[Federal Register Volume 79, Number 249 (Tuesday, December 30, 2014)]
[Rules and Regulations]
[Pages 78287-78296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-30218]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
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Federal Register / Vol. 79, No. 249 / Tuesday, December 30, 2014 /
Rules and Regulations
[[Page 78287]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 50
[Docket ID OCC-2014-0028]
RIN 1557-AD91
FEDERAL RESERVE SYSTEM
12 CFR Parts 217 and 249
[Regulations Q and WW; Docket No. R-1507]
RIN 7100 AE-28
Regulatory Capital Rules, Liquidity Coverage Ratio: Interim Final
Revisions to the Definition of Qualifying Master Netting Agreement and
Related Definitions
AGENCY: Office of the Comptroller of the Currency (OCC) and Board of
Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for comment.
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SUMMARY: The OCC and Board (collectively, the agencies) invite comment
on an interim final rule that amends the definition of ``qualifying
master netting agreement'' under the regulatory capital rules, and the
liquidity coverage ratio rule, as well as under the lending limits rule
applicable to national banks and Federal savings associations. The
agencies also are proposing to amend the definitions of ``collateral
agreement,'' ``eligible margin loan,'' and ``repo-style transaction''
under the regulatory capital rules. The amendments are designed to
ensure that the regulatory capital, liquidity, and lending limits
treatment of certain financial contracts is not affected by
implementation of special resolution regimes in foreign jurisdictions
or by the International Swaps and Derivative Association Resolution
Stay Protocol.
DATES: This rule is effective on January 1, 2015. Comments must be
received on or before March 3, 2015.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to each of the agencies. Commenters are encouraged to use the
title ``Regulatory Capital Rules, Liquidity Coverage Ratio: Interim
Final Revisions to the Definition of Qualifying Master Netting
Agreement and Related Definitions'' to facilitate the organization and
distribution of comments among the Agencies.
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules, Liquidity Coverage Ratio: Interim
Final Revisions to the Definition of Qualifying Master Netting
Agreement and Related Definitions'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov. Enter ``Docket ID OCC-2014-0028'' in the
Search Box and click ``Search.'' Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
Email: [email protected].
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2014-0028'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2014-0028'' in the Search
box and click ``Search.'' Comments can be filtered by agency using the
filtering tools on the left side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
viewing public comments, viewing other supporting and related
materials, and viewing the docket after the close of the comment
period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC
20219. For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1507 and RIN 7100 AE 28, by any of the
following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx .
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 78288]]
Email: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/apps/foia/proposedregs.aspx as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets NW., Washington, DC 20551) between 9:00 a.m. and 5:00 p.m. on
weekdays.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk Expert, (202) 649-6982; or
Nicole Billick, Risk Expert, (202) 649-7932, Capital Policy; or Valerie
Song, Senior Attorney, (202) 649-5500, Bank Activities and Structure,
or Carl Kaminski, Counsel, or Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities Division, (202) 649-5490, for
persons who are deaf or hard of hearing, TTY, (202) 649-5597, Office of
the Comptroller of the Currency, 400 7th Street SW., Washington, DC
20219.
Board: Constance M. Horsley, Assistant Director, (202) 452-5239,
Thomas Boemio, Manager (202) 452-2982, or Kevin R. Tran, Supervisory
Financial Analyst, (202) 452-2309, Capital and Regulatory Policy,
Division of Banking Supervision and Regulation; or Laurie Schaffer,
Associate General Counsel, (202) 452-2277, Christine Graham, Counsel,
(202) 452-3005, Will Giles, Counsel, (202) 452-3351, or Trevor
Feigleson, Attorney, (202) 475-3274, Legal Division, Board of Governors
of the Federal Reserve System, 20th and C Streets NW., Washington DC
20551. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Summary
The agencies' 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 a counterparty
default.\1\ The agencies, by rule, have defined a qualifying master
netting agreement as 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 (default rights), thereby reducing its counterparty
exposure and market risks.\2\ On the whole, measuring the amount of
exposure of these contracts on a net basis, rather than a gross basis,
results in a lower measure of exposure, and thus, a lower capital
requirement under the regulatory capital rules.
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\1\ See 12 CFR part 3 (OCC) and 12 CFR part 217 (Board). All
references to sections in the regulatory capital rules should be
read to mean references to the corresponding sections to the
applicable CFR part of each agency's rules. The term ``banking
organization'' includes national banks, state member banks, savings
associations, and top-tier bank holding companies domiciled in the
United States not subject to the Board's Small Bank Holding Company
Policy Statement (12 CFR part 225, appendix C), as well as top-tier
savings and loan holding companies domiciled in the United States,
except for certain savings and loan holding companies that are
substantially engaged in insurance underwriting or commercial
activities.
\2\ See section 2 of the regulatory capital rules.
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The current definition of ``qualifying master netting agreement''
recognizes that default rights may be stayed if the financial company
is in receivership, conservatorship, or resolution under Title II of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\3\ or the Federal Deposit Insurance Act (FDI Act).\4\
Accordingly, transactions conducted under netting agreements where
default rights may be stayed under Title II of the Dodd-Frank Act or
the FDI Act may qualify for the favorable capital treatment described
above. However, the current definition of ``qualifying master netting
agreement'' does not recognize that default rights may be stayed where
a master netting agreement is subject to limited stays under foreign
special resolution regimes or where counterparties agree through
contract that a special resolution regime would apply. When the
agencies adopted the current definition of ``qualifying master netting
agreement,'' no other country had adopted a special resolution regime
relevant to the definition, and no banking organizations had
communicated to the agencies an intent to enter into contractual
amendments to clarify that bilateral over-the-counter (OTC) derivatives
transactions are subject to certain provisions of certain U.S. and
foreign special resolution regimes.
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\3\ See 12 U.S.C. 5390(c)(8)-(16).
\4\ See 12 U.S.C. 1821(e)(8)-(13). The definition would also
recognize that default rights may be stayed under any similar
insolvency law applicable to government sponsored enterprises
(GSEs). Generally under the agencies' regulatory capital rules, GSE
means an entity established or chartered by the U.S. government to
serve public purposes specified by the U.S. Congress but whose debt
obligations are not explicitly guaranteed by the full faith and
credit of the U.S. government. See regulatory capital rules section
2.
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In recent months, the European Union (EU) finalized the Bank
Recovery and Resolution Directive (BRRD), which prescribes aspects of a
special resolution regime that EU member nations should implement. In
addition, several U.S. banking organizations have opted to adhere to
the International Swaps and Derivatives Association's (ISDA) Resolution
Stay Protocol (ISDA Protocol),\5\ which provides for amendments to the
terms of ISDA Master Agreements \6\ between counterparties that adhere
to the ISDA Protocol to stay certain default rights and other remedies
provided under the agreements. The expected implementation of the BRRD
by EU member nations and the effective date of certain provisions of
the ISDA Protocol may be as early as January 1, 2015. This expected
implementation would mirror steps taken in the United States to
implement a special resolution regime under Title II of the Dodd-Frank
Act.
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\5\ See ISDA Protocol at http://assets.isda.org/media/f253b540-25/958e4aed.pdf/.
\6\ The ISDA Master Agreement is a form of agreement that
governs OTC derivatives transactions and is used by a significant
portion of the parties to bilateral OTC derivatives transactions,
including large, internationally active banking organizations.
Furthermore, the ISDA Master Agreement generally creates a single
legal obligation that provides for the netting of all individual
transactions covered by the agreement.
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A master netting agreement under which default rights may be stayed
under the BRRD or that incorporates the amendments of the ISDA Protocol
would no longer qualify as a qualifying master netting agreement under
the regulatory capital, liquidity, and lending limits rules. This would
result in considerably higher capital and liquidity requirements that
could discourage both the implementation of the BRRD and the ISDA
Protocol and the realization of the benefits of these efforts in
improving financial stability. In addition, affected national banks and
Federal savings associations would be required to measure their lending
limits on a gross basis, which would increase the measure of exposure
in a manner not contemplated or intended under the current lending
limits rules. This result flows from the use of ``qualifying master
[[Page 78289]]
netting agreement'' as a cross-reference in the lending limits rules.
Accordingly, effective January 1, 2015, the interim final rule
would permit an otherwise qualifying master netting agreement to
qualify if (i) default rights under the agreement may be stayed under a
qualifying foreign special resolution regime or (ii) the agreement
incorporates a qualifying special resolution regime by contract.
Through these revisions, the interim final rule maintains the existing
treatment for these contracts for purposes of the regulatory capital,
liquidity, and for national banks and Federal savings associations,
lending limits rules, while recognizing the recent changes contemplated
by the BRRD and the ISDA Protocol.
The interim final rule also revises certain other definitions of
the regulatory capital rules to make various conforming changes
designed to ensure that a banking organization may continue to
recognize the risk mitigating effects of financial collateral \7\
received in a secured lending transaction, repo-style transaction, or
eligible margin loan for purposes of the regulatory capital, liquidity,
and lending limits rules, while recognizing the recent changes
contemplated by the BRRD and banking organizations that have adhered to
the ISDA Protocol. Specifically, the interim final rule would revise
the definition of ``collateral agreement,'' ``eligible margin loan,''
\8\ and ``repo-style transaction'' \9\ to provide that a counterparty's
default rights may be stayed under a foreign special resolution regime
or, if applicable, under a special resolution regime incorporated by
contract.\10\ The agencies request comment on all aspects of these
definitions.
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\7\ Generally, under the agencies' regulatory capital rules,
financial collateral means collateral in the form of: (i) Cash on
deposit with the banking organization (including cash held for the
banking organization by a third-party custodian or trustee); (ii)
gold bullion; (iii) long-term debt securities that are not
resecuritization exposures and that are investment grade; (iv)
short-term debt instruments that are not resecuritization exposures
and that are investment grade; (v) equity securities that are
publicly traded; (vi) convertible bonds that are publicly traded; or
(vii) money market fund shares and other mutual fund shares if a
price for the shares is publicly quoted daily. In addition, the
regulatory capital rules also require that the banking organization
have a perfected, first-priority security interest or, outside of
the United States, the legal equivalent thereof (with the exception
of cash on deposit and notwithstanding the prior security interest
of any custodial agent). See regulatory capital rule, section 2.
\8\ Generally under the agencies' regulatory capital rules,
eligible margin loan means an extension of credit where: (i) The
extension of credit is collateralized exclusively by liquid and
readily marketable debt or equity securities, or gold; (ii) the
collateral is marked-to-fair value daily, and the transaction is
subject to daily margin maintenance requirements; and (iii) the
extension of credit is conducted under an agreement that provides
the banking organization with default rights, provided that any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, resolution under the FDI Act, Title
II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs. See regulatory capital rule, section 2. In
addition, in order to recognize an exposure as an eligible margin
loan a banking organization must comply with the requirements of
section 3(b) of the regulatory capital rules with respect to that
exposure.
\9\ Generally, under the agencies' regulatory capital rules,
repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the banking
organization acts as agent for a customer and indemnifies the
customer against loss, provided that: (1) The transaction is based
solely on liquid and readily marketable securities, cash, or gold;
(2) the transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements; (3) the transaction provides
certain default rights. See regulatory capital rule, section 2. In
addition, in order to recognize an exposure as a repo-style
transaction for purposes of this subpart, a banking organization
must comply with the requirements of section 3(e) of the regulatory
capital rules.
\10\ See 12 CFR part 32.
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II. Background
A. U.S. Resolution Regime
It is common market practice for bilateral derivatives and certain
other types of financial contracts entered into by large banking
organizations to permit a non-defaulting counterparty to exercise early
termination rights and other contractual remedies upon a counterparty
(or a related entity) experiencing an event of default. These
contractual provisions are generally recognized as a credit risk
mitigant because the provisions allow a non-defaulting party the
uninterrupted right to close-out, net, and liquidate any collateral
securing its claim under the contract upon a counterparty's default.
However, as the failure of Lehman Brothers demonstrated, the
uninterrupted exercise of such rights by counterparties of a globally-
active financial company with a significant derivatives portfolio could
impede the orderly resolution of the financial company and pose risks
to financial stability. The United States has enacted laws that impose
a limited stay on the exercise of early termination rights and other
remedies with regard to qualified financial contracts (such as OTC
derivatives, securities financing transactions, and margin loans) with
insured depository institutions in resolution under the FDI Act and, in
2010, with financial companies in resolution under Title II of the
Dodd-Frank Act.
B. Foreign Special Resolution Procedures and the ISDA Protocol
In recognition of the issues faced in the financial crisis
concerning resolution of globally-active financial companies, the EU
issued the BRRD on April 15, 2014, which requires EU member states to
implement a resolution mechanism by December 31, 2014, in order to
increase the likelihood for successful national or cross-border
resolutions of a financial company organized in the EU.\11\ The BRRD
contains special resolution powers, including a limited stay on certain
financial contracts that is similar to the stays provided under Title
II of the Dodd-Frank Act and the FDI Act. Therefore, the operations of
U.S. banking organizations located in jurisdictions that have
implemented the BRRD could become subject to an orderly resolution
under the BRRD, including the application of a limited statutory stay
of a counterparty's right to exercise early termination rights and
other remedies with respect to certain financial contracts. The BRRD is
generally designed to be consistent with the Key Attributes of
Effective Resolution Regimes for Financial Institutions (Key
Attributes),\12\ which were initially adopted by the Financial
Stability Board (FSB) \13\ of the G-20 \14\
[[Page 78290]]
member nations in October 2011, and are designed to provide a standard
for the responsibilities and powers that national resolution regimes
should have to resolve a failing systemically important financial
institution.
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\11\ On January 1, 2015, most of the provisions of the BRRD are
expected to take effect in a number of the EU member states.
\12\ The Key Attributes are available at
www.financialstabilityboard.org/publications/r_111104cc.pdf. See
specifically Key Attributes 4.1-4.4 regarding set-off, netting,
collateralization and segregation of client assets and Appendix I
Annex 5 regarding temporary stays on early termination rights. In
October 2014, the FSB adopted a 2014 version of the Key Attributes
that incorporates new annexes to provide additional guidance with
respect to specific Key Attributes. No changes were made to the text
of the twelve Key Attributes of October 2011.
\13\ The FSB is an international body that monitors and makes
recommendations about the global financial system. The FSB
coordinates the regulatory, supervisory, and other financial sector
policies of national financial authorities and international
standard-setting bodies.
\14\ The G-20 membership comprises a mix of the world's largest
advanced and emerging economies. The G-20 members are Argentina,
Australia, Brazil, Canada, China, France, Germany, India, Indonesia,
Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South
Africa, Turkey, the United Kingdom, the United States, and the
European Union. Following the most recent financial crisis, leaders
of the G-20 member nations recognized that the orderly cross-border
resolution of a globally-active financial company requires all
countries to have effective national resolution regimes to resolve
failing financial companies in an orderly manner and that national
resolution regimes should be consistent with one another. Subjecting
the same financial company to conflicting legal rules, procedures,
and mechanisms across jurisdictions can create uncertainty,
instability, possible systemic contagion, and higher costs of
resolution.
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In addition to the issuance of the BRRD, on November 4, 2014, ISDA
published the ISDA Protocol, which enables counterparties to amend the
terms of their ISDA Master Agreements to stay certain early termination
rights and other remedies provided under the agreement. As of November
12, 2014, 18 global financial institutions, including several of the
largest U.S. banking organizations,\15\ have opted to adhere to the
ISDA Protocol and thereby would modify ISDA Master Agreements among
those adhering parties. Like other qualified financial contracts, OTC
derivatives transactions executed under standard ISDA Master Agreements
allow a party to terminate the agreement immediately upon an event of
default of its counterparty, including if its counterparty (or a
related entity) \16\ enters insolvency or similar proceedings.
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\15\ As of November 12, 2014, the U.S. banking organizations
that have agreed to adhere to the ISDA Protocol are Bank of America
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., and Morgan Stanley, and certain subsidiaries thereof.
See current list of adhering parties to the ISDA Protocol at http://www2.isda.org/functional-areas/protocol-management/protocol-adherence/20.
\16\ Under the ISDA Resolution Stay Protocol, a related entity
is defined to include (i) each parent or (ii) an affiliate that is
(a) a creditor support provider or (b) a specified entity.
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The contractual amendments effectuated pursuant to the ISDA
Protocol would apply the provisions of Title II of the Dodd-Frank Act
and the FDI Act concerning limited stays of termination rights and
other remedies in qualified financial contracts to ISDA Master
Agreements between adhering counterparties, including adhering
counterparties that are not otherwise subject to U.S. law. The
amendments also would apply substantially similar provisions of certain
non-U.S. laws, such as the BRRD, to ISDA Master Agreements between
adhering counterparties that are not otherwise subject to such
laws.\17\ The contractual amendments effectuated pursuant to the ISDA
Protocol would permit a party that has agreed to adhere to the ISDA
Protocol to exercise early termination rights and other remedies only
to the extent that it would be entitled to do so under the special
resolution regime applicable to its adhering counterparties (or related
entities, as applicable).\18\
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\17\ The provisions of the ISDA Protocol relating to the special
resolution regimes in these jurisdictions will become effective on
January 1, 2015, for ISDA Master Agreements between the 18 adhering
financial companies (as of November 21, 2014). The ISDA Protocol
also covers special resolution regimes in other FSB member
jurisdictions so long as the regimes meet conditions specified in
the ISDA Protocol relating to creditor safeguards, which are
consistent with the Key Attributes.
\18\ Parties adhering to the ISDA Protocol would initially be
contractually subject to the statutory special resolution regimes of
France, Germany, Japan, Switzerland, the United Kingdom and the
United States.
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C. Description of Relevant Provisions of the Regulatory Capital and the
Liquidity Coverage Ratio Rules
As noted above, the agencies' regulatory capital rules permit a
banking organization to measure exposure from certain types of
financial contracts on a net basis, provided that the contracts are
subject to a qualifying master netting agreement or other agreement
that contains specific provisions. Specifically, under the regulatory
capital rules, a banking organization with multiple OTC derivatives
that are subject to a qualifying master netting agreement would be able
to calculate a net exposure amount by netting the sum of all positive
and negative fair values of the individual OTC derivative contracts
subject to the qualifying master netting agreement and calculating a
risk-weighted asset amount based on the net exposure amount. For
purposes of the supplementary leverage ratio (as applied only to
advanced approaches banking organizations), a banking organization that
has one or more OTC derivatives with the same counterparty that are
subject to a qualifying master netting agreement would be permitted to
not include in total leverage exposure cash variation margin received
from such counterparty that has offset the mark-to-fair value of the
derivative asset or cash collateral that is posted to such counterparty
that has reduced the banking organization's on-balance sheet
assets.\19\
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\19\ Under the agencies' regulatory capital rules, the general
framework consists of two approaches: (1) The standardized approach,
which, beginning on January 1, 2015, will apply to all banking
organizations regardless of total asset size, and (2) the advanced
approaches, which currently apply to large internationally active
banking organizations (defined as those banking organizations with
$250 billion or more in total consolidated assets or $10 billion or
more in total on-balance-sheet foreign exposure, depository
institution subsidiaries of those banking organizations that use the
advanced approaches rule, and banking organizations that elect to
use the advanced approaches). As a general matter, the standardized
approach sets forth standardized risk weights for different asset
types for regulatory capital calculations, whereas, for certain
assets, the advanced approaches make use of risk assessments
provided by banking organizations' internal systems as inputs for
regulatory capital calculations. Consistent with section 171 of the
Dodd-Frank Act (codified at 12 U.S.C. 5371), a banking organization
that is required to calculate its risk-based capital requirements
under the advanced approaches (i.e., an advanced approaches banking
organization) also must determine its risk-based capital
requirements under the generally applicable risk-based capital
rules, which will be the standardized approach beginning on January
1, 2015). The lower--or more binding--ratio for each risk-based
capital requirement is the ratio that the advanced approaches
banking organization must use to determine its compliance with
minimum regulatory capital requirements. See generally 12 CFR part 3
(OCC) and 12 CFR part 217 (Board).
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In addition, the agencies' rules permit a banking organization to
recognize the risk-mitigating effect of financial collateral for other
types of collateralized exposures. Specifically, for risk-based capital
purposes, a banking organization with a securities financing
transaction that meets the definition of a repo-style transaction with
financial collateral, a margin loan that meets the definition of an
eligible margin loan with financial collateral, or an OTC derivative
contract collateralized with financial collateral may determine a net
exposure amount to its counterparty according to section 37 or section
132 of the regulatory capital rules. A banking organization with
multiple repo-style transactions or eligible margin loans with a
counterparty that are subject to a qualifying master netting agreement
may net the exposure amounts of the individual transactions under that
agreement. In addition, for purposes of the supplementary leverage
ratio, an advanced approaches banking organization with multiple repo-
style transactions with the same counterparty that are subject to a
qualifying master netting agreement would be permitted to net for
purposes of calculating the counterparty credit risk component of its
total leverage exposure. In general, recognition of netting results in
a lower measure of risk-weighted assets and total leverage exposure
than if a banking organization were to calculate its OTC derivatives,
repo-style transactions, and eligible margin loans on a gross basis.
This result is consistent with the view that entering into transactions
under a netting agreement that satisfies certain criteria reduces a
banking organization's risk exposure.
[[Page 78291]]
The agencies also use the concept of a qualifying master netting
agreement in the liquidity coverage ratio (LCR) rule.\20\ The LCR rule
requires a banking organization to maintain an amount of high-quality
liquid assets (the numerator) to match at least 100 percent of its
total net cash outflows over a prospective 30 calendar-day period (the
denominator). For derivative transactions subject to a qualifying
master netting agreement, a banking organization would be able to
calculate the net derivative outflow or inflow amount by netting the
contractual payments and collateral that it would give to, or receive
from, the counterparty over a prospective 30-day period.\21\ If the
derivative transactions are not subject to a qualifying master netting
agreement, then the derivative cash outflows for that counterparty
would be included in the net derivative cash outflow amount and the
derivative cash inflows for that counterparty would be included in the
net derivative cash inflow amount, without any netting and subject to
the LCR rule's cap on total inflows. Recognition of netting may result
in lower net cash outflows, and thus a lower LCR denominator and
liquidity requirement, than if a banking organization were to calculate
its inflows and outflows on its derivatives transactions on a gross
basis.
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\20\ The agencies' LCR rules will be codified at 12 CFR part 50
(OCC) and 12 CFR part 249 (Board).
\21\ See 12 CFR _ .32(c) and _ .33(b) of the agencies' LCR rule.
The LCR final rule provides that foreign currency transactions that
meet certain criteria can be netted regardless of whether those
transactions are covered by a qualified master netting agreement. 79
FR 61440, 61532-33 (October 10, 2014).
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III. The Interim Final Rule
The interim final rule amends the definitions of ``collateral
agreement,'' ``eligible margin loan,'' ``qualifying master netting
agreement,'' and ``repo-style transaction'' in the agencies' regulatory
capital rules and ``qualifying master netting agreement'' in the
agencies' LCR rules to ensure that the regulatory capital, liquidity,
and lending limits treatment of OTC derivatives, repo-style
transactions, eligible margin loans, and other collateralized
transactions would be unaffected by the adoption of various foreign
special resolution regimes and the ISDA Protocol. In particular, the
interim final rule amends these definitions to provide that a relevant
netting agreement or collateral agreement may provide for a limited
stay or avoidance of rights where the agreement is subject by its terms
to, or incorporates, certain resolution regimes applicable to financial
companies, including Title II of the Dodd-Frank Act, the FDI Act, or
any similar foreign resolution regime that provides for limited stays
substantially similar to the stay for qualified financial contracts
provided in Title II of the Dodd-Frank Act or the FDI Act.
In determining whether the laws of foreign jurisdictions are
``similar'' to the FDI Act and Title II of the Dodd-Frank Act and
provide for limited stays substantially similar to those provided for
in the FDI Act and Title II of the Dodd-Frank Act, the agencies intend
to consider all aspects of the stays under the U.S. laws.\22\ Relevant
factors include, for instance, the length of stay and the related
creditor safeguards or protections provided under a foreign special
resolution regime.\23\ The agencies expect that the implementation of
special resolution regimes of France, Germany, Japan, Switzerland, and
the United Kingdom would be substantially similar to those of the
United States and provide for limited stays substantially similar to
those provided for in the FDI Act and Title II of the Dodd-Frank
Act.\24\
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\22\ See 12 U.S.C. 1821(e)(8)-(13) and 5390(c)(8)-(16). As noted
above, the ISDA Protocol covers only resolution regimes that are
considered to be consistent with the principles of the Key
Attributes. Therefore, it is also expected that any limited
statutory stay under foreign law determined for purposes of this
interim final rule to be similar to the FDI Act and Title II of the
Dodd-Frank Act would also be consistent with the relevant principles
of the Key Attributes.
\23\ Under Title II of the Dodd-Frank Act, counterparties are
stayed until 5:00 p.m. on the business day following the date of
appointment of a receiver from exercising termination, liquidation,
or netting rights under the qualified financial contract. 12 U.S.C.
5390(c)(10)(B)(i)(I). If the qualified financial contracts are
transferred to a solvent third party before the stay expires, the
counterparty is permanently enjoined from exercising such rights
based upon the appointment of the receiver, but is not stayed from
exercising such rights based upon other events of default. See 12
U.S.C. 5390(c)(10)(B)(i)(II).
\24\ Annexes to the ISDA Protocol specify conditions that the
special resolution regimes of the five countries must meet in order
for section 1(a) of the ISDA Protocol to apply to the ISDA Master
Agreements of adhering parties.
---------------------------------------------------------------------------
Without the interim final rule, several banking organizations would
no longer be permitted to recognize financial contracts as subject to a
qualifying master netting agreement or satisfying the criteria
necessary for the current regulatory capital, liquidity, and lending
limits treatment, and would be required to measure exposure from these
contracts on a gross, rather than net, basis. This result would
undermine the salutary effects of the BRRD and similar resolution
regimes and the ISDA Protocol on financial stability. The interim final
rule is necessary to maintain the existing treatment for these
contracts for purposes of the regulatory capital, liquidity, and
lending limits rules. The agencies do not believe that the
disqualification of master netting agreements that would otherwise
result in the absence of the interim final rule accurately reflects the
risk posed by these OTC derivative transactions. Implementation of
consistent, national resolution regimes on a global basis furthers the
orderly resolution of internationally active financial companies, and
enhances financial stability. Moreover, the development of the ISDA
Protocol furthers the principles of Title II of the Dodd-Frank Act and
the FDI Act (in instances where a counterparty is a U.S. entity or its
subsidiary) by applying limited stays of termination rights to
counterparties who are not otherwise subject to U.S. law.
In addition, the agencies intend to incorporate the definition of
``qualifying master netting agreement'' set forth in this interim final
rule into rules that establish minimum margin requirements for
registered swap dealers, major swap participants, security-based swap
dealers, and major security-based swap participants (covered swap
entities) subject to agency supervision. On September 24, 2014, the
OCC, Board, Federal Deposit Insurance Corporation, the Farm Credit
Administration, and the Federal Housing Finance Agency published a
notice of proposed rulemaking that would establish minimum margin
requirements for covered swap entities subject to agency supervision
(2014 swap margin NPR).\25\ The proposed rule would permit a covered
swap entity to calculate variation margin requirements on an aggregate,
net basis under an eligible master netting agreement (EMNA) with a
counterparty. The comment period for the 2014 swap margin NPR closed on
November 24, 2014. The OCC, Board, Federal Deposit Insurance
Corporation, Farm Credit Administration and Federal Housing Finance
Agency are reviewing the comments received and drafting a final rule.
Ultimately, the Federal banking agencies intend to align the
definitions of EMNA and qualifying master netting agreement in their
respective regulations pertaining to swap margin requirements,
regulatory capital requirements, liquidity requirements, and lending
limits.
---------------------------------------------------------------------------
\25\ 79 FR 57348 (September 24, 2014).
---------------------------------------------------------------------------
IV. Request for Comments
The agencies are interested in receiving comments on all aspects of
the interim final rule. In particular, do the amendments to the
definitions of
[[Page 78292]]
``qualifying master netting agreement,'' ``collateral agreement,''
``repo-style transaction,'' and ``eligible margin loan'' ensure that
the regulatory capital, liquidity, and lending limits treatment of OTC
derivatives, repo-style transactions, eligible margin loans and other
collateralized transactions is unaffected by the ISDA Protocol and the
BRRD? Is there any reason why the agencies should not revise the above
mentioned definitions?
The ISDA Protocol also provides for limited stays of termination
rights for cross-defaults resulting from affiliate insolvency
proceedings under a limited number of U.S. general insolvency regimes,
including the U.S. Bankruptcy Code.\26\ The interim final rule does not
address this portion of the ISDA Protocol because this portion of the
ISDA Protocol does not take effect on January 1, 2015. Instead, it
takes effect upon the effective date of implementing regulations in the
United States. The agencies request comment on whether the definitions
of ``qualifying master netting agreement,'' ``collateral agreement,''
``repo-style transaction,'' and ``eligible margin loan'' should also be
amended to recognize the stay of default rights in this context.
---------------------------------------------------------------------------
\26\ Under the ISDA Protocol, upon commencement of such
proceedings, adhering counterparties would be subject to a limited
stay of their termination rights and other remedies. The limited
stay does not apply if a direct counterparty is subject to general
insolvency proceedings. The stay also does not apply to payment or
delivery defaults or to defaults that are not directly or indirectly
related to the affiliate insolvency proceedings.
---------------------------------------------------------------------------
V. Effective Date; Solicitation of Comments
This interim final rule is effective January 1, 2015. Pursuant to
the Administrative Procedure Act (APA), at 5 U.S.C. 553(b)(B), notice
and comment are not required prior to the issuance of a final rule if
an agency, for good cause, finds that ``notice and public procedure
thereon are impracticable, unnecessary, or contrary to the public
interest.'' \27\ Similarly, a final rule may be published with an
immediate effective date if an agency finds good cause and publishes
such with the final rule.\28\
---------------------------------------------------------------------------
\27\ 5 U.S.C. 553(b)(B).
\28\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------
The ISDA Protocol was published by ISDA on November 4, 2014, and as
of November 12, 2014, 18 large banking organizations, including five
large U.S. banking organizations, have voluntarily adhered to the ISDA
Protocol, which will become effective on January 1, 2015. Upon the
effective date of the ISDA Protocol, the ISDA Master Agreements entered
into between the adhering banking organizations would be disqualified
from recognition as transactions subject to a qualifying master netting
agreement.
The BRRD was adopted on April 15, 2014.\29\ Implementation of the
BRRD by a number of EU member states is expected to occur by January 1,
2015. Becoming subject to the limited stays contemplated by the BRRD
also disqualifies agreements that would otherwise qualify as a
qualifying master netting agreement or a collateral agreement, and
disqualifies securities financing transactions or margin loans from the
regulatory capital treatment of a repo-style transaction or eligible
margin loan, respectively. Adoption of this interim final rule, in
conjunction with the implementation of the BRRD and the ISDA Protocol
by relevant foreign jurisdictions is consistent with steps to
facilitate the orderly resolution of systemically important financial
institutions.
---------------------------------------------------------------------------
\29\ The United Kingdom published a consultative paper in July
2014 regarding the implementation of the BRRD.
---------------------------------------------------------------------------
Changes to the definitions of qualifying master netting agreement,
repo-style transaction, eligible margin loan and collateral agreement
are needed to ensure that contractually subjecting netting and
collateral agreements, agreements executing a repo-style transaction
and agreements executing an eligible margin loan to domestic and
foreign special resolution regimes does not disrupt current treatment
under the agencies' regulatory capital, liquidity, and lending limits
rules. Notice and comment through the issuance of a notice of proposed
rulemaking for purposes of these amendments would extend beyond January
1, 2015, resulting in adverse financial consequences to some U.S.
banking organizations.
The agencies find that, under these circumstances, prior notice and
comment through the issuance of a notice of proposed rulemaking are
impracticable and that the public interest is best served by making the
rule effective on January 1, 2015. Otherwise, banking organizations
could be subject to considerably higher capital and liquidity
requirements because the regulatory capital and liquidity rules would
not recognize netting under the relevant agreements or the current
treatment of such contracts. Moreover, under the OCC's legal lending
limits for national banks and Federal savings association, which rely
on the definition of qualifying master netting agreement, the legal
lending limits of those institutions may be significantly reduced.
These outcomes could weaken liquidity in OTC derivatives markets,
increase the cost of credit, and reduce the availability of credit.
National implementation of the BRRD and adherence to the ISDA
Protocol should facilitate the orderly resolution of internationally
active banking organizations. Absent capital and liquidity treatment
and legal lending limits (where applicable) afforded to counterparties
entering into a qualifying master netting agreement, banking
organizations would be dis-incentivized to enter into such agreements.
For these reasons, with respect to the amendments to the
definitions of qualifying master netting agreement, collateral
agreement, repo-style transaction, and eligible margin loan, the
agencies find good cause to dispense with the delayed effective date
otherwise required by 5 U.S.C. 553(b)(B) and 553(d)(3) and under
section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802.\30\
---------------------------------------------------------------------------
\30\ The RCDRIA requires that, subject to certain exceptions,
regulations imposing additional reporting, disclosure, or other
requirements on insured depository institutions take effect on the
first day of the calendar quarter after publication of the final
rule. This effective date requirement does not apply if the agency
finds for good cause that the regulation should become effective
before such time.
---------------------------------------------------------------------------
VI. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act (RFA) does not apply to a
rulemaking where a general notice of proposed rulemaking is not
required. 5 U.S.C. 603 and 604. As noted previously, the OCC has
determined that it is unnecessary to publish a general notice of
proposed rulemaking for this joint rule. Accordingly, the RFA's
requirements relating to an initial and final regulatory flexibility
analysis do not apply.
Board: The requirements of the RFA are not applicable to this
interim final rule.\31\ Nonetheless, the Board observes that the
interim final rule would not have a significant economic impact on a
substantial number of small entities. The Board requests comment on its
conclusion that the new interim final rule should not have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\31\ The requirements of the RFA are not applicable to rules
adopted under the Administrative Procedure Act's ``good cause''
exception, see 5 U.S.C. 601(2) (defining ``rule'' and notice
requirements under the Administrative Procedure Act).
---------------------------------------------------------------------------
To support the above finding that the interim final rule would not
have a significant economic impact on a substantial number of small
entities, the
[[Page 78293]]
Board is publishing a final regulatory flexibility analysis for the
interim final rule. The RFA generally requires an agency to assess the
impact a rule is expected to have on small entities.\32\ The RFA
requires an agency either to provide a regulatory flexibility analysis
or to certify that the interim final rule will not have a significant
economic impact on a substantial number of small entities. Based on
this analysis and for the reasons stated below, the Board believes that
this interim final rule will not have a significant economic impact on
a substantial number of small entities.
---------------------------------------------------------------------------
\32\ Under standards the U.S. Small Business Administration has
established, an entity is considered ``small'' if it has $175
million or less in assets for banks and other depository
institutions. U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------
Under regulations issued by the U.S. Small Business Administration,
a small entity includes a depository institution, bank holding company,
or savings and loan holding company with total assets of $550 million
or less (a small banking organization).\33\ As of June 30, 2014, there
were approximately 657 small state member banks, 3,719 small bank
holding companies, and 254 small savings and loan holding companies.
---------------------------------------------------------------------------
\33\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------
The interim final rule is expected only to apply to banking
organizations that adhere to the ISDA Protocol or engage in a
substantial amount of cross-border derivatives transactions. Small
entities generally will not fall into this category. To date, the Board
is aware of less than two dozen banking organizations, all with total
consolidated assets greater than $250 billion, that are likely to
adhere to the ISDA Protocol or engage in a substantial amount of cross-
border derivatives transactions. The Board is aware of no other Federal
rules that duplicate, overlap, or conflict with this interim final
rule. The Board believes that this interim final rule will not have a
significant economic impact on small banking organizations supervised
by the Board and therefore believes that there are no significant
alternatives to the interim final rule that would reduce the economic
impact on small banking organizations supervised by the Board.
B. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the agencies to
use plain language in all proposed and final rules published after
January 1, 2000. The agencies invite comment on how to make this
interim final rule easier to understand. For example:
Have the agencies organized the material to suit your
needs? If not, how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Does the rule contain technical language or jargon that is
not clear? If so, what language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the rule easier to understand? If
so, what changes would make the rule easier to understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could the agencies do to make the rule easier to
understand?
C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501-3521) (``PRA''), the agencies may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (``OMB'') control number. The agencies reviewed
the interim final rule and determined that it would not produce any new
collection of information pursuant to the PRA.
List of Subjects
12 CFR Part 3
Administrative practice and procedure; Capital; National banks,
Reporting and recordkeeping requirements; Risk.
12 CFR Part 50
Administrative practice and procedure; Banks, banking; Liquidity;
Reporting and recordkeeping requirements; Savings associations.
12 CFR Part 217
Administrative practice and procedure; Banks, banking; Capital;
Federal Reserve System; Holding companies; Reporting and recordkeeping
requirements; Securities.
12 CFR Part 249
Administrative practice and procedure; Banks, banking; Federal
Reserve System; Holding companies; Liquidity; Reporting and
recordkeeping requirements.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the supplementary information, the
Office of the Comptroller of the Currency amends part 3 of chapter I of
title 12, Code of Federal Regulations as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
Part 3 [Amended]
0
1a. Part 3 is amended by redesignating footnotes 5 through 29 as
footnotes 9 through 33, respectively.
0
2. Section 3.2 is amended by:
0
a. Revising the definitions of ``collateral agreement'' and
``qualifying master netting agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin
loan'';
0
c. Republishing the introductory text of the definition of ``repo-style
transaction''; and
0
d. Revising paragraph (3)(ii)(A) of the definition of ``repo-style
transaction''.
The revisions are set forth below:
Sec. 3.2 Definitions.
* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a national bank or Federal savings association for
a single financial contract or for all financial contracts in a netting
set and confers upon the national bank or Federal savings association 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 national bank or
Federal savings association 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 national bank's or
Federal savings association's exercise of rights under the agreement
may be
[[Page 78294]]
stayed or avoided under applicable law in the relevant jurisdictions,
other than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \4\ to the U.S. laws
referenced in this paragraph (1) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\4\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition.
* * * * *
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is conducted under an agreement that
provides the national bank or Federal savings association the right to
accelerate and terminate the extension of credit and to liquidate or
set-off collateral promptly upon an event of default, including upon an
event of receivership, insolvency, liquidation, conservatorship, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions, other than
in receivership, conservatorship, or resolution under the Federal
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any
similar insolvency law applicable to GSEs,\5\ or laws of foreign
jurisdictions that are substantially similar \6\ to the U.S. laws
referenced in this paragraph in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\5\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
\6\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
* * * * *
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 national bank or Federal savings
association the right to accelerate, terminate, and close-out on a net
basis all transactions under the agreement and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \7\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\7\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a national bank or
Federal savings association must comply with the requirements of Sec.
3.3(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 national bank or
Federal savings association acts as agent for a customer and
indemnifies the customer against loss, provided that:
* * * * *
(3) * * *
(ii) * * *
(A) The transaction is executed under an agreement that provides
the national bank or Federal savings association the right to
accelerate, terminate, and close-out the transaction on a net basis and
to liquidate or set-off collateral promptly upon an event of default,
including upon an event of receivership, insolvency, liquidation, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions, other than
in receivership, conservatorship, or resolution under the Federal
Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any
similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \8\ to the U.S. laws
referenced in this paragraph (3)(ii)(a) in order to facilitate the
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\8\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
* * * * *
PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS
0
3. The authority citation for part 50 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, and 1462 et
seq.
0
4. Section 50.3 is amended by:
0
a. Revising the definition of ``qualifying master netting agreement'';
and
0
b. In paragraph (2) of the definition of ``regulated financial
company'', redesignating footnote 1 as footnote 2.
The revision is set forth below.
Sec. 50.3 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 national bank or Federal savings
association the right to accelerate, terminate, and close-out on a net
basis all transactions under the agreement and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
[[Page 78295]]
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \1\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\1\ The OCC expects to evaluate jointly with the Board and FDIC
whether foreign special resolution regimes meet the requirements of
this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a national bank or
Federal savings association must comply with the requirements of Sec.
50.4(a) with respect to that agreement.
* * * * *
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the supplementary information, the
Board amends 12 CFR Chapter II parts 217 and 249 to read as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
5. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
Part 217 [Amended]
0
5a. Part 217 is amended by redesignating footnotes 5 through 29 as
footnotes 9 through 33, respectively.
0
6. Section 217.2 is amended by:
0
a. Revising the definitions of ``collateral agreement'' and
``qualifying master netting agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin
loan'';
0
c. Republishing the introductory text of the definition of ``repo-style
transaction''; and
0
d. Revising paragraph (3)(ii)(A) of the definition of ``repo-style
transaction''.
The revisions are set forth below:
Sec. 217.2 Definitions.
* * * * *
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a Board-regulated institution for a single
financial contract or for all financial contracts in a netting set and
confers upon the Board-regulated 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 Board-regulated 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 Board-regulated institution's exercise of rights
under the agreement may be stayed or avoided under applicable law in
the relevant jurisdictions, other than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \4\ to the U.S. laws
referenced in this paragraph (1) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\4\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
(2) Where the agreement is subject by its terms to any of the laws
referenced in paragraph (1) of this definition.
* * * * *
Eligible margin loan means:
(1) * * *
(iii) The extension of credit is conducted under an agreement that
provides the Board-regulated institution the right to accelerate and
terminate the extension of credit and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, conservatorship, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than in
receivership, conservatorship, or resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs,\5\ or laws of foreign jurisdictions
that are substantially similar \6\ to the U.S. laws referenced in this
paragraph in order to facilitate the orderly resolution of the
defaulting counterparty; or
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\5\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions under sections 401-407 of
the Federal Deposit Insurance Corporation Improvement Act or the
Federal Reserve Board's Regulation EE (12 CFR part 231).
\6\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
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* * * * *
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 Board-regulated institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \7\ to the U.S. laws
referenced in this paragraph (2)(i) in
[[Page 78296]]
order to facilitate the orderly resolution of the defaulting
counterparty; or
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\7\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
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(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a Board-regulated
institution must comply with the requirements of Sec. 217.3(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 Board-regulated
institution acts as agent for a customer and indemnifies the customer
against loss, provided that:
(3) * * *
(ii) * * *
(A) The transaction is executed under an agreement that provides
the Board-regulated institution the right to accelerate, terminate, and
close-out the transaction on a net basis and to liquidate or set-off
collateral promptly upon an event of default, including upon an event
of receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case, any exercise of rights
under the agreement will not be stayed or avoided under applicable law
in the relevant jurisdictions, other than in receivership,
conservatorship, or resolution under the Federal Deposit Insurance Act,
Title II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs, or laws of foreign jurisdictions that are
substantially similar \8\ to the U.S. laws referenced in this paragraph
(3)(ii)(a) in order to facilitate the orderly resolution of the
defaulting counterparty; or
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\8\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
* * * * *
PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)
0
7. The authority citation for part 249 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1),
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.
0
8. Section 249.3 is amended by:
0
a. Revising the definition of ``qualifying master netting agreement'';
and
0
b. In paragraph (2) of the definition of ``regulated financial
company'', redesignating footnote 1 as footnote 2.
Sec. 249.3 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 Board-regulated institution the
right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, conservatorship, insolvency, liquidation, or similar
proceeding, of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar \1\ to the U.S. laws
referenced in this paragraph (2)(i) in order to facilitate the orderly
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------
\1\ The Board expects to evaluate jointly with the OCC and
Federal Deposit Insurance Corporation whether foreign special
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i) of this
definition;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a Board-regulated
institution must comply with the requirements of Sec. 249.4(a) with
respect to that agreement.
* * * * *
Dated: December 16, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, December 16, 2014.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2014-30218 Filed 12-29-14; 8:45 am]
BILLING CODE P