# Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2014-30734

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** January 7, 2015
- **Citation:** 80 FR 966

## Text

DEPARTMENT OF THE TREASURY
31 CFR Part 148
RIN 1505-AC36
Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

AGENCY:

The Secretary of the Department of the Treasury, as Chairperson of the Financial Stability Oversight Council.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Secretary of the Treasury (the “Secretary”), as Chairperson of the Financial Stability Oversight Council, is proposing rules (the “Proposed Rules”) to implement the qualified financial contract (“QFC”) recordkeeping requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act” or the “Dodd-Frank Act”). The Act provides that if the federal primary financial regulatory agencies do not prescribe joint final or interim final regulations requiring financial companies to maintain records with respect to QFCs to assist the Federal Deposit Insurance Corporation (“FDIC”) as receiver for a covered financial company to exercise its rights and fulfill its obligations under the Act within 24 months of the enactment of the Act, the Chairperson of the Financial Stability Oversight Council (the “Council”) shall prescribe, in consultation with the FDIC, such regulations. The Secretary, as Chairperson of the Council, is proposing the Proposed Rules in consultation with the FDIC because the federal primary financial regulatory agencies did not so prescribe joint final or interim final regulations. The Proposed Rules would require recordkeeping with respect to positions, counterparties, legal documentation and collateral. This information is necessary to assist the FDIC as receiver to: Fulfill its obligations under the Dodd-Frank Act in deciding whether to transfer QFCs; assess the consequences of decisions to transfer, disaffirm or repudiate, or allow the termination of, QFCs with one or more counterparties; determine if any financial systemic risks are posed by the transfer, disaffirmance or repudiation, or termination of such QFCs; and otherwise exercise its rights under the Act. The Secretary is requesting comment on all aspects of the Proposed Rules.

DATES:

Written comments must be received by April 7, 2015.

ADDRESSES:

Submit comments electronically through the Federal eRulemaking Portal:
http://www.regulations.gov,
or by mail (if hard copy, preferably an original and two copies) to: The Treasury Department, Attn: Qualified Financial Contracts Recordkeeping Comments, 1500 Pennsylvania Avenue NW., Washington, DC 20220. Because paper mail in the Washington, DC area may be subject to delay, it is recommended that comments be submitted electronically. Please include your name, affiliation, address, email address, and telephone number in your comment. Comments will be available for public inspection on
www.regulations.gov.
In general, comments received, including attachments and other supporting materials, are part of the public record and are available to the public. Do not submit any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT:

Monique Rollins, Acting Deputy Assistant Secretary for Capital Markets; Patricia Kao, Director, Office of Financial Institutions Policy: (202) 622-4948.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Executive Summary

B. Publication of the Notice of Proposed Rulemaking

II. Background—QFCs and Receivership

III. The Proposed Rules

A. Scope, Purpose, Effective Date and Compliance Dates

1. Scope

a. Key Definitions

b. Records Entities Within a U.S. Holding Company

c. Clearing Organizations

d. Scope of Proposed Rules

2. Purpose

3. Effective Date and Compliance Dates

B. General Definitions

C. Form, Availability, and Maintenance of Records

1. Form and Availability

2. Maintenance and Updating

3. Exemptions

D. Content of Records

1. General Information

2. Appendix Information

IV. Administrative Law Matters

A. Initial Regulatory Flexibility Analysis

1. Statement of the Need for, Objectives of, and Legal Basis for the Proposed Rules

2. Small Entities Affected by the Proposed Rules

3. Projected Recordkeeping and Other Compliance Requirements

4. Identification of Duplication, Overlapping, or Conflicting Federal Rules

5. Significant Alternatives to the Proposed Rules

B. Paperwork Reduction Act

C. Executive Orders 12866 and 13563

1. Description of the Need for the Regulatory Action

2. Literature Review

a. Fire Sales Among Financial Institutions

b. Costs of Lehman Brothers Bankruptcy

c. Conclusion

3. Baseline

4. Evaluation of Alternatives

a. Scope of the Proposed Rules

b. Content of Records

c. Standardized Recordkeeping

5. Affected Population

6. Assessment of Potential Costs and Benefits

a. Potential Costs

b. Potential Benefits

7. Retrospective Analysis

I. Introduction

A. Executive Summary

The Dodd-Frank Act was enacted on July 21, 2010.
1

As part of a new and comprehensive regulatory framework, Title II of the Dodd-Frank Act (“Title II”) generally establishes a mechanism for the orderly resolution of a financial company whose failure and resolution under otherwise applicable federal or state law would have serious adverse effects on financial stability in the United States. A “financial company” under Title II is a company that is incorporated or organized under any provision of federal law or the laws of any State (as defined in 12 U.S.C. 5301(16)) that is:

1
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

• A bank holding company;

• A nonbank financial company supervised by the Board of Governors of the Federal Reserve System (“Board”);

• Any company that is predominantly engaged in activities that the Board has determined are financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding Company Act of 1956 (“BHC Act”);
2

or

2
The FDIC has published a final rule that identifies the activities listed in section 4(k) of the BHC Act and the Board's Regulation Y (12 CFR part 225) that would be considered financial in nature or incidental thereto for purposes of Title II.
See
78 FR 34712 (June 10, 2013).

• Any subsidiary of such financial company that is itself predominantly engaged in activities that the Board has determined are financial in nature or incidental thereto for purposes of section 4(k) of the BHC Act, other than an insured depository institution or an insurance company.
3

3
Dodd-Frank Section 201(a)(11), 12 U.S.C. 5381(a)(11). The definition excludes Farm Credit System institutions chartered under and subject to the provisions of the Farm Credit Act; governmental entities; and regulated entities, as defined under section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

The Title II orderly liquidation mechanism is modeled in part on

provisions of the Federal Deposit Insurance Act (“FDIA”)
4

regarding insolvencies of insured depository institutions. Under Title II, the FDIC has been given similar responsibilities as under the FDIA, including receivership authority over financial companies in default or in danger of default for which a determination has been made by the Secretary (in consultation with the President) to seek the appointment of the FDIC as receiver pursuant to section 203(b) of the Dodd-Frank Act.

4
12 U.S.C. 1811
et seq.

Title II includes provisions, set forth at section 210(c)(8), concerning the QFCs held by covered financial companies. A “QFC” is a securities contract, commodities contract, forward contract, repurchase agreement, swap agreement, or any similar agreement that the FDIC determines by regulation, resolution, or order to be a qualified financial contract;
5

and a “covered financial company” is a financial company, other than an insured depository institution, for which the Secretary has made a determination to seek the appointment of the FDIC as receiver under the Dodd-Frank Act.
6

5
12 U.S.C. 5390(c)(8)(D)(i).

6
12 U.S.C. 5381(a)(8).

The treatment afforded to QFCs under Title II parallels the treatment afforded to them under section 11(e) of the FDIA.
7

Under Title II and the FDIA, from the time the FDIC is appointed as receiver until 5 p.m. (eastern time) on the business day following the date of the appointment, a QFC counterparty is prohibited from exercising any contractual rights (including termination) triggered by the appointment of the receiver.
8

7
12 U.S.C. 1821(e).

8

See e.g.,
12 U.S.C. 5390(c)(9) and (10).

After its appointment as receiver and prior to 5 p.m. on the following business day, the FDIC has three options for a QFC to which a covered financial company is a party:

(1) Transfer the QFC to another financial institution;

(2) Retain the QFC within the receivership and allow the counterparty to terminate; or

(3) Retain the QFC within the receivership and disaffirm or repudiate the QFC and pay compensatory damages.
9

9
12 U.S.C. 5390(c)(1), (10) and (11).

In order to assess the options that would be available following its appointment as receiver, the FDIC needs detailed information about the covered financial company's QFCs. Section 210(c)(8)(H) therefore requires that the Federal primary financial regulatory agencies, as defined in the Act
10

(the “PFRAs”), to jointly prescribe, by July 21, 2012, final or interim final regulations that require financial companies to maintain such records with respect to QFCs that the PFRAs determine to be necessary or appropriate to assist the FDIC as receiver for a covered financial company. Section 210(c)(8)(H) further provides that if the PFRAs do not so prescribe such joint regulations by July 21, 2012, the Secretary, as Chairperson of the Council, shall prescribe such regulations in consultation with the FDIC.

10
12 U.S.C. 5301(12).
See
the term “primary financial regulatory agency.”

As the PFRAs did not prescribe such regulations by the statutory deadline, the Secretary, as Chairperson of the Council, in consultation with the FDIC, is publishing the Proposed Rules. As described in greater detail below, the Proposed Rules would apply to a “records entity,” which is defined in the Proposed Rules to include certain types of financial companies that are parties to an open QFC or guarantee, support, or are linked to an open QFC and that meet certain size or other thresholds (such as risk, complexity, and interconnectedness), or other conditions or are certain affiliates in the same corporate group as a financial company that meets these thresholds or conditions (referred throughout this release as “affiliated financial companies”) and that are party to an open QFC or that guarantee, support, or are linked to an open QFC of an affiliate.
11

11
The term “affiliated financial companies” used in this release is the combination of two defined terms in the Proposed Rules: “affiliate” is defined in § 148.2(a) and “financial company” is defined in § 148.2(f) of the Proposed Rules. An affiliated financial company of a records entity would itself be a records entity if it is not an exempt entity and is a party to an open QFC or guarantees, supports, or is linked to an open QFC of an affiliate. An “open” QFC is a QFC which has not been fully performed.

The Proposed Rules would require these records entities to maintain detailed information about their QFC positions and be capable of providing this information to their PFRAs within 24 hours of request by their PFRAs. This would assist the FDIC in resolving financial companies that may be subject to an orderly liquidation under Title II of the Dodd-Frank Act based on consideration of such financial companies' size, risk, complexity, leverage, frequency and dollar amount of QFCs and interconnectedness to the financial system, and any other factors deemed appropriate.
12

To that end, it is necessary that financial companies that qualify as records entities maintain the capacity to generate, on an ongoing basis, QFC information in a common data format. To facilitate the resolution of QFC portfolios, the FDIC needs to analyze such data upon being appointed as receiver under Title II. The information must be sufficient to allow the FDIC to estimate the financial and operational impact on the covered financial company or its affiliated companies of the FDIC's decision to transfer, disaffirm or repudiate, or retain the QFCs. It must also allow the FDIC to assess the potential impact that such decisions may have on the financial markets as a whole. The standardized data format would reduce the time and effort needed by the FDIC to perform the analysis and would facilitate comparison of QFC data across financial companies with large complex QFC portfolios.

12
See 12 U.S.C. 5390(c)(8)(H)(iv).

The Proposed Rules also would allow the Secretary to issue conditional or unconditional general and specific exemptions from one or more requirements in the rule as the Secretary determines to be necessary or appropriate, including whether application of one or more requirements of the rule would not be necessary to achieve the purpose of the rule. The issuance of a conditional or unconditional exemption would be consistent with section 210(c)(8)(H)(iv) of the Act which provides that the regulations required by section 210(c)(8)(H)(i) differentiate among financial companies, as appropriate, by taking into consideration a number of factors. Specifically, the Secretary would consider whether to grant an exemption after receiving a recommendation from the FDIC, prepared in consultation with the applicable PFRAs, that takes into consideration the financial company's or financial companies' size, risk, complexity, leverage, frequency and dollar amount of QFCs, and interconnectedness to the financial system and any other factors deemed necessary or appropriate.

The proposed recordkeeping requirements of the Proposed Rules are based, in part, on 12 CFR part 371, Recordkeeping Requirements for Qualified Financial Contracts,
13

which

implements section 11(e)(8)(H) of the FDIA.
14

The Proposed Rules also have been informed by the FDIC's experience with both large and small portfolios of QFCs of failed insured depository institutions.

13
73 FR 78170 (Dec. 22, 2008). Part 371 requires an insured depository institution in troubled condition, upon written notification by the FDIC, to produce immediately at the close of processing of the institution's business day, for a period provided in the notification, the electronic files for certain position level and counterparty level data; electronic or written lists of QFC counterparty and

portfolio location identifiers, certain affiliates of the institution and the institution's counterparties to QFC transactions, contact information and organizational charts for key personnel involved in QFC activities, and contact information for vendors for such activities; and copies of key agreements and related documents for each QFC.

14
12 U.S.C. 1821(e)(8)(H).

The recent financial crisis demonstrated that management of QFC positions, including steps undertaken to close out such positions, can be an important element of a resolution strategy which, if not handled properly, may magnify market instability. The recordkeeping requirements of the Proposed Rules are designed to ensure that the FDIC, as receiver of a covered financial company, will have comprehensive information about the QFC portfolio maintained by such financial company subject to orderly resolution, and to enable the FDIC to plan the rapid and orderly resolution of a financial company's QFC portfolio in the event of insolvency. The Proposed Rules are also designed to provide the FDIC with information necessary for the FDIC as receiver to comply with the statutory requirements for the transfer, disaffirmance, or repudiation of the QFCs of a financial company, within any applicable time periods mandated under Title II of the Dodd-Frank Act.

B. Publication of the Notice of Proposed Rulemaking

The Secretary is publishing this notice of proposed rulemaking in light of his responsibilities under section 210(c)(8)(H) of the Dodd-Frank Act. The Secretary is seeking comment on all aspects of the Proposed Rules.

The Proposed Rules provide that the compliance date for most of the provisions will be the day that is 270 days after a records entity becomes subject to the final rule. Thus, for entities that would be subject to the final rule on its effective date, the compliance date would be the day that is 270 days after the effective date of the final rule (which is 330 days after the date of publication). However, one aspect of the Proposed Rules will require compliance in 60 days. Specifically, on the effective date of the final rule, a records entity must provide up-to-date contact information to the FDIC and each of its PFRAs. A financial company that becomes a records entity after the effective date of the final rule would be required to provide such contact information within 60 days of becoming a records entity.

II. Background—QFCs and Receivership

A QFC is a type of financial contract and is defined in section 210(c)(8) of the Act. As further described below, QFCs are treated differently than other types of contracts in the event of the failure of a financial company.
15

The treatment afforded to QFCs under Title II parallels the treatment afforded to QFCs under section 11(e) of the FDIA.
16

15
12 U.S.C. 5390(c)(8), (9), and (10).

16
12 U.S.C. 1821(e).

Under section 210(c)(8), QFCs include five specific types of financial contracts: securities contracts, commodity contracts, forward contracts, repurchase agreements, and swap agreements.
17

The FDIC is empowered to define other similar agreements as QFCs by rule, regulation or order.
18

In addition, a master agreement that governs any contracts in these five categories is treated as a QFC.
19

Security agreements, guarantees, credit enhancements or reimbursement obligations that relate to QFCs are also defined to be QFCs.
20

All swaps and security-based swaps defined in Title VII of the Act qualify as QFCs under section 210(c)(8).

17
12 U.S.C. 5390(c)(8)(D)(i). The term “securities contract” includes contracts “for the purchase, sale or loan of a security[.]” 12 U.S.C. 5390(c)(8)(D)(ii).

18
12 U.S.C. 5390(c)(8)(D)(i).

19
12 U.S.C. 5390(c)(8)(D)(viii).

20
12 U.S.C. 5390(c)(8)(D)(ii)-(vi).

The filing of a bankruptcy petition or the appointment of the FDIC as receiver triggers an automatic stay that precludes a party to most types of contracts with an insolvent company from taking actions under that contract.
21

Therefore, most types of contracts with a financial company cannot be terminated based solely upon the appointment of the FDIC as receiver.
22

Under Title II, the FDIA, and other U.S. insolvency statutes, however, a party to a QFC with an insolvent entity can exercise any of its contractual rights to terminate such QFC, offset or net any amounts due, and apply any pledged collateral for payment of such amounts subject to certain conditions.
23

Further, under Title 11 of the United States Bankruptcy Code (“Bankruptcy Code”), this right to terminate is immediate upon initiation of bankruptcy proceedings.
24

However, Title II and the FDIA do not permit counterparties to exercise a contractual right of termination based solely upon insolvency or the appointment of a receiver until after 5 p.m. (eastern time) on the first business day following the appointment of the FDIC as receiver,
25

nor do they permit counterparties to terminate a QFC because of its transfer to a bridge entity or another financial institution.
26

21

See
11 U.S.C. 361; 12 U.S.C. 1821(e)(13); 12 U.S.C. 5390(c)(13).

22
12 U.S.C. 5390(c)(13) and 12 U.S.C. 1821(e)(13)(A).

23

See e.g.,
12 U.S.C. 5390(c)(8)(A).

24
11 U.S.C. 362(b)(6), (7) and (17).

25
12 U.S.C. 1821(e)(10)(B)(i) and 12 U.S.C. 5390(c)(10)(B)(i). This time frame in which QFC counterparties are stayed from acting is in contrast to parties to other contracts with a failed financial company, who are stayed from terminating such other contracts for 90 days.

26
Id. There is an exception to this general rule in section 210(c)(8)(G) with respect to cleared QFCs, which provides in relevant part that a clearing organization would not be stayed from exercising its rights to liquidate all positions and collateral of the covered financial company under the company's QFCs in certain circumstances. See 12 U.S.C. 5390(c)(8)(G).

After its appointment as receiver and prior to the close of the 5 p.m. window, the FDIC has three options in managing a covered financial company's QFC portfolio. With respect to all of the covered financial company's QFCs with a particular counterparty, and its affiliates, the FDIC may:

(1) Transfer the QFCs to another institution, including a bridge financial company established by the FDIC;
27

27
12 U.S.C. 5390(c)(9). The FDIC as receiver of an insolvent financial company may establish a bridge financial company and transfer to such company assets and certain liabilities as the FDIC generally deems appropriate. 12 U.S.C. 5390(h).

(2) Retain the QFCs within the receivership and allow the counterparty to terminate; or

(3) Retain the QFCs within the receivership, disaffirm or repudiate the QFCs, and pay compensatory damages.
28

28
12 U.S.C. 5390(c)(11).

Within certain constraints,
29

the FDIC can take different approaches to QFCs with different counterparties. However, the receiver's power to transfer or repudiate a QFC is limited. If the FDIC as receiver desires to transfer any QFC with a particular counterparty, it must transfer all QFCs between the covered financial company and such counterparty and any affiliate of such counterparty to a single financial institution. Similarly, if the FDIC desires to repudiate any QFC with a particular counterparty, it must repudiate all QFCs between the covered financial company and such counterparty and any affiliate of such counterparty as a group.
30

29
12 U.S.C. 5390(c)(11)(A).

30
For transfer,
see
12 U.S.C. 5390(c)(9)(A); for repudiation,
see
12 U.S.C. 5390(c)(11).

Transfer:
The FDIC may transfer a QFC to any other financial institution not subject to a bankruptcy or insolvency proceeding. Such financial

institutions include, but are not limited to, banks, foreign banks,
31

and bridge financial companies operated by the FDIC. If the FDIC as receiver transfers a QFC to a financial institution within the specified period of time, the counterparty cannot exercise its contractual right to terminate the QFC solely by reason of or incidental to the appointment of the FDIC as receiver, or the insolvency or financial condition of the covered financial company.
32

If the FDIC as receiver decides to transfer any QFCs, it must take steps reasonably calculated to provide notice of the transfer of the QFCs of the failed financial company to the relevant counterparties.
33

The counterparties must accept the transferee as a counterparty and cannot terminate the QFC solely by reason of such transfer.
34

31
The FDIC as receiver of a covered financial company may not transfer QFCs to a foreign bank unless, under applicable law, the contractual rights of the parties to such QFCs and any netting contracts, security agreements or arrangements or other credit enhancements related to any such QFCs are enforceable substantially to the same extent as under 12 U.S.C. 5390. 12 U.S.C. 5390(c)(9)(B).

32
12 U.S.C. 5390(c)(10)(B) and 12 U.S.C. 5390(c)(16).

33

See
12 U.S.C. 5390(c)(10)(B).

34
12 U.S.C. 5390(c)(10)(B).

Disaffirmance or Repudiation:
The FDIC as receiver may disaffirm or repudiate a QFC within a reasonable period of time if the receiver determines that the contract is burdensome.
35

If the receiver does not elect to transfer all QFCs with a given counterparty (and with its affiliates), under the law the receiver has a “reasonable time” in which to repudiate such QFCs. However, as a practical matter, the receiver must promptly decide whether to repudiate all QFCs involving such counterparty (and its affiliates), in order to minimize the potential for an adverse change in the market value of such QFCs. For example, although counterparties to QFCs that are not transferred are not required to terminate the contracts immediately after the expiration of a one-business day stay,
36

they may decide to exercise any contractual right they have to terminate in order to protect against the potential adverse change in the market value of the QFCs (especially if the counterparties have sufficient collateral to cover the termination value of the QFCs).

35
12 U.S.C. 5390(c)(1).

36
See 12 U.S.C. 5390(c)(8)(F)(ii), which provides that any payment or delivery obligations otherwise due from a party pursuant to the QFC shall be suspended from the time at which the FDIC is appointed as receiver under the earlier of (I) the time at which such party receives notice that such contract has been transferred pursuant to section 210(c)(10)(A), or (II) 5 p.m. (eastern time) on the business day following the date of the appointment of the FDIC as receiver.

If the receiver repudiates the QFCs, it must pay actual direct compensatory damages,
37

which may include the normal and reasonable costs of cover or other reasonable measure of damages used in the industry for such claims (after giving effect to any contractual netting rights of the counterparty). Such damages are calculated as of the date of repudiation.
38

37
The receiver's payment obligation is subject to the claims process of 12 U.S.C. 5390(a)(2). Therefore, if the counterparty does not have a perfected security interest in collateral sufficient to satisfy its claim, the counterparty might not receive cash payment in full.

38
12 U.S.C. 5390(c)(3).

Retention:
The FDIC's retention of a QFC in the receivership would allow a counterparty to terminate the contract after 5 p.m. (eastern time) on the first business day after the appointment of the FDIC as receiver.
39

If the counterparty then terminates QFCs with the financial company, the counterparty may exercise any contractual right it may have to net any payment the counterparty owes to the receivership against any payment owed by the receivership to the counterparty with respect to QFCs as set forth in any netting agreement.

39
12 U.S.C. 5390(c)(10)(B)(i).

In order to assess by 5 p.m. on the business day following the date of its appointment as receiver of a financial company its options to retain and allow the counterparty to terminate, retain and disaffirm or repudiate, or transfer QFCs, the FDIC needs detailed information about the company's QFCs. To make a well-informed decision on these three options, the FDIC needs access to the information required to be maintained under the Proposed Rules. The information must be sufficient to allow the FDIC to estimate the financial and operational impact on the covered financial company or its affiliated financial companies of the receiver's decision to transfer, repudiate or retain the QFCs. It must also allow the FDIC to assess the potential impact that such decisions may have on the financial markets as a whole.

Under the Act, the FDIC as receiver has additional powers with respect to contracts of subsidiaries or affiliates of a covered financial company that are guaranteed or otherwise supported by or linked
40

to such covered financial company.
41

Such contracts can be enforced by the FDIC as receiver notwithstanding the insolvency, financial condition, or receivership of the financial company. Contracts which are guaranteed or otherwise supported by the covered financial company remain enforceable by the FDIC if the FDIC transfers any such guaranty or other support and all related assets and liabilities to a bridge financial company or third-party financial institution not subject to a bankruptcy or insolvency proceeding within the period of time provided under section 210(c)(10), or if the FDIC provides adequate protection
42

with respect to the support of such contracts.
43

The FDIC as receiver may also need to make sure that affiliates
44

of the covered financial company continue to perform their QFC obligations in order to preserve the critical operations of the covered financial company and its affiliates. In such cases, the FDIC may need to provide additional liquidity, support, or collateral to the affiliates to enable them to meet collateral obligations and generally perform their QFC obligations.
45

The Proposed Rules therefore would impose recordkeeping requirements on affiliated financial companies in a corporate group because the Secretary, as informed by the FDIC,

believes that the information would be necessary or appropriate in assisting the FDIC in exercising its rights as receiver for a financial company with affiliates. In addition, the imposition of recordkeeping requirements on affiliated financial companies could also assist the FDIC as receiver of one or more of such affiliated financial companies of the Act in fulfilling its obligations under section 210(c)(8), (9), or (10).
46

40
12 U.S.C. 5390(c)(16). Section 210(c)(16) does not define the terms “linked” to, or “guaranteed or supported” by, the covered financial company. As explained later in this preamble, the Proposed Rules include definitions of “guaranteed or supported” and “linked” that are consistent with the definitions of such terms in the FDIC final rule implementing section 210(c)(16) of the Orderly Liquidation Authority provisions of the Dodd-Frank Act. The FDIC published a final rule addressing all aspects of section 210(c)(16) on October 16, 2012. 77 FR 63205 (“FDIC Final Rule”).

41
12 U.S.C. 5390(c)(16). This section provides for the enforcement of contracts guaranteed by a financial company subject to orderly liquidation under Title II.

42
Under the FDIC final rule, contracts “supported by” a covered financial company may also be enforced by providing “adequate protection” either in the alternative to transferring any related support or in combination with a partial transfer of such support. Adequate protection, with respect to the covered financial company's support of the obligations under such contracts, means: (1) making a cash payment or periodic cash payments to counterparties to the extent that the failure to cause the assignment and assumption of the covered financial company's support and related assets and liabilities causes a loss to the counterparties; (2) provision by the FDIC as receiver of a guarantee of the subsidiary or affiliate's obligations; or, (3) provision of relief that will result in realization by the counterparty of the “indubitable equivalent of the covered financial company's support of such obligations or liabilities.” The definition of the term “adequate protection” is consistent with the definition under section 361 of the United States Bankruptcy Code. 77 FR 63205.

43
12 U.S.C. 5390(c)(16)(A)(ii). See also 77 FR 63205.

44
The term “affiliate” is defined in § 148.2(a) of the Proposed Rules as any entity that controls, is controlled by, or is under common control with a financial company or counterparty.

45

See
12 U.S.C. 5384(d). Section 204(d) of the Act authorizes the FDIC, for example, to make loans to and guarantee the obligations of the covered financial company and its covered subsidiaries.

46
For example, the FDIC could be appointed as receiver of an affiliated financial company under section 210(a)(1)(E) of the Act.

Under Title II, the FDIC may become receiver for financial companies of a substantial size or complexity. These large and complex companies and certain of their affiliates that enter into QFCs may hold large and complex portfolios of QFCs. Such financial companies and their affiliates often have counterparties that are themselves members of large, complex, and interconnected corporate financial groups. Therefore QFCs tend to increase the interconnectedness of the financial system and systemic risk. They are also an important and integral component of a Title II resolution, presenting multiple challenges to an orderly liquidation process. Given the limited post-receivership time frame allowed by Title II for the FDIC to make decisions regarding QFCs, it is important that the FDIC has adequate time to obtain QFC data, conduct necessary analysis, and make informed decisions on a QFC portfolio.

Therefore, the Secretary in consultation with the FDIC is proposing the Proposed Rules described below. The Proposed Rules are similar to the FDIC's Part 371 but the information requirements of the Proposed Rules are more extensive. Unlike the FDIC's Part 371 (which requires that only banks in “troubled condition” maintain records of QFCs) the Proposed Rules do not contain such a “troubled financial condition” trigger. The recordkeeping requirements of the Proposed Rules have been informed by the FDIC's experience in dealing with multiple QFC portfolios of insured depository institutions. The data requirements were also informed by efforts to standardize regulatory data.

Given the short time frame for the FDIC to make decisions regarding a QFC portfolio of significant size or complexity, the Proposed Rules would also require the use of an updated and standardized format to allow the FDIC to obtain and process the large amount of QFC information quickly. In the absence of updated and standardized information, it is possible that QFCs could be left in the receivership, when transfer to a solvent financial institution or a bridge financial company would be a preferred course of action. The absence of QFC data may reduce the FDIC's flexibility in managing the QFC portfolio, and may increase systemic risk.

However, to reduce the burdens on financial companies, the Proposed Rules provide that upon receipt of a written recommendation from the FDIC, prepared in consultation with the primary financial regulatory agencies for the applicable records entities, the Secretary may grant conditional or unconditional exemptions as the Secretary determines to be necessary or appropriate. Such exemptions could include a conditional exemption to allow for a different recordkeeping format than that set forth in the Proposed Rules. For example, financial companies are required to report some QFC data to swap data repositories (“SDRs”),
47

and some data may be available through derivatives clearing organizations registered with the CFTC or clearing agencies registered with the SEC (collectively referred to in this release as “clearing organizations”).
48

The Secretary notes that the FDIC would need to be able to manipulate and analyze such data to determine the effect of FDIC decisions under Title II with respect to a covered financial company's QFC portfolio.

47
Not all QFC data would be reported under Title VII of the Dodd-Frank Act. Some QFCs may not have central reporting repositories.

48
Clearing organizations would include central counterparties and security-based swap clearing organizations.

III. The Proposed Rules

The following section describes the requirements in the Proposed Rules and the rationale underlying the requirements. The Proposed Rules set forth the general requirements for financial companies, while the detailed lists of the records that would be required to be maintained are provided in the Appendix in the Proposed Rules.

The Proposed Rules are organized into four parts:

• Section 148.1 Scope, purpose, effective date, and compliance dates

• Section 148.2 Definitions

• Section 148.3 Form, availability and maintenance of records

• Section 148.4 Content of records

The Appendix in the Proposed Rules list the records that would be required to be maintained and provide the file structure for the QFC recordkeeping requirements. The Appendix is organized as follows:

• Table A-1—Position-Level Data

• Table A-2—Counterparty Collateral Data

• Table A-3—Legal Agreements

• Table A-4—Collateral Detail Data

The discussion in this section of the release is based on the organization of the Proposed Rules and the Appendix is discussed in a separate subsection below. The Secretary asks questions and solicits comment in each subsection with respect to the related parts of the Proposed Rules or the Appendix.

A. Scope, Purpose, Effective Date and Compliance Dates

Section 148.1(a) of the Proposed Rules defines the scope of the rules and provides that the rules apply to each financial company that is a “records entity.” Section 148.1(b) explains the purpose of the rules. Section 148.1(c) sets forth the rule's effective and compliance dates. The Proposed Rules are discussed below, followed by the Secretary's questions regarding their subject matter.

1. Scope

a. Key Definitions

The scope of the Proposed Rules is established by certain key definitions which determine the entities that would be subject to the rules. Specifically section 148.1(a) of the Proposed Rules provides that the rules would apply to any “financial company” that is a “records entity” as those terms are defined in the Proposed Rules. The definitions of “financial company,” “records entity,” and other related definitions are explained below, followed by an illustrative discussion of the records entities within a U.S. bank holding company structure, a summary of the application of the Proposed Rules to clearing organizations, and a discussion of the records entities that may come within the scope section of the Proposed Rules.

Financial Company:
The Proposed Rules incorporate the definition of a “financial company” set forth in section 201(a)(11) of the Dodd-Frank Act. Entities that are not included in the section 201(a)(11) definition of “financial company” would not be included in the definition of “records entity” and, therefore, would not be subject to the rules. Entities that are included in the section 201(a)(11) definition of “financial company” would be subject to the rules if they also meet the other criteria in the definition of records entity. In addition, the definition of “covered financial company” in section 201(a)(8)(B) of the Dodd-Frank Act excludes insured

depository institutions,
49

which as a result are ineligible for orderly liquidation under Title II. Thus, based on the section 201(a)(11) definition of “financial company” and the section 201(a)(8)(B) definition of “covered financial company,” the following entities would not be required to maintain records under the Proposed Rules:

49
12 U.S.C. 5381(a)(8)(B).

• Financial companies that are not incorporated or organized under U.S. federal or state law;

• Farm Credit System institutions;

• Governmental entities, and regulated entities under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (“FHA”);
50

and

50
12 U.S.C. 4502(20). This provision, therefore, excludes from the orderly liquidation authority of Title II the Federal National Mortgage Association and any affiliate thereof, the Federal Home Loan Mortgage Corporation and any affiliate thereof, and any Federal Home Loan Bank.

• Insured depository institutions.

The following financial companies would be subject to the rules if they are incorporated or organized under any provision of federal law or the laws of any State and meet the definition of “records entity” in the rules:

• A bank holding company;

• A nonbank financial company supervised by the Board;

• Any company that is predominantly engaged in activities that the Board has determined are financial in nature or incidental thereto for purposes of section 4(k) of the BHC Act; and

• Any subsidiary (other than an insured depository institution or insurance company) of such financial company where such subsidiary is predominantly engaged in activities that the Board has determined are financial in nature or incidental thereto for purposes of section 4(k) of the BHC Act.
51

51

See
12 U.S.C. 1843(k)(4)(C).

Records Entity:
Each records entity would be required to maintain records with respect to all of its QFCs unless such records entity receives an exemption under the rules.
52

In developing the definition of a records entity, the Secretary took into consideration factors such as financial company size, risk, complexity, leverage, frequency and dollar amount of QFCs, and interconnectedness to the financial system in addition to other factors described herein.
53

The records entity definition would include a financial company that is a party to an open QFC or guarantees, supports, or is linked to an open QFC of an affiliate and is a member of a corporate group in which at least one financial company meets one of three other criteria for being a records entity. Because affiliated financial companies that are part of the same corporate group may play an important role in determining risks that are present, the information about the affiliates' QFCs could assist the FDIC as receiver. Furthermore, the FDIC has authority to enforce the QFCs of affiliates of covered financial companies, the obligations of which are guaranteed or otherwise supported by or linked to the covered financial company.
54

52
Exemptions would be available as outlined in § 148.3(c) of the Proposed Rules. For example, the Secretary may consent to the use of electronic records maintained in an SDR or internally at the records entity which are not in the format set forth in the Appendices to the Proposed Rules if such alternative format is sufficient to enable the FDIC as receiver to exercise its rights and fulfill its obligations under 12 U.S.C. 5390(c)(8), (9), or (10). See discussion below in subsection III.3.C of this Supplementary Information.

53
See 12 U.S.C. 5390(c)(8)(H)(iv).

54
12 U.S.C. 5390(c)(16).

A “records entity” is defined in section 148.2(l) of the Proposed Rules as a financial company that: is not an exempt entity; is a party to an open QFC, or guarantees, supports or is linked to an open QFC; and meets one of the following requirements: (a) Is determined pursuant to 12 U.S.C. 5323 (Title I of the Dodd-Frank Act) to be an entity that could pose a threat to the financial stability of the United States; (b) Is designated pursuant to 12 U.S.C. 5463 (Title VIII of the Dodd-Frank Act) as a financial market utility
55

that is, or is likely to become, systemically important; or (c) Has total assets equal to or greater than $50 billion,
56

or (d) Is a party to an open QFC or guarantees, supports, or is linked to an open QFC of an affiliate and is a member of a corporate group within which at least one affiliate meets one of the requirements in (a), (b), or (c).

55

See
Title VIII, “Payment, Clearing, and Settlement Supervision Act of 2010.” 12 U.S.C. 5461,
et seq.
A financial market utility is defined in section 802(6) of Title VIII as any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and such person. 12 U.S.C. 5461(6)(A).

56
Total assets would be determined based on the most recent year-end consolidated statements of financial condition filed with a primary financial regulatory agency. For financial companies that are not required to file such statements, total assets would be determined based on the consolidated balance sheet for the most recent fiscal year-end. An entity, such as an investment adviser, that acts as agent on behalf of a client and is not a party to that client's QFC or does not support, guarantee or is not otherwise linked to that client's QFC would not be subject to the rule.

The Secretary has adequately considered the factors referenced in section 210(c)(8)(H)(iv) in developing the scope of the definition of records entity. The Secretary has decided to include in the scope of the definition of records entity those financial companies that: (1) the Council determines could pose a threat to U.S. financial stability; (2) the Council designates as systemically important financial market utilities; and (3) financial companies that have at least $50 billion in assets, for several reasons. First, the factors the Council must consider in designating a nonbank financial company as posing a threat to financial stability under section 113 of the Act, or a financial market utility as systemically important under section 804, are similar to the factors listed in section 210(c)(8)(H)(iv). The Council may make a determination under section 113 if it finds that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the United States.
57

Similarly, in making a determination that a financial market utility is or is likely to become systemically important, the Council is required to consider the effect that the failure of or a disruption to the financial market utility would have on critical markets, financial institutions, or the broader financial system.
58

The Secretary believes that it would be unnecessary to create a different scheme for determining the scope of financial companies subject to recordkeeping for the purposes of this rulemaking.
59

57
Section 113 authorizes the Council to make determinations for U.S. nonbank financial companies and foreign nonbank financial companies pursuant to two separate paragraphs, but the considerations related to the financial stability of the United States are nearly identical.
See
12 U.S.C. 5323(a) and (b). A determination under section 113 would mean that the nonbank financial company would be subject to supervision by the Board of Governors of the Federal Reserve System and to enhanced prudential standards established in accordance with Title I.
See
12 U.S.C. 5365.

58
12 U.S.C. 5463(a)(2)(D).

59
The first proposed prong under § 148.2(l)(3) of the Proposed Rules includes those entities that the Council designates as posing a threat to U.S. financial stability. The Council takes into consideration each of the factors expressly referenced in section 210(c)(8)(H)(iv) as follows: leverage of a company is expressly considered under rule 1310.11(a)(1) and (b)(1); complexity is addressed in a variety of ways, including under rules 1310.11(a)(2) and (b)(2) regarding the extent and nature of off-balance-sheet exposures; interconnectedness to the financial system is addressed in several of the rules including rules 1310.11(a)(3)-(5) and (b)(3)-(5); size is expressly addressed in rules 1310.11(a)(7) and (b)(7); frequency and dollar amount of QFCs, to the extent relevant, is addressed through rules 1310.11(a)(9) and (10) and (b)(9)(10); and risk is addressed

directly and indirectly through various rules, including for instance rules 1310.11(a)(1), (a)(2), (a)(10) and (11), (b)(1), (b)(2) and (b)(10) and (11). See 12 CFR part 1310. See also 77 FR 21637. The second proposed prong under § 148.2(l)(3) of the Proposed Rules includes those entities that the Council designates as systemically important financial market utilities under 12 CFR part 1320. The Council's rulemaking regarding financial market utilities takes into consideration various factors, which are directly or effectively the factors referenced in section 210(c)(8)(H)(iv). See 12 CFR 1320.10. See also 76 FR 44763. In the third proposed prong of § 148.2(l)(3) of the Proposed Rules, the stand-alone test of assets equal to or greater than $50 billion is used because that size threshold, by itself, together with other aspects of the definition of records entity is sufficient to differentiate financial companies or their corporate groups that might be subject to orderly liquidation under Title II. The test in the fourth proposed prong of § 148.2(l)(3) of the Proposed Rules includes a requirement that the entity be a member of a corporate group in which at least one financial company meets one of the first three prongs, thus taking the various factors into account. To the extent a general or specific exemption from the rules may be necessary or appropriate, it is expected that the Secretary would consider these factors in determining whether to grant an exemption.

The Secretary also believes that the $50 billion threshold is a useful means for identifying entities that are of a sufficient size that they could potentially be considered for orderly liquidation under Title II, and therefore should be incorporated in the definition of a records entity. A $50 billion asset threshold has been separately established for similar purposes under the Dodd-Frank Act.
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In particular, the Council applies a $50 billion threshold as an initial evaluation tool for determining whether a nonbank financial company could pose a threat to the financial stability of the United States and should be subject to heightened supervision under Title I of the Dodd-Frank Act, citing the potential for these types of firms to pose a threat to U.S. financial stability.
61

60
12 U.S.C. 5365(a).

61

See
Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies. 12 CFR part 1310. In adopting this threshold, the Council noted that it is consistent with the Dodd-Frank Act threshold of $50 billion in assets for subjecting bank holding companies to enhanced prudential standards. 77 FR 21637, 21661.

Finally, a nonbank financial company supervised by the Board, a designated financial market utility, or a financial company (including a bank holding company) with total assets of $50 billion or more are the types of financial companies that potentially would be the most likely to be considered for orderly liquidation under Title II. Therefore, the Secretary proposes including this set of financial companies in the definition of records entity for purposes of the Proposed Rules. The definition of records entity is thus designed to reduce recordkeeping burdens by only capturing those financial companies with QFC positions for which the FDIC is most likely to be appointed as receiver. It does not, however, capture an entity, such as an investment adviser, that acts as agent on behalf of a client and is not a party to or does not support, guarantee or is not otherwise linked to that client's QFC. These criteria would serve to exclude from the scope of the rule small financial company corporate groups that are unlikely to be subject to the orderly liquidation authority of Title II.

Exempt Entity:
An exempt entity that would be excluded from the definition of “records entity” and, therefore, the scope of the rules is defined in section 148.2(e) of the Proposed Rules as:

(1) An insured depository institution as defined in 12 U.S.C. 1813(c)(2);

(2) A subsidiary of an insured depository institution that is not a functionally regulated subsidiary as defined in 12 U.S.C. 1844(c)(5), a security-based swap dealer as defined in 15 U.S.C. 78c(a)(71), or a major security-based swap participant as defined in 15 U.S.C. 78c(a)(67); or

(3) A financial company that is not a party to a QFC and controls only exempt entities as defined in clause (1) of this definition.

Insured depository institutions are proposed to be exempt because they are excluded from the definition of covered financial company and thus from the scope of Title II regardless of whether they are also a major swap or security-based swap participant or a swap or security-based swap dealer.
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In addition, subsidiaries of an insured depository institution which are supervised on a consolidated basis with the insured depository institution are also proposed to be exempt for purposes of consistency with the insured depository institution exemption. However, functionally regulated subsidiaries, security-based swap dealers, and major security-based swap participants are not supervised on a consolidated basis with the parent insured depository institution and are not already required to maintain records under Part 371, as discussed above. These subsidiaries meet the definition of financial company in Title II, and would be required to comply with the recordkeeping requirements of the rules if they are “records entities.” Finally, a financial company that controls only insured depository institutions and is not itself a party to a QFC is also proposed to be exempt for purposes of consistency with the insured depository institution exemption.

62
12 U.S.C. 5381(a)(8)(B).

Guaranteed, Supported, or Linked:
Under section 210(c)(16), the FDIC as receiver for the covered financial company may enforce contracts of subsidiaries or affiliates that are “guaranteed,” “supported” by, or “linked” to the covered financial company. However, section 210(c)(16) does not define these terms. The Proposed Rules thus include a definition of “guaranteed or supported” and a definition of “linked,” each of which is consistent with the definition of similar terms in the FDIC's final rule implementing section 210(c)(16) of the Orderly Liquidation Authority provisions of the Dodd-Frank Act.
63

Under the FDIC final rule, a contract is “linked” to a covered financial company if it contains a “specified financial condition clause,” which is any provision that permits a contract counterparty to terminate, accelerate, liquidate, or exercise any other remedy under any contract to which the subsidiary or affiliate is a party or to obtain possession of or exercise control over any property of the subsidiary or affiliate or affect any contractual rights of the subsidiary or affiliate based on enumerated conditions related to the insolvency or financial condition of the covered financial company. The FDIC final rule also defines the term “support” as undertaking any of the following for the purpose of supporting the contractual obligations of a subsidiary or affiliate of a covered financial company: guaranteeing, indemnifying, or undertaking to make any loan or advance to or on behalf of the subsidiary or affiliate; undertaking to make capital contributions to the subsidiary or affiliate; or being contractually obligated to provide any other financial assistance to the subsidiary or affiliate. In some instances, “support” may itself constitute a QFC.
64

63
See 77 FR 63205 (October 16, 2012).

64
See,
e.g.,
section 210(c)(8)(D)(ii)(XII) (defining “securities contract” to include “any security agreement or arrangement or other credit enhancement related to any agreement or transaction referred to in this clause, including any guarantee or reimbursement obligation in connection with any agreement or transaction referred to in this clause”).

The terms “linked” and “guarantees, supports” are also used to define the financial companies that are records entities under the Proposed Rules. A financial company that guarantees or supports open QFCs would be a records entity, provided that the other conditions of the definition are met, because its exposure is connected to the exposure of the financial company that is the counterparty to the QFC. A

financial company that is linked to an open QFC would also be a records entity, provided that the other conditions of the definition are met, because its financial condition or other circumstances are connected to such counterparty. Moreover, the financial company providing support or a guarantee is exposed, along with, depending on the circumstances, its corporate group, to the risk of termination of QFCs. Therefore, the Proposed Rules would require each records entity that guarantees or supports QFCs to keep records with respect to all such guaranteed or supported QFCs. The records entity that links its QFCs to another entity would be responsible for keeping records related to the specified financial condition clause. In each case, a records entity would be responsible for obtaining from its affiliates all information necessary to enable it to maintain these records.

Including affiliated financial companies as records entities under the Proposed Rules is necessary: (1) To assist the FDIC in exercising its right to enforce contracts of subsidiaries and affiliates under section 210(c)(16), and fulfilling its obligations under section 210(c)(9) and section 210(c)(10) with respect to the timing and notification of the transfer of any guarantee or other support and related assets and liabilities in connection with any agreement or transaction referred to in any such QFC; and (2) to assist the FDIC in fulfilling its obligations under section 210(c)(9) and section 210(c)(10) in the event the FDIC is appointed as receiver of an affiliated financial company. In connection with the transfers and notifications under section 210(c)(9) and section 210(c)(10), the FDIC will need the same information with respect to such QFCs (including guaranteed or supported QFCs) of an affiliate as it does with respect to QFCs to which the financial company was a party.

Affiliate, Subsidiary, and Control:
The definitions of the terms “subsidiary” and “affiliate” in the Proposed Rules are consistent with the definitions given to such terms in the Dodd-Frank Act. Section 2(18) of the Act provides that these terms will have the same meanings as in section 3 of the FDIA (12 U.S.C. 1813). Under the FDIA, the term “subsidiary” is broadly defined as “any company which is owned or controlled directly or indirectly by another company.” Similarly, the term “affiliate” is defined by reference to the BHC Act, 12 U.S.C. 1841(k) as “any company that controls, is controlled by, or is under common control with another company.”

The definition of “control” is provided in the FDIA, which in turn, refers to the definition provided in the BHC Act, 12 U.S.C. 1841(a). The Proposed Rules would define “control” to include a company that directly or indirectly or acting through one or more persons owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company, controls in any manner the election of a majority of the directors or trustees of the company, or must consolidate another entity for financial or regulatory reporting purposes. The first two prongs of this definition are consistent with the BHC Act definition. The third prong reflects the fact that, in certain situations, a controlling interest may be achieved through arrangements that do not involve voting interests,
65

and, unlike the BHC Act definition, provides an objective test that does not require a determination by the Board.

65
See,
e.g.,
Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 167 (2009).

Non-U.S. Entities.
Because the Proposed Rules would incorporate the Title II definition of “financial company,” the Proposed Rules apply only to entities incorporated or organized in the United States that are considered records entities under the Proposed Rules. For example, a U.K.-incorporated London affiliate of a U.S. broker-dealer would not be a records entity because it is a separate legal entity that is not incorporated or organized within the United States.

b. Records Entities Within a U.S. Holding Company

Figure 1 below illustrates how the definition of financial company affects whether various affiliates in a U.S. holding company corporate group would qualify under the Proposed Rules as records entities based on the application of the definition of financial company in the Dodd-Frank Act and the Proposed Rules. The holding company and some affiliates would qualify as records entities as shown below, while the other affiliates would not.

EP07JA15.000

c. Clearing Organizations

The Proposed Rules would not exclude from their scope any records entity that is a clearing organization with respect to derivatives cleared for its members. As part of fulfilling its responsibilities, a clearing organization must keep, on a near real-time basis, thorough and well-organized records of the contracts with each of its members. The FDIC, as receiver for a clearing organization under Title II, would have access to this information to analyze clearing organization positions. Taking into consideration a clearing organization's functions and that its role is to interpose itself between counterparties to transactions, some of the data elements that would be required by the Proposed Rules may not be relevant for clearing organizations. The Appendix to the Proposed Rules provides that a records entity may leave an entry blank or insert N/A in a data field that does not apply to a given QFC transaction or agreement.

Accordingly, the Secretary seeks comment on the following: (i) Whether the Proposed Rules should provide a different set of data requirements for clearing organizations and/or for centrally cleared transactions; (ii) whether such different data elements should contain fields in addition to those included in Tables A-1 through A-4 of the Appendix in the Proposed Rules, should exclude some of the fields listed in Tables A-1 through A-4, or some combination of the two; and (iii) whether any required data set should be maintained in a form or fashion different from the format contained in the Proposed Rules. The Secretary seeks comment on whether, and if so, how best to modify those data elements and general recordkeeping requirements set forth in the Proposed Rules with respect to clearing organizations and/or centrally cleared transactions. For example, should the Secretary establish a different set of data elements, data format, or other general recordkeeping requirements for clearing organizations and/or centrally cleared transactions? If yes, how should the format and the content of data fields listed in Tables 1-4 of the Appendix in the Proposed Rules be modified for clearing organizations? Which fields should be deleted, modified, or replaced with other data fields? Are there any data fields that should be added for clearing organizations and/or centrally cleared transactions?

Upon the written recommendation of the FDIC, prepared in consultation with the primary financial regulatory agencies for the applicable records entities, the Secretary may also issue exemptions of general applicability to address the issues that are relevant to clearing organizations. In addition, the Secretary notes that for data elements and recordkeeping requirements that

may adversely affect a specific clearing organization, rather than all clearing organizations, the specific exemption process set forth in the Proposed Rules would be available. The decision to grant such an exemption could be conditioned upon the ability of the clearing organization to demonstrate and ensure that appropriate records are kept.

d. Scope of Proposed Rules

The “scope” subsection of the Proposed Rules provides that the rules apply to each entity that qualifies as a records entity. Section 210(c)(8)(H) of the Dodd-Frank Act gives the Secretary broad flexibility in determining the scope of the recordkeeping requirements based on factors that are deemed necessary or appropriate in order to assist the FDIC as a receiver for a covered financial company in being able to exercise its rights and fulfill its obligations under section 210(c)(8), (9) or (10) of the Dodd-Frank Act. Section 210(c)(8)(H) also requires the regulations to differentiate among financial companies, as appropriate, by taking into consideration their size, risk, complexity, leverage, frequency and dollar amount of QFCs, and interconnectedness to the financial system and any other factors deemed appropriate. As discussed earlier, the Secretary has complied with these requirements.

The Secretary anticipates that records entities would include the following types of financial companies (i) broker-dealers, investment advisers, investment companies,
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security-based swap dealers, security-based swap participants, and clearing agencies;
67

(ii) a bank holding company or bank holding company subsidiary (that is not an insured depository institution or other type of exempt entity); a savings and loan holding company or a savings and loan holding company subsidiary (that is not an insured depository institution or other type of exempt entity); a U.S. affiliate of a foreign bank; a noninsured state member bank; an agency or commercial lending company other than a federal agency; any organization organized and operated under section 25A of the Federal Reserve Act or operating under section 25 of the Federal Reserve Act; (iii) any entity that the Council has determined to be either (A) a nonbank financial company that could pose a threat to the financial stability of the United States pursuant to 12 U.S.C. 5323 or (B) a financial market utility that is, or is likely to become, systemically important pursuant to 12 U.S.C. 5463; (iv) subsidiaries of State non-member insured banks that are not supervised on a consolidated basis with the State non-member insured bank, or financial companies that are not supervised by a PFRA.

66
Each individual series of a registered investment company offering multiple series would be deemed to be a separate financial company for purposes of these rules. See Investment Company Act Release No. 7276 (Aug. 8, 1972) published at 37 FR 17384 (Aug. 26, 1972) (“The individual series of such a [registered open-end investment] company are, for all practical purposes, separate investment companies. Each series of stock represents a different group of stockholders with an interest in a segregated portfolio of securities.”).

67
Not all of these entities would qualify as records entities subject to the Proposed Rules because of conditions in the definition of records entity related to asset size, systemic importance and QFC activity. “Financial company” includes any company that is incorporated or organized under any provision of federal law or the laws of any state and is predominantly engaged in activities that the Board of Governors has determined are financial in nature for purposes of section 4(k) of the Bank Holding Company Act of 1956. 12 U.S.C. 5381(a)(11). Activities that are “financial in nature” include “providing financial, investment, or economic advisory services, including advising an investment company” and “issuing or selling instruments representing interests in pools of assets . . .” and “underwriting, dealing in, or making a market in securities.” 12 U.S.C. 1843(k)(4).

2. Purpose

Section 148.1(b) of the Proposed Rules provides that the purpose of the rules is to establish QFC recordkeeping requirements for a records entity in order to assist the FDIC as receiver for a covered financial company.

3. Effective Date and Compliance Dates

Section 148.1(c) of the Proposed Rules provides that the rule would become effective 60 days after publication of the final rule in the
Federal Register
. Section 148.1(d) of the Proposed Rules provides that each entity that constitutes a records entity on the date the final rule becomes effective would be required to comply with the rule not later than the 270th day after the date on which the final rule becomes effective. For a records entity that becomes subject to the rule after it becomes effective, compliance would be required 270 days after such entity becomes subject to the rule. In addition, section 148.1(d) of the Proposed Rules cross-references section 148.3(a)(3) of the Proposed Rules and would require a financial company that is a records entity on the effective date of the final rule to provide to each of its PFRAs and the FDIC a point of contact responsible for recordkeeping under the rule on the effective date of the rule. A financial company that becomes a records entity after the effective date would be required to provide a point of contact to each of its PFRAs and the FDIC within 60 days of becoming a records entity. A financial company that no longer qualifies as a records entity would be permitted to cease maintaining records one year after it ceases to qualify as a records entity. This determination would be made on a rolling 12-month basis.
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The Secretary considered periods ranging from six months to eighteen months, but after consultation with the FDIC, chose to maintain a parallel with the FDIC's Part 371 Recordkeeping rules.

68
For the rolling 12-month period, a financial company's total consolidated assets are calculated based on the most recent financial statements from the prior fiscal year-end.

If during the one-year period such financial company becomes subject to the rules again, even for a short period of time, the one-year period would be re-calculated from that later time. A financial company that becomes subject to the rules again after it had ceased recordkeeping would be required to comply with the requirements of the rule within 90 days. The Proposed Rules specify that the 90-day period commences on the date a financial company becomes subject to these rules as a records entity.

Questions:

1. Is the scope of the Proposed Rules adequate? Should additional entities be subject to the rule? Please provide specific details supporting these views.

2. Is the initial compliance date of 270 days adequate? If it is too long, please explain how records entities would be able to meet a shorter initial compliance date? If it is too short, please explain why a longer period would be necessary to comply with the rule.

3. Is the rolling 12-month baseline for a financial company to cease being a records entity adequate? Please provide specific details if it is inadequate. Is the subsequent compliance date of 90 days adequate? Please provide specific details if it is inadequate.

4. Should each affiliate of a corporate group that meets the records entity definition under section 148.2(l)(3)(iv) of the Proposed Rules be required to maintain records, or should the parent company aggregate records for all open QFCs that any such affiliate in the consolidated corporate group is a party to or guarantees, supports, or is linked? Should there be one recordkeeping requirement for an entire corporate group by the top tier holding company? Are there any barriers to the parent company obtaining the necessary information from such subsidiaries and affiliates? Should the parent company be required to maintain records for the QFCs at its foreign subsidiaries and

affiliates? Would such a definition, in which only the parent company in a corporate group is a records entity, make compliance more or less burdensome? Are the recordkeeping requirements in the Proposed Rules an effective means of assisting the FDIC as receiver of a covered financial company to exercise its rights and fulfill its obligations under section 210(c)(8), (9), or (10) of the Dodd-Frank Act? If not, how could the Proposed Rules be more effective to assist the FDIC?

5. Should a records entity also be required to maintain records with respect to QFCs of affiliates that are linked to such entity? Should such records entity be responsible for obtaining from its affiliates or subsidiaries all information necessary to enable such records entity to maintain records with respect to QFCs of affiliates that are linked to it? Is there a different way the FDIC could obtain information about linked QFCs? Would the information provided in Table A-3 to the Appendix be sufficient to identify such linkages? How would such recordkeeping be handled if the affiliate is not a financial company or is an exempt entity?

6. Would the current definitions provide for adequate recordkeeping for QFCs at foreign affiliates of U.S. records entities (recognizing that such foreign affiliates would not be records entities)? If not, should the record maintenance requirements be altered?

7. Is the scope of the definition of “exempt entity” adequate? What changes, if any, should be made to the definition of “exempt entity?” Are there other entities that should be included in the definition of “exempt entity”? Are there entities that should be excluded from the definition of “exempt entity”? Should the rules exempt other entities based on the number of QFC counterparties, QFC notional amounts, QFC mark-to-market values as of a particular date, or some other criteria? If so, at what levels should such exemptions be set? Please provide any data or other analyses that support this view. Should there be any other form of de minimis exemption?

8. Should the rules provide additional categorization or tiering of financial companies based on other criteria? What should such other criteria be? Would financial company or QFC portfolio leverage be relevant? Should the dollar amount of the QFC portfolio or the frequency of trading be used to differentiate among financial companies? Please provide specific explanations of how such criteria would be applied together with an explanation of whether such criteria would help, be neutral to, or interfere with, the FDIC's ability to resolve a QFC portfolio. Please provide specific details on the relevance of such criteria toward the orderly liquidation authority goal of reducing systemic risk.

9. Should the Secretary further differentiate among financial companies or their corporate groups by their size, risk, complexity, leverage, frequency and dollar amount of QFCs, or interconnectedness to the financial system? Should any other factors be considered? Should the Secretary adopt different criteria? Please provide specific details on any factors to be considered or criteria proposed, including an explanation on why such factors would help, be neutral to, or interfere with, the FDIC's ability to resolve a QFC portfolio.

10. Should the Secretary have considered the factors referenced in section 210(c)(8)(H)(iv) in a different way than discussed above? Should the Secretary not rely on the Council's designations? If so, how should the Secretary consider those factors? Should any other factors be considered?

11. Is the scope of the Proposed Rules sufficiently clear with respect to subsidiaries of insured depository institutions? If not, how should the scope of the Proposed Rules be clarified? Should all subsidiaries of insured depository institutions be included in the scope of the Proposed Rules?

12. Is it appropriate to include affiliates and other entities that might not be designated as systemically important, or that might not have total assets equal to or greater than $50 billion, within the scope of the Proposed Rules? If not, how should the scope of the Proposed Rules be narrowed? For example, should affiliates be included only if they themselves are designated as systemically important or have total assets equal to or greater than $50 billion? How would this affect the FDIC's ability to exercise its rights under the Act and fulfill its obligations under section 210(c)(8), (9), or (10), as receiver? Conversely, should the scope of the Proposed Rules regarding affiliates be broadened? Are there any affiliates that would not fall within the scope of the Proposed Rules that should? If so, why?

13. Does the definition of “control” adequately capture those entities that should be defined as affiliates for purposes of the rules? Should the definition of “control” be modified and, if so, how? For example, should the definition be the same as the definition of “control” under the BHC Act?

14. Should financial companies that guarantee or support QFC positions be required to maintain records on such QFCs if such QFCs qualify for treatment under section 210(c)(16)? If not, how would the recordkeeping of such QFCs be handled?

15. Should there be any additional data to avoid duplication of records of guaranteed, supported or linked QFCs if the related affiliate also is a records entity and maintains records with respect to such QFCs?

16. Is the criterion in the definition of records entity in section 148.2(l)(3)(iii) of the Proposed Rules appropriate? Should the calculation of $50 billion in total assets exclude non-proprietary assets that are included on a balance sheet under accounting rules, such as certain types of client assets under management required to be included on an investment adviser's balance sheet? Is it appropriate for some financial companies or corporate groups with less than $50 billion in total assets to not be required to maintain records?

17. On what basis should investment advisers that are to be included as records entities be identified? Should the advisers be required to file fiscal year-end balance sheets and should their status as records entities be based on information contained in these balance sheets?

18. Are there any other entities for which the rules need not apply? If so, which entities, and why?

19. Should swap dealers and major swap participants be required to maintain records under the rules irrespective of the size and other requirements of the definition of records entity?

20. Is the inclusion in the Proposed Rules of clearing organizations or other financial market utilities that are designated as systemically important appropriate? What issues should the Secretary consider when addressing recordkeeping requirements with respect to clearing organizations or other financial market utilities? What records do clearing organizations currently maintain for QFCs? Are they different from the records required in the Appendix to the Proposed Rules? Are they different from those maintained by counterparties in bilateral QFC transactions? If so, should a different framework for QFC records be considered for clearing organizations than for other records entities? Should a different set of data requirements be considered for clearing organizations? Should such different data set contain fields in addition to those included in Tables A-1 through A-4 of the Appendix, exclude some of the fields

listed in Tables A-1 through A-4 of the Appendix, or some combination of the two? Should any required data be provided in a form or fashion different from the format contained in the Proposed Rules?

21. Should the recordkeeping requirements for centrally-cleared transactions differ from those for non-centrally-cleared transactions? If so, should such requirements include data fields in addition to those included in Tables A-1 through A-4 of the Appendix, exclude some of the fields listed in Tables A-1 through A-4 of the Appendix, or some combination of the two?

22. Are there special considerations regarding a clearing organization resolution that should be reflected in the rule? In particular, what records of a clearing organization would be useful to the FDIC as receiver? Is this different from the records that are needed for the resolution of other types of financial companies under Title II? If so, how should recordkeeping requirements be modified to address appropriately a clearing organization or other financial market utility resolution?

23. Is it appropriate, if a registered investment company has multiple series, to deem each series of the company to be a separate financial company for purposes of the rules? If not, why not?

24. Should the rules apply to an investment adviser acting as agent for its client with respect to a QFC if the adviser otherwise is not a party to, does not support, does not guarantee, or is not linked to the client's QFC?

B. General Definitions

In addition to the definitions described in detail above in reference to the scope of the Proposed Rules, certain additional terms are defined in the Proposed Rules to describe a records entity's recordkeeping obligations. The term “counterparty” would be defined as any natural person or entity (or separate non-U.S. branch of any entity)
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that is a party to a QFC with a records entity. An affiliate or a non-U.S. branch of such records entity that is not itself a records entity would be considered a counterparty of a records entity if it is a party to a QFC with such affiliated records entity. The term “counterparty” would also include any natural person or entity that is a party to a QFC that is guaranteed or supported by a records entity. To the extent a corporate group includes more than one records entity, for each inter-affiliate QFC to which two or more affiliated records entities are a party (or are otherwise linked), each affiliate would be required to treat the other as a counterparty for purposes of the rules. Recordkeeping with respect to inter-affiliate QFCs is necessary to enable the FDIC to decide as quickly as possible which affiliated financial companies in a corporate group should be subject to orderly liquidation under Title II, to understand all QFC linkages in a corporate group, and to evaluate the potential systemic effects of FDIC decisions.

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The term non-U.S. branch is used to designate a U.S. entity that operates in a non-U.S. jurisdiction under special license in such jurisdictions instead of operating through a subsidiary incorporated or organized in such non-U.S. jurisdiction.

The term “primary financial regulatory agency” would consist of the Federal banking agencies, the CFTC, FHFA and the SEC and would be defined by reference to the definition of “primary financial regulatory agency” in the Dodd-Frank Act.
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70
12 U.S.C. 5301(12).

Questions:

25. Should the proposed definition of counterparty be modified to exclude some affiliated entities? If so, which affiliated entities should be excluded and why?

26. Would the proposed definitions result in duplication of data or positions? If so, how could such duplication be removed?

27. Is there an alternative means of introducing transparency for inter-affiliate transactions other than including affiliates in the definition of counterparty? How would the recordkeeping requirements need to be modified to accomplish this goal?

28. Should other terms used in the Proposed Rules be defined? If so which ones? Please include support for any suggested definition or clarification to definitions supplied.

29. Are the Proposed Rules' definitions appropriate? Would there be any additional definitions, modifications or considerations that would be helpful?

C. Form, Availability, and Maintenance of Records

1. Form and Availability

Section 148.3(a)(1) of the Proposed Rules would require that a records entity maintain all records in electronic form in the format set forth in the Appendix to the Proposed Rules. All records entities in a corporate group would be required to be able to generate data in the same data format and use the same counterparty identifiers to enable the aggregation of all records entities in the corporate group. In addition, the use of such counterparty identifiers would enable the data to be aggregated by counterparty, thus permitting the FDIC to understand the exposure of the entire corporate group to a given counterparty. The FDIC will use the aggregation of counterparty positions to determine the effects of termination or transfer of QFCs. Although the Proposed Rules specify a recordkeeping format, the Secretary recognizes the need to build-in flexibility for an alternate recordkeeping format. Therefore, Section 148.3(c) of the Proposed Rules provides that the Secretary may grant conditional or unconditional exemptions from compliance with one or more of the requirements of the rule. An exemption with regard to the recordkeeping format requirements could be conditioned upon the records entity keeping the records in an alternate format that enables the FDIC to exercise its rights under the Act and fulfill its obligations under section 210(c)(8), (9), or (10) of the Act.

Section 148.3(a)(1) of the Proposed Rules would require that all records be capable of being transmitted electronically to a records entity's PFRA and the FDIC. This requirement would impose a recordkeeping burden but not a reporting burden on records entities. In order to comply with the rule, a records entity would need to ensure that it is able to comply with the recordkeeping requirements of the rules for all cross-border transactions.

These proposed requirements are necessary and appropriate in order to assist the FDIC as receiver. Transparency with respect to all QFC positions is necessary to enable the FDIC as receiver to rapidly dispose of the QFC portfolio or perform on the QFCs and minimize the potential for disorderly liquidation of the covered financial company and increased systemic risk. Accordingly, the FDIC should have detailed and complete information available to it with respect to all QFCs of a records entity and its affiliated financial companies, without delay, on the date of appointment. As discussed above, given the short time frame for FDIC decisions, it may be difficult to obtain and analyze a large amount of information unless it is readily available to the FDIC in an updated and standardized format that enables the FDIC to carry out the required financial and legal analysis in an expeditious and efficient manner. Furthermore, absent electronic access to the complete records of a records entity and the ability to view such information in the context of the records entity's booking practices, governing law, and organizational structure, the FDIC may

not be able to analyze QFC positions and make decisions with respect to such QFCs by the end of the first business day following the appointment of the receiver. In addition, the FDIC could use the data to help subsidiaries of a financial company in receivership perform their obligations under the QFCs, thereby preserving the value of the receivership estate. This should help to prevent the disorderly termination of trades, including cross-border and affiliate trades, which could have far-reaching negative effects on the records entity and its corporate group, as well as the broader financial markets.

Section 148.3(a)(2) of the Proposed Rules would require that each records entity maintain records for all QFCs to which it is a party, including inter-affiliate QFCs to which it is a party. Each records entity also would be required to maintain records for all QFCs that are guaranteed or supported by such records entity.
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These records would help to enable the FDIC as receiver to determine the effect of termination or transfer of counterparty transactions on the QFC portfolio held by affiliates as well as any potential effects on broader financial markets, such as by inadvertently un-hedging one or more affiliated counterparties. However, a records entity that is only linked to an open QFC would not be required to maintain records under the Proposed Rules with respect to such linked QFCs.

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An entity, such as an investment adviser, that acts as agent on behalf of a client would not be required to maintain records for any QFC to which the adviser is not a party or that the adviser does not support or guarantee.

Section 148.3(a)(3) of the Proposed Rules would require that each records entity provide a point of contact to enable its PFRA and the FDIC to contact the records entity with respect to the rule, and to update this information within 30 days of any change. Because the FDIC, after being appointed as receiver, will have very little time to update QFC information and make decisions with respect to QFCs, the FDIC must work cooperatively with personnel in charge of QFCs at each records entity who can provide greater context for the data, including the records entity's booking practices, governing law, and organizational structure.

Section 148.3(a)(4) of the Proposed Rules would require that each records entity that is regulated by a PFRA be capable of providing all QFC records specified in the rules to its PFRA within 24 hours of request. This requirement would impose a recordkeeping burden but not a reporting burden on records entities. A PFRA could exercise its own authority by imposing a 24 hour reporting requirement on a records entity for the QFC records maintained under the rule, and by sharing such records with the FDIC. The Secretary recognizes that many financial companies may not currently have the capability to provide all QFC records in the required format within a 24-hour time period. Nevertheless, because of timing constraints set forth in Title II, the FDIC must become familiar with the types and formats of QFC data maintained by records entities to be able to comply with the statutory deadlines upon receivership and to be able to exercise its rights under the Act. In addition, the records entity must be able to generate the records in the formats specified in the rules quickly, generally overnight, to refresh the information provided to regulators. These formats or records may also be used by the FDIC both to refine receivership processes with respect to the evaluation of QFCs of financial companies and their corporate groups, and to familiarize itself with the QFCs of the records entities in a given corporate group.

Questions:

30. Are the proposed requirements that records entities in a corporate group be able to maintain the records in the same data format and use the same counterparty identifiers to enable the aggregation of the data across all records entities in the corporate group or by counterparty reasonable?

31. Are there any other procedures that should be addressed by the rules which may help streamline data production? For example, some records entities may have a very large volume of QFC records. Could this raise practical considerations in the electronic transmission of such records?

32. Are there particular methods that would best address record maintenance and data requirements for inter-affiliate transactions and cross-border transactions? Should there be specific requirements for such transactions? Should records entities be exempted from any part of the recordkeeping requirements in the Proposed Rules for such transactions?

33. Should the Proposed Rules set forth a standard data specification that would require common data structures and content for data submitted for each corporate group?

34. What types of consents, if any, would a records entity need to obtain from counterparties outside of the United States in order to comply with the recordkeeping requirements in the Proposed Rules? Would records entities be able to comply with the rules if they are unable to get such consents? Are there any alternatives to the Proposed Rules that would allow the records entity to maintain the records and have the capability to provide the data to its PFRA?

35. Should the chief compliance officer for registered investment advisers and the officers of registered investment companies be deemed to be the point of contact under the rules? If not, who should the point of contact be for each of these entities?

36. The Proposed Rules currently contemplate requiring a records entity that is regulated by a PFRA to be capable of providing to such PFRA, within 24 hours of request, the required records. The records entity must also be capable of transmitting electronically the required records to such PFRA and the FDIC. Should the rule provide for the PFRAs to make actual requests? If so, should anyone other than the PFRA (
e.g.,
the FDIC) also have the ability to request records? Should the records entity be required to provide their records directly to the FDIC rather than only to the PFRA? Is 24 hours sufficient time to produce the records?

2. Maintenance and Updating

Section 148.3(b) of the Proposed Rules would require that each records entity maintain the capacity to produce QFC records on a daily basis based on previous end-of-day records and values. This provision would not require that the records entity update all values daily in the ordinary course of business. Rather, it would require that the records entity have the capacity to do so upon request. Some data elements set forth in Tables A-1 through A-4 of the Appendix may not generally be updated daily. However, since all data items must be updated to enable the FDIC as receiver to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) within the limited time frame afforded by the Act, each records entity would need to maintain the capacity to update the data elements to current values within a 24-hour period. To the extent the electronic recordkeeping system produces data that is more current than previous end-of-day records and values (
e.g.,
real-time data), such data would also comply with the Proposed Rules. If a records entity is not able to update the records or values quickly, the FDIC may not be able to comply with the requirements of Title II with respect to QFCs. As mentioned above, this inability of a records entity could increase the potential for a disorderly liquidation of a financial company.

When a records entity uses an affiliate or a third party to maintain the records required under the Proposed Rules, it would be the responsibility of the records entity to ensure that records maintained by the affiliate or third party can be provided to the PFRA within 24 hours of a request.

Each records entity also would be required to be able to generate historical end-of-day records of open QFC positions, and any other QFC positions needed to generate data based on end-of-day records and values, for a period of at least the preceding five business days. Historical data are important as a measure of the day-to-day volatility of the given positions, and such data may help the FDIC calculate portfolio values on the business day after the appointment of the receiver.

With respect to record retention, the proposed requirement for a records entity to maintain records would generally apply to records and values with respect to open QFC positions and any other QFC positions needed to generate information based on end-of-day records and values for at least the five business days prior to the date of a request.

Questions:

37. Are the record maintenance requirements of the Proposed Rules sufficiently clear? If not, what additional requirements should be adopted?

38. Is the five-day retention period for required historical data sufficient? If a different period would be more appropriate, please provide support for your recommendation.

39. In the case of records entities that use affiliates or third-party service providers to maintain their records, is it appropriate for the records entity to be responsible for providing the records within 24 hours of a request, rather than the affiliate or third-party service provider?

40. Should the records be retained for a period shorter or longer than that set forth in the Proposed Rules based on the status of an open QFC? What are the potential benefits or costs of a shorter or longer period for record retention?

3. Exemptions

Section 148.3(c) of the Proposed Rules would permit the Secretary to grant two types of exemptions from the rules. Any exemptions granted pursuant to the rules may be subject to conditions. The Proposed Rules provide that, upon written request by a records entity, the FDIC, in consultation with the PFRAs for the records entity, may recommend that the Secretary grant a specific exemption from compliance with one or more of the requirements of the rules. For example, if a records entity is a subsidiary of a national bank, but is also registered as a major swap participant and a major security-based swap participant, the FDIC, in consultation with the OCC, SEC and CFTC, could recommend that the Secretary issue an exemption because the OCC is the primary banking regulator while the SEC and the CFTC have oversight authority over the entity by virtue of it being a major swap participant and a major security-based swap participant. As another example, if a records entity is a financial company that does not collect certain types of QFC recordkeeping data in the ordinary course of its business, the FDIC, in consultation with the relevant PFRAs, could recommend that the Secretary issue a specific exemption from certain data requirements of the rules, if the FDIC believes such data omissions are warranted under the particular circumstances.

The Secretary would also be permitted to issue exemptions that have general applicability upon receipt of a recommendation from the FDIC, in consultation with the PFRAs for the applicable records entities. For example, the FDIC, in consultation with the PFRAs, could recommend that the Secretary issue an exemption informing all records entities that some data elements required by Tables A-1 through A-4 of the Appendix are not relevant for a particular type of QFC.

The Secretary considered authorizing the FDIC and the PFRAs to jointly grant specific and general exemptions, because the PFRAs are familiar with the operations of the records entities, and because the FDIC as the intended user of the QFC recordkeeping would be affected by the granting of any exemption. However, the Act does not appear to authorize the Secretary, as Chairperson of the Council, to sub-delegate decision making authority to other agencies. Instead, the Secretary is turning directly to the FDIC and indirectly to the PFRAs for recommendations on whether to grant specific or general exemptions. The Secretary will consider any FDIC recommendation that carefully considers the factors contained in section 210(c)(8)(H)(iv) of the Act.

Section 210(c)(8)(H) of the Dodd-Frank Act gives the Secretary broad flexibility in determining the scope of the records entities based on, as appropriate, the financial companies' size, risk, complexity, leverage, frequency, and dollar amount of QFCs and interconnectedness to the financial system. The Secretary also may consider other factors deemed appropriate, which the Secretary believes should include whether the application of one or more requirements of the Proposed Rules is not necessary to achieve the purpose of the rule. As noted previously, in determining whether to grant any exemptions permitted under the rule, the Secretary expects to take into consideration with respect to financial companies their size, risk, complexity, leverage, frequency and dollar amount of QFCs, interconnectedness to the financial system, and any other factors deemed necessary or appropriate, including whether the application of one or more requirements of the rule is not necessary to achieve the purpose of the rule.
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72

See supra
note 59.

Moreover, some records entities are subject to separate recordkeeping rules promulgated by the CFTC and SEC and may in the future be subject to additional recordkeeping requirements promulgated by other U.S. and non-U.S. agencies. The exemption provisions set forth in the Proposed Rules are designed to enable the rules to work in conjunction with the CFTC's, SEC's and other regulatory recordkeeping requirements as well as any global or local standard adopted after the publication of the final rule, as they would provide the ability for the Secretary to be flexible in taking such requirements and standards into account. Although section 148.3(a)(1) of the Proposed Rules specify a standard format for recordkeeping, the Secretary, upon receipt of a recommendation from the FDIC made in consultation with the appropriate PFRAs, could exempt records entities from this requirement on the condition that they maintain electronic records maintained in a swap data repository or internally in a different format. The format of proposed Tables A-1 through A-4 of the Appendix therefore, should not complicate appropriate recordkeeping, so long as the information set forth in the Appendix can be provided to the FDIC in a manner that allows the FDIC to properly analyze and aggregate the data. Records entities could build upon the mandatory data templates of the swap data repositories and augment and/or hyperlink the data to create the totality of the information requested. A records entity could also help the FDIC, upon appointment as receiver, analyze internal databases by providing the personnel necessary to manipulate internal databases. Because the PFRA for a records entity and the FDIC must work with and understand the data, a records entity would need an exemption

from the Secretary (which could be conditioned on the use of an alternative recordkeeping format) before using a recordkeeping format that is different from the format referenced in section 148.3(a)(1) of the Proposed Rules.

The Proposed Rules also would empower the Secretary, in consultation with the FDIC, to grant extensions of time with respect to compliance with the recordkeeping requirements. It is anticipated that such extensions of time would apply when records entities first become subject to the rules and likely would not be used to lengthen the time periods specified in the maintenance and updating requirements of the rules. Extensions of time may also be appropriate on a limited basis with respect to being capable of providing full records because of unforeseen technical issues.

Questions:

41. Is the scope of the exemptions appropriate as written?

42. The Proposed Rules would allow the Secretary, upon receipt of a written recommendation from the FDIC, to issue general or specific exemptions based on factors the Secretary determines to be necessary or appropriate. Is the prerequisite of an FDIC recommendation appropriate? For example, in the case of a records entity request for a specific exemption, should the Secretary proceed in determining whether to grant or deny the request if the FDIC does not submit its recommendation within a reasonable period of time? If yes, should the FDIC and/or the PFRAs be consulted in some other manner? Is the FDIC's consultation with the relevant PFRAs in preparing the written recommendation appropriate? If not, should the relevant PFRA be involved in some other manner? For example, should a recommendation be made jointly by the FDIC and the relevant PFRA, or should they each submit separate recommendations to the Secretary? Are the factors the FDIC would be required to consider in making its recommendation appropriate?

43. Should the Secretary delegate decision making authority to the FDIC, the PFRAs, or both with regard to granting general or specific exemptions and extensions of time? If so, please explain the authority by which the Secretary could make such a delegation.

44. How should the PFRAs' separate rulemaking and exemptive authority be used in conjunction with exemptions under this rulemaking?

45. What is the volume and nature of exemption requests that commenters believe are likely to be requested?

46. Should the final rule exempt categories of financial companies? If so, which categories should be exempted and why? Alternatively, should the final rule exempt certain categories of financial companies only from certain provisions of the rules but require them to comply with others? Please specify the conditions and factors to be considered for each such exemption.

47. Should clearing organizations or other financial market utilities be exempted from recordkeeping under the rule? Please explain in detail why current recordkeeping requirements for clearing organizations and other financial market utilities are sufficient to enable the FDIC to conduct the orderly liquidation of clearing organizations or financial market utilities.

48. What conditions, if any, should be included in a clearing organization exemption? Should it suffice that a clearing organization coordinates with its members that are records entities to ensure that appropriate records are kept?

49. Is it feasible for data to be maintained in a standardized format? Should specific format exemptions be included in the final rule, in particular for formats used by common QFC reporting repositories (
e.g.,
swap data repositories)? To the extent such other recordkeeping requirements do not meet the full requirements contemplated here (
e.g.,
they do not include certain categories or fields necessary), how would records entities meet the contemplated recordkeeping requirement? In such a case, would a format exemption reduce regulatory burden?

50. Should the provisions addressing form and availability of data be further detailed?

51. Should the rule specify a process for requesting exemptions and extensions of time? If so, what should this process be?

D. Content of Records

1. General Information

Section 148.4(a) of the Proposed Rules would require each records entity to maintain all data required by Tables A-1 through A-4 of the Appendix, as well as additional information that is needed to be able to understand affiliated relationships among records entities and counterparties. Records entities may currently maintain such data; however, they might not be maintaining it in the manner or format in the Proposed Rules. By presenting the data elements in the form of an Appendix, the Secretary has sought to maintain a parallel with the FDIC's Part 371 QFC Recordkeeping rules, and to provide an easy means of separating the data into their relevant categories. As stated below, the Appendix corresponds to position level data, counterparty exposure data, legal agreement data, and collateral data. Where appropriate, each table in the appendix also gives an example of each data element and describes the relevance of such data in the context of an FDIC receivership.

For the purpose of QFC recordkeeping, each records entity would be required to treat its affiliates, including affiliated clearing organizations or other financial market utilities, as third-party counterparties and maintain complete records of all inter-affiliate QFCs. The Proposed Rules would require a records entity to use a unique counterparty identifier to identify each of its counterparties. The records entity would be required to assign a separate unique counterparty identifier to each legal entity and each non-U.S. branch or office of a legal entity that transacts business as a separate branch or division to enable the FDIC to analyze cross-border QFC activity. The unique counterparty identifier also would facilitate the aggregation of positions by counterparty as well as the aggregation by corporate group. The ability of records entities to incorporate unique identifiers for each counterparty is likely to vary significantly depending on the number and types of counterparties, and if the counterparties are currently identified and tracked within the records entity's systems.

Authorities from around the world, including the FDIC, have established a global legal entity identifier (“LEI”) system, with oversight effected by a Regulatory Oversight Committee (“ROC”), comprised of those same authorities, in order to coordinate and oversee a global system of legal entity identification. In June 2014, a Swiss non-profit foundation (the “Global LEI Foundation”) was established with the intention for it to provide operational governance and management over Local Operating Units (“LOUs”) that will issue LEIs.

Before the Global LEI Foundation was established, the ROC created an interim system by which those with pre-LEIs (LEIs compliant with various ROC principles) issued by ROC-endorsed LOUs would be sufficient to satisfy the regulatory requirements of ROC member authorities.

As a result, unique LEIs were already being issued prior to the operational governance and management of the system by the Global LEI Foundation

and such LEIs are being accepted by certain individual ROC members, including for purposes of meeting certain other recordkeeping and reporting requirements mandated by the Dodd-Frank Act. The Proposed Rules would require records entities to use LEIs issued by LOUs endorsed by the ROC, and by those LOUs endorsed or otherwise governed by the Global LEI Foundation.

To the extent that the LEI or pre-LEI does not allow branches to be separately identified, the records entity would be required to include additional identifiers to enable the FDIC to segment the QFC activity both across the corporate group and by jurisdiction, as treatment of a QFC varies based on the law governing the QFC and/or the location of the collateral.

To that end, financial companies would need to maintain the capacity to generate QFC information in a common data format, at a minimum, within each corporate group, and, ideally, among financial companies. To facilitate the resolution of QFC portfolios, the FDIC needs to analyze such data upon appointment as receiver under Title II by working collaboratively with the PFRAs. The standardized data format would reduce the time and effort needed by the FDIC to perform the analysis and facilitate comparison of QFC data across financial companies with large complex QFC portfolios.

A records entity also would be required to maintain electronic copies of all agreements that govern the QFC transactions, as well as credit support documents related to such QFC transactions. As noted previously, electronic records are necessary or appropriate to assist the FDIC as receiver to quickly analyze QFC positions and make prompt decisions with respect to such QFCs, and to minimize the potential for disorderly liquidation of the covered financial company and increased systemic risk. These copies would need to be maintained in full-text searchable electronic form, and would be required to include master agreements and annexes, confirmations, master netting agreements, credit support annexes, guarantees, net worth maintenance agreements, security interest agreements, and other related agreements, if any. Similarly, the Proposed Rules would require records entities to keep full-text searchable copies of all assignment or novation documents to enable the FDIC to determine the appropriate counterparties for the various QFC positions.

The Proposed Rules would require that each records entity also maintain a list of vendors directly supporting the QFC-related activities and the contact information for such vendors. Section 148.4(a) of the Proposed Rules would also require that each records entity maintain certain additional information with respect to its current QFC portfolio, including information about the risk metrics used to monitor the QFC portfolios and contact information for each risk manager. The maintenance of such information would enable the FDIC to contact a risk manager or vendor quickly in the event that the FDIC requires additional information that is not currently included among the required data. Furthermore, maintaining risk manager contact information and a vendor list is unlikely to be overly burdensome because most financial companies are likely to already maintain similar information in the ordinary course of business.

Questions:

52. Are the proposed requirements related to unique counterparty identifiers sufficient to enable compliance with the rules?

53. Is it necessary or appropriate for a records entity to maintain full-text searchable electronic copies of all agreements governing QFC transactions? If not, are there any viable alternatives to this?

54. Is it necessary or appropriate for a records entity to maintain risk metrics used to monitor the QFC portfolio, risk manager contact information, and a list of vendors that directly support the QFC related activities of the records entity? If not, are there any viable alternatives to this?

55. Should the rule include additional guidance with respect to form, content and format of the records required? If so, how?

56. Should the rule specify a data standard (or language, or specification,
e.g.,
XML or XBRL) and a standard set (
e.g.,
a schema or taxonomy) of data item tags? Should the rule specify further the definitions which the records entity must use for its QFC records data? Please provide detailed specifications of the data standard or standard set as well as of the proposed definitions, if any.

57. Should data elements be interoperable among affiliated records entities and among financial company groups? If so, discuss which standard(s) should be considered, and why? If the rule should not include such a requirement to use a standard for the QFC data, will the complexity and quantity of data hinder the ability of the FDIC to use the QFC data for the purposes described in the rule?

2. Appendix Information

As described previously, the Proposed Rules would organize the detailed QFC recordkeeping requirements into an appendix of four tables: (1) Position-level data set forth in Table A-1; (2) counterparty collateral data set forth in Table A-2; (3) legal agreements related data set forth in Table A-3; and (4) collateral detail data set forth Table A-4. The information that would be required by Tables A-1 through A-4 is largely self-explanatory and contains examples as well as narrative explanations of the applications. Some of the data fields, such as the unique counterparty identifiers for the records entity and the counterparty, are used in each table to help link the data among the tables.

The Appendix specifies that a records entity may leave an entry blank, or may insert “N/A” for any data fields that do not apply to a given QFC transaction or agreement. For example, if a QFC is not guaranteed, data fields that relate to a guarantee agreement would not need to be filled in, so long as those guarantee-related fields that required a Y/N (“Yes/No”) answer are completed where appropriate. Similarly, if QFCs with a counterparty are not collateralized, there would be no need to maintain collateral information with respect to that counterparty.

a. Table A-1

Table A-1 would set forth position-level data that enable the FDIC to evaluate a records entity's exposure to its counterparties. The FDIC would also use these data to evaluate the effects of the receiver's determination to transfer, disaffirm or repudiate, or retain QFCs. In addition, position-level information would assist the receiver or any transferee to comply with the terms of the QFCs and reduce the likelihood of inadvertent defaults. For example, a unique position identifier would allow for the tracking and separation of positions maintained by the records entity, and the identifier also would be consistent with the CFTC- and SEC-mandated data that need to be reported to SDRs.
73

The information would also be required to include CUSIP identifier numbers, unique trade confirmation numbers, as well as other internal identifying information relevant to the position.

73
See 17 CFR 45.5.

The unique booking unit or desk identifier is intended to serve to further segment the data provided by the

records entity. It identifies which division or trading desk of a records entity has entered into the QFC position. This information is necessary to enable the FDIC to evaluate the business purposes of each QFC and locate back office contacts. The information that would be maintained in this field would help to determine the purpose of the QFC and assist the FDIC to determine whether the QFC was backed by another entity or an affiliate, if the QFC had a full or partial hedge, or if the QFC was used to hedge an asset. In addition to a unique booking unit or desk identifier, a description of that booking unit or desk would facilitate QFC classification. This description would assist in determining the specific nature and purpose of the QFCs and enable the FDIC to carry out an orderly liquidation.

Counterparties to records entities often trade QFCs under the terms of a single master agreement or similar governing document. Each master agreement may contain non-standard legal provisions that govern the relationship of the parties. In certain cases, counterparties may maintain multiple master agreements with the same records entity. For the FDIC to accurately assess the effect of transfer or termination of QFC positions on the financial stability of the derivatives and other financial markets, such QFC positions would need to be aggregated under the relevant corresponding agreements or governing documents at each level permitted by the documents. To the extent the master agreements are subject to further cross-product or multi-party netting, such “master-master agreements” also would need to be identified. All master agreements are included in the QFC definition under the Act and would be required to be treated as QFCs for all purposes under the Proposed Rules. The data that would be maintained must enable the FDIC to not only aggregate and disaggregate positions at the level of each counterparty, affiliate, and agreement, but also to determine the overall effect of the FDIC's decisions for each of the counterparty's and the records entity's corporate groups.

Table A-1 would also require the records entity to maintain information with respect to any loan or other obligation that relates to a QFC. For example, the counterparty to a swap with a records entity may have entered into the swap to hedge the interest rate exposure on amounts borrowed from an affiliate of the records entity, where both the loan and the swap are secured by one mortgage on the property. This information is necessary to enable the FDIC to evaluate both the loan and the swap. The information that would be maintained with respect to related obligations includes a reference number of the obligation and information about the borrower, lender and any other material terms of the related obligation.

b. Table A-2

Table A-2 would require a records entity to maintain counterparty aggregate exposures and collateral data for all QFCs entered into by a records entity with a counterparty. For such data, the records entity would need to demonstrate the ability to maintain itemized records of collateral by counterparty, which also would allow for the aggregation of collateral based on the netting rights of the counterparty and its affiliates. The data would need to take into account enforceability of netting in an insolvency close-out situation in specific jurisdictions, in addition to contractual payment netting outside an insolvency or receivership.

The information in Table A-2 would need to be maintained at each level of netting under a master agreement. For example, if a master agreement includes Annexes that require intermediate netting under each Annex, the net exposures under each Annex would need to be maintained separately. The data would need to identify whether multi-party or cross-product netting is contemplated among affiliates in a corporate group and provide exposure data taking into account such multi-party or cross-product netting. To the extent netting is not enforceable in an insolvency of the records entity or the counterparty, the positions that cannot be netted in an insolvency would not need to be netted for the purpose of Table A-2. This information would allow counterparty-level data to be segregated by records entity and counterparty. The use of the term “counterparty” would also include each affiliate in a records entity's corporate group that is a counterparty to an inter-affiliate QFC.

The title and name of each master agreement, master netting agreement, and accompanying governing documentation relating to counterparty positions, would enable the FDIC as receiver to identify the related agreement and review the contractual provisions governing the counterparty relationship.

The primary objective of proposed Table A-2 is to identify exposure of the records entity to each counterparty and its affiliates, as well as the exposure that counterparties might have to the records entity. This information would enable the FDIC to determine the effects of transfer or termination of QFCs with a given counterparty and the potential risk of contagion in the financial markets. Therefore, the data would need to be aggregated only to the extent permitted under the governing agreements and applicable law. Such information al

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2014-30734. Public record. Not legal advice.