C. 5390(c)(9)(A)
and 5390(c)(11).
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However, RIHC stated that CNS does not engage in the types of QFCs
that would exclude its clients from the SIPA definition of customer.
RIHC stated that CNS offers its retail customers only standard cash
products as described above. Further, as CNS is not registered with the
CFTC as a swap dealer or futures commission merchant, its ability to
transact in certain types of QFCs is restricted. As represented by
RIHC, CNS's QFCs with its retail customers are
[[Page 273]]
of a small size, present little complexity and leverage, have low
trading frequency, and impose little risk.
Treasury received a final recommendation from the FDIC regarding
the exemption request, prepared in consultation with the SEC, and,
after consultation with the FDIC, Treasury is making the determinations
discussed below.\14\
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\14\ All exemptions to the recordkeeping requirements of the
rule are made at the discretion of the Secretary and the Secretary's
discretion is not limited by any recommendations received from other
governmental agencies. Exemptions to the FDIC's recordkeeping rules
under 12 CFR part 371 (Recordkeeping Requirements for Qualified
Financial Contracts) are at the discretion of the board of directors
of the FDIC and entail a separate request, process, and policy
considerations. References to the FDIC in this notice should not be
taken to imply that the FDIC has determined that similar exemptions
under Part 371 would be available.
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Determination of Exemption
Given the above-discussed restrictions on the FDIC's discretion as
to whether or not to transfer QFCs \15\ from a broker-dealer, the
limited nature of CNS's business, and the limited types of QFCs entered
into by CNS with its clients, Treasury has determined to grant CNS an
exemption from the recordkeeping requirements of the rule with respect
to any QFCs of CNS with clients that are customers \16\ of CNS under
SIPA with respect to any transactions or accounts they have with CNS,
subject to the terms and conditions stipulated below. Treasury does not
expect that granting this conditional exemption will unduly hinder the
FDIC as receiver in exercising its rights and fulfilling its
obligations under the Act or interfere with the FDIC's ability to avoid
or mitigate serious adverse effects on financial stability or economic
conditions in the United States. In CNS's case, the size, risk,
complexity, and leverage of its QFCs with its customers do not present
a high likelihood that the financial stability exception to the
transfer requirement of section 210(a)(1)(O) of the Act would be met.
If the financial stability exception is not met, the FDIC would likely
either transfer, pursuant to section 210(a)(1)(O), all of a broker-
dealer's customer accounts, customer name securities, and customer
property included in such customer accounts and any other QFCs with
such customer to the bridge financial company or transfer all such
accounts, securities, and property to another broker-dealer. In either
case, the FDIC would not need the detailed records required by the rule
with respect to QFCs to accomplish the transfer.
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\15\ As used in the remainder of this notice of exemption, the
term ``QFC'' means a qualified financial contract as defined for
purposes of Title II of the Act. See, 12 U.S.C. 5390(c)(8)(D).
\16\ As used in the remainder of this notice of exemption, the
term ``customer'' means a person who is a customer as defined in
SIPA with respect to any transaction or account it has with CNS.
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For the avoidance of doubt, Treasury is not granting the exemption
request as presented in the RIHC request letter. There, RIHC requested
an exemption for CNS from compliance with the rule for the current and
any future QFC portfolio of CNS; that is, RIHC did not limit the
exemption request only to QFCs with SIPA customers. If granted as
requested, such an exemption would allow CNS to avoid recordkeeping for
any and all QFCs that it may enter into now or in the future, without
any limitation as to the type of QFC, the nature of the counterparty,
or any other factor, including QFCs for its own account with
counterparties who may be other broker-dealers or who may not otherwise
qualify as customers under SIPA. Treasury is granting a narrower,
limited and conditional exemption that applies only to QFCs with CNS
customers; except as described in the next paragraph, CNS's QFCs for
its own account or with non-customers, whether or not affiliated with
CNS, are not covered by this exemption and remain subject to the
recordkeeping requirements of the rule. Consistent with the
determinations of exemption Treasury provided to MSSB and WFCS-FiNet,
Treasury has determined not to provide an exemption with respect to
CNS's QFCs for its own account or with non-customers because the FDIC
would retain discretion as to whether to transfer or retain such QFCs
and because the size and risks of such QFCs at the time could be such
that the FDIC would need the records required by the rule to make a
transfer determination.
Treasury is also granting an exemption for any QFC entered into by
CNS as introducing broker with another broker-dealer as clearing broker
and that relates to the clearing of any exempted QFCs with CNS
customers as discussed above, subject to the terms and conditions
stipulated below, and provided that CNS maintains documentation of any
agreement between CNS and each such clearing broker. This exemption
would cover QFCs, such as a master clearing agreement, between CNS and
its clearing broker that relate to the clearing of any CNS customer
QFCs. For purposes of this exemption, the term ``clearing broker''
means an SEC-registered broker-dealer that is a member of the Financial
Industry Regulatory Authority (FINRA) and has authority to execute,
settle, and clear transactions and carry accounts on a fully disclosed
basis on behalf of CNS and CNS's customers pursuant to a master
clearing agreement or similar agreement. If the FDIC were to transfer
the customer QFCs to a bridge financial company or other financial
institution, it would presumably also transfer any master clearing
agreement or similar agreement entered into with a clearing broker that
facilitates the clearance or settlement of such customer QFCs.
Therefore, the records required by the rule regarding such QFCs with a
clearing broker should not be needed by the FDIC to address the
clearance of CNS's exempted customer QFCs.
Conditions of the Exemption
The exemption granted below is based on the factual representations
made by RIHC on behalf of CNS to Treasury, the FDIC, and the SEC, in
its submissions, including the factual representations regarding CNS's
registration as a broker-dealer and investment adviser, the limitations
on its business lines, the limitations on the types of clients it
serves and the types of products and services it offers its clients,
the frequency, size, and dollar amounts of QFCs with clients, the lack
of complexity of the QFCs it has with clients, the number of client
accounts it maintains, and the description of its activities as
introducing broker on behalf of its customers with its clearing
brokers.
Treasury reserves the right to rescind or modify the exemption at
any time. Further, Treasury intends to reassess the exemption in five
years. At that time, Treasury, in consultation with the FDIC and the
SEC, would evaluate any material changes in the nature of CNS's
business as well as any relevant changes to market structure or
applicable law or other relevant factors that might affect the reasons
for granting the exemptions. Treasury may request an updated submission
from CNS as to its business at that time. Treasury expects that it
would provide notice to CNS prior to any modification or rescission of
the exemption and that, in the event of a rescission or modification,
Treasury would grant CNS a limited period of time in which to come into
compliance with the applicable recordkeeping requirements of the rule.
Terms and Conditions of the Exemption
CNS is hereby granted an exemption from the requirements of 31 CFR
148.3 and 148.4 for (i) any QFC entered into by CNS with or on behalf
of any customer of CNS that is booked and carried in accounts at CNS
maintained for the benefit of such customer; and (ii)
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any QFC entered into by CNS with a clearing broker that relates to the
clearing of any QFC referenced in clause (i), provided that CNS
maintains documentation of any agreement between CNS and each such
clearing broker. For purposes of the exemption, ``customer'' means a
person who is a customer as defined in 15 U.S.C. 78lll(2) with respect
to any transactions or accounts it has with CNS, and ``clearing
broker'' means an SEC-registered broker-dealer that is a member of
FINRA and has authority to execute, settle, and clear transactions and
carry accounts on a fully disclosed basis on behalf of CNS and CNS's
customers pursuant to a master clearing agreement or similar agreement.
This exemption is subject to modification or revocation at any time
the Secretary determines that such action is necessary or appropriate
in order to assist the FDIC as receiver for a covered financial company
in being able to exercise its rights and fulfill its obligations under
sections 210(c)(8), (9), or (10) of the Act. The exemption extends only
to CNS and to no other entities.
Nandini Ajmani,
Deputy Assistant Secretary for Capital Markets.
[FR Doc. 2021-27733 Filed 1-3-22; 8:45 am]
BILLING CODE 4810-AK-P