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

Federal RegisterOct 30, 2017

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324, 329, and 382

RIN 3064-AE46

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

AGENCY:

Federal Deposit Insurance Corporation (FDIC).

ACTION:

Final rule.

SUMMARY:

The FDIC is adding regulations to improve the resolvability of systemically important U.S. banking organizations and systemically important foreign banking organizations and enhance the resilience and the safety and soundness of certain State savings associations and State-chartered banks that are not members of the Federal Reserve System (“State non-member banks” or “SNMBs”) for which the FDIC is the primary Federal regulator (together, “FSIs” or “FDIC-supervised institutions”). This final rule requires that FSIs and their subsidiaries (“covered FSIs”) ensure that covered qualified financial contracts (QFCs) to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Federal Deposit Insurance Act (FDI Act). In addition, covered FSIs are generally prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the covered FSI based on the entry into a resolution proceeding under the FDI Act, or any other resolution proceeding of an affiliate of the covered FSI. The final rule also amends the definition of “qualifying master netting agreement” in the FDIC's capital and liquidity rules, and certain related terms in the FDIC's capital rules. These amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is party would not be affected by the restrictions on such QFCs.

DATES:

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

FOR FURTHER INFORMATION CONTACT:

Ryan Billingsley, Acting Associate Director,

rbillingsley@fdic.gov

, Capital Markets Branch, Division of Risk Management and Supervision; Alexandra Steinberg Barrage, Senior Resolution Policy Specialist, Office of Complex Financial Institutions,

abarrage@fdic.gov

; David N. Wall, Assistant General Counsel,

dwall@fdic.gov

, Cristina Regojo, Counsel,

cregojo@fdic.gov

, Phillip Sloan, Counsel,

psloan@fdic.gov

, Michael Phillips, Counsel,

mphillips@fdic.gov

, Greg Feder, Counsel,

gfeder@fdic.gov

, or Francis Kuo, Counsel,

fkuo@fdic.gov

, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Background

B. Notice of Proposed Rulemaking and General Summary of Comments

C. Overview of the Final Rule

D. Consultation With U.S. Financial Regulators

E. Overview of Statutory Authority and Purpose

II. Restrictions on QFCs of Covered FSIs

A. Covered FSIs

B. Covered QFCs

C. Definition of “Default Right”

D. Required Contractual Provisions Related to the U.S. Special Resolution Regimes

E. Prohibited Cross-Default Rights

F. Process for Approval of Enhanced Creditor Protections

III. Transition Periods

IV. Expected Effects

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

VI. Regulatory Analysis

A. Paperwork Reduction Act

B. Regulatory Flexibility Act: Initial Regulatory Flexibility Analysis

C. Riegle Community Development and Regulatory Improvement Act of 1994

D. Solicitation of Comments on the Use of Plain Language

E. Small Business Regulatory Enforcement Fairness Act

I. Introduction

A. Background

This final rule addresses one of the ways the failure of a major financial firm could destabilize the financial system. The disorderly failure of a large, interconnected financial company could cause severe damage to the U.S. financial system and, ultimately, to the economy as a whole, as illustrated by the failure of Lehman Brothers in September 2008. Protecting the financial stability of the United States is a core objective of the Dodd-Frank Act,

which Congress passed in response to the 2007-2009 financial crisis and the ensuing recession. One way the Dodd-Frank Act helps to protect the financial stability of the United States is by reducing the damage that such a company's failure would cause to the financial system if it were to occur. This strategy centers on measures designed to help ensure that a failed company's resolution proceeding—such as bankruptcy or the special resolution process created by the Dodd-Frank Act—would be more orderly, thereby helping to mitigate destabilizing effects on the rest of the financial system.

The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L. 111-203). According to its preamble, the Dodd-Frank Act is intended “[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end `too big to fail', [and] to protect the American taxpayer by ending bailouts.”

The Dodd-Frank Act itself pursues this goal through numerous provisions, including by requiring systemically important financial companies to develop resolution plans (also known as “living wills”) that lay out how they could be resolved in an orderly manner under bankruptcy if they were to fail and by creating a new back-up resolution regime, the Orderly Liquidation Authority, applicable to systemically important financial companies. 12 U.S.C. 5365(d), 5381-5394.

The 2016 Notices of Proposed Rulemaking

On May 3, 2016, the FRB issued a Notice of Proposed Rulemaking, (the FRB NPRM), pursuant to section 165 of the Dodd-Frank Act.

The FRB's proposed rule stated that it is intended as a further step to increase the resolvability of U.S. global systemically important banking organizations (GSIBs)

and global systemically important foreign banking organizations (foreign GSIBs) that operate in the United States (collectively, “covered entities”).

Subsequent to the FRB NPRM, the OCC issued the OCC Notice of Proposed Rulemaking (OCC NPRM),

which applies the same QFC

requirements to “covered banks” within the OCC's jurisdiction. The FDIC issued a parallel proposal (FDIC NPRM, also referred to as “the proposal” or “the proposed rule”) applicable to FSIs that are subsidiaries of a “covered entity” as defined in the FRB NPRM and to subsidiaries of such FSIs (collectively, “covered FSIs”).

After considering the comments received on the FDIC NPRM, the FDIC is now finalizing its rule (“FDIC FR”). The final rule is intended to work in tandem with the FRB's final rule adopted on September 1, 2017 (“FRB FR”) and the OCC's expected final rule (“OCC FR”).

81 FR 29169 (May 11, 2016).

Under the GSIB surcharge rule's methodology, there are currently eight U.S. GSIBs: Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley Inc., State Street Corporation, and Wells Fargo & Company.

See

FRB NPRM, 81 FR 29169, 29175 (May 11, 2016). This list may change in the future in light of changes to the relevant attributes of the current U.S. GSIBs and of other large U.S. bank holding companies.

See

FRB NPRM at § 252.82(a) (defining “covered entity” to include: (1) A bank holding company that is identified as a global systemically important [bank holding company] pursuant to 12 CFR 217.402; (2) A subsidiary of a company identified in paragraph (a)(1) of § 252.82 (other than a subsidiary that is a covered bank); or (3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global systemically important foreign banking organization (other than a U.S. subsidiary, U.S. branch, or U.S. agency that is a covered bank, section 2(h)(2) company or a DPC branch subsidiary)). In its final rule, the FRB also excluded entities supervised by the FDIC from the definition of a “covered entity.” 82 FR 42882 (September 12, 2017).

81 FR 55,381 (Aug. 19, 2016).

81 FR 74,326 (Oct. 26, 2016).

The policy objective of this final rule is to improve the orderly resolution of a GSIB by limiting disruptions to a failed GSIB through its FSI subsidiaries' financial contracts with other companies. The FRB FR, the OCC FR, and FDIC FR complement the ongoing work of the FRB and the FDIC on resolution planning requirements for GSIBs.

The FDIC has a strong interest in preventing a disorderly termination of covered FSIs' QFCs upon a GSIB's entry into resolution proceedings. In fulfilling the FDIC's responsibilities as (i) the primary Federal supervisor for SNMBs and State savings associations;

(ii) the insurer of deposits and manager of the Deposit Insurance Fund (DIF); and (iii) the resolution authority for all FDIC-insured institutions under the FDI Act and, if appointed by the Secretary of the Treasury, for large complex financial institutions under Title II of the Dodd-Frank Act, the FDIC's interests include ensuring that large complex financial institutions are resolvable in an orderly manner, and that FDIC-insured institutions operate safely and soundly.

Although the FDIC is the insurer for all insured depository institutions in the United States, it is the primary Federal supervisor only for State-chartered banks that are not members of the Federal Reserve System, State-chartered savings associations, and insured State-licensed branches of foreign banks. As of June 30, 2017, the FDIC had primary supervisory responsibility for 3,711 SNMBs and State-chartered savings associations.

See

https://www.fdic.gov/about/strategic/strategic/supervision.html.

The final rule specifically addresses QFCs, which are typically entered into by various operating entities in a GSIB group, including covered FSIs. These covered FSIs are affiliates of U.S. GSIBs or foreign GSIBs that have OTC derivatives exposure. The exercise of default rights against an otherwise healthy covered FSI resulting from the failure of its affiliate—

e.g.,

its top-tier U.S. holding company—may cause it to weaken or fail. Accordingly, FDIC-supervised affiliates of U.S. or foreign GSIBs are exposed, through the interconnectedness of their QFCs and their affiliates' QFCs, to destabilizing effects if their counterparties or the counterparties of their affiliates exercise default rights upon the entry into resolution of the covered FSI itself or its GSIB affiliate.

For additional background regarding the interconnectivity of the largest financial firms, see FRB NPRM, 81 FR 29175-29176 (May 11, 2016).

These potentially destabilizing effects are best addressed by requiring all GSIB entities to amend their QFCs to include contractual provisions aimed at avoiding such destabilization. It is imperative that all entities within the GSIB group amend their QFCs in a similar way, thereby eliminating an incentive for counterparties to concentrate QFCs in entities subject to fewer restrictions. Therefore, the application of this final rule to the QFCs of covered FSIs is not only necessary for the safety and soundness of covered FSIs individually and collectively, but also to avoid potential destabilization of the overall banking system.

The FDIC received a total of 14 comment letters in response to the FDIC NPRM from trade groups representing GSIBs or GSIB groups, buy-side and end-users of derivatives, individuals and community advocates. There was substantial overlap in the comments received by the FRB, OCC and FDIC regarding the NPRMs. Notably, a copy of comments the commenter had already sent to the FRB or the OCC generally accompanied the comments received by the FDIC and were incorporate therein by reference. Commenters requested that the agencies coordinate in developing final rules and consider comments submitted to the other agencies regarding their NPRMs.

All comments were considered in developing the final rule. Comments are discussed in the relevant sections that follow. The FDIC consulted with the FRB and the OCC in developing the final rule.

Qualified financial contracts, default rights, and financial stability.

Like the FDIC NPRM, this final rule pertains to several important classes of financial transactions that are collectively known as QFCs.

QFCs include swaps, other derivatives contracts, repurchase agreements (also known as “repos”) and reverse repos, and securities lending and borrowing agreements.

Financial institutions enter into QFCs for a variety of purposes, including to borrow money to finance their investments, to lend money, to manage risk, and to enable their clients and counterparties to hedge risks, make markets in securities and derivatives, and take positions in financial investments.

The final rule adopts the definition of “qualified financial contract” set out in section 210(c)(8)(D) of the Dodd-Frank Act, 12 U.S.C. 5390(c)(8)(D).

See

final rule § 382.1.

The definition of “qualified financial contract” is broader than this list of examples, and the default rights discussed are not common to all types of QFCs.

See

final rule § 382.1.

QFCs play a role in economically valuable financial intermediation when markets are functioning normally. But they are also a major source of financial interconnectedness, which can pose a threat to financial stability in times of market stress. The final rule focuses on a context in which that threat is especially great: The failure of a GSIB that is an affiliate of a covered FSI that is party to large volumes of QFCs, which are likely to include QFCs with counterparties that are themselves systemically important.

QFC continuity is important for the orderly resolution of a GSIB because it helps to ensure that the GSIB entities remain viable and to avoid instability caused by asset fire sales. Together, the FRB and FDIC have identified the exercise of certain default rights in financial contracts as a potential obstacle to orderly resolution in the context of resolution plans filed pursuant to section 165(d) of the Dodd-Frank Act,

and have instructed systemically important firms to demonstrate that they are “amending, on an industry-wide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of external counterparties triggered by insolvency proceedings.”

More recently, in April 2016,

the FRB and FDIC noted the important changes that have been made to the structure and operations of the largest financial firms, including the adherence by all U.S. GSIBs and their affiliates to the ISDA 2015 Universal Resolution Stay Protocol.

12 U.S.C. 5365(d).

FRB and FDIC, “Agencies Provide Feedback on Second Round Resolution Plans of `First-Wave' Filers” (Aug. 5, 2014), available at

https://www.fdic.gov/news/news/press/2014/pr14067.html

See also

FRB and FDIC, “Agencies Provide Feedback on Resolution Plans of Three Foreign Banking Organizations” (Mar. 23, 2015), available at

https://www.fdic.gov/news/news/press/2015/pr15027.html

; FRB and FDIC, “Guidance for 2013 165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Initial Resolution Plans in 2012” 5-6 (Apr. 15, 2013), available at

https://www.fdic.gov/news/news/press/2013/pr13027.html

See https://www.fdic.gov/news/news/press/2016/pr16031a.pdf

, at 13.

International Swaps and Derivatives Association, Inc., “ISDA 2015 Universal Resolution Stay Protocol” (November 4, 2015), available at

http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf.

Direct defaults and cross-defaults.

This rule focuses on two distinct scenarios in which a party to a QFC is commonly able to exercise default rights. These two scenarios involve a default that occurs when either the GSIB entity that is a direct party

to the QFC or an affiliate of that entity enters a resolution proceeding.

The first scenario occurs when a GSIB entity that is itself a direct party to the QFC enters a resolution proceeding and such event gives rise to default rights under the QFC it is a party to; this preamble refers to such a scenario as a “direct default” and refers to the default rights that arise from a direct default as “direct default rights.” The second scenario occurs when an affiliate of the GSIB entity that is a direct party to the QFC (such as the direct party's parent holding company) enters a resolution proceeding and such event gives rise to default rights under the QFC it is a party to; this preamble refers to such a scenario as a “cross-default” and refers to default rights that arise from a cross-default as “cross-default rights.” A GSIB parent entity will often guarantee the derivatives transactions of its subsidiaries and those derivatives contracts could contain cross-default rights against a subsidiary of the GSIB that would be triggered by the bankruptcy filing of the GSIB parent entity even though the subsidiary continues to meet all of its financial obligations.

In general, a “direct party” refers to a party to a financial contract other than a credit enhancement (such as a guarantee). The definition of “direct party” and related definitions are discussed in more detail below.

This preamble uses phrases such as “entering a resolution proceeding” and “going into resolution” to encompass the concept of “becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding.” These phrases refer to proceedings established by law to deal with a failed legal entity. In the context of the failure of a systemically important banking organization, the most relevant types of resolution proceedings include the following: For most U.S.-based legal entities, the bankruptcy process established by the U.S. Bankruptcy Code (Title 11, United States Code); for U.S. insured depository institutions, a receivership administered by the FDIC under the FDI Act (12 U.S.C. 1821); for companies whose “resolution under otherwise applicable Federal or State law would have serious adverse effects on the financial stability of the United States,” the Dodd-Frank Act's Orderly Liquidation Authority (12 U.S.C. 5383(b)(2)); and, for entities based outside the United States, resolution proceedings created by foreign law.

Importantly, the final rule does not affect all types of default rights, and, where it affects a default right, the rule does so only temporarily for the purpose of allowing the relevant resolution authority to take action to continue to provide for continued performance on the QFC or to transfer the QFC. Moreover, the final rule is concerned only with default rights that run

against

a GSIB entity—that is, direct default rights and cross-default rights that arise from the entry into resolution of a GSIB entity. The final rule does not affect default rights that a GSIB entity (or any other entity) may have against a counterparty that is not a GSIB entity. This limited scope is appropriate because, as described above, the risk posed to financial stability by the exercise of QFC default rights is greatest when the defaulting counterparty is a GSIB entity.

Resolution Strategies

Single-point-of-entry resolution.

Cross-default rights are especially significant in the context of a GSIB failure because GSIBs and their affiliates often enter into large volumes of QFCs. For example, a U.S. GSIB is made up of a U.S. bank holding company and numerous operating subsidiaries that are owned, directly or indirectly, by the bank holding company. From the standpoint of financial stability, the most important of these operating subsidiaries are generally a U.S. insured depository institution, a U.S. broker-dealer, or similar entities organized in other countries.

Many complex GSIBs have developed resolution strategies that rely on the single-point-of-entry (SPOE) resolution strategy. In an SPOE resolution of a GSIB, only a single legal entity—the GSIB's top-tier bank holding company—would enter a resolution proceeding. The effect of losses that led to the GSIB's failure would pass up from the operating subsidiaries that incurred the losses to the holding company and would then be imposed on the equity holders and unsecured creditors of the holding company through the resolution process. This strategy is designed to help ensure that the GSIB subsidiaries remain adequately capitalized, and that operating subsidiaries of the GSIB are able to stabilize and continue meeting their financial obligations without immediately defaulting or entering resolution themselves. The expectation that the holding company's equity holders and unsecured creditors would absorb the GSIB's losses in the event of failure would help to maintain the confidence of the operating subsidiaries' creditors and counterparties (including their QFC counterparties), reducing their incentive to engage in potentially destabilizing funding runs or margin calls and thus lowering the risk of asset fire sales. A successful SPOE resolution would also avoid the need for separate resolution proceedings for separate legal entities run by separate authorities across multiple jurisdictions, which would be more complex and could therefore destabilize the resolution of a GSIB. An SPOE resolution can also avoid the need for insured bank subsidiaries, including covered FSIs, to be placed into receivership or similar proceedings as the likelihood of their continuing to operate as going concerns will be significantly enhanced if the parent's entry into resolution proceedings does not trigger the exercise of cross-default rights. Accordingly, this final rule, by limiting such cross-default rights in covered QFCs based on an affiliate's entry into resolution proceedings, assists in stabilizing both the covered FSIs and the larger banking system.

Multiple-Point-of-Entry Resolution.

This final rule is also intended to yield benefits for other approaches to resolution. For example, preventing early terminations of QFCs would increase the prospects for an orderly resolution under a multiple-point-of-entry (MPOE) strategy involving a foreign GSIB's U.S. intermediate holding company going into resolution or a resolution plan that calls for a GSIB's U.S. insured depository institution to enter resolution under the FDI Act. As discussed above, the final rule should help support the continued operation of one or more affiliates of an entity that has entered resolution to the extent the affiliate continues to perform on its QFCs.

U.S. Bankruptcy Code.

While insured depository institutions are not subject to resolution under the U.S. Bankruptcy Code, if a bank holding company were to fail, it would likely be resolved under the U.S. Bankruptcy Code. When an entity goes into resolution under the U.S. Bankruptcy Code, attempts by the debtor's creditors to enforce their debts through any means other than participation in the bankruptcy proceeding (for instance, by suing in another court, seeking enforcement of a preexisting judgment, or seizing and liquidating collateral) are generally blocked by the imposition of an automatic stay.

A key purpose of the automatic stay, and of bankruptcy law in general, is to maximize the value of the bankruptcy estate and the creditors' ultimate recoveries by facilitating an orderly liquidation or restructuring of the debtor. The automatic stay thus solves a collective action problem in which the creditors' individual incentives to become the first to recover as much from the debtor as possible, before other creditors can do so,

collectively cause a value-destroying disorderly liquidation of the debtor.

See

11 U.S.C. 362.

See, e.g., Aiello

Providian Financial Corp.,

239 F.3d 876, 879 (7th Cir. 2001).

However, the U.S. Bankruptcy Code largely exempts QFC.

counterparties of the debtor from the automatic stay through special “safe harbor” provisions.

Under these provisions, any rights that a QFC counterparty has to terminate the contract, set-off obligations, or liquidate collateral in response to a direct default are not subject to the stay and may be exercised against the debtor immediately upon default. (The U.S. Bankruptcy Code does not itself confer default rights upon QFC counterparties; it merely permits QFC counterparties to exercise certain rights created by other sources, such as contractual rights created by the terms of the QFC.)

The U.S. Bankruptcy Code does not use the term “qualified financial contract,” but the set of transactions covered by its safe harbor provisions closely tracks the set of transactions that fall within the definition of “qualified financial contract” used in Title II of the Dodd-Frank Act and in this final rule.

11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 559, 560, 561. The U.S. Bankruptcy Code specifies the types of parties to which the safe harbor provisions apply, such as financial institutions and financial participants.

Id.

The U.S. Bankruptcy Code's automatic stay also does not prevent the exercise of cross-default rights against an affiliate of the party entering resolution. The stay generally applies only to actions taken against the party entering resolution or the bankruptcy estate,

whereas a QFC counterparty exercising a cross-default right is instead acting against a distinct legal entity that is not itself in resolution: The debtor's affiliate.

See

11 U.S.C. 362(a).

Title II of the Dodd-Frank Act and the Orderly Liquidation Authority.

Title II of the Dodd-Frank Act (Title II) imposes stay requirements on QFCs of financial companies that enter resolution under that back-up resolution authority. In general, a U.S. bank holding company (such as the top-tier holding company of a U.S. GSIB) that fails would be resolved under the U.S. Bankruptcy Code. With Title II of the Dodd-Frank Act, Congress recognized, however, that a financial company might fail under extraordinary circumstances in which an attempt to resolve it through the bankruptcy process would have serious adverse effects on financial stability in the United States. Title II of the Dodd-Frank Act establishes the Orderly Liquidation Authority, an alternative resolution framework intended to be used rarely to manage the failure of a firm that poses a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.

Title II of the Dodd-Frank Act authorizes the Secretary of the Treasury, upon the recommendation of other government agencies and a determination that several preconditions are met, to place a financial company into a receivership conducted by the FDIC as an alternative to bankruptcy.

Section 204(a) of the Dodd-Frank Act, codified at 12 U.S.C. 5384(a).

See

section 203 of the Dodd-Frank Act, codified at 12 U.S.C. 5383.

Title II of the Dodd-Frank Act empowers the FDIC to transfer QFCs to a bridge financial company or some other financial company that is not in a resolution proceeding and should therefore be capable of performing under the QFCs.

To give the FDIC time to effect this transfer, Title II of the Dodd-Frank Act temporarily stays QFC counterparties of the failed entity from exercising termination, netting, and collateral liquidation rights “solely by reason of or incidental to” the failed entity's entry into Title II resolution, its insolvency, or its financial condition.

Once the QFCs are transferred in accordance with the statute, Title II of the Dodd-Frank Act permanently stays the exercise of default rights for those reasons.

See

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

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

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

Title II of the Dodd-Frank Act addresses cross-default rights through a similar procedure. It empowers the FDIC to enforce contracts of subsidiaries or affiliates of the failed covered financial company that are “guaranteed or otherwise supported by or linked to the covered financial company, notwithstanding any contractual right to cause the termination, liquidation, or acceleration of such contracts based solely on the insolvency, financial condition, or receivership of” the failed company, so long as, if such contracts are guaranteed or otherwise supported by the covered financial company, the FDIC takes certain steps to protect the QFC counterparties' interests by the end of the business day following the company's entry into Title II resolution.

12 U.S.C. 5390(c)(16); 12 CFR 380.12.

These stay-and-transfer provisions of the Dodd-Frank Act are intended to mitigate the threat posed by QFC default rights. At the same time, the provisions allow appropriate protections for QFC counterparties of the failed financial company. The provisions stay the exercise of default rights based on the failed company's entry into resolution, the fact of its insolvency, or its financial condition. Further, the stay period is temporary, unless the FDIC transfers the QFCs to another financial company that is not in resolution (and should therefore be capable of performing under the QFCs) or, in the case of cross-default rights relating to guaranteed or supported QFCs, the FDIC takes the action required in order to continue to enforce those contracts.

See id.

The Federal Deposit Insurance Act.

Under the FDI Act, a failing insured depository institution would generally enter a receivership administered by the FDIC.

The FDI Act addresses direct default rights in the failed bank's QFCs with stay-and-transfer provisions that are substantially similar to the provisions of Title II of the Dodd-Frank Act discussed above.

However, the FDI Act does not address cross-default rights, leaving the QFC counterparties of the failed depository institution's affiliates free to exercise any contractual rights they may have to terminate, net, or liquidate QFCs with such affiliates based on the depository institution's entry into resolution. Moreover, as with Title II, there is a possibility that a court of a foreign jurisdiction might decline to enforce the FDI Act's stay-and-transfer provisions under certain circumstances.

12 U.S.C. 1821(c).

See

12 U.S.C. 1821(e)(8)-(10).

B. Notice of Proposed Rulemaking and General Summary of Comments

The proposal was intended to increase GSIB resolvability and resiliency by addressing two QFC-related issues. First, the proposal sought to address the risk that a court in a foreign jurisdiction may decline to enforce the QFC stay-and-transfer provisions of Title II and the FDI Act discussed above. Second, the proposal sought to address the potential disruptions that may occur if a counterparty to a QFC with an affiliate of a GSIB entity that goes into resolution under the Bankruptcy Code or the FDI Act is provided cross-default rights.

Scope of application.

The proposal's requirements would have applied to all “covered FSIs.” “Covered FSIs” include: Any State savings associations (as defined in 12 U.S.C. 1813(b)(3)) or State non-member bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to § 252.82(a)(1) of the FRB's

Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization

that has been designated pursuant to § 252.87 of the FRB's Regulation YY (12 CFR 252.87). This final rule also makes clear that the mandatory contractual stay requirements apply to the subsidiaries of any covered FSI. Under the final rule, the term “covered FSI”

also

includes “any subsidiary of a covered FSI.” For the reasons noted above, all subsidiaries of covered FSIs should also be subject to mandatory contractual stay requirements—

e.g.,

to avoid concentrating QFCs in entities subject to fewer restrictions.

The definition of covered FSI does not include insured State-licensed branches of FBOs. Any insured State-licensed branches of global systemically important FBOs would be covered by the FRB FR. Therefore, unlike the FRB FR, the FDIC is not including in the rule any special provisions relating to multi-branch netting arrangements.

In the proposal, “qualified financial contract” or “QFC” was defined to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act,

and included, among other arrangements, derivatives, repos, and securities borrowing and lending agreements. Subject to the exceptions discussed below, the proposal's requirements would have applied to any QFC to which a covered FSI is party (covered QFC).

Under the proposal, a covered FSI would have been required to conform pre-existing QFCs if a covered FSI entered into a new QFC with a counterparty or its affiliate.

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

See

proposed rule § 382.1.

In addition, the proposed rule states at § 382.2(d) that it does not modify or limit, in any manner, the rights and powers of the FDIC as receiver under the FDI Act or Title II of the Dodd-Frank Act, including, without limitation, the rights of the receiver to enforce provisions of the FDI Act or Title II of the Dodd-Frank Act that limit the enforceability of certain contractual provisions. For example, the suspension of payment and delivery obligations to QFC counterparties during the stay period as provided under the FDI Act and Title II when an entity is in receivership under the FDI Act or Title II remains valid and unchanged irrespective of any contrary contractual provision and may continue to be enforced by the FDIC as receiver. Similarly, the use by a counterparty to a QFC of a contractual provision that allows the party to terminate a QFC on demand, or at its option at a specified time, or from time to time, for any reason, as a basis for termination of a QFC on account of the appointment of the FDIC as receiver (or the insolvency or financial condition of the company) remains unenforceable. This provision is retained in the final rule.

Required contractual provisions related to the U.S. special resolution regimes.

Under the proposal, covered FSIs would have been required to ensure that covered QFCs include contractual terms explicitly providing that any default rights or restrictions on the transfer of the QFC are limited to at least the same extent as they would be pursuant to the U.S. Special Resolution Regimes—that is, Title II and the FDI Act.

The proposed requirements were not intended to imply that the statutory stay-and-transfer provisions would not in fact apply to a given QFC, but rather to help ensure that all covered QFCs would be treated the same way in the context of an FDIC receivership under the Dodd-Frank Act or the FDI Act. This section of the proposal was also consistent with analogous legal requirements that have been imposed in other national jurisdictions

and with the Financial Stability Board's “Principles for Cross-border Effectiveness of Resolution Actions.”

See

proposed rule § 382.3.

See, e.g.,

Bank of England Prudential Regulation Authority, Policy Statement, “Contractual stays in financial contracts governed by third-country law” (Nov. 2015), available at

http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf.

Financial Stability Board, “Principles for Cross-border Effectiveness of Resolution Actions” (Nov. 3, 2015), available at

http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.

Prohibited cross-default rights.

Under the proposal, a covered FSI would generally have been prohibited from entering into covered QFCs that would allow the exercise of cross-default rights—that is, default rights related, directly or indirectly, to the entry into resolution of an affiliate of the direct party—against it.

Covered FSIs would generally have been similarly prohibited from entering into covered QFCs that included a restriction on the transfer of a credit enhancement supporting the QFC from the covered FSI's affiliate to a transferee upon or following the entry into resolution of the affiliate.

See

proposed rule § 382.4(b).

The FDIC did not propose to prohibit covered FSIs from entering into QFCs that allow its counterparties to exercise direct default rights against the covered FSI.

Under the proposal, a covered FSI also could, to the extent not inconsistent with Title II or the FDI Act, enter into a QFC that grants its counterparty the right to terminate the QFC if the covered FSI fails to perform its obligations under the QFC.

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

As an alternative to bringing their covered QFCs into compliance with the requirements set out in the proposed rule, covered FSIs would have been permitted to comply by adhering to the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and the Other Agreements Annex (together, the “Universal Protocol”).

The preamble to the proposal explained that the FDIC viewed the Universal Protocol as achieving an outcome consistent with the outcome intended by the requirements of the proposed rule by similarly limiting direct default rights and cross-default rights.

ISDA, “Attachment to the ISDA 2015 Universal Resolution Stay Protocol,” (Nov. 4, 2015), available at

http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/

See

proposed rule § 382.5(a).

Process for approval of enhanced creditor protection conditions.

As noted above, in the context of addressing the potential disruption that may occur if a counterparty to a QFC with an affiliate of a GSIB entity that goes into resolution under the Bankruptcy Code or the FDI Act is allowed to exercise cross-default rights, the proposed rule would have generally restricted the exercise of cross-default rights by counterparties against a covered FSI. The proposal also would have allowed the FDIC, at the request of a covered FSI, to approve as compliant with the requirements of § 382.5 proposed creditor protection provisions for covered QFCs.

See

proposed rule § 382.5(c).

The FDIC would have been permitted to approve such a request if, in light of several enumerated considerations,

the alternative creditor protections would mitigate risks to the financial stability of the United States presented by a GSIB's failure to at least the same extent as the proposed requirements.

See

proposed rule § 382.5(c).

This provision is retained in the final rule and the FDIC expects to consult with the FRB and OCC during its consideration of a request under this section.

Amendments to certain definitions in the FDIC 's capital and liquidity rules.

The proposal would have amended certain definitions in the FDIC's capital and liquidity rules to help ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is party would not be affected by the proposed restrictions on such QFCs. Specifically, the proposal would have amended the definition of “qualifying master netting agreement” in the FDIC's regulatory capital and liquidity rules and would have similarly amended the definitions of the terms “collateral agreement,” “eligible margin loan,” and “repo-style transaction” in the FDIC's regulatory capital rules.

See

proposed rule §§ 324.2 and 329.3.

Comments on the Proposal.

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

their request to discuss their comments on the proposal, and summaries of these meetings may be found on the FDIC's public Web site.

A number of commenters including GSIBs that would be subject to the proposed requirements included in the proposal expressed strong support for the proposed rule as a well-considered effort to reduce systemic risk with minimal burden and as an important step to ensure a more efficient and orderly resolution process for GSIB entities and thereby to protect the stability of the U.S. financial system. Other commenters, however, expressed concern with the proposed rule. These commenters generally argued that the proposal should not restrict contractual rights of GSIB counterparties and contended that the proposal would have shifted the costs of resolving the covered FSIs, covered entities, and covered banks to non-defaulting counterparties. Some commenters argued that the proposal would not assuredly mitigate systemic risk, as the requirements could result in increased market and credit risk for QFC counterparties of a GSIB. Commenters also argued that it would be more appropriate for Congress to impose the proposal's restrictions on contractual rights through the legislative process rather than through a regulation.

As described above, the proposal applied to “covered FSIs.” A covered FSI included any subsidiary of a covered FSI. The proposal defined “subsidiary of a covered FSI” as an entity owned or controlled directly or indirectly by a covered FSI. “Control” was defined by reference to the Bank Holding Company Act of 1956, as amended (“BHC Act”). The other NPRMs similarly used the definition of control from the BHC Act for purposes of determining the entities that would have been subject to the requirements of the NPRMs. Commenters urged the agencies to move to a financial consolidation standard to define the subsidiaries of covered FSIs, arguing that the concept of control under the BHC Act includes entities (1) that are not under the operational control of the GSIB entity and (2) over whom the GSIB may not have the practical ability to require remediation. Furthermore, commenters urged that non-financial consolidated subsidiaries are unlikely to raise the types of concerns for the orderly resolution of GSIBs targeted by the proposal. For similar reasons, these commenters argued that, for purposes of the requirement that a covered FSI conform existing QFCs if a covered FSI enters into a new QFC with a counterparty or its affiliate, a counterparty's “affiliate” should also be defined by reference to financial consolidation rather than BHC Act control. Commenters also expressed concern that the definition of “covered QFCs” under the proposal was overly broad. The proposal required a covered QFC to explicitly provide that it is subject to the stay-and-transfer provisions of Title II and the FDI Act and generally prohibited a covered FSI from being a party to a QFC that would allow the exercise of cross-default rights. Commenters argued that the final rule should exclude QFCs that do not contain any contractual transfer restrictions, direct default rights, or cross-default rights, as these QFCs do not give rise to the risk that counterparties will exercise their contractual rights in a manner that is inconsistent with the provisions of the U.S. Special Resolution Regimes. Commenters also urged the FDIC to exclude QFCs governed by U.S. law from the requirement that QFCs explicitly “opt in” to the U.S. Special Resolution Regimes since it is already clear that such QFCs are subject to the stay-and-transfer provisions of Title II and the FDI Act. With respect to the proposal's prohibition against provisions that would allow the exercise of cross-default rights in covered QFCs of a GSIB, commenters argued that the final rule should clarify that QFCs that do not contain such cross-default rights or transfer restrictions regarding related credit enhancements are not within the scope of the prohibition.

Commenters also requested that certain types of contracts that may include transfer or default rights subject to the proposal's requirements (

e.g.,

warrants; certain commodity contracts including commodity swaps; certain utility and gas supply contracts; certain retail customer and investment advisory agreements; securities underwriting agreements; securities lending authorization agreements) be excluded from all requirements of the final rule because these types of contracts do not raise the risks to the resolution of a covered FSI or financial stability that are the target of this final rule and because certain existing contracts of these types would be difficult, if not impossible, to amend. Commenters also requested that securities contracts that typically settle in the short term or that typically include only transfer restrictions and not default rights similarly be excluded from all requirements of the final rule because they do not impose ongoing or continuing obligations on either party after settlement. In all of the above cases, commenters argued that remediation of such outstanding contracts would be burdensome with no meaningful resolution benefits. Certain commenters also urged that the final rule apply only to contracts entered into after the final rule's effective date and not to contracts existing as of the final rule's effective date.

As noted above, the proposal would have deemed compliant covered QFCs amended by the existing Universal Protocol (which allows for creditor protections in addition to those otherwise permitted by the proposed rule). Commenters generally supported this aspect of the proposal, although they requested express clarification that adherence to the existing Universal Protocol would satisfy all of the requirements of the final rule. Commenters urged that the final rule should also provide a safe harbor for a future ISDA protocol that would be substantially similar to the existing Universal Protocol except that it would seek to address the specific needs of buy-side market participants, such as asset managers, insurance companies, and pension funds who are counterparties to QFCs with GSIBs, to allow, for example, entity-by-entity adherence and the exclusion of certain foreign special resolution regimes.

Commenters expressed support for the exemption in the proposal for cleared QFCs but requested that this exemption be broadened to extend to the client leg of a cleared back-to-back transaction and also to exclude any contract cleared, processed, or settled on a financial market utility (FMU) as well as any QFC conducted according to the rules of an FMU. Commenters also requested an exemption for QFCs with sovereign entities and central banks. Commenters further requested a longer period of time for covered FSIs, entities, and banks to conform covered QFCs with certain types of counterparties to the requirements of the final rule. Commenters also requested that the FDIC coordinate with other regulatory agencies, consider comments submitted to the OCC and the FRB regarding their proposals and from entities not regulated by the FDIC, and finalize a rule with conformance periods consistent with the OCC's and FRB's final rules. In addition, commenters requested confirmation that modifications to contracts to comply with this rule would not trigger other regulatory requirements (

e.g.,

margin requirements for non-cleared swaps) or impact the enforceability of QFCs. The FDIC has considered the comments received on the proposal, including those of entities not regulated by the

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

SUPPLEMENTARY INFORMATION

C. Overview of Final Rule

The FDIC is adopting this final rule to improve the resolvability of GSIBs and thereby furthering financial stability and enhancing the resilience, and the safety and soundness of covered FSIs. The FDIC has made a number of changes to the proposal in response to concerns raised by commenters, as further described below.

The final rule is intended to protect covered FSIs and to facilitate the orderly resolution of the most systemically important banking firms—GSIBs—by limiting the ability of the counterparties of the firms' FSI subsidiaries to terminate qualified financial contracts upon the entry of the GSIB or one or more of its affiliates into resolution. The rule requires the inclusion of contractual restrictions on the exercise of certain default rights in those QFCs. In particular, the final rule requires the QFCs of covered FSIs to contain contractual provisions that opt into the stay-and-transfer provisions of the FDI Act and the Dodd-Frank Act to reduce the risk that the stay-and-transfer related actions by the receiver would be successfully challenged by a QFC counterparty or a court in a foreign jurisdiction. The final rule also prohibits covered FSIs from entering into QFCs that contain cross-default rights, subject to certain creditor protection exceptions that would not be expected to interfere with an orderly resolution.

The final rule also furthers the implementation of the Universal Protocol, which extends, through contractual agreement, the application of the resolution frameworks of the FDI Act and the Dodd-Frank Act to all QFCs entered into by an adhering GSIB and its adhering subsidiaries, including QFCs entered into outside of the United States, and establishes restrictions on cross-default rights that are similar to those in the final rule. The final rule is necessary to implement the Universal Protocol provisions regarding the resolution of a GSIB under the U.S. Bankruptcy Code, as these provisions do not become effective until implemented by U.S. regulations. To support further adherence to the Universal Protocol, the final rule creates a safe harbor allowing covered FSIs to sign up to the Universal Protocol and thereby amend their QFCs pursuant to the Universal Protocol as an alternative to implementing the restrictions of the final rule on a counterparty-by-counterparty basis. In addition, the final rule provides that covered QFCs amended pursuant to adherence of a covered FSI to a new protocol (the “U.S. Protocol”) would be deemed to conform to the requirements of the final rule. The U.S. Protocol may differ (and is required to differ) from the Universal Protocol in certain respects discussed below, but otherwise must be substantively identical to the Universal Protocol.

The final rule requires covered FSIs to conform certain covered QFCs to the requirements of the final rule beginning one year after the effective date of the final rule (first compliance date) and phases in conformance requirements with respect to all covered QFCs over a two-year period depending on the type of counterparty. As explained below, a covered FSI generally is required to conform pre-existing QFCs only if the covered FSI or an affiliate of the covered FSI enters into a new QFC with the same counterparty or a consolidated affiliate of the counterparty on or after the first compliance date.

Covered FSIs

The final rule, like the proposal, applies to “covered FSIs,” which generally are State savings associations and State non-member banks and their subsidiaries. “Subsidiary” continues to be defined in the final rule by reference to BHC Act control. As discussed below, certain other types of subsidiaries, including a subsidiary that is owned in satisfaction of debt previously contracted in good faith, a portfolio concern controlled by a small business investment company, or a subsidiary that promotes the public welfare, are excluded from the definition of covered FSI and therefore not required to conform any QFCs.

Covered Qualified Financial Contracts

The final rule like the proposal defines “qualified financial contract” or “QFC” to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act

and would include, among other things, derivatives, repos, and securities lending agreements.

Subject to the exceptions discussed below, the final rule's requirements apply to any QFC to which a covered FSI is party (covered QFC). The final rule makes clear that covered FSIs do not need to conform QFCs that have no transfer restrictions, direct default rights, or cross-default rights as these QFCs have no provisions that the rule is intended to address.

The final rule also excludes certain retail investment advisory agreements, and certain existing warrants. It also provides the FDIC with authority to exempt one or more covered FSIs from conforming certain contracts or types of contracts to the one or more of the requirements of the final rule after considering, in addition to any other factor the FDIC deems relevant, the burden the exemption would relieve and the potential impact of the exemption on the resolvability of the covered FSI or its affiliates.

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

See

proposed rule § 382.1.

See

final rule § 382.1.

See

final rule § 382.2.

See

final rule § 382.7.

The final rule also makes clear that a covered FSI must conform existing QFCs with a counterparty if the GSIB group (

i.e.,

the covered FSI or its affiliates that are covered FSIs or covered banks or covered entities) enters into a new QFC with that counterparty or its consolidated affiliate, defined by reference to financial consolidation principles. In particular, the final rule provides that a covered QFC includes a QFC that the covered FSI entered, executed, or otherwise became a party to before the first compliance date of this final rule if the covered FSI or any affiliate that is a covered FSI, covered entity or covered bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of that person on or after the first compliance date.

“Consolidated affiliate” is a defined term in the final rule that is defined by reference to financial consolidation principles.

See

final rule § 382.2(c).

See

final rule § 382.1.

Required Contractual Provisions Related to the U.S. Special Resolution Regimes

Under the final rule, covered FSIs are required to ensure that covered QFCs include contractual terms explicitly providing that any default rights or restrictions on the transfer of the QFC are limited to the same extent as they would be pursuant to the U.S. Special Resolution Regimes.

However, any covered QFC that is governed under U.S. law and involves only parties (other than the covered FSI) that are domiciled (in the case of individuals), incorporated in, organized under, the laws of the United States or any State, or whose principal place of business is located in the United States, including any State, or that is a U.S. branch or U.S. agency (U.S. counterparties) is also

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

See

final rule § 382.3.

See

final rule § 382.3.

Prohibited Cross-Default Rights

Under the final rule, a covered FSI is prohibited from entering into covered QFCs that would allow the exercise of cross-default rights—that is, default rights related, directly or indirectly, to the entry into resolution of an affiliate of the direct party—against it.

Covered FSIs are similarly prohibited from entering into covered QFCs that would restrict the transfer of a credit enhancement supporting the QFC from the covered FSI's affiliate to a transferee upon the entry into resolution of the affiliate.

See

final rule § 382.4(b).

See id.

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

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

Industry-Developed Protocol

As an alternative to bringing their covered QFCs into compliance with the requirements of the final rule, the final rule allows covered FSIs to comply with the rule by adhering to the Universal Protocol.

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

See

final rule § 382.5(a).

Process for Approval of Enhanced Creditor Protection Conditions

The final rule also allows the FDIC, at the request of a covered FSI, to approve as compliant with the final rule covered QFCs with creditor protections other than those that would otherwise be permitted under § 382.4 of the final rule.

The FDIC could approve such a request if, in light of several enumerated considerations, the alternative approach would prevent or mitigate risks to the financial stability of the United States presented by a GSIB's failure and would protect the safety and soundness of covered FSIs to at least the same extent as the final rule's requirements.

See

final rule § 382.5(c).

See

final rule § 382.5(c) and (d).

Amendments to Certain Definitions in the FDIC's Capital and Liquidity Rules

The final rule also amends certain definitions in the FDIC's capital and liquidity rules to help ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is party is not affected by the proposed restrictions on such QFCs. Specifically, the final rule amends the definition of “qualifying master netting agreement” in the FDIC's regulatory capital and liquidity rules and similarly amends the definitions of the terms “collateral agreement,” “eligible margin loan,” and “repo-style transaction” in the FDIC's regulatory capital rules.

D. Consultation With U.S. Financial Regulators

In developing this final rule, the FDIC consulted with the FRB and the OCC as a means of promoting alignment across regulations and avoiding redundancy. Furthermore, the FDIC has consulted with and expects to continue to consult with foreign financial regulatory authorities regarding the implementation of this final rule and the establishment of other standards that would maximize the prospects for the cooperative and orderly cross-border resolution of a failed GSIB on an international basis.

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

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

E. Overview of Statutory Authority and Purpose

The FDIC is issuing this final rule under its authorities under the FDI Act (12 U.S.C. 1811

et seq.

), including its general rulemaking authorities.

The FDIC views the final rule as consistent with its overall statutory mandate.

An overarching purpose of the final rule is to limit disruptions to an orderly resolution of a GSIB and its subsidiaries, thereby furthering financial stability generally. Another purpose is to enhance the safety and soundness of covered FSIs by addressing the two main issues raised by covered QFCs (noted above): Cross-border recognition and cross-default rights.

See

12 U.S.C. 1819.

The FDIC is (i) the primary Federal supervisor for SNMBs and State savings associations; (ii) insurer of deposits and manager of the DIF; and (iii) the resolution authority for all FDIC-insured institutions under the Federal Deposit Insurance Act and for large complex financial institutions under Title II of the Dodd-Frank Act.

See

12 U.S.C. 1811, 1816, 1818, 1819, 1820(g), 1828, 1828m, 1831p-1, 1831u, 5301

et seq.

As discussed above, the exercise of default rights by counterparties of a failed GSIB can have significant impacts on financial stability. These financial stability concerns are necessarily intertwined with the safety and soundness of covered FSIs and the banking system—the disorderly exercise of default rights can produce a sudden, contemporaneous threat to the safety and soundness of individual institutions, including insured depository institutions, throughout the system, which in turn threatens the system as a whole. Furthermore, the failure of multiple insured depository institutions in the same time period could stress the DIF, which is managed by the FDIC.

While a covered FSI may not itself be considered systemically important, as part of a GSIB, the disorderly resolution of the covered FSI could result in a significant negative impact on the GSIB. Additionally, the application of the final rule to the QFCs of covered FSIs should avoid creating what may otherwise be

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

II. Restrictions on QFCs of Covered FSIs

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

The proposed rule applied to “covered FSIs.” The term “covered FSI” included: Any State savings associations (as defined in 12 U.S.C. 1813(b)(3)) or State non-member bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to § 252.82(a)(1) of the FRB's Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization that has been designated pursuant to § 252.87 of the FRB's Regulation YY (12 CFR 252.87). Under the proposed rule, the term “covered FSI” included any “subsidiary of covered FSI.”

The definition of “subsidiary” under the proposal included any company that is owned or controlled directly or indirectly by another company where the term “control” was defined by reference to the BHC Act.

The BHC Act definition of control includes ownership, control or the power to vote 25 percent of any class of voting securities; control in any manner of the election of a majority of the directors or trustees of; or exercise of a controlling influence over the management or policies.

See

12 CFR 252.2.

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

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

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

A number of commenters urged the agencies to move to a financial consolidation standard to define a “subsidiary” of a covered entity, covered bank or covered FSI instead of by reference to BHC Act control.

These commenters argued that, under Generally Accepted Accounting Principles, a company generally would consolidate an entity in which it holds a majority voting interest or over which it has the power to direct the most significant economic activities, to the extent it also holds a variable interest in the entity. In addition, commenters asserted that financially consolidated subsidiaries are often subject to operational control and generally fully integrated into the parent's enterprise-wide governance, policies, procedures, control frameworks, business strategies, information technology systems, and management systems. These commenters noted that the concept of BHC Act control was designed to serve other policy purposes (

e.g.,

separation between banking and commercial activities). A number of commenters argued that BHC Act control may include an entity that is not under the day-to-day operational control of the GSIB and over whom the GSIB does not have the practical ability to require remediation of that entity's QFCs to comply with the proposed rule. Moreover, commenters contended that entities that are not consolidated with a GSIB for financial reporting purposes are unlikely to raise the types of concerns for the orderly resolution of GSIBs targeted by the proposal. Commenters also noted that the Universal Protocol and, generally, the standard forms of ISDA master agreements define “affiliate” by reference to ownership of a majority of the voting power of an entity or person. For these reasons, commenters urged that the term “subsidiary” of a covered FSI should be based on financial consolidation under the final rule.

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

Commenters urged that regardless of whether financial consolidation standard is adopted for the purpose of defining “subsidiary,” the final rule should exclude from the definition of “covered FSI, covered bank, or covered entity” entities over which the GSIB does not exercise operational control, such as merchant banking portfolio companies, section 2(h)(2) companies, joint ventures, sponsored funds as distinct from their sponsors or investment advisors, securitization vehicles, entities in which the GSIB holds only a minority interest and does not exert a controlling influence, and subsidiaries held pursuant to provisions for debt previously contracted in good faith (DPC subsidiaries).

Further, commenters asked the FDIC to coordinate with the FRB and the OCC to ensure the scope of entities covered under the terms “subsidiary” and “affiliate” is consistent. Consistent with the FRB and the OCC, the FDIC is excluding from the definition of “covered FSI” subsidiaries that are portfolio concerns, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), or that is owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24) and designed to promote the public welfare, and companies owned in satisfaction of debt previously contracted in good faith.

See, e.g.,

12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 CFR 225.12(b), 225.22(d)(1).

Certain commenters requested other exclusions from the definition of “covered entity” that are not applicable to the FDIC's final rule. For example, certain commenters argued that subsidiaries of foreign GSIBs for which the foreign GSIB has been given special relief by an FRB order not to hold the subsidiary under an intermediate holding company (IHC) should not be included in the definition of covered entity, even if such entities would be consolidated under financial consolidation principles. The FDIC is not addressing these comments.

Under the final rule, a “covered FSI” is generally any State savings associations (as defined in 12 U.S.C. 1813(b)(3)) or State non-member bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect subsidiary of (i) a global systemically important bank holding company that has been designated pursuant to § 252.82(a)(1) of the FRB's Regulation YY (12 CFR 252.82); or (ii) a global systemically important foreign banking organization that has been designated pursuant to § 252.87 of the FRB's Regulation YY (12 CFR 252.87), and any subsidiary of a covered FSI, other than a portfolio concern, as defined under 13 CFR 107.50 that is controlled by a small business investment company as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662) or owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24).

U.S. GSIB subsidiaries.

Covered FSI would also generally include all subsidiaries of a covered FSI other than

the exceptions noted above.

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

See

final rule § 382.2(b).

“Subsidiary” in the final rule continues to be defined by reference to BHC Act control as does the definition of “affiliate.”

The final rule does not limit the definition of covered FSIs to only those subsidiaries of GSIBs that are financially consolidated as requested by certain commenters. Defining “subsidiary” and “affiliate” by reference to BHC Act control is consistent with the definitions of those terms in the FDI Act and Title II of the Dodd-Frank Act. Specifically, Title II permits the FDIC, as receiver of a covered financial company or as receiver for its subsidiary, to enforce QFCs and other contracts of subsidiaries and affiliates, defined by reference to the BHC Act, notwithstanding cross-default rights based solely on the insolvency, financial condition, or receivership of the covered financial company.

Therefore, maintaining consistent definitions of subsidiary and affiliate with Title II should better ensure that QFC stays may be effected in resolution under a U.S. Special Resolution Regime. As covered FSIs are subsidiaries of GSIBs that are already subject to the requirements of the BHC Act, they should already know all of their BHC Act controlled subsidiaries and be familiar with BHC Act control principles.

See

final rule § 382.1.

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

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

General definition.

The proposal applied to any “covered QFC,” generally defined as any QFC that a covered FSI enters into, executes, or otherwise becomes party to with the person or an affiliate of the same person.

Under the proposal, “qualified financial contract” or “QFC” was defined as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and included swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, securities contracts, and forward agreements.

See

proposed rule §§ 382.1 and 382.3(a). For convenience, this preamble generally refers to “a covered FSI's QFCs” or “QFCs to which a covered FSI is party” as shorthand to encompass the definition of “covered QFC.”

See

proposed rule § 382.1.

See also

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

The application of the rule's requirements to a “covered QFC” was one of the most commented upon aspects of the proposal. Certain commenters argued that the definition of QFC in Title II of the Dodd-Frank Act was overly broad and imprecise and could include agreements that market participants may not expect to be subject to the stay-and-transfer provisions of the U.S. Special Resolution Regimes. More generally, commenters argued that the proposed definition of QFC was too broad and would capture contracts that do not present any obstacles to an orderly resolution. Commenters advocated for the exclusion of a variety of types of QFCs from the requirements of the final rule. In particular, a number of commenters requested the exclusion of QFCs that do not contain any transfer restrictions or default rights, because these types of QFCs do not give rise to the risk that counterparties will exercise their contractual rights in a manner that is inconsistent with the provisions of the U.S. Special Resolution Regimes. Commenters provided several examples of contracts that they asserted fall into this category, including cash market securities transactions, certain spot FX transactions (including securities conversion transactions), retail brokerage agreements, retirement/IRA account agreements, margin agreements, options agreements, FX forward master agreements, and delivery versus payment client agreements. Commenters contended that these types of QFCs number in the millions at some firms and that remediating these contracts to include the express provisions required by the final rule would require an enormous client outreach effort that would be extremely burdensome and costly while providing no meaningful resolution benefits. For example, commenters indicated that for certain types of transactions, such as cash securities transactions, FX spot transactions, and retail QFCs, such a requirement could require an overhaul of existing market practice and documentation that affects hundreds of thousands, if not millions, of transactions occurring on a daily basis and significant education of the general market.

Commenters also requested the exclusion of QFCs that do not contain any default or cross-default rights but that may contain transfer restrictions. Commenters contended that examples of these types of agreements included investment advisory account agreements with retail customers, which contain transfer restrictions as required by section 205(a)(2) of the Investment Advisers Act of 1940, but no direct default or cross-default rights; underwriting agreements;

and client onboarding agreements. A few commenters provided prime brokerage or margin loan agreements as examples of transactions that generally do not have default or cross-default rights but may have transfer restrictions. Another commenter also requested the exclusion of securities market transactions that generally settle in the short term, do not impose ongoing or continuing obligations on either party after settlement, and do not typically include default rights.

In these cases, commenters contended that remediation of these agreements would be burdensome with no meaningful resolution benefits.

However, certain commenters noted that underwriting, purchase, subscription or placement agency agreements may contain rights that could be construed as cross-default rights or default rights.

In the alternative, the commenter requested that such securities market transactions be excluded to the extent they are cleared, processed, and settled through (or subject to the rules of) FMUs through expansion of the proposed exemption for transactions with central counterparties. This aspect of the comment is addressed in the subsequent section discussing requests for expansion of the proposed exemption for transactions with central counterparties.

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

a security or a basket of securities be excluded. Although warrants issued in capital markets may contain direct default and cross-default rights as well as transfer restrictions, commenters argued that remediation of outstanding warrant agreements would be difficult, if not impossible, since remediation would require the affirmative vote of a substantial number of separate voting groups of holders to amend the terms of the instruments and that obtaining such consent could be expensive due to “hold-out” premiums. Commenters also argued that since these instruments are traded in the markets, it is not possible for an issuer to ascertain whether a particular investor in such instruments has also entered into other QFCs with the dealer or any of its affiliates (or vice versa) for purposes of complying with the proposed mechanism for remediation of existing QFCs. Commenters argued that issuers would be able to comply if the final rule's requirements applied only on a prospective basis with respect to new issuances since new investors could be informed of the terms of the warrant at the time of purchase and no after-the-fact consent would be required as is the case with existing outstanding warrants. Commenters expressed the view that prospective application of the final rule's requirements to warrants would allow time for firms to develop new warrant agreements and warrant certificates, to engage in client outreach efforts, and to make any appropriate public disclosures. Commenters suggested that the requirements of the final rule should only apply to such instruments issued after the effective date of the final rule and that the compliance period for such new issuances be extended to allow time to establish new issuance programs that comply with the final rule's requirements. Other examples of contracts in this category given by commenters include contracts with special purpose vehicles that are multi-issuance note platforms, which commenters urged would be difficult to remediate for similar reasons to warrants other than on a prospective basis.

Commenters also urged the exclusion of contracts for the purchase of commodities in the ordinary course of business (

e.g.,

utility and gas energy supply contracts) or physical delivery commodity contracts more broadly.

In general, commenters argued that exempting these contracts would not increase systemic risk but would help ensure the smooth operation of utilities and the physical commodities markets.

Commenters indicated that failure to make commodity deliveries on time can result in the accrual of damages and penalties beyond the accrual of interest (

e.g.,

demurrage and other fines in shipping) and that counterparties may not be able to obtain appropriate compensation for amendment of default rights due to the difficulty of pricing the risk associated with an operational failure due to the failure to deliver a commodity on time. Commenters also contended that agreements with power operators governed by regulatory tariffs would be difficult, if not impossible, to remediate.

For example, some commenters urged the exclusion of all contracts requiring physical delivery between commercial entities in the course of regulatory business such as (i) contracts subject to a Federal Energy Regulatory Commission-filed tariff; (ii) contracts that are traded in markets overseen by independent system operators or regional transmission operators; (iii) retail electric contracts; (iv) contracts for storage or transportation of commodities; (v) contracts for financial services with regulated financial entities (

e.g.,

brokerage agreements and futures account agreements); and (vi) public utility contracts.

One commenter also argued that utility and gas supply contracts are covered sufficiently in section 366 of the U.S. Bankruptcy Code. This section of the U.S. Bankruptcy Code places restrictions on the ability of a utility to “alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under [the U.S. Bankruptcy Code] or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.” 11 U.S.C. 366. The purpose and effect of § 382.44 of the final rule and section 366 of the U.S. Bankruptcy Code are different and therefore do not serve as substitutes. Section 366 of the U.S. Bankruptcy Code does not address cross-defaults or provide additional clarity regarding the application of the U.S. Special Resolution Regimes. Similarly, § 382.4 of the final rule does not prevent a covered FSI from entering into a covered QFC that allows the counterparty to exercise default rights once a non-bank covered FSI that is a direct party enters bankruptcy or fails to pay or perform under the QFC.

One commenter also requested exclusion of overnight transactions, particularly overnight repurchase agreements, arguing that such transactions present little risk of creating negative liquidity effects and that an express exclusion for such transactions may increase the likelihood that such contracts would remain viable funding sources in times of liquidity stress. Although the final rule does not exempt overnight repo transactions, the final rule may have limited if any effect on such transactions. As described below, the final rule provides a number of exemptions that may apply to overnight repo and similar transactions. Moreover, the restrictions on default rights in § 382.4 of the final rule do not apply to any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.

See

final rule § 382.1 (defining “default right”). Therefore, § 382.4 does not restrict the ability of QFCs, including overnight repos, to terminate at the end of the term of the contract.

The final rule applies to any “covered QFC,” which generally is defined as any “in-scope QFC” that a covered FSI enters into, executes, or to which the covered FSI otherwise becomes a party.

As under the proposal, “qualified financial contract” or “QFC” is defined in the final rule as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and includes swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, and forward agreements.

Parties that enter into contracts with covered FSIs have been potentially subject to the stay-and-transfer provisions of Title II of the Dodd-Frank Act since its enactment. Consistent with Title II of the Dodd-Frank Act, the final rule does not exempt QFCs involving physical commodities. However as explained below, the final rule responds to concerns regarding the smooth operation of physical commodities end users and markets by allowing counterparties to terminate QFCs based on the failure to pay or perform.

See

final rule § 382.2(c).

See

12 U.S.C. 5390(c)(8)(D); final rule § 382.1.

However, those default rights remain subject to Title II and FDI Act.

In response to concerns raised by commenters, the final rule exempts QFCs that have no transfer restrictions or default rights, as these QFCs have no provisions that the rule is intended to address. The final rule effects this exemption by limiting the scope of QFCs potentially subject to the rule to those QFCs that explicitly restrict the transfer of a QFC from a covered FSI or explicitly provide default rights that may be exercised against a covered FSI (in-scope QFCs).

This change addresses a major concern raised by commenters regarding the overbreadth of the definition of “covered QFC” in the proposal. The change also mitigates the burden of complying with the rule without undermining its purpose by not requiring covered FSIs to conform contracts that do not contain the types of default rights and transfer restrictions that the final rule is intended to address. The final rule does not, however, exclude QFCs that have transfer restrictions (but no default rights or cross-default rights) as requested by certain commenters, as such QFCs would have provisions (

i.e.,

transfer restrictions) that are subject to the requirements of the final rule and could otherwise impede the orderly resolution of a covered FSI or its affiliate.

See

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

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

by commenters (

i.e.,

investment advisory contracts with retail advisory customers

of the covered FSI that only contain transfer restrictions necessary to comply with section 205(a) of the Investment Advisers Act). The final rule also exempts any existing warrant evidencing a right to subscribe or to otherwise acquire a security of a covered FSI or its affiliate.

The final rule excludes these types of agreements because there is persuasive evidence that these types of contracts would be burdensome to conform and that it is unlikely that excluding such contracts from the requirements of the final rule would impair the orderly resolution of a GSIB.

The final rule also provides the FDIC with authority to exempt one or more covered FSIs from conforming certain contracts or types of contracts to the final rule after considering, in addition to any other factor the FDIC deems relevant, the burden the exemption would relieve and the potential impact of the exemption on the resolvability of the covered FSI or its affiliates.

Covered FSIs that request that the FDIC exempt additional contracts from the final rule should be prepared to provide information in support of their requests. The FDIC expects to consult as appropriate with the FRB and the OCC during its consideration of any such request.

See

final rule § 382.7(c)(1). The final rule defines retail customers or counterparty by reference to the FDIC's rule relating to the liquidity coverage ratio, 12 CFR part 329. Covered FSIs should be familiar with this definition and its application.

See

final rule § 382.7(c)(2). Warrants issued after the effective date of the final rule are not excluded from the requirements of the final rule.

The exclusions for investment advisory agreements and existing warrants set forth in the final rule are included to address commenters' concerns as to the scope and potential compliance burden of the final rule. These exemptions are not interpretations of the definition of QFC and should not be construed as indicating that the FDIC has determined such contracts are necessarily QFCs.

See

final rule § 382.7(d).

Definition of covered QFC.

As noted above, the proposal applied to any “covered QFC,” generally defined as a QFC that a covered FSI enters into, after the effective date and a QFC entered earlier, but only if the covered FSI or its affiliate enters into a new QFC with the same person or an affiliate of the same person.

“Affiliate” in the proposal was defined in the same manner as under the BHC Act to mean any company that controls, is controlled by, or is under common control with another company.

As noted above, “control” under the BHC Act means the power to vote 25 percent or more of any class of voting securities; control in any manner the election of a majority of the directors or trustees; or exercise of a controlling influence over the management or policies.

See

proposed rule §§ 382. 3(a); 382.4(a).

See

proposed rule § 382.1 (defining “affiliate”).

See

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

Commenters argued that requiring remediation of existing QFCs of a person if the GSIB entered into a new QFC with an affiliate of the person would make compliance with the proposed rule overly burdensome.

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

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

The final rule's definition of “covered QFC” has been modified to address the concerns raised by commenters. In particular, the final rule provides that a covered QFC includes a QFC that the covered FSI entered, executed, or otherwise became a party to before January 1, 2019, if the covered FSI or any affiliate that is a covered FSI, covered entity, or covered bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of the same person on or after January 1, 2019.

The final rule defines “consolidated affiliate” by reference to financial consolidation principles.

As commenters indicated, counterparties will already track and monitor financially consolidated affiliates. Moreover, exposures to a non-consolidated affiliate may be captured as a separate counterparty (

e.g.,

when the non-consolidated affiliate enters a new QFC with the covered FSI). As a consequence, modifying the coverage of affiliates in this manner addresses concerns raised by commenters regarding burden.

See

final rule § 382.2(c).

See

final rule § 382.1.

The definition of “covered QFC” is intended to limit the restrictions of the final rule to those financial transactions whose disorderly unwind has substantial potential to frustrate the orderly resolution of a GSIB, as discussed above. By adopting the Dodd-Frank Act's definition of QFC, with the modifications described above, the final rule generally extends stay-and-transfer protections to the same types of transactions as Title II of the Dodd-Frank Act. In this way, the final rule enhances the prospects for an orderly resolution in bankruptcy and under the U.S. Special Resolution Regimes.

Exclusion of cleared QFCs.

The proposal excluded from the definition of “covered QFC” all QFCs that are cleared through a central counterparty.

Commenters generally expressed support for this exclusion but some commenters requested that the agencies broaden this exclusion in the final rule. In particular, a number of commenters urged the agencies to exclude the “client-facing leg” of a cleared swap where a clearing member faces a CCP on one leg of the transaction and faces the client on an otherwise identical offsetting transaction.

One commenter

requested the agencies confirm its understanding that “FCM agreements,” which the commenter defined as futures and cleared swaps agreements with a futures commission merchant, are excluded because FCM agreements “are only QFCs to the extent that they relate to futures and swaps and, since futures and cleared swaps are excluded, the FCM Agreements are also excluded.”

The commenter requested, in the alternative, that the final rule expressly exclude such agreements.

See

proposed rule § 382.7(a).

Commenters argued that in the European-style principal-to-principal clearing model, the clearing member faces the CCP on one swap (the “CCP-facing leg”), and the clearing member, frequently a GSIB, faces the client on an otherwise identical, offsetting swap (the “client-facing leg”). Under the proposed rule, only the CCP-facing leg of the transaction was excluded even though the client-facing leg relates to the mechanics of clearing and is only entered into by the clearing member to effectuate the cleared transaction. Commenters argued that the proposed rule thus treated two pieces of the same transaction differently, which could result in an imbalance in insolvency or resolution and that the possibility of such an imbalance for the clearing member could expose the clearing member to unnecessary and undesired market risk. Commenters urged the agencies to adopt the same approach taken under Section 2 of the Universal Protocol, which allows the client-facing leg of the cleared swap with the clearing

member that is a covered entity, covered bank or covered FSI to be closed out substantially contemporaneously with the CCP-facing leg in the event the CCP were to take action to close out the CCP-facing leg.

Some commenters requested clarification that transactions between a covered entity, covered bank, or covered FSI client and its clearing member (as opposed to transactions where the covered entity, covered bank, or covered FSI is the clearing member) would be subject to the rule's requirements, since this would be consistent with the Universal Protocol. As explained in this section, the exemption in the final rule regarding CCPs does not depend on whether the covered entity, covered bank, or covered FSI is a clearing member or a client. A covered QFC—generally a QFC to which a covered entity, covered bank, or covered FSI is a party—is exempted from the requirements of the final rule if a CCP is also a party.

Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from James M. Cain, Sutherland Asbill & Brennan LLP, writing on behalf of the eleven Federal Home Loan Banks, at 2 (Dec. 12, 2016).

A few commenters requested that the FDIC modify the definition of “central counterparty,” which was defined to mean “a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating trades” in the proposal.

These commenters argued that a CCP does far more than “facilitate” or “guarantee” trades and that a CCP “interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.”

As an alternative definition of CCP, these commenters suggested the final rule should define central counterparty to mean: “an entity (for example, a clearinghouse or similar facility, system, or organization) that, with respect to an agreement, contract, or transaction: (i) Enables each party to the agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the CCP for the credit of the parties; and (ii) arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, or transactions executed by participants in the CCP.”

12 CFR 324.2.

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

Id.

at 9.

Commenters also urged the FDIC to exclude from the requirements of the final rule all QFCs that are cleared, processed, or settled through the facilities of an FMU as defined in section 803(6) of the Dodd-Frank Act

or that are entered into subject to the rules of an FMU.

For example, commenters argued that QFCs with FMUs such as the provision of an extension of credit by a central securities depositary (CSD) to a GSIB entity that is a member of the CSD in connection with the settlement of securities transactions, should be excluded from the requirements of the final rule. Commenters contended that, similar to CCPs, the relationship between a covered FSI and FMU is governed by the rules of the FMU and that there are no market alternatives to continuing to transact with FMUs. Commenters argued that FMUs generally should be excluded for the same reasons as CCPs and that a broader exemption to cover FMUs would serve to mitigate the systemic risk of a GSIB in distress, an underlying objective of the rule's requirements. Commenters contended that such an exclusion would be consistent with the treatment of FMUs under U.K. regulations and German law. Some commenters also requested that related or underlying agreements to CCP-cleared QFCs and QFCs entered into with other FMUs also be excluded, since such agreements “form an integrated whole with [those] QFCs” and such an exemption would facilitate the continued expansion of the clearing and settlement framework and the benefits of such a framework.

100

One commenter urged that the final rule should not in any manner restrict an FMU's ability to close out a defaulting clearing member's portfolio, including potential liquidation of cleared contracts.

12 U.S.C. 5462(6). In general, Title VIII of the Dodd-Frank Act defines “financial market utility” to mean any person that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person.

Id.

As discussed above, one commenter who recommended an exclusion of securities market transactions that generally settle in the short term, do not impose ongoing or continuing obligations on either party after settlement, and do not typically include the default rights targeted by this rule, requested this treatment in the alternative.

100

Letter to Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation, from Larry E. Thompson, Vice Chairman and General Counsel, The Depository Trust & Clearing Corporation, at 6 (Dec. 12, 2016).

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

101

See

final rule § 382.1. See also 12 CFR 324.2.

The final rule also makes clear that, if one or more FMUs are the only counterparties to a covered QFC, the covered FSI is not required to conform the covered QFC to the final rule.

102

Therefore, an FMU's default rights and transfer restrictions under the covered QFC are not affected by the final rule. However, this exclusion would not include a covered QFC with a non-FMU counterparty, even if the QFC is settled by an FMU or if the FMU is a party to such QFC, because the final rule is

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

102

See

final rule § 382.7(a)(2). In response to commenters, the final rule uses the definition of FMU in Title VIII of the Dodd-Frank Act and may apply, for purposes of the final rule, to entities regardless of jurisdiction. The definition of FMU in the final rule includes a broader set of entities, in addition to CCPs. However, the definition in the final rule does not include depository institutions that are engaged in carrying out banking-related activities, including providing custodial services for tri-party repurchase agreements. The definition also explicitly excludes certain types of entities (

e.g.,

registered futures associations, swap data repositories) and other types of entities that perform certain functions for or related to FMUs (

e.g.,

futures commission merchants).

The final rule does not explicitly exclude futures and cleared swaps agreements with a futures commission merchant, as requested by a commenter. The nature and scope of the requested exclusion is unclear, and, therefore, it is unclear whether the exclusion would be necessary, on the one hand, or overbroad, on the other hand. However, the final rule makes a number of clarifications and exemptions that may help address the commenter's concern regarding FCM agreements.

QFCs with Central Banks and Sovereign Entities.

The proposal included covered QFCs with sovereign entities and central banks, consistent with Title II of the Dodd-Frank Act and the FDI Act. Commenters urged the FDIC to exclude QFCs with central bank and sovereign counterparties from the final rule. Commenters argued that sovereign entities might not be willing to agree to limitations on their QFC default rights and noted that other countries' measures such as those of the United Kingdom and Germany, consistent with their governing laws, exclude central banks and sovereign entities. Commenters contended that central banks and sovereign entities are sensitive to financial stability concerns and resolvability goals, thus reducing the concern that they would exercise default rights in a way that would undermine resolvability of a GSIB or financial stability. Commenters indicated it was unclear whether central banks or sovereign entities would be permitted under applicable statutes to enter into QFCs with limited default rights, but did not provide specific examples of such statutes.

103

Commenters further noted that these entities did not participate in the development of the Universal Protocol and that the Universal Protocol does not provide a viable mechanism for compliance with the final rule by these entities.

103

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

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

C. Definition of “Default Right” (Section 382.1 of the Final Rule)

As discussed above, a party to a QFC generally has a number of rights that it can exercise if its counterparty defaults on the QFC by failing to meet certain contractual obligations. These rights are generally, but not always, contractual in nature. One common default right is a setoff right: The right to reduce the total amount that the non-defaulting party must pay by the amount that its defaulting counterparty owes. A second common default right is the right to liquidate pledged collateral and use the proceeds to pay the defaulting party's net obligation to the non-defaulting party. Other common rights include the ability to suspend or delay the non-defaulting party's performance under the contract or to accelerate the obligations of the defaulting party. Finally, the non-defaulting party typically has the right to terminate the QFC, meaning that the parties would not make payments that would have been required under the QFC in the future.

104

The phrase “default right” in the proposed rule was broadly defined to include these common rights as well as “any similar rights.”

105

Additionally, the definition included all such rights regardless of source, including rights existing under contract, statute, or common law.

104

But see

12 U.S.C. 1821(e)(8)(G); 12 U.S.C. 5390(c)(8)(F).

105

See

proposed rule § 382.1.

However, the proposed definition of default right excluded two rights that are typically associated with the business-as-usual functioning of a QFC. First, same-day netting that occurs during the life of the QFC in order to reduce the number and amount of payments each party owes the other was excluded from the definition of “default right.”

106

Second, contractual margin requirements that arise solely from the change in the value of the collateral or the amount of an economic exposure were also excluded from the definition.

107

The reason for these exclusions was to leave such rights unaffected by the proposed rule. The proposal's preamble explained that such exclusions were appropriate because the proposal was intended to improve resolvability by addressing default rights that could disrupt an orderly resolution, not to interrupt the parties' business-as-usual interactions under a QFC.

108

106

See

proposed rule § 382.1.

107

See id.

These rights are nonetheless subject to the stay provisions of the FDIA and Title II.

108

See

81 FR 74333.

However, certain QFCs are also commonly subject to rights that would increase the amount of collateral or margin that the defaulting party (or a guarantor) must provide upon an event of default. The financial impact of such default rights on a covered FSI could be similar to the impact of the liquidation and acceleration rights discussed above. Therefore, the proposed definition of “default right” included such rights (with the exception discussed in the previous paragraph for margin requirements based solely on the value of collateral or the amount of an economic exposure).

109

See id.

Finally, contractual rights to terminate without the need to show cause, including rights to terminate on demand and rights to terminate at contractually specified intervals, were excluded from the definition of “default right” under the proposal for purposes of the proposed rule's restrictions on cross-default rights.

110

This exclusion was consistent with the proposal's objective of restricting only default rights that are related, directly or indirectly, to the entry into resolution of an affiliate of the covered FSI, while leaving other default rights unrestricted.

111

110

See

proposed rule §§ 382.1, 382.4.

111

The definition of “default right” parallels the definition contained in the ISDA Protocol.

However, certain rights not included as such “default rights” are nonetheless subject to the stay and other provisions of the FDI Act and the Dodd-Frank Act. The final rule does not modify or limit the FDIC's powers in its capacity as receiver under the FDI Act or the Dodd-Frank Act with respect to a counterparties' contractual or other rights.

Commenters expressed support for a number of aspects of the definition of default rights. For example, a number of commenters supported the proposed exclusion from the definition of “default right” of contractual rights to terminate without the need to show cause, noting that such rights exist for a variety of reasons and that reliance on these rights is unlikely to result in a fire sale of assets during a GSIB resolution. At least one commenter requested that this exclusion be expanded to include force majeure events. Commenters also expressed support for the exclusion for what commenters referred to as “business-as-usual” payments associated with a QFC. However, these commenters requested clarification that certain “business-as-usual” actions would not be included in the definition of default right, such as payment netting, posting and return of collateral, procedures for the substitution of collateral and modification to the terms of the QFC, and also requested clarification that the definition of “default right” would not include off-setting transactions to third parties by the non-defaulting counterparty. One commenter to the FRB and the OCC's proposal urged that if the FRB's and OCC's goal is to provide that a party cannot enforce a provision that requires more margin because of a credit downgrade but may demand more margin for market price changes, the rule should state so explicitly. Another commenter expressed concern that the definition of default right in the proposal would permit a defaulting covered FSI to demand collateral from its QFC counterparty as margin due to a market price change, but would not allow the non-covered FSI to demand collateral from the covered FSI.

The final rule retains the same definition of “default right” as that of the proposal. The FDIC believes that the definition of default right is sufficiently clear and that additional modifications are not needed to address the concerns raised by commenters. The final rule does not adopt a particular exclusion for force majeure events as requested by certain commenters as it is not clear without reference to particular contractual provisions what this term would encompass. Moreover, it should be clear that events typically considered to be captured by force majeure clauses (

e.g.,

natural disasters) would not be related, directly or indirectly, to the resolution of an affiliate.

112

See

final rule § 382.4(b).

“Business as usual” rights regarding changes in collateral or margin would not be included within the definition of default right to the extent that the right or operation of a contractual provision arises solely from either a change in the value of collateral or margin or a change in the amount of an economic exposure.

113

In response to commenters' requests for clarification, this exception includes changes in margin due to changes in market price, but does not include changes due to counterparty credit risk (

e.g.,

credit rating downgrades). Therefore, the right of either party to a covered QFC to require margin due to changes in market price would be unaffected by the definition of default right. Moreover, default rights that are exercised before a covered FSI or its affiliate enter resolution and that would not be affected by the stay-and-transfer provisions of the U.S. Special Resolution Regimes also would not be affected.

113

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

Regarding transactions with third parties, the final rule, like the proposal, does not require covered FSIs to address default rights in QFCs solely between parties that are not covered FSIs (

e.g.,

off-setting transactions to third parties by the non-GSIB counterparty, to the extent none are covered FSIs).

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

The proposed rule generally would have required a covered QFC to explicitly provide both (a) that the transfer of the QFC (and any interest or obligation in or under it and any property securing it) from the covered FSI to a transferee will be effective to the same extent as it would be under the U.S. Special Resolution Regimes if the covered QFC were governed by the laws of the United States or of a State of the United States and (b) that default rights with respect to the covered QFC that could be exercised against a covered FSI could be exercised to no greater extent than they could be exercised under the U.S. Special Resolution Regimes if the covered QFC were governed by the laws of the United States or of a State of the United States.

114

The final rule contains these same provisions.

115

114

See

proposed rule § 382.3.

115

See

final rule § 382.3(b).

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

116

See

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

See

final rule § 382.1.

A number of commenters argued that QFCs should be exempt from the requirements of proposed § 382.3 if the QFC is governed by U.S. law. An example of such a QFC provided by commenters includes the standard form repurchase and securities lending agreement published by the Securities Industry and Financial Markets Association. These commenters argued that counterparties to such agreements are already required to observe the stay-and-transfer provisions of the FDI Act and Title II of the Dodd-Frank Act, as mandatory provisions of U.S. Federal law, and that requiring an amendment of these types of QFCs to include the express provisions required under § 382.3 would be redundant and would not provide any material resolution benefit, but would significantly increase the remediation burden on covered FSIs.

Other commenters proposed a three-prong test of “nexus with the United States” for purposes of recognizing an exclusion from the express acknowledgment of the requirements of proposed § 382.3. In particular, these commenters argued that the presence of two factors, in addition to the contract being governed by U.S. law, would provide greater certainty that courts would apply the stay-and-transfer provisions of the FDI Act and Title II of the Dodd-Frank Act: (1) If a contract is entered into between entities organized in the United States; and (2) to the extent the GSIB's obligations under the QFC are collateralized, if the collateral is held with a U.S. custodian or depository pursuant to an account agreement governed by U.S. law.

117

Other commenters contended that only whether the contract is under U.S. law, and not the location of the counterparty or the collateral, is relevant to the analysis of whether the FDI Act and the Dodd-Frank Act would govern the

contract. Commenters also requested that if the first additional factor (

i.e.,

that the QFC be entered into between entities organized in the United States) were to be included within the exception, it should be broadened to include counterparties that have principal places of business or that are otherwise domiciled in the United States.

117

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

The requirements of the final rule (in conjunction with those of the FRB FR and the expected OCC FR) seek to provide certainty that all covered QFCs would be treated the same way in the context of a resolution of a covered entity, covered bank or covered FSI under the Dodd-Frank Act or the FDI Act. The stay-and-transfer provisions of the U.S. Special Resolution Regimes should be enforced with respect to all contracts of any U.S. GSIB entity that enters resolution under a U.S. Special Resolution Regime, as well as all transactions of the subsidiaries of such an entity. Nonetheless, it is possible that a court in a foreign jurisdiction would decline to enforce those provisions. In general, the requirement that the effect of the statutory stay-and-transfer provisions be incorporated directly into the QFC contractually helps to ensure that a court in a foreign jurisdiction would enforce the effect of those provisions, regardless of whether the court would otherwise have decided to enforce the U.S. statutory provisions.

118

Further, the knowledge that a court in a foreign jurisdiction would reject the purported exercise of default rights in violation of the required contractual provisions should deter covered FSIs' counterparties from attempting to exercise such rights.

118

See generally

Financial Stability Board, “Principles for Cross-border Effectiveness of Resolution Actions” (Nov. 3, 2015), available at

http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf

In response to comments, the final rule exempts from the requirements of § 382.3 a covered QFC that meets two requirements.

119

First, the covered QFC must state that it is governed by the laws of the United States or a State of the United States.

120

It has long been clear that the laws of the United States and the laws of a State of the United States both include U.S. Federal law, such as the U.S. Special Resolution Regimes.

121

Therefore, this requirement ensures that contracts that meet this exemption also contain language that helps ensure that foreign courts will enforce the stay-and-transfer provisions of the U.S. Special Resolution Regimes. Second, the counterparty to the covered FSI must be organized under the laws of the United States or a State,

122

have its principal place of business

123

located in the United States, or be a U.S. branch or U.S. agency.

124

Similarly, a counterparty that is an individual must be domiciled in the United States.

125

This requirement helps ensure that the FDIC will be able to quickly and easily enforce the stay-and-transfer provisions of the U.S. Special Resolution Regimes.

126

This exemption is expected to significantly reduce the burden associated with complying with the final rule while continuing to provide assurance that the stay-and-transfer provisions of the U.S. Special Resolution Regimes may be enforced.

119

See

final rule § 382.3(a).

120

However, a contract that explicitly provides that one or both of the U.S. Special Resolution Regimes, including a broader set of laws that includes a U.S. special resolution regime, is excluded from the laws governing the QFC would not meet this exemption under the final rule. For example, a covered QFC would not meet this exemption if the contract stated that it was governed by the laws of the State of New York but also stated that it was not governed by U.S. Federal law. In contrast, a contract that stated that it was governed by the laws of the State of New York but opted out of a specific non-mandatory Federal law (

e.g.,

the Federal Arbitration Act) would meet this exemption.

Cf. Volt Info. Scis.

Bd. Of Trs.,

489 U.S. 468 (1989).

121

Although many QFCs only explicitly state that the contract is governed by the laws of a specific State of the United States, it has been made clear on numerous occasions that the laws of each State include Federal law.

See e.g.,

Hauenstain

Lynham,

100 U.S. 483, 490 (1979) (stating that Federal law is “as much a part of the law of every State as its own local laws and the Constitution”);

Fid. Fed. Sav. & Loan Ass'n

de la Cuesta,

458 U.S. 141, 157 (1982) (same);

Testa

Katt,

330 U.S. 386, 393 (1947) (“For the policy of the Federal Act is the prevailing policy in every state.”).

122

For purposes of this requirement of the exemption, “State” means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.

123

See Hertz Corp.

Friend,

559 U.S. 77(2010) (describing the appropriate test for principal place of business).

124

See

final rule § 382.3(a)(1)(ii).

125

See id.

126

See e.g.,

Daimler AG

Bauman,

134 S. Ct. 746 (2014);

Goodyear Dunlop Tires Operations, S.A.

Brown,

564 U.S. 915 (2011);

Hertz Corp.

Friend,

559 U.S. 77 (2010).

This section of the final rule is consistent with efforts by regulators in other jurisdictions to address similar risks by requiring that financial firms within their jurisdictions ensure that the effect of the similar provisions under these foreign jurisdictions' respective special resolution regimes would be enforced by courts in other jurisdictions, including the United States. For example, the U.K.'s Prudential Regulation Authority (PRA) recently required certain financial firms to ensure that their counterparties to newly created obligations agree to be subject to stays on early termination that are similar to those that would apply upon a U.K. firm's entry into resolution if the financial arrangements were governed by U.K. law.

127

Similarly, the German parliament passed a law in November 2015 requiring German financial institutions to have provisions in financial contracts that are subject to the law of a country outside of the European Union that acknowledge the provisions regarding the temporary suspension of termination rights and accept the exercise of the powers regarding such temporary suspension under the German special resolution regime.

128

Additionally, the Swiss Federal Council requires that banks “ensure at both the individual institution and group level that new agreements or amendments to existing agreements which are subject to foreign law or envisage a foreign jurisdiction are agreed only if the counterparty recognises a postponement of the termination of agreements in accordance with” the Swiss special resolution regime.

129

Japan's Financial Services Agency also revised its supervisory guidelines for major banks to require those banks to ensure that the effect of the statutory stay decision and statutory special creditor protections under

Japanese resolution regimes extends to contracts governed by foreign laws.

130

127

See

PRA Rulebook: CRR Firms and Non-Authorised Persons: Stay in Resolution Instrument 2015 (Nov. 12, 2015), available at

http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf

;