# Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-25329

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** October 31, 2016
- **Citation:** 81 FR 75624

## Text

DEPARTMENT OF THE TREASURY
31 CFR Part 148
RIN 1505-AC46
Qualified Financial Contracts Recordkeeping Related to Orderly Liquidation Authority

AGENCY:

Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

The Secretary of the Treasury (the “Secretary”), as Chairperson of the Financial Stability Oversight Council (the “Council”), is adopting final rules (the “Final Rules”) in consultation with the Federal Deposit Insurance Corporation (the “FDIC”) to implement the qualified financial contract (“QFC”) recordkeeping requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”). The Final Rules require recordkeeping with respect to positions, counterparties, legal documentation, and collateral. This information is necessary and appropriate 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 risks to financial stability are posed by the transfer, disaffirmance or repudiation, or termination of such QFCs; and otherwise exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) of the Act.

DATES:

The Final Rules are effective December 30, 2016.

FOR FURTHER INFORMATION CONTACT:

Monique Y.S. Rollins, Deputy Assistant Secretary for Capital Markets, (202) 622-1745; Jacob Liebschutz, Director, Office of Capital Markets, (202) 622-8954; Peter Nickoloff, Financial Economist, Office of Capital Markets, (202) 622-1692; Steven D. Laughton, Assistant General Counsel (Banking & Finance), (202) 622-8413; or Stephen T. Milligan, Attorney-Advisor, (202) 622-4051.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Description of the Final Rules

A. Scope, Purpose, Effective Date, and Compliance Dates

1. Scope

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

III. Administrative Law Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Executive Orders 12866 and 13563

1. Description of the Need for the Regulatory Action

2. Literature Review

3. Baseline

4. Evaluation of Alternatives

5. Affected Population

6. Assessment of Potential Costs and Benefits

7. Retrospective Analysis

IV. Text of the Final Rules

I. Introduction

Title II of the Dodd-Frank Act (“Title II”)
1

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.

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

Section 210(c)(8)(H) of the Act requires the Federal primary financial regulatory agencies, as defined in the Act
2

(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 in being able to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10).
3

Section 210(c)(8)(H) also requires the regulations to, as appropriate, differentiate among financial companies by taking into consideration their size, risk, complexity, leverage, frequency and dollar amount of QFCs, interconnectedness to the financial system, and any other factors deemed appropriate.

2
12 U.S.C. 5301(12). See the term “primary financial regulatory agency.”

3
12 U.S.C. 5390(c)(8)(H).

Section 210(c)(8)(H) 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. As the PFRAs did not prescribe such regulations by the statutory deadline, on January 7, 2015, the Secretary, as Chairperson of the Council, in consultation with the FDIC, requested public comment on proposed rules that would implement section 210(c)(8)(H) (the “Proposed Rules”).
4

The Secretary received comments on the Proposed Rules from trade associations, asset managers, insurance companies, clearing organizations, a nonprofit organization, and a private individual. In general, commenters acknowledged the need for the FDIC to have access to appropriate QFC records in order to exercise its role as a receiver under Title II of the Dodd-Frank Act but also requested relief from aspects of the Proposed Rules that they argued were unduly burdensome.
5

As discussed below, the Secretary has, in consultation with the FDIC, made substantial changes in the Final Rules in response to the comments received. In making these changes, the Secretary has sought to reduce the burden of the rules while still assuring that the FDIC will have the records it needs to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), and (10).

4
80 FR 966 (Jan. 7, 2015).

5

See, e.g.,
comment letters from The Clearing House Association L.L.C., the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Roundtable, and the Int'l Swaps and Derivatives Association, Inc. (April 7, 2015) (the “TCH et al. letter”), p. 2; The Depository Trust & Clearing Corporation (April 7, 2015) (“DTCC letter”), pp. 1-2; Sutherland Asbill & Brennan LLP on behalf of The Commercial Energy Working Group (April 7, 2015) (“CEWG letter), p. 2; the Asset Management Group of the Securities Industry and Financial Markets Association (April 7, 2015) (“SIFMA AMG letter”), p. 1.

The substantial constraints imposed by Title II on the FDIC's exercise of its rights with respect to QFCs necessitate the detailed, standardized recordkeeping requirements adopted in the Final Rules. As discussed in greater detail in the Supplementary Information to the Proposed Rules,
6

Title II provides the FDIC as receiver of a covered financial company with the authority to (i) transfer the QFCs of the covered financial company to another financial institution, including a bridge financial company established by the FDIC or (ii) retain the QFCs within the receivership, disaffirm or repudiate the QFCs, and pay compensatory damages.
7

The FDIC may also retain the QFCs within the receivership and allow the counterparties to terminate the QFCs. In deciding whether to transfer, disaffirm or repudiate, or allow counterparties to terminate the QFCs of the covered financial company, the FDIC must take

into consideration the requirements of Title II, including those discussed below.

6
A more general summary of the treatment of QFCs under Title II and the rights and obligations of the FDIC under the Act was provided in section II of the Supplementary Information to the Proposed Rules.
See
80 FR 966, 968-70.

7
12 U.S.C. 5390(c)(11).

As referenced throughout this Supplementary Information to the Final Rules, Title II requires that the FDIC as receiver treat the QFCs of a covered financial company with a particular counterparty and that counterparty's affiliates consistently. Within certain constraints, the FDIC may take different approaches with respect to QFCs with different counterparties. However, 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 disaffirm or repudiate any QFC with a particular counterparty, it must disaffirm or repudiate all QFCs between the covered financial company and such counterparty and any affiliate of such counterparty.
8

8
For transfer,
see
12 U.S.C. 5390(c)(9)(A); for disaffirmance or repudiation,
see
12 U.S.C. 5390(c)(11).

Furthermore, the FDIC is required to confirm that the aggregate amount of liabilities, including QFCs, of the covered financial company that are transferred to, or assumed by, the bridge financial company from the covered financial company do not exceed the aggregate amount of the assets of the covered financial company that are transferred to, or purchased by, the bridge financial company from the covered financial company.
9

In addition, in order to repudiate any QFCs of the covered financial company, the receiver must first determine that the performance of such QFCs would be burdensome and that such repudiation will promote the orderly administration of the affairs of the covered financial company.
10

More generally, Title II provides that with respect to the disposition of assets of a covered financial company, including a repudiation or transfer of QFCs, the FDIC shall, to the greatest extent practicable, do so in a way that maximizes value and minimizes losses and mitigates the potential for serious adverse effects to the financial system.
11

Finally, the FDIC must make its decision as to how to treat the QFCs of the covered financial company within a very limited time frame because the stay that prevents termination based on the appointment of the receiver lasts only for the period between the appointment of the FDIC as receiver and 5 p.m. (eastern time) on the business day following the date of the appointment.
12

9

See
12 U.S.C. 5390(h)(5)(F).

10

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

11

See
12 U.S.C. 5390(a)(9)(E).
See also
12 U.S.C. 5390(a)(1)(B)(iv).

12

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

The Secretary has determined that, given these statutory constraints, it is necessary and appropriate for the FDIC as receiver to have access to detailed, standardized records from the financial companies that potentially would be the most likely to be considered for orderly liquidation under Title II. Nonetheless, having considered the comments received, the Secretary has determined that it is possible to reduce the scope of financial companies subject to the rules and the extent of recordkeeping required while still requiring the records the FDIC would need as receiver in order to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10). In particular, the Secretary has made changes in the Final Rules that provide for further differentiation among financial companies by:

• Adding to the definition of “records entity” new thresholds based on the level of a financial company's derivatives activity;

• providing an exclusion for insurance companies;

• providing a conditional exemption for clearing organizations; and

• providing a de minimis exemption from the recordkeeping requirements, other than the requirement to maintain copies of the documents that govern QFC transactions, for entities that are party to 50 or fewer open QFC positions.

The Final Rules also significantly reduce the burden of the required recordkeeping by, among other things:

• Revising the definition of “records entity” to identify which members of a corporate group are records entities by reference to whether they are consolidated under accounting standards;

• replacing the requirement to maintain organizational charts of counterparties with a requirement to identify only certain information as to each counterparty, such as the ultimate and immediate parent entities of the counterparty;

• eliminating the requirement to maintain risk metrics information;

• eliminating the requirement to maintain copies of additional information with respect to QFCs provided by the records entity to other regulators, swap data repositories, and security-based swap data repositories;

• eliminating the requirement that copies of QFC agreements be searchable;

• eliminating several fields from the required data tables; and

• providing for tiered initial compliance dates based on the size of the corporate group, with all records entities having additional time to comply with the rules.

The Final Rules also provide for additional fields in the required data tables that are not anticipated to impose a significant additional burden on records entities, and the proposed requirement that records of affiliated records entities be maintained in a form that allows for aggregation has been replaced in the Final Rules with the requirement that the top-tier parent financial company be capable of aggregating such records.

II. Description of the Final Rules

The following discussion provides a summary of the Proposed Rules, the comments received, and the Secretary's responses to those comments, including modifications made in the Final Rules. In addition to the considerations discussed in this section, the Secretary, in adopting these Final Rules, has taken into account the potential costs and benefits of the rules discussed in Section III below.

A. Scope, Purpose, Effective Date, and Compliance Dates

Section 148.1(a) of the Final Rules defines the scope of the rules. Section 148.1(b) explains the purpose of the rules. Sections 148.1(c) and (d) set forth the rules' effective and compliance dates.

1. Scope

a. Key Definitions

The scope of the Final Rules is established by certain key definitions that determine the entities that would be subject to the rules. Specifically, section 148.1(a) of the Final Rules provides that the rules apply to any “financial company” that is a “records entity” and, with respect to section 148.3(a), to the “top-tier financial company” of a “corporate group,” as those terms are defined in the Final Rules.

Financial Company:
The Final Rules, as did the Proposed Rules, incorporate the definition of “financial company” set forth in section 201(a)(11) of the Dodd-Frank Act.
13

Entities that are not included in the section 201(a)(11) definition of “financial company” are not included in the definition of “records entity” and, therefore, are not subject to the rules. Entities that are included in the section 201(a)(11) definition of “financial company” are 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) of the Dodd-Frank Act excludes insured depository institutions,
14

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

13
12 U.S.C. 5381(a)(11)

14
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;
15

and

15
12 U.S.C. 4502(20).

• Insured depository institutions.

Records Entity:
Each records entity is required to maintain records with respect to all of its QFCs unless such records entity receives an exemption under the rules. The Proposed Rules would have defined “records entity” 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 section 113 of the Dodd-Frank Act
16

to be an entity that could pose a threat to the financial stability of the United States; (b) is designated pursuant to section 804 of the Dodd-Frank Act
17

as a financial market utility that is, or is likely to become, systemically important; (c) has total assets equal to or greater than $50 billion; 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 criteria in (a), (b), or (c).

16
12 U.S.C. 5323.

17
12 U.S.C. 5463.

As described below, the Secretary has modified the definition of “records entity” in order to further differentiate financial companies by reference to certain factors listed in section 210(c)(8)(H)(iv) and to reduce the costs of complying with the rules. This has the effect of substantially narrowing the scope of entities subject to the recordkeeping requirements of the Final Rules, as discussed more fully below, and thereby reducing the costs imposed by the rules. Furthermore, as discussed below, the Secretary has eliminated the phrase “guarantees, supports, or is linked to an open QFC” from the definition of “records entity” in the Final Rules.

Designated nonbank financial companies and financial market utilities.
The Secretary continues to believe that nonbank financial companies subject to a determination by the Council under section 113 of the Act and financial market utilities designated by the Council under section 804 of the Act as, or as likely to become, systemically important should be included as records entities. As was noted in the Supplementary Information to the Proposed Rules, certain of the factors relevant to a designation under both section 113 and 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 determines 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.
18

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.
19

In light of the factors the Council must consider in making a determination regarding a nonbank financial company under section 113 or a designation of a financial market utility under section 804, the Secretary has concluded that these are the types of financial companies that potentially would be the most likely to be considered for orderly liquidation under Title II
20

and that it is therefore appropriate that they be deemed to be records entities. Therefore, the Secretary has retained the inclusion of such nonbank financial companies and financial market utilities in the definition of “records entity” in the Final Rules. However, the Secretary has provided a conditional exemption applicable to certain financial market utilities as described below.

18
A determination under section 113 subjects the nonbank financial company to supervision by the Board of Governors of the Federal Reserve System and to enhanced prudential standards established in accordance with Title I of the Act.
See
12 U.S.C. 5365.

19

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

20
In making a determination under section 113, the Council may take into consideration each of the factors expressly referenced in section 210(c)(8)(H)(iv), including as follows: Leverage of a company may be considered under sections 113(a)(2)(A) or 113(b)(2)(A); complexity may be considered under sections 113(a)(2)(B) or 113(b)(2)(B); interconnectedness to the financial system may be considered under sections 113(a)(2) (C), (G), and (I) or 113(b)(2)(C), (G), and (I); size may be considered under sections 113(a)(2)(B), (D), (E), (G), (I), and (J) or 113(b)(2) (B), (D), (E), (G), (I) and (J); frequency and dollar amount of QFCs may be considered under sections 113(a)(2)(I) and (J) or 113(b)(2)(I) and (J); and risk may be considered throughout sections 113(a)(2) and 113(b)(2).
See also
12 CFR 1310.11 (setting forth the Council's considerations in making proposed and final determinations, which correspond to the considerations provided in section 113) and 77 FR 21637 (April 11, 2012) (adopting 12 CFR part 1310 and related interpretive guidance). In making a determination under section 804, the Council takes into consideration various factors under section 804(a)(2) and 12 CFR 1320.10 that correspond to the factors referenced in section 210(c)(8)(H)(iv).
See also
76 FR 44763 (July 27, 2011) (adopting 12 CFR part 1320).

Financial Companies with $50 Billion in Assets; Additional Factors.
The Proposed Rules would have included as a records entity any 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 has total assets equal to or greater than $50 billion. The Secretary proposed the $50 billion threshold as a useful means of identifying entities that are of a sufficient size that they could potentially be considered for orderly liquidation under Title II. In proposing the $50 billion asset threshold, the Secretary took into consideration the fact that it corresponds to the threshold that was established for determining which bank holding companies would be subject to enhanced supervision and prudential standards under Title I of the Dodd-Frank Act
21

and was also adopted by the Council as an initial threshold for identifying nonbank financial companies that merit further evaluation as to whether they should be designated under section 113 of the Act.
22

21

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

22

See
Financial Stability Oversight Council Guidance for Nonbank Financial Company Determinations, 12 CFR part 1310, app. A., III.a.

The proposed $50 billion asset threshold received substantial attention from commenters. Several commenters stated that reliance on this threshold would lead to an overbroad application of the recordkeeping requirements and argued for a more tailored approach that would focus on those institutions that are more likely to be resolved under Title II.
23

One commenter proposed $250 billion as a more appropriate level for an asset threshold.
24

Several commenters recommended that the

Secretary adopt a multi-factor approach, citing the use of multi-factor approaches in other contexts, including the Council's nonbank financial holding company determinations process and the methodology used by the Board of Governors of the Federal Reserve System (“Federal Reserve”) for identifying U.S. global systemically important bank holding companies (“G-SIBs”).
25

One commenter stated that the scope of entities subject to the Proposed Rules was too narrow.
26

23

See, e.g.,
TCH et al. letter, p. 7; IIB letter, pp. 5-6; ICI letter, pp. 7-9; SIFMA AMG letter, pp. 3-5. The specific concerns raised with respect to the application of the $50 billion asset threshold to investment companies and investment advisers are discussed below.

24

See
IIB letter, p. 7.

25

See
IIB letter, pp. 3, 11; TCH et al. letter, p. 11; letter from Capital One Financial Corporation, Fifth Third Bancorp, The PNC Financial Services Group, Inc., Regional Financial Corporation and SunTrust Banks, Inc. (April 7, 2015) (the “Regional Banks letter”).

26

See
Letter from Better Markets, Inc. (April 7, 2015) (“Better Markets letter”), p. 6-10.

The Secretary is making two changes to the definition of “records entity” in the Final Rules that will, by incorporating additional factors, substantially reduce the number of entities that will be subject to recordkeeping requirements. These measures relate to several of the factors specifically enumerated in section 210(c)(8)(H) of the Act and allow the Secretary to better limit the financial companies included within the scope of records entities to those companies that potentially would be the most likely to be considered for orderly liquidation under Title II.

First, the Final Rules specifically include in the definition of “records entity” those entities that are identified as G-SIBs.
27

Since the Proposed Rules were issued, the Federal Reserve has adopted rules specifying the criteria by which U.S. bank holding companies are identified as G-SIBs.
28

G-SIBs are required to hold additional capital to increase their resiliency in light of the greater threat they pose to the financial stability of the United States.
29

An entity is identified as a G-SIB pursuant to the Federal Reserve's rules based on its level of twelve systemic indicators as compared to the aggregate indicator amounts across other large, global banking organizations. These twelve systemic indicators correspond to five categories—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity—that correlate with systemic importance and overlap with the factors specifically enumerated in section 210(c)(8)(H) of the Act, listed above.
30

Because the G-SIBs have been deemed to be the top-tier U.S. bank holding companies with the greatest systemic importance, the Secretary has determined that it is appropriate that they be included within the definition of “records entity” under the Final Rules. By incorporating the Federal Reserve's multi-factor framework into the definition of “records entity,” the Secretary has responded to comments to reflect the use of additional factors in the definition of “records entity.”

27
§ 148.2(n)(1)(iii)(C).

28

See
12 CFR part 217, subpart H.

29

See
12 CFR part 217, subpart H; Federal Reserve, Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies, 80 FR 49082, 83 (Aug. 14, 2015).

30

See
12 CFR 217.404.
See also
80 FR at 49095-97.

However, the Secretary believes that to include only the G-SIBs identified by the Federal Reserve, along with designated financial market utilities and nonbank financial companies subject to a Council determination, within the definition of “records entity” would unduly limit the entities that would be subject to the recordkeeping rules. The G-SIBs identified under the Federal Reserve's rules by definition only include U.S. top-tier bank holding companies, whereas other types of financial companies potentially would also be among the most likely financial companies to be considered for orderly liquidation under Title II. Therefore, in addition to adding the G-SIBs to the definition of “records entity,” the Secretary has chosen to maintain the $50 billion threshold but supplement it with an additional factor tied to a financial company's level of derivatives activity. Specifically, section 148.2(n)(iii)(D) of the Final Rules provides that in addition to having total consolidated assets equal to or greater than $50 billion, an entity must on a consolidated basis have either (i) total gross notional derivatives outstanding equal to or greater than $250 billion or (ii) derivative liabilities equal to or greater than $3.5 billion in order to be deemed a records entity under that prong of the definition. As explained below, this approach incorporates the most relevant factors into the definition of “records entity” by reference to metrics that are already generally calculated by financial companies.

Gross notional derivatives outstanding relates directly to three of the factors enumerated in section 210(c)(8)(H)(iv)—complexity, interconnectedness, and the dollar amount of QFCs. Gross notional derivatives outstanding is used in the Federal Reserve's methodology for identifying G-SIBs as an indicator of complexity.
31

Gross derivatives exposure is also one metric the Council has taken into consideration when assessing the interconnectedness of a nonbank financial company under review for a potential determination under section 113.
32

In addition, because derivatives reflected in the total gross notional derivatives outstanding metric are all QFCs as defined in Title II, this metric relates directly to the importance of an institution's maintaining QFC records. Derivatives are among the most complex QFCs, and thus the inclusion in the definition of “records entity” of measures of derivatives activity relates directly to the objective of the rules, which is to allow the FDIC to make informed judgments about complex portfolios of QFCs in a timely manner.

31

Id.

32

See
12 CFR part 1310, appx. A.II.d.2.

Unlike some other potential measures of complexity and interconnectedness and unlike the measures of the volume of QFCs generally, gross notional derivatives outstanding is a measure that the Secretary understands is generally already calculated, and in most cases reported or disclosed, by financial companies with assets of $50 billion or more. Bank holding companies with assets of $50 billion or more are required to report to the Federal Reserve the amount of gross notional derivatives outstanding quarterly on Schedule H-CL of Form Y-9C and annually on Schedule D of Form Y-15. Financial companies often satisfy the requirement to disclose in their financial statements the volume of their derivatives activity by disclosing the amount of gross notional derivatives outstanding;
33

disclosure of gross notional derivatives outstanding is also frequently provided by large financial companies filing annual and quarterly reports under sections 13 and 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) to satisfy the requirement of the Securities and Exchange Commission (“SEC”) to provide quantitative disclosures about the market risk of their derivatives portfolio.
34

In addition, registered investment companies typically disclose notional amounts with respect to certain derivatives. The Final Rules define “total gross notional derivatives outstanding” as the gross notional value of all derivative instruments that are outstanding as of the end of the most recent fiscal year as recognized and measured in accordance with U.S. generally accepted accounting

principles (“GAAP”) or other applicable accounting standards.

33

See
FASB Accounting Standards Codification Topic 815, Derivatives and Hedging ¶ 10-50-1A.

34

See
Item 305 of Regulation S-K, 17 CFR 229.305.

Referring to gross notional derivatives outstanding alone, however, would not be sufficient to identify financial companies with large exposures to derivatives. The Final Rules include the amount of a financial company's derivative liabilities as an alternative measure by which a financial company may be deemed a records entity. The Final Rules define “derivative liabilities” as the fair value of derivative instruments in a negative position that are outstanding as of the end of the most recent fiscal year as recognized and measured in accordance with GAAP or other applicable accounting standards, taking into account the effects of master netting agreements and cash collateral held with the same counterparty on a net basis to the extent reflected on the financial company's financial statements. This metric, like total gross notional derivatives outstanding, serves as a proxy for interconnectedness, as a company that has a greater level of derivative liabilities would have higher counterparty exposure throughout the financial system. For this reason, derivative liabilities is one of the metrics used by the Council for identifying nonbank financial companies that may merit further evaluation for a potential determination under section 113.
35

Bank holding companies with assets of $50 billion or more are required to report quarterly to the Federal Reserve the net negative fair value of their derivatives contracts classified as trading liabilities on Schedule HC-D of Form Y-9C. Moreover, large financial companies filing annual and quarterly reports under the Exchange Act generally disclose the amount of their derivative liabilities in the footnotes to their financial statements in accordance with GAAP.

35

See
12 CFR part 1310, appx. A.III.a.

The inclusion of both the total gross notional amount of derivatives outstanding and derivative liabilities thresholds in the definition of “records entity” will better capture entities that are using substantial amounts of derivatives. The amount of total gross notional derivatives outstanding is an amount that may not, by itself, be fully representative of the interconnection and complexity of an entity and its QFC activities. For example, the notional amount of interest rate derivatives tends to be significantly larger than the notional amount of credit derivatives representing comparable levels of fair value risk, yet both types of derivatives are indicative of the interconnection and complexity of an entity. In turn, reference to derivative liabilities alone could obscure entities' level of derivatives activity to the extent a financial company's financial statements take into account the effects of netting agreements and cash collateral held with the same counterparty on a net basis. Although such netting may reduce the risk to the entity from engaging in such derivatives, even a derivatives portfolio with a low negative fair value after accounting for the effects of master netting agreements and cash collateral held with the same counterparty is indicative of interconnection and complexity if it is sufficiently large on a gross notional basis.

By including reference to total assets, notional amount of derivatives, and derivative liabilities, the Secretary has incorporated, as explained above, consideration of size, complexity, interconnectedness to the financial system, and the dollar amount of QFCs into the definition of “records entity.” Size, complexity, and interconnectedness to the financial system are, in turn, all indicators of risk, particularly risk to financial stability.
36

The Secretary, in adopting the definition of “records entity,” also considered the other factors listed in section 210(c)(8)(H),
i.e.,
frequency of QFCs and leverage. To the extent that the inclusion of frequency of QFCs among these factors is intended to serve as a proxy for the extent to which QFCs are utilized by a financial company, the Secretary believes that the inclusion of the total gross notional amount of derivatives outstanding and derivative liabilities achieves the same purpose. In addition, the Secretary has considered the frequency of QFCs in providing in the Final Rules for the de minimis exemption pursuant to which a records entity of any size that is a party to 50 or fewer open QFC positions is not required to maintain the records required under the rules other than to maintain copies of the documents governing its QFC transactions. The Secretary has decided not to reference leverage in the definition of “records entity,” because the appropriate methodology for calculating leverage may vary depending on the type of financial company, which would make incorporation of a specific measure of leverage difficult, particularly given the wide variety of entities that fall within the definition of “financial company.”

36

See, e.g.,
80 FR at 49095-49097.

The Final Rules provide for thresholds of $250 billion of total gross notional derivatives outstanding and $3.5 billion of total derivative liabilities. As noted above, bank holding companies with $50 billion or more in total consolidated assets report both total gross notional derivatives outstanding and derivative liabilities in regulatory filings. As of December 31, 2015, all of the G-SIBs were above the thresholds for total gross notional amount of derivatives outstanding and derivative liabilities and in most cases were significantly above the thresholds.
37

Conversely, most other bank holding companies were well below both of these thresholds. In addition, calibrating the derivatives thresholds as provided for in the Final Rules includes within their scope large, complex, and interconnected U.S. subsidiaries of foreign bank organizations that have been identified as global systemically important banks in their home countries.

37
Although each of the eight bank holding companies that currently are identified as G-SIBs pursuant to 12 CFR part 217 would also qualify as records entities pursuant to § 148.2(n)(iii)(D) of the Final Rules because they each have total consolidated assets in excess of $50 billion and total gross notional derivatives outstanding equal to or greater than $250 billion or derivative liabilities equal to or greater than $3.5 billion, it is possible that in the future, an entity could be deemed a G-SIB without being a records entity under § 148.2(n)(iii)(D) of the Final Rules if it does not maintain a large portfolio of derivatives but does have comparatively high levels of the other systemic indicators set forth in the G-SIB rules. The Secretary has determined that the G-SIBs, having been identified as the bank holding companies with the greatest systemic importance, should be subject to the recordkeeping requirements of the Final Rules regardless of whether they meet the other thresholds provided for in the definition of “records entity.”

Another reason for setting the thresholds at these levels is to provide for some degree of stability in the set of financial companies that are deemed to be records entities. In looking back across the previous eight quarters, the bank holding companies with derivative liabilities currently at or above the $3.5 billion threshold were at or above the threshold in nearly every quarter, while those with total derivative liabilities currently below the threshold were below the threshold in each quarter. Similarly, for total gross notional derivatives outstanding, bank holding companies at or above the $250 billion threshold were at or above the threshold in nearly every quarter over the last eight quarters, while those with total gross notional derivatives outstanding currently below the threshold were below the threshold in nearly every quarter over the last eight quarters.

Similar trends are evidenced among other public financial companies reporting derivative liabilities and total gross notional derivatives outstanding

in their financial statements filed with the SEC. Among the nonbank financial companies with greater than $50 billion in total consolidated assets that publicly disclose their derivative liabilities or total gross notional derivatives outstanding, as of December 31, 2015, several reported amounts significantly above one or both thresholds while the majority were well below both thresholds. In looking back across the previous eight quarters, those with total derivative liabilities currently at or above the $3.5 billion threshold were above the threshold in every quarter, while those with total derivative liabilities currently below the threshold were below the threshold in nearly every quarter. Similarly, for total gross notional derivatives outstanding, those at or above the $250 billion threshold were above the threshold in nearly every quarter over the last eight quarters, while those below were below in every quarter over the last eight quarters.

Members of Corporate Groups.
The Proposed Rules included within the definition of “records entity” those financial companies that (i) are members of a corporate group in which at least one financial company is a nonbank financial company subject to a Council determination or financial market utility designated by the Council, is a U.S. G-SIB, or meets the $50 billion asset threshold, (ii) are a party to or support a QFC, and (iii) are not excluded entities. The Proposed Rules defined “corporate group” of an entity to include all affiliates of that entity and “affiliate” to include any entity that controls, is controlled by, or is under common control with another entity.

Several commenters stated that the use of the definition of “affiliate,” discussed further below, had the effect of including too broad a scope of affiliates within the definition of “records entity.”
38

Several commenters argued that only the affiliates that reasonably might be subject to resolution under the orderly liquidation authority of Title II should be included as records entities.
39

Other commenters proposed that only those affiliates that meet threshold minimum asset, QFC activity, and complexity criteria should be considered records entities.
40

One commenter proposed including as records entities only entities that are identified as being significant to a critical operation or core business line, which, in the case of bank holding companies, would be the “material entities” identified in the resolution plans they are required to prepare.
41

Another commenter proposed that the definition of “records entity” only include entities that are consolidated for financial reporting purposes either on the Federal Reserve's Form FR Y-9C (regarding the financial condition of bank holding companies, savings and loan holding companies, and securities holding companies) or under any other generally applicable reporting rules or regulations applicable to the records entity.
42

38

See
TCH et al. letter, pp. 8-10; ACLI letter, p. 11-13; ICI Letter, pp. 9-10; TIAA-CREF letter, pp. 5-6.

39

See
TCH et al. letter, p. 2-3, 8-10, and 13-15; ACLI letter, p. 12; CEWG letter, p. 2.

40

See
ACLI letter, p. 11; TIAA-CREF letter, p. 7.

41

See
TCH et al. letter, p. 15.
See also
Dodd-Frank Act § 165(d) (12 U.S.C. 5365); 12 CFR parts 243, 381.

42

See
Letter from The Clearing House Association L.L.C. and the Asset Management Group of the Securities Industry and Financial Markets Association (Nov. 13, 2015) (“TCH/SIFMA letter”).

As discussed further below, the Secretary has adopted the suggestion of commenters, noted above, to revise the definition of “records entity” to identify which members of a corporate group are records entities by reference to whether they are consolidated under accounting standards. This change should have the effect of reducing the number of records entities. The Final Rules do not otherwise revise the scope of members of a corporate group that are included as records entities because the Secretary has decided that it is not possible to describe,
ex ante,
the precise characteristics of a financial company that could be placed into receivership under Title II. In particular, an entity could be resolved under Title II without the Secretary making the determination required under section 203(b) with respect to a covered financial company. Title II provides that the FDIC may appoint itself as receiver of an entity if it is a “covered subsidiary” of a covered financial company of which the FDIC has been appointed as receiver and it is jointly determined by the FDIC and the Secretary that (i) the covered subsidiary is in default or in danger of default, (ii) the FDIC's appointment as receiver would avoid or mitigate serious adverse effects on the financial stability or economic conditions of the United States, and (iii) the FDIC's appointment as receiver would facilitate the orderly liquidation of the covered financial company.
43

If the FDIC appoints itself receiver of a covered subsidiary, that subsidiary is treated as a covered financial company for purposes of Title II, and the FDIC as receiver would have the same rights under the Act and the same obligations under sections 210(c)(8), (9), or (10) of the Act as it does for other covered financial companies.
44

43

See
12 U.S.C. 5390(a)(1)(E)(i). “Covered subsidiary” is defined as any subsidiary of a covered financial company, other than an insured depository institution, an insurance company, or a covered broker or dealer.
See
12 U.S.C. 5381(a)(9).

44

See
12 U.S.C. 5390(a)(1)(E)(ii).

Moreover, information about QFCs of each of the members of the corporate group could be of assistance to the FDIC as receiver in deciding whether to transfer the QFCs to a bridge financial company by giving the FDIC a full understanding of the impact of any transfer of the QFCs on the records entity's corporate group. For example, in the case of certain QFCs that the FDIC might otherwise determine to retain in the receivership rather than transfer to a bridge financial company (to which the equity in all of the records entity's subsidiaries have been transferred), if, by reference to a subsidiary's QFC records, the FDIC determines that the QFCs are offset by QFCs of the subsidiary with another counterparty, the FDIC as receiver may decide to transfer the records entity's QFCs to the bridge financial company in order to maintain a matched book at the corporate group level with the QFCs of the subsidiary.

The Secretary has, instead of excluding certain types or sizes of members of a corporate group from the definition of “records entity,” differentiated among financial companies by providing the de minimis exemption discussed below for records entities that are a party to 50 or fewer QFCs. As discussed below, the FDIC has advised the Secretary that it would be able to review the terms of that number of QFCs on a manual basis within the time frame provided by Title II. The de minimis exemption included in the Final Rules will, unlike commenters' proposed exclusions based on the materiality of the records entity, avoid a situation in which the FDIC as receiver will not have the records it may need for a particular records entity.

Requested additional limitations on definition of “records entity.”
Referring to the FDIC's rules at 12 CFR part 371 (“Part 371”), which require recordkeeping by insured depository institutions that are “in a troubled condition,” commenters suggested that the recordkeeping requirements should apply only to financial companies “in a troubled condition”
45

or that meet an analogous threshold.
46

Unlike the

Federal Deposit Insurance Act (the “FDIA”), which restricts the authority of the FDIC to require QFC recordkeeping by insured depository institutions to those that are “in a troubled condition,”
47

Title II contains no such limitation, and the Secretary believes that adding such a limitation to the Final Rules would not be appropriate. There is no statutory or other established definition of “in a troubled condition” or of an analogous concept for a financial company as there is for an insured depository institution. Although one commenter proposed adoption of a condition based on the amount of risk-based capital at an insurance company,
48

such a condition would have to be appropriately calibrated for each type of financial company subject to the rules. More important, the amount of time that records entities are anticipated to need in order to come into compliance with the rules is such that to allow companies to wait until such a condition is met would not provide sufficient time to ensure that the relevant records would be available to the FDIC if needed. Several commenters requested two years to establish the recordkeeping systems required by the Proposed Rules,
49

and, as discussed below, the Secretary has provided for two or more years for all but the largest corporate groups to comply with the rules.

45

See
letter from The Capital Group Companies, Inc. (April 7, 2015) (the “Capital Group letter”), p. 3, ICI letter, p. 9.

46

See
ACLI letter, p. 17.

47

See
section 11(e)(8)(H) of the FDIA (12 U.S.C. 1821(e)(8)(H)).

48

See
ACLI letter, p. 17.

49

See
AMG letter, p. 13; Regional Banks letter, p. 4.

Excluded Entity:
The Proposed Rules provided that the following entities would be exempt from the definition of “records entity” and, therefore, the scope of the rules:

(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.

The Final Rules use the term “excluded entity” rather than “exempt entity,” as used in the Proposed Rules, in order to avoid confusion with the Secretary's authority to grant exemptive relief from the requirements of the Final Rules. Several commenters requested the addition of other types of entities to the list of excluded entities, as discussed below.

Insurance companies.
Several commenters recommended that the Proposed Rules be revised to exclude insurance companies from the definition of “records entity.” These commenters pointed to section 203(e) of the Dodd-Frank Act, which requires that the liquidation or rehabilitation of an insurance company, as defined in Title II, would be conducted as provided under applicable state law, rather than under the orderly liquidation authority otherwise provided for under Title II.
50

Citing this provision, these commenters argued that subjecting insurance companies to the rules' recordkeeping requirements would not be sufficiently justified.
51

50
12 U.S.C. 5383(e).

51

See
ACLI letter, pp. 4-6; letter from New York Life Insurance Company, The Northwestern Mutual Life Insurance Company, Massachusetts Mutual Life Insurance Company, and The Guardian Life Insurance Company of America (April 7, 2015) (the “Mutual Insurance Companies letter”), pp. 3-4; TIAA-CREF letter, p. 4.

Having considered these comments and the requirements of section 203(e) of the Act, the Secretary is excluding insurance companies from the definition of “records entity” in the Final Rules. Given that the liquidation or rehabilitation of an insurance company under Title II would be conducted under state law, to subject insurance companies to the requirements of the rules would not assist the FDIC as receiver in exercising its rights under the Act or fulfilling its obligations under sections 210(c)(8), (9), or (10). As discussed below, a definition of “insurance company” has been added in the Final Rules to ensure consistency with the application of section 203(e) of the Act.

Commenters also requested that certain non-insurance affiliates of insurance companies be excluded from the scope of the rules, specifically, that non-insurance affiliates within a holding company structure that is predominantly engaged in insurance activities be excluded from the rules.
52

Section 203(e) of the Act, however, excludes non-insurance company subsidiaries and affiliates from the requirement, referenced above, that the liquidation or rehabilitation of insurance companies be conducted under state law. Such non-insurance company subsidiaries and affiliates could themselves be determined to be a covered financial company or covered subsidiary. As these entities would be subject to the orderly liquidation authority of Title II, the records that would be required to be generated by these entities under the rules would assist the FDIC in being able to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) of the Act. The Secretary is therefore not excluding such insurance company affiliates from the definition of “records entity” under the Final Rules. However, the changes to the definition of “records entity” discussed above will reduce the number of corporate groups, including those predominantly engaged in insurance activities, that are subject to the rules, and the de minimis exemption discussed below will substantially eliminate recordkeeping requirements for those records entities with minimal QFC activity. A commenter proposed that QFCs that are entered into for the benefit of or on behalf of affiliated insurance companies be excluded from the rules.
53

However, it is unclear how such QFCs would be distinguished from other QFCs of non-insurance company affiliates, and the FDIC has advised that it would not necessarily treat such QFCs any differently than the way it would treat other QFCs of non-insurance company affiliates.

52

See
ACLI letter, p. 3; Mutual Insurance Companies letter, p. 5.

53

See
ACLI letter, p. 10.

Investment companies and investment advisers.
A number of commenters argued that investment companies and investment advisers should not be included as records entities subject to the rules' recordkeeping requirements.
54

Commenters outlined the manner in which investment advisers and funds are typically resolved outside the scope of Title II
55

and argued that it would be very unlikely for an investment adviser or the funds it manages either to be resolved under Title II or be important to the FDIC's consideration of a resolution under Title II of a financial company of which the adviser is an affiliate.
56

Commenters argued that regulatory constraints applied to registered investment companies, particularly leverage requirements and structural features, such as the ability to limit redemptions, mitigate the potential use of the orderly liquidation authority of Title II.
57

Additionally, they contended that because each investment adviser and investment company is highly substitutable, their assets under

management could be liquidated or transferred to other managers without threatening financial stability.
58

54

See
SIFMA AMG letter, pp. 3-4; ICI letter, pp. 7-12

55

See
SIFMA AMG letter, p. 7; ICI letter, pp. 4-5.

56

See
SIFMA AMG letter, p. 4; ICI letter, pp. 3-4

57

See
TIAA-CREF letter, p. 5; ICI letter, p. 4.

58

See
SIFMA AMG letter, p. 6.

The definition of “records entity” in the Final Rules would include only extremely large and interconnected asset management firms, and, for the reasons discussed above, investment advisers that are members of a corporate group that is subject to the rules. Although commenters cited examples of mergers and closures of funds and advisers that were conducted in an orderly fashion as demonstrating the unlikelihood of the need to resolve such entities under Title II, these examples did not address the potential effects of the rapid failure of a fund or of an asset management firm or other corporate group of the size and complexity that would be subject to the Final Rules.

The Secretary has made certain other changes in the Final Rules that will further reduce their impact on asset management firms. In response to the proposal of a commenter that noted that an investment adviser may be party to a QFC of one of its funds or clients for the limited purpose of providing a representation,
59

the Secretary confirms that an entity will not be considered to be a party to a QFC for purposes of the rules if it is only a party to such QFC for the limited purpose of providing a representation. In addition, the Secretary notes that individual investment funds, including mutual funds, would not be deemed to be affiliates of an investment adviser or other funds managed by that investment adviser solely by virtue of the investment adviser serving in such capacity with respect to the funds. Further, the Secretary confirms that, as stated in the Supplementary Information to the Proposed Rules,
60

each series of a series company (as defined in Rule 18f-2 under the Investment Company Act)
61

will be deemed to be a separate financial company, which means that an individual series would itself have to meet the asset and derivatives thresholds in order to be subject to the rules as a “records entity” and that such an individual series would be able to avail itself of the de minimis exemption if it alone was a party to 50 or fewer QFCs.

59

Id.,
p. 10.

60

See
80 FR 966, 975, n. 66.

61
17 CFR 270.18f-2.

Clearing Organizations.
The Proposed Rules' inclusion of designated financial market utilities within the definition of “records entity” would have subjected certain clearing organizations to the recordkeeping requirements of the rules. Three commenters recommended either excluding or exempting clearing organizations from the scope of the Final Rules.
62

Commenters stated that the requirements of the Proposed Rules were not appropriate for clearing organizations because they were designed to collect information relevant to bilateral trades and that such information is generally irrelevant to, and not collected by, clearing organizations.
63

Commenters stated that there is no need to require maintenance of copies of legal agreements as contemplated by the Proposed Rules, as a clearing organization's legal relationships with its clearing members are governed by its rulebook and not by individual contracts with its clearing members.
64

More generally, commenters stated that the recordkeeping requirements under the Proposed Rules were not tailored in a manner that would best facilitate resolution of a clearing organization.
65

62

See
DTCC letter, p. 11, letter from the Options Clearing Corporation (April 7, 2015) (“OCC letter”), pp. 6-8; letter from the Clearing Division of CME Mercantile Exchange Inc. (April 7, 2015) (“CME letter”), pp. 5-6.

63

See
Letter from the Futures Industry Association (April 10, 2015), p. 2; DTCC letter, p. 9; OCC letter, p. 8.

64

See
DTCC letter, p. 9; OCC letter pp. 11-12.
See also
CME letter, pp. 6-7.

65

See
DTCC letter, p. 7; CME letter, p. 6; OCC letter, pp. 8-13.

Commenters stated that the FDIC should coordinate with the clearing organizations' primary regulators (the Commodity Futures Trading Commission (“CFTC”) or SEC, as applicable) and utilize to the maximum extent practicable the existing reporting regulations, mechanisms, and formats already applicable to clearing organizations.
66

Commenters submitted that the records required to be provided under existing regulations should be sufficient to allow the FDIC as receiver to decide whether to transfer, disaffirm or repudiate, or allow the termination of a clearing organization's QFCs.
67

For example, one commenter indicated that a clearing organization can be expected to maintain trade records; aggregated trade data by clearing member; records of the amount of margin posted by or through clearing members; detail on the amount, type, and location of collateral; records of variation margin payments; and the terms of each QFC cleared by the derivatives clearing organization as provided in its rulebook.
68

66

See
DTCC letter, p. 7; OCC letter, pp. 7-8; CME letter, p. 5.

67

See
OCC letter, p. 7.

68

See
CME letter, p. 7.

The Secretary acknowledges that all derivatives clearing organizations are required by the CFTC to maintain extensive records.
69

In addition, systemically important derivatives clearing organizations are required by CFTC rules to have procedures for providing the CFTC and FDIC with “information needed for purposes of resolution planning.”
70

Likewise, clearing agencies registered with the SEC are required to maintain extensive records,
71

and systemically important or covered clearing agencies for which the SEC is the supervisory agency under the Dodd-Frank Act are required to adopt recovery and wind-down plans.
72

69

See
17 CFR 39.14(e), 39.20.

70

See
17 CFR 39.39(c)(2).

71

See
17 CFR 240.17a-1.

72

See
17 CFR 240.17Ad-22 (e)(3)(ii).

In addition, as commenters noted, the unique nature of derivatives clearing organizations make it possible that their existing recordkeeping practices would be sufficient to meet the needs of the FDIC. The unique characteristics include the following: (i) A clearing organization's only counterparties are its clearing members; (ii) it enters into, or clears, a prescribed set of QFCs; (iii) it maintains a consolidated recordkeeping system to calculate aggregate exposures and margin requirements of its clearing members; and (iv) all transactions are governed by the rulebook of the clearing organization rather than individual legal agreements. The data requirements of the tables included in the Proposed Rules and the Final Rules were created with the expectation that the FDIC as receiver might need to make decisions as to whether to transfer, disaffirm or repudiate, or allow the termination of QFCs with a specific counterparty and its affiliates. In the case of a clearing organization, in contrast, a significant focus of the FDIC would be maintaining the clearing organization's matched book of QFCs. In these cases, the most relevant data would be the type of data that would be of value to a transferee in managing the transferred QFC portfolio, and this is the type of data that clearing organizations are required by their primary regulators to maintain and report.

Having considered the foregoing, the Secretary has determined, after consulting with the FDIC, that the FDIC would be able to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) of the Act if it has access to the records currently required to be maintained by clearing organizations. Accordingly, the Final Rules provide that a clearing

organization is exempt from complying with the recordkeeping requirements of the Final Rules other than the requirement to designate a point of contact if it is (i) in compliance with the recordkeeping requirements of the CFTC and the SEC, as applicable, including its maintenance of records pertaining to all QFCs cleared by the clearing organization and (ii) capable of and not restricted from, whether by law, regulation, or agreement, such as the clearing organization's rulebook, transmitting electronically directly to the FDIC the records maintained under such recordkeeping requirements within 24 hours of request of the SEC or CFTC, as applicable, as PFRA for the clearing organization. The Secretary has determined that this approach should eliminate the burden of duplicative and unnecessary data collection for such entities.

Guaranteed, Supported, or Linked:
The Proposed Rules provided definitions for “guaranteed or supported” and “linked.” Under section 210(c)(16) of 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 to such covered financial company.
73

Such contracts can be enforced by the FDIC as receiver of the covered financial company notwithstanding the insolvency, financial condition, or receivership of the covered financial company. The terms “guarantees or supports” and “linked” in the Proposed Rules were defined in the same way as they are defined in the FDIC's regulations implementing section 210(c)(16) of the Act. Under the Proposed Rules, a financial company would have had to be a party to or have guaranteed or supported or been linked to an open QFC in order to be deemed a records entity, and a records entity would have been required to have maintained records with respect to QFCs that it guaranteed or supported.

73

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

The Secretary has decided to simplify the rules by omitting references to “guaranteed or supported” and “linked.” Under the Final Rules, a financial company would, in addition to meeting the other criteria discussed above, have to be a party to an open QFC in order to be a “records entity,” and such a records entity would only be required to maintain records with respect to its QFCs. This change reduces the complexity of the rules but generally would not be expected to change significantly which entities would be records entities because guarantees and other credit enhancements of QFCs are themselves QFCs.
74

Further, given that the FDIC has adopted regulations clarifying that no special action will be required of the receiver to preserve enforceability of QFCs that are merely “linked” to the entity in receivership,
75

the Secretary has removed all references to “linked” from the Final Rules.

74

See
12 U.S.C. 5390(c)(8)(D).

75

See
12 CFR 380.12

Affiliate, Subsidiary, and Control:
The Proposed Rules defined the terms “affiliate” and “subsidiary” consistently with the definitions given to such terms in the Dodd-Frank Act. Sections 2(1)
76

and 2(18)
77

of the Dodd-Frank Act provide that these terms will have the same meanings as in section 3 of the FDIA. Under section 3(w)(4) of the FDIA, the term “subsidiary” is defined as “any company which is owned or controlled directly or indirectly by another company.” Similarly, the term “affiliate” is defined in section 3(w)(6) of the FDIA by reference to section 2(k) of the Bank Holding Company Act of 1956, as amended (“BHC Act”)
78

as “any company that controls, is controlled by, or is under common control with another company.”

76
12 U.S.C. 5301(1).

77
12 U.S.C. 5301(18).

78
12 U.S.C. 1841(k).

The FDIA, by reference to section 2 of the BHC Act, provides that any company has control over another company if the company 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; the company controls in any manner the election of a majority of the directors or trustees of the company; or the Federal Reserve determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the company. The first two prongs of the definition of “control” in the Proposed Rules are consistent with the BHC Act definition. The third prong of the definition of “control” in the Proposed Rules, that an entity controls another entity if it must consolidate another entity for financial or regulatory purposes, was proposed to reflect the fact that, in certain situations, a controlling interest may be achieved through arrangements that do not involve voting interests and to provide an objective test that does not require a determination by the Federal Reserve. In the Proposed Rules, the definitions of “affiliate” and “control” related both to (1) the determination of which members of a corporate group would be records entities and (2) the information that would be required to be maintained by records entities as to the identities of affiliates of counterparties.

One commenter stated that existing recordkeeping and operational controls with respect to QFCs are customarily maintained by parent companies or other entities that have majority ownership of or are otherwise required to consolidate the entities engaging in QFC activity for financial and regulatory purposes.
79

Commenters stated that, in contrast, the proposed definition of “control” would result in records entity status for legal entities, such as joint ventures and companies in which other members of the corporate group only have a minority interest, that might not be subject to actual governing control by the other members of the corporate group. These commenters indicated that this would pose difficulties for corporate groups attempting to coordinate the compliance of all of their member records entities.
80

This concern would apply in particular to the requirement that affiliated records entities use the same unique counterparty identifier for each counterparty and the proposed requirement that records of affiliated records entities be maintained in a form that allows for aggregation, which has been replaced in the Final Rules with the requirement that the top-tier parent financial company be capable of aggregating such records. As to the Proposed Rules' requirement to identify the affiliates of counterparties, one commenter argued that non-financial company counterparties' lack of familiarity with the BHC Act definition of “control” would make it difficult for records entities to maintain records as to the identity of such affiliates.
81

79

See
ACLI letter, p. 14.

80

See
ACLI letter, pp. 13-14; TIAA-CREF letter, p. 6.

81

See
TCH et al. letter, p. 16.

The Secretary has determined that the FDIC as receiver in a Title II resolution would need to know the identities of the affiliates, as defined by reference to the BHC Act definition of “control,” of the records entity's counterparties. Specifically, as referenced above, section 210(c)(9)(A) of the Act provides the FDIC as receiver shall transfer to one transferee either all or none of the QFCs of a counterparty and the counterparty's “affiliates,” as defined by reference to the BHC Act definition of “control.”
82

In addition, this provision requires that in making any such transfer, the FDIC

as receiver must also transfer (i) all claims of the counterparty or any of its affiliates against the covered financial company under any such QFC, (ii) all claims of the covered financial company against the counterparty and any of its affiliates under any such QFC, and (iii) all property securing or any other credit enhancement for any such QFC. In order for the FDIC to comply with these requirements, the FDIC must have available to it the information as to affiliates, as defined in Title II, of counterparties that is specified in the tables in the appendix to the rules.

82

See
12 U.S.C. 5390(c)(9)(A).

As discussed below, the Proposed Rules would have required a records entity to identify each affiliate of a counterparty by maintaining full organizational charts of the corporate group of a QFC counterparty. This has been replaced in the Final Rules with a requirement in the tables in the appendix to the rules to maintain records as to the identity of the immediate and ultimate parent entity of each counterparty, which will allow the FDIC to identify affiliated counterparties based on their common parent and ultimate parent entities. A new term, “parent entity,” has been defined for this purpose as an entity that controls another entity.

In addition, the Final Rules have been revised to conform the third prong in the definition of “control” to that provided in the BHC Act,
i.e.,
that control exists if the Federal Reserve has determined, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the company.
83

Including this prong will ensure that in the case in which the Federal Reserve has made such a determination, the FDIC would have the relevant records with respect to QFCs with that entity. Likewise, eliminating the proposed consolidation prong of the definition of “control,”
i.e.,
that an entity controls another entity if it must consolidate another entity for financial or regulatory purposes, will avoid the possibility of capturing entities that are not affiliates of the counterparty for purposes of Title II.

83

See
12 U.S.C. 1841(a)(2)(C).

As to the determination of which members of a corporate group would be records entities, the Secretary has adopted the request of commenters, referenced above, to define “records entity” by reference to whether an entity is consolidated under accounting standards. Specifically, under the Final Rules, “records entity” is defined to include a member of a corporate group that consolidates, is consolidated with, or is consolidated by the financial company member of the corporate group that meets the other criteria of the definition of “records entity,”
e.g.,
the asset and derivatives thresholds. The rules provide that with respect to financial companies that are not subject to such accounting principles or standards, for instance because they are not required to prepare financial statements, such member of the corporate group would be a “records entity” if it would consolidate, be consolidated by, or be consolidated with such financial company if such principles or standards applied.

This change addresses the concerns identified by commenters that members of a corporate group would not have access to the records of a minority-owned entity or joint venture and is intended to better align the identification of records entities in a way that comports with existing recordkeeping practices by corporate groups. The modification of the definition of “records entity” is also responsive to concerns from commenters that the scope of the Proposed Rules would have been too broad, given that reference to accounting consolidation generally requires a higher level of an affiliation relationship than the 25 percent voting interest standard of the BHC Act definition of “control.”

Two commenters stated that the definition of “affiliate” could deem investment companies that are “seeded” with an initial capital investment by the fund's sponsor to be affiliates of that sponsor during the period before such a fund attracted third party investors.
84

The changes made to the definition of “records entity” in the Final Rules should greatly limit the circumstances in which this is likely to arise. In the event that such a seeded fund were to be deemed a records entity under the rules, the fund would be able to request an exemption from the recordkeeping requirements of the rules for the duration of the seeding period.

84

See
TIAA-CREF letter, p. 6; ICI letter, p. 10.

Non-U.S. Entities:
Because the Proposed Rules incorporated the Title II definition of “financial company,” the Proposed Rules applied only to entities incorporated or organized in the United States.
85

One commenter argued that the records of foreign affiliates of U.S. broker-dealers should be subject to the recordkeeping requirements.
86

However, the Secretary's authority to adopt recordkeeping rules under section 210(c)(8)(H) only extends to financial companies as defined in Title II of the Act; therefore, entities that are not incorporated or organized within the United States, including foreign affiliates of records entities, are not subject to the Final Rules.

85

See
12 U.S.C. 5381(a)(11)(A).

86

See
Better Markets letter, pp. 16-19.

b. Scope of Final Rules

Section 148.1(a) of the Final Rules provides that the recordkeeping requirements apply to each financial company that qualifies as a records entity and, with respect to section 148.3(a), to the top-tier financial company of a corporate group. As discussed above, the Secretary received numerous comments on the Proposed Rules pertaining to the definition of “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 as necessary or appropriate in order to assist the FDIC as a receiver for a covered financial company in being able to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) of the 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, interconnectedness to the financial system, and any other factors deemed appropriate. As discussed earlier, the Secretary has complied with these requirements and consulted extensively with the FDIC.

The Secretary anticipates that records entities may include the following types of financial companies:
87

(i) Broker-dealers, investment advisers, investment companies, swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, derivatives clearing organizations, and clearing agencies; (ii) bank holding companies or bank holding company subsidiaries (that are not insured depository institutions or other types of excluded entities); savings and loan

holding companies or savings and loan holding company subsidiaries (that are not insured depository institutions or other types of excluded entity); U.S. affiliates of a foreign bank; noninsured state member banks; agencies or commercial lending companies other than a federal agency; organizations organized and operated under section 25A of the Federal Reserve Act or operating under section 25 of the Federal Reserve Act; (iii) (A) nonbank financial companies that the Council has determined shall be subject to Federal Reserve supervision and enhanced prudential standards under section 113 or (B) financial market utilities that the Council has designated as, or as likely to become, systemically important under section 804; (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; and (v) other non-bank financial companies satisfying criteria set forth in the Final Rules.

87
Not all of these entities would qualify as records entities subject to the Final Rules because of conditions in the definition of records entity related to asset size and level of derivatives 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 BHC Act. 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 provided 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. The Secretary did not receive any comments requesting changes to this section and has not modified it from the Proposed Rules.

3. Effective Date and Compliance Dates

a. Initial Compliance Dates

Section 148.1(c) of the Proposed Rules provided that the rules would become effective 60 days after publication of the Final Rules in the
Federal Register
. Section 148.1(d)(1) of the Proposed Rules provided that each entity that constitutes a records entity on the date the rules become effective would be required to provide each of its PFRAs and the FDIC a point of contact responsible for recordkeeping under the rules and to comply with all the other requirements of the rules within 270 days of the effective date. For a records entity that becomes subject to the rules after they become effective, compliance with the point of contact requirement would have been required within 60 days after such entity becomes subject to the rules and compliance with all the other requirements of the rules would have been required within 270 days after such entity becomes subject to the rules.

Several commenters submitted that the proposed compliance period would be an inadequate amount of time for implementation because of the significant information systems upgrades and changes in recordkeeping practices that commenters said would be required for implementation.
88

Some commenters suggested that the initial compliance period should be extended to two years.
89

Other commenters suggested that compliance should be phased in in stages, with staggered compliance dates for various types of QFCs
90

or for entities based on the size of their QFC portfolios, with entities with the largest QFC portfolios required to comply first under the assumption that they would be more likely to have the infrastructure in place to comply with the recordkeeping requirements.
91

88

See
ACLI letter, pp. 19-20; OCC letter, p. 12; SIFMA AMG letter, pp. 13, 22-23.

89

See
Regional Banks letter, p. 4; SIFMA AMG letter, p. 13.

90

See
TCH et al. letter, p. 23.

91

See
ACLI letter, pp. 15-16.

In response to these comments, the Final Rules provide additional time to all records entities to comply with the requirements of the rules. All records entities will have 90 days after the effective date of the rules to comply with the requirement to provide point of contact information to their PFRAs and the FDIC; this extension will provide additional time to financial companies to determine whether they are records entities under the rules. As to the remainder of the requirements of the rules, the Final Rules provide staggered compliance dates that will provide all records entities with additional time to comply with the recordkeeping requirements. The Final Rules provide that records entities with $1 trillion or more in total consolidated assets and the financial company members of their corporate group will have 540 days (approximately 18 months) after the effective date to comply with the rules. The Secretary understands that only the four largest G-SIBs would meet this threshold on the effective date. The Secretary has determined that it is important for data on the largest, most systemically important entities to be available as soon as reasonably possible. The FDIC has advised that, in general, large insured depository institutions subject to the Part 371 recordkeeping requirements have been able to comply with those requirements within 270 days. Although the recordkeeping requirements under the Final Rules are more detailed in many respects than those under Part 371, the Secretary believes that the extra time allotted for compliance should be sufficient to allow the largest financial companies to adapt the processes, procedures, and systems to comply with the Final Rules.

Under the Final Rules, all other records entities will have at least two years to comply with the rules' recordkeeping requirements. Records entities with total assets equal to or greater than $500 billion (but less than $1 trillion) and financial company members of the corporate group of such entities will have two years from the effective date to comply. Records entities with total assets equal to or greater than $250 billion (but less than $500 billion) and financial company members of the corporate group of such entities will have three years from the effective date to comply. All other records entities will have four years from the effective date to comply.

The Final Rules provide for a staggered schedule based on the total consolidated assets of the records entities (or other members of their corporate group) on the understanding that larger entities will generally have greater capacity to apply to the task of coming into initial compliance with the rules. In addition, because the Department of the Treasury and the FDIC anticipate providing guidance to records entities as they work to come into compliance with the rules, the staggered compliance schedule will permit staff of the Department of the Treasury and the FDIC to allocate their resources to address more efficiently requests for guidance from each tier of records entities in turn. The commenter's proposal to provide for staggered compliance based on type of QFC would mean that the FDIC would not have records that would be of meaningful usefulness under Title II until the final compliance deadline had been met, given the requirement, discussed above, that if the FDIC as receiver decides to (i) 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 and (ii) disaffirm or repudiate any QFC with a particular counterparty, it must disaffirm or repudiate all QFCs between the covered financial company and such counterparty and any affiliate of such counterparty. In contrast, the compliance schedule provided for in the Final Rules would provide the FDIC with complete records for a successively larger set of companies.

The Final Rules provide that a financial company that becomes a records entity after the effective date

must provide point of contact information within 90 days of becoming a records entity and must comply with all other applicable requirements of the rules within 540 days of becoming a records entity or within the remainder of the applicable initial compliance period if it has not yet expired, whichever period is longer. The Secretary believes that this amount of time will be sufficient given that financial companies generally should be able to anticipate meeting the criteria for being deemed a records entity in advance of crossing the total assets and derivatives thresholds.

b. Subsequent Compliance Dates

Under Section 148.1(d)(2) of the Proposed Rules, a financial company that no longer qualifies as a records entity would have been permitted to cease maintaining records one year after it ceases to qualify as a records entity. The definition of “records entity” in section 148.2(n) of the Final Rules provides that a company that is a records entity by virtue of exceeding the total assets and derivatives exposure thresholds shall remain a records entity until one year after it ceases to meet the total assets and derivatives exposure thresholds. Financial companies that are members of such a corporate group would be subject to the same provision. However, in a change from the Proposed Rules, any company that is a records entity because it meets the other criteria of the definition shall cease to be a records entity and thus shall cease to be subject to the rules immediately upon ceasing to meet such criteria. For example, a nonbank financial company with respect to which the Council rescinds a determination under section 113 would no longer be a records entity upon such rescission.

The Proposed Rules provided that 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 rules within 90 days of the date it again becomes subject to the rules. The Final Rules extend that period to 365 days, but if a longer period still remains under the applicable initial compliance period discussed above, the entity has until the end of that longer period to comply with the rules.

c. Extensions of Compliance Dates

Section 148.1(d)(3) of the Final Rules, consistent with section 148.3(c)(3) of the Proposed Rules, authorizes the Secretary, in consultation with the FDIC, to grant extensions of time with respect to compliance with the recordkeeping requirements. As discussed in the Supplemental Information to the Proposed Rules, 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 adjust the time periods specified in the maintenance and updating requirements of section 148.3(b) of the Final Rules. Extensions of time may also be appropriate on a limited basis with respect to a records entity that is temporarily incapable of generating records due to unforeseen technical issues.

d. Compliance by Top-Tier Financial Company

Finally, section 148.1(d)(4) of the Final Rules provides that a top-tier financial company must comply with the requirement, discussed below, to be capable of generating a single, compiled set of records of all the members of its corporate group on the same date as the date on which the records entity members of the corporate group of which it is a member are required to comply with this part.

B. General Definitions

In addition to the definitions described in detail above in reference to the scope of the Proposed Rules, certain additional terms were defined in the Proposed Rules to describe a records entity's recordkeeping obligations. The Secretary did not receive any comments on these definitions.

The definition of “primary financial regulatory agency” has been revised to include, with respect to a financial market utility that is subject to a designation pursuant to section 804 of the Act, the Supervisory Agency for that financial market utility, as defined in section 803(8) of the Act, if such financial market utility would not otherwise have a PFRA.
92

92
12 U.S.C. 5462(8).

The term “total assets,” which is used both in the definition of “records entity” and for determining a particular records entity's compliance date, is defined in the Final Rules by reference to the audited consolidated statement of financial condition submitted to the financial company's PFRAs or, if no such statement is submitted, to the financial company's consolidated balance sheet for the most recent fiscal year end, as prepared in accordance with GAAP or other applicable accounting standards. This definition is unchanged from the Proposed Rules other than the addition of the reference to GAAP or other applicable accounting standards. One commenter proposed excluding from the definition of “total assets” any assets under management, even if those assets are included on a balance sheet under applicable accounting standards.
93

The Secretary has decided, for the sake of consistency and to allow for ease of determination as to what a financial company's total assets are, not to provide such an exclusion. However, to the extent assets under management are not reflected on a financial company's consolidated statement of financial condition or consolidated balance sheet, as applicable, such assets would not be included within the definition of “total assets.”

93

See
SIFMA AMG letter, p. 10.

The Final Rules also include several additional definitions. A definition of “legal entity identifier,” previously provided in the appendix, has been added to section 148.2. In addition, a definition of “parent entity” has been added because, as discussed below, the appendix has been revised in the Final Rules to require information regarding the immediate and ultimate parent entity of a counterparty to a QFC rather than a full organizational chart for each counterparty. In order to align with the definition of “affiliate” in Title II, as discussed above, “parent entity” is defined in the Final Rules as “an entity that controls another entity.”

Because, as discussed above, the Final Rules exclude insurance companies from the definition of “records entity,” a definition of “insurance company” has been added. In addition to incorporating the definition of “insurance company” provided in Title II, the definition in the Final Rules includes mutual insurance holding companies that meet the conditions, specified by the FDIC in part 380 of its rules, for being treated as an insurance company for the purpose of section 203(e) of the Act.
94

The Final Rules also

include definitions of “gross notional amount of derivatives outstanding” and “derivative liabilities,” as discussed above, and a definition of “top-tier financial company,” as discussed below.

94
A mutual insurance holding company is created through the restructuring of a mutual insurance company into two entities, a mutual insurance holding company and a stock insurance company that is converted from the original mutual insurance company. The FDIC excluded mutual insurance holding companies that meet the conditions specified in its rules in order to address concerns that, because, under applicable state laws, a mutual insurance holding company generally is prohibited from selling policies of insurance, it might not fit squarely within a literal reading of the statutory definition of insurance company under the Dodd-Frank Act. The FDIC also noted that state law generally subjects a mutual insurance holding company to liquidation or rehabilitation under the state regime if the converted mutual insurance company is placed in liquidation or rehabilitation and that in the liquidation of a converted mutual insurance company, the assets of the mutual insurance holding company generally are included in the estate of the converted mutual insurance company being liquidated.
See
77 FR 25349, 25349-50 (April 30, 2012).

C. Form, Availability, and Maintenance of Records

1. Form and Availability

Generally applicable requirements.
Section 148.3(a)(1) of the Proposed Rules provided that a records entity must maintain all records in electronic form in the format set forth in the appendix to the Proposed Rules. The Proposed Rules further provided that all affiliated records entities in a corporate group must be able to generate data in the same data format and use the same unique counterparty identifiers to enable the aggregation of data. As explained in the Supplemental Information to the Proposed Rules, the FDIC would use the aggregation of counterparty positions to determine the effects of termination or transfer of QFCs. The Secretary requested comments on whether the rules should require that the parent company of a corporate group aggregate the records of the records entities of the corporate group.
95

The Secretary, after consulting with the FDIC, has determined that it is important that the FDIC be able to receive a single set of compiled records from a corporate group in order to allow it to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), or (10) of the Act under the short time frame provided in Title II.

95

See
80 FR 966, 975.

Accordingly, section 148.3(a)(1) has been revised in the Final Rules to provide that a top-tier financial company, defined as a financial company that is a member of a corporate group consisting of multiple records entities and that is not itself controlled by another financial company, must be able to generate a single, compiled set of the records, in electronic form, for all records entities in the corporate group that it consolidates or are consolidated with it, in a format that allows for aggregation and disaggregation of such data by records entity and counterparty. By limiting this requirement to records of records entities that are consolidated by or with the top-tier financial company, the Secretary has sought to avoid circumstances in which the top-tier financial company might not have access to the records it is required to compile. The top-tier financial company may comply with this requirement by providing that any of its affiliates or any third-party service provider maintains the capability of generating the single, compiled set of the records, in electronic form, for all records entities in the corporate group; provided, however, that the top-tier financial company shall itself maintain records under this part in the event that such affiliate or service provider shall fail to maintain such records.
96

Given that the Proposed Rules would have required each records entity in a corporate group to generate data in the same format, the Secretary does not anticipate that this will place a significant additional burden on records entities. Section 148.3(a)(2) of the Proposed Rules has been consolidated in the Final Rules with section 148.4, as discussed below under section II.D.1.

96
It is possible that there could be more than one top-tier financial company in a corporate group, particularly in the circumstance in which the top-tier parent entity of the group is not itself a financial company; in such a case, the top-tier financial companies would presumably provide that only one of them, or an affiliate or service provider, would maintain the capability of generating the single, compiled set of the records for all records entities in the corporate group.

Section 148.3(a)(3) of the Proposed Rules provided that each records entity designate a point of contact to enable its PFRA and the FDIC to contact the records entity with respect to the rules and to update this information within 30 days of any change. The Secretary did not receive any comments on this subsection, which in the Final Rules appears as section 148.3(a)(2), and has not modified it from the Proposed Rules, other than by subjecting the top-tier financial company of a corporate group to this requirement and by making certain technical changes.

Section 148.3(a)(4) of the Proposed Rules provided 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 provision has been revised as section 148.3(a)(3) of the Final Rules to provide that the records entity is required to be capable of providing electronically, within 24 hours of the request of the PFRA, all QFC records specified in the rules to both its PFRA and the FDIC. This change has been made to ensure that the records will be maintained in a format that is compatible with the FDIC's systems and to avoid any delay resulting from the records having to be transmitted from the PFRA to the FDIC.
97

This provision also provides that the top-tier financial company of a corporate group be required to be capable of providing, upon the request of the PFRA, the compiled set of records for all records entities of the corporate group to both its PFRA and the FDIC.

97
One commenter requested that the Secretary provide clarification that, given the global nature of many financial companies that would be records entities under the rule, a request for records made before 5:00 p.m., eastern time on a given day must be satisfied by 5:00 p.m. eastern time on the following day.
See
TCH et al. letter, p. 23. This is not the intention of Secretary in adopting the 24 hour requirement.

Request for reliance on existing recordkeeping requirements.
Commenters suggested that the records required under the Proposed Rules be made consistent with supervisory recordkeeping or reporting requirements for derivatives imposed by other federal regulatory agencies.
98

However, the types of financial contracts included within the scope of other derivatives recordkeeping and reporting requirements is not as broad as the definition of QFCs under the Dodd-Frank Act.
99

Further, the scope of entities required to maintain records under such other recordkeeping and reporting rules is different from that under the Final Rules, given their differing purposes. Finally, reliance on a collection of records maintained under different recordkeeping and reporting regimes would not permit the aggregation of data that will be necessary for the receiver to comply with the time frame under which the FDIC as receiver must take action with respect to the covered financial company's QFCs under the statutory constraints discussed above.

98

See
SIFMA AMG letter, pp. 12-13; DTCC letter, p. 7; ACLI letter, p. 20; Capital Group letter, pp. 3-4.

99
For example the CFTC's swap data recordkeeping requirement at 17 CFR part 46 covers “swaps,” which does not include certain contracts such as commodity contracts and margin loans that are included in the definition of QFCs under the Dodd-Frank Act.

Request for exclusion of certain types of transactions.
One commenter proposed that the recordkeeping requirements of the Final Rules not apply to QFCs that are for the purchase and sale of securities such as typical cash transactions that settle on a delivery-versus-payment basis or settle within a fixed number of days following the transaction date.
100

The commenter argued that (i) these short-term transactions are not relevant to the FDIC for the purposes of its decision making under Title II, (ii) the significant volume of these transactions that would be reported on any given day would overwhelm and obscure otherwise relevant data, and (iii) for those transactions that are exchange traded, only the settlement system and the

clearing agency would be listed as direct counterparties, which should simplify the FDIC's decisions with respect to such transactions. The commenter offered similar arguments with respect to QFCs entered into with retail customers or as part of a records entity's retail or brokerage account activities.

100

See
TCH/SIFMA letter.

All QFCs, regardless of their tenor, their volume, and how they are settled, are subject to the requirement, discussed above, that if the FDIC as receiver determines (i) 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 or (ii) to disaffirm or repudiate any QFC with a particular counterparty, it must disaffirm or repudiate all QFCs between the covered financial company and such counterparty and any affiliate of such counterparty. The large volume of these short-term transactions supports the determination that the QFC information required to be provided must be maintained in the standard format specified in the rules to ensure rapid aggregation and evaluation of the information by the receiver. Whether these transactions are exchange traded will not necessarily affect the FDIC's decision as to whether to transfer the QFCs in question; rather, the FDIC's decision as to whether to transfer a particular counterparty's QFCs will be based on an evaluation of the other information required to be collected under the Final Rules and on an evaluation of the impact of such transfer on the receivership and U.S. financial stability. Furthermore, for corporate groups that include members that are subject to different recordkeeping regimes, permitting entities to rely on their existing records would not be consistent with the requirement for the top-tier financial company to be capable of generating a single, compiled set of QFC records in a format that allows for aggregation and disaggregation of such data. The Secretary notes, however, that under the exemptive process provided in the rules and discussed below, a records entity may apply for relief from particular requirements as to the information to be maintained by a records entity for a particular type of QFC or counterparty. Any exemptive relief requested with respect to a particular type of QFC or counterparty would need to be defined in such a way as to ensure consistency of treatment by each records entity.

2. Maintenance and Updating

Section 148.3(b) of the Proposed Rules would have required that each records entity maintain the capacity to produce QFC records on a daily basis based on previous end-of-day records and values. The Secretary has clarified in the Final Rules that, if records are maintained on behalf of a records entity by an affiliate or service provider, such records entity shall itself maintain records under this part in the event that such affiliate or service provider fails to maintain such records. The Secretary confirms that, as was suggested by a commenter, the information required to be capable of being provided shall be with respect to QFCs as of the end of the day on the date the request is provided.
101

101

See
TCH et al. letter, p. 23.

3. Exemptions

a. Requests for Exemptions

Section 148.3(c) of the Proposed Rules provided 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. In addition, under the Proposed Rules, the Secretary would also have been 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.

One commenter suggested that exemptions should be granted by the PFRAs for a records entity rather than by the Secretary.
102

Another commenter suggested that exemption recommendations should be made by the PFRAs rather than by the FDIC.
103

A third commenter suggested that the exemption process should be streamlined to involve only one agency.
104

After considering these comments, the Secretary is adopting the provision for granting exemptions substantially as proposed, with certain modifications as described below. The Secretary believes that the Act does not authorize the Secretary, as Chairperson of the Council, to delegate decision making authority with respect to these rules to other agencies. In making any decision regarding exemptions, the Secretary continues to believe that it is appropriate to obtain a recommendation from the FDIC, prepared in consultation with the PFRAs for the relevant records entities. The provision for a recommendation from the FDIC is consistent with the requirement that the Secretary consult with the FDIC in adopting these rules and reflects the fact that the FDIC is the intended user of the QFC records. Including the PFRAs for the relevant records entities in the exemption process recognizes their familiarity with the operations of the records entities. The Final Rules have been modified to clarify that, even if the FDIC does not make a recommendation, the Secretary nevertheless may make a determination to grant or deny an exemption request.

102

See
Capital Group letter, p. 4.

103

See
ICI letter, p. 10.

104

See
OCC letter, p. 8.

In addition, the Secretary has simplified the exemption provision by consolidating the separate provisions for general and specific exemptions and has specified in the Final Rules what a request for an exemption must contain. In determining whether to grant any requests from records entities for exemptions, the Secretary may take into consideration their size, risk, complexity, leverage, frequency and dollar amount of QFCs, interconnectedness to the financial system, and any other factors deemed appropriate, including whether the application of one or more requirements of the rules is not necessary or appropriate to achieve the purpose of the rules.

b. De Minimis Exemption

Several commenters argued that the requirements of the Proposed Rules should not apply to records entities that have a minimal level of QFC activity. Commenters noted that a financial company might be subject to the recordkeeping requirements of the Proposed Rules even if it is a party to only a single QFC.
105

One commenter suggested that the definition of “records entity” exclude any financial company that, over the immediately preceding 12 months, (i) had fewer than 50 unaffiliated counterparties or entered into fewer than 100 QFC transactions with non-affiliates and (ii) entered into QFCs having a gross notional value equal to or less than $2.5 billion.
106

Another commenter proposed providing varying de minimis thresholds for each type of QFC, with different levels set to reflect the different risks associated with each type of QFC.
107

105

See
ACLI letter, p. 15; TCH et al. letter, p. 11; TIAA-CREF letter, p. 7; CWEG letter, pp. 4-5.

106

See
TCH/SIFMA letter.

107

See
ACLI letter, p. 15.

After consideration of these comments, the Secretary has determined that an exemption from the preponderance of the recordkeeping

requirements of the rules is appropriate for records entities that have a minimal level of QFC activity such that if the FDIC were appointed as receiver for any such records entity, the FDIC would be in a position to make the requisite determinations with respect to the treatment of QFCs during the stay period even in the absence of the records required to be maintained under the rules. The Secretary considered a number of different approaches to setting the threshold for the de minimis exemption, including the gross notional value of a records entity's QFC portfolio over a defined period, the number of discrete unaffiliated QFC counterparties, and the number of open positions. The Secretary determined that gross notional value would not be an appropriate metric because the gross notional amount of a QFC portfolio is not a good proxy for the difficulty the receiver would have in assessing the QFC portfolio and in making the requisite determinations with speed and accuracy. For instance, a single interest rate swap that exceeds a specified threshold may easily be reviewed by the receiver without standardized recordkeeping. By contrast, a records entity may have a QFC portfolio that falls below the threshold but is comprised of hundreds of open positions, such that the portfolio would pose challenges for the receiver to review and act upon during the one business day stay period and thus would necessitate the advance recordkeeping required by the rules. Likewise, the Secretary determined that neither the risk each type of QFC might pose, even if that were something that could be distinguished for purposes of these rules, nor any of the other factors listed in section 210(c)(8)(H)(iv) would be relevant to the question of how many QFCs a receiver will be able to review during the one business day stay period.

The recordkeeping requirements of Part 371 of the FDIC's rules relax the recordkeeping requirements for institutions with fewer than twenty open QFC positions. Based on its experience with Part 371, the FDIC advised that a receiver should be able to exercise its statutory rights and duties under the Dodd-Frank Act relating to QFCs without having access to standardized records for any records entity that is a party to no more than 50 open QFC positions. Having considered the comments received and the FDIC's experience with evaluating QFC portfolios, the Secretary has provided in the Final Rules that any records entity that is a party to no more than 50 open QFC positions is not required to maintain the records described in section 148.4 other than the copies of the documents governing QFC transactions between the records entity and each counterparty as provided in section 148.4(i). This exemption provides further differentiation among financial companies and reduces the burden of the rules without compromising the ability of the FDIC to exercise its rights under the Act and fulfill its obligations under sections 210(c)(8), (9), and (10).

D. Content of Records

1. General Information

Section 148.4 of the Final Rules requires each records entity to maintain the data listed in the appendix tables, copies of the documents that govern QFCs, and lists of vendors directly supporting the QFC-related activities of the records entity and the vendors' contact information with respect to each QFC to which it is a party. As discussed above, the Final Rules have been simplified so as not to separately require that a full set of records be maintained with respect to the underlying QFCs for which a records entity provides a guarantee or other credit enhancement. Instead, as discussed below, certain fields specific to the provision by a records entity of a guarantee of a QFC or of another type of credit enhancement of a QFC have been added to the tables in the Final Rules.

The Proposed Rules would have also required that records entities maintain any written data or information that is not listed in the appendix tables that the records entity is required to provide to a swap data repository, security-based swap data repository, the CFTC, the SEC, or any non-U.S. regulator with respect to any QFC, for any period that such data or information is required to be maintained by its PFRA. Having considered a comment received indicating that this would be unduly burdensome,
108

the Secretary has chosen to eliminate these requirements as not sufficiently significant to the receiver to justify the burden they would place on records entities.

108

See
TCH et al. letter, p. 17.

The Proposed Rules provided that a records entity also would be required to maintain electronic, full-text searchable copies of all agreements that govern the QFC transactions subject to the rules, as well as credit support documents related to such QFC transactions. Having considered the comments received indicating that the requirement that such electronic documents be full-text searchable would be unduly burdensome,
109

the Secretary has decided to omit this requirement as not sufficiently significant to the receiver to justify the burden it would place on records entities. No comments were received on the proposed requirement that each records entity maintain a list of vendors directly supporting the QFC-related activities and the contact information for such vendors, and this provision has been retained without change in the Final Rules. The Proposed Rules also provided that each records entity would be required to maintain information about the risk metrics used to monitor the QFC portfolios and contact information for each risk manager. The Secretary has decided to eliminate this requirement as not sufficiently significant to the receiver to justify its burden on records entities.

109

See
TCH et al. letter, pp. 18-19; ACLI letter, pp. 18-19.

2. Appendix Information

For the receiver to make a well-informed decision that complies with the requirements of Title II discussed in section I, the receiver must have sufficient information to fully evaluate and model various QFC transfer or termination scenarios as well as the potential impact of its transfer or retention decisions. To perform this analysis in the extremely limited time frame provided by Title II, the receiver must have access to data on the QFC positions of the records entity, net QFC exposures under applicable netting agreements, detailed and aggregated collateral positions of the records entity and of its counterparties, and information regarding certain key provisions of the legal agreements governing the QFC transactions. Many commenters recognized the importance of maintaining detailed records of QFCs for use by the FDIC if it were appointed as receiver under Title II; however, several commenters expressed concern that the requirements of Tables A-1 through A-4, as proposed, were overly burdensome and would require maintenance of data that is different in content or format from that currently tracked or collected in the ordinary course of business or for other regulatory purposes.
110

110

See
TCH et al. letter, pp. 15, 20; ACLI letter, pp. 17-18; SIFMA AMG letter, pp. 12-13; TIAA-CREF letter, p. 2.

The appendix to the Final Rules preserves the basic structure and content of the data tables included in the Proposed Rules. However, the Secretary has eliminated data fields that the Secretary decided would not provide a sufficiently significant benefit to the FDIC as receiver to justify the

burden they would place on records entities. Further, the Final Rules add four master data lookup tables, composed largely of requirements that previously appeared in the four data tables of the Proposed Rules, in order to reduce the burden on records entities and improve the tables' functionality for the receiver. These include: (1) A corporate organization master data lookup table; (2) a counterparty master data lookup table; (3) a booking location master data lookup table; and (4) a safekeeping agent master data lookup table.

The master data lookup tables are cross-referenced to one or more of Tables A-1 through A-4 and provide a centralized site for records of affiliate, counterparty, booking location, and safekeeping agent data, which eliminates the need for a records entity to include duplicative data in Tables A-1 through A-4 and thereby makes it easier for a records entity to enter and update the data included in those Tables. In particular, the records entity members of a corporate group, which are required to utilize common identifiers for shared counterparties, will be able to use the same counterparty consolidated corporate master lookup table for a given counterparty. For example, if there were several records entities in a corporate group and each was a party to one or more QFCs with a particular counterparty, use of the counterparty master lookup table would enable the information as to that counterparty to be entered only once. The lookup table format, which conforms to customary information technology practices, will also allow for smaller file sizes by eliminating repetitive entries, thereby reducing the burden of maintaining the records and maintaining the capability of transmitting them to the FDIC and the records entity's PFRA.

Each table contains examples and, as relevant, instructions for recording the required information and an indication of how the FDIC as receiver would apply the required information. A records entity may leave an entry blank for any data fields that do not apply to a given QFC transaction, agreement, collateral item, or counterparty. For example, if a QFC is not collateralized, the data fields that relate to collateral may be left blank (in the case of character fields) or given a zero value (in the case of numerical fields).

Several commenters noted that the scope of the recordkeeping requirements in the appendix is more extensive than that of the recordkeeping requirements in the appendix to Part 371.
111

As noted in the Supplementary Information to the Proposed Rules, the recordkeeping requirements of the rules have been informed by the FDIC's experience in evaluating multiple QFC portfolios of insured depository institutions.

111

See
TCH et al. letter, p. 20; Capital Group letter, p. 3.

a. Table A-1—Position-Level Data

Table A-1 requires each records entity to maintain detailed position-level data to enable the FDIC as receiver to evaluate a records entity's QFC exposure to each of its counterparties on a position-by-position basis. The records required by the table include critical information about the type, terms, and value of each of the records entity's QFCs. Position-level information must be available for each counterparty, affiliate, and governing netting agreement to allow the FDIC as receiver to model the potential impacts of its decisions relating to the transfer or retention of positions. This information will also enable the FDIC to confirm that the netting-set level data provided in Table A-2, such as the market value of all positions in the netting set (A2.6), based on the aggregated data from Table A-1, is accurate and can be validated across different tables. In addition, position-level information will assist the receiver or any transferee in complying with the terms of the records entity's QFCs and thereby reduce the likelihood of inadvertent defaults.

In response to comments received, the Secretary has made several changes to Table A-1 that will reduce the recordkeeping burden. One commenter recommended elimination of the requirement to identify the purpose of a QFC position, stating that this could involve a complicated analysis and impose a substantial burden on records entities. The commenter stated that a QFC position may have multiple purposes that may change over time such that any identified purpose would be of minimal value to the receiver.
112

In response to this comment, the Secretary has eliminated from Table A-1 the requirement to identify the purpose of each QFC.

112

See
TCH et al. letter, pp. 20-21.

One commenter also recommended eliminating the requirement to maintain operational and business-level details relating to QFC positions, such as the identification of related inter-affiliate positions, trading desk identifiers, and points of contact. The commenter stated that such operational and business-level details are subject to frequent change that would require frequent updates by records entities and submitted that this information would likely be of limited value to the receiver.
113

In consideration of this comment, the Secretary has decided to eliminate both the requirement to maintain data on related inter-affiliate positions and the requirement to maintain contact information for the person at the records entity responsible for each position. The Secretary has replaced the inter-affiliate fields of the Proposed Rules with a narrower requirement to link only related positions, if any, to which the records entity itself is a party (A1.22). All positions of a particular records entity that are reported on Table A-1 and that are related to one another should have the same designation in this field. The requirement to identify loans related to a QFC position has also been retained (A1.23-24). In addition, in recognition that it may be necessary for the FDIC, in determining whether to transfer a QFC, to locate the personnel at a records entity who are familiar wi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-25329. Public record. Not legal advice.