Netting Eligibility for Financial Institutions

FEDERAL RESERVE SYSTEM

12 CFR Part 231

Regulation EE; Docket No. R-0801]

Netting Eligibility for Financial Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board has adopted a rule to include certain entities under

the definition of ``financial institution'' in section 402 of the

Federal Deposit Insurance Corporation Improvement Act of 1991 so that

they will be covered by the Act's netting provisions. The Act

authorizes the Board to expand the definition of ``financial

institution'' to the extent consistent with the purposes of enhancing

efficiency and reducing systemic risk in the financial markets.

EFFECTIVE DATE: March 7, 1994.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General

Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-

3198), Legal Division. For the hearing impaired only:

Telecommunications Device for the Deaf, Dorothea Thompson (202/452-

3544).

SUPPLEMENTARY INFORMATION:

Background

The Federal Deposit Insurance Corporation Improvement Act of 1991

(Act) (Pub. L. 102-242, sections 401-407; 105 Stat. 2236, 2372-3; 12

U.S.C. 4401-4407) validates netting contracts among financial

institutions. Parties to a netting contract agree that they will pay or

receive the net, rather than the gross, payment due under the netting

contract. The Act provides certainty that netting contracts will be

enforced, even in the event of the insolvency of one of the parties.

The Act's netting provisions, effective December 19, 1991, are designed

to promote efficiency and reduce systemic risk within the banking

system and financial markets.

The netting provisions apply to bilateral netting contracts between

two financial institutions and multilateral netting contracts among

members of a clearing organization. Section 402(9) of the Act defines

``financial institution'' to include a depository institution, a

securities broker or dealer, a futures commission merchant, and any

other institution as determined by the Board. In addition, the Act's

definition of ``broker or dealer'' (section 402(1)(B)) includes any

affiliate of a registered broker or dealer, to the extent consistent

with the Act, as determined by the Board.

Proposed Rule

In May 1993, the Board requested comment on a proposed regulation

that would expand the application of the Act's netting provisions to a

broader range of financial market participants (58 FR 29149, May 19,

1993). The Board proposed that persons meeting certain tests based on

market activity would qualify as ``financial institutions'' under the

Act. The proposed tests were designed to capture institutions that are

significant market participants whose coverage could enhance market

liquidity and whose failure without coverage could have systemic risk

implications. The Board chose the activity-based tests instead of tests

based on an institution's status as a regulated entity, its affiliation

with a defined financial institution, or its class of charter. As these

three latter tests likely would be both over- and under-inclusive, the

Board believed they were not as appropriate as an activity-based test.

The test proposed by the Board had both a qualitative and a

quantitative aspect. First, to qualify as a financial institution under

the proposed rule, a person1 would have to participate actively in

a financial market for its own account and hold itself out as a

counterparty that will engage in transactions both as a buyer and a

seller in the financial market. Second, the person would have to meet

one of two quantitative thresholds: It must have either (1) had one or

more financial contracts of a total gross dollar value of $1 billion in

notional principal amount outstanding on any day during the previous

15-month period with counterparties that are not its affiliates, or (2)

incurred total gross mark-to-market positions of $100 million

(aggregated across counterparties) in one or more financial contracts

on any day during the previous 15-month period with counterparties that

are not its affiliates.

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\1\``Person'' is defined broadly to include any legal entity,

such as a corporation, partnership, or individual.

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Final Rule

The final rule adopted by the Board retains the qualitative test,

in a modified form, as well as the quantitative test. Under the final

rule, a person would qualify as a financial institution if it

represents that it will engage in financial contracts as a counterparty

on both sides of one or more financial markets and meets one of the

quantitative thresholds, which are largely unchanged from the proposal.

The operation of the rule is prospective, i.e., the Act's netting

provisions will apply only to those netting contracts entered into

after a person qualifies as a financial institution. The final rule

clarifies that a person will continue to be considered a financial

institution for the purposes of any contract entered into during the

period in which it qualifies, even if the person subsequently fails to

qualify during the life of the contract. In addition, the Board has

grandfathered those netting contracts in existence on the effective

date of the final rule. If a person qualifies as a financial

institution on the effective date, that person will be considered a

financial institution for the purposes of any outstanding contract

entered into prior to that date.

The Board also made various revisions to the proposed definitions.

Those revisions are discussed in the comment summary below.

Summary of Comments

The Board received 32 comment letters (from 30 commenters) on

proposed Regulation EE. The commenters were distributed as follows:

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Type of institution Number

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Trade association............................................ 7

Federal Reserve Bank......................................... 4

Commercial bank.............................................. 4

Government-sponsored entity.................................. 3

Clearing house............................................... 2

Financial institution holding company........................ 2

Swaps dealer................................................. 3

Federal agency............................................... 2

Law firm..................................................... 1

Financial corporation........................................ 1

International agency......................................... 1

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Total.................................................... 30

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General Comments

Virtually all of the commenters supported the objectives of the

Act's netting provisions and the Board's proposed regulation. The

commenters generally agreed that broadening the Act's definition of

``financial institution'' would enhance efficiency and reduce risk in

the financial markets. Only two commenters expressed doubts as to

whether broader netting protection would decrease systemic risk.

One commenter specifically supported expansion of the definition by

rule rather than by case-by-case determinations. Two commenters

suggested that the Board should indicate in advance how it intends to

use its discretion in case-by-case determinations. The Board, however,

has set forth in the regulation the standards it believes should apply

for a person to qualify as a financial institution in most

circumstances. In case of unanticipated circumstances, the Board has

the flexibility to make case-by-case determinations based on standards

different from those in the regulation.

Qualitative Test

Fifteen commenters raised concerns about the qualitative prong of

the proposed rule's test. Eleven of these commenters argued that the

rule should cover major market participants that are end users, in

addition to covering market intermediaries. (Four commenters suggested

that the Board eliminate the test altogether, and one commenter

suggested that coverage be extended to any entity that enters into a

netting contract as defined by the Act.) The commenters stated that the

insolvency of a major end user would raise substantial settlement,

liquidity, and systemic risks and that such risks arise from the size

and nature of an entity's positions, not from the character of its

business. The commenters noted that although end users may not be

market-makers, their arbitrage strategies may cause them to take

positions on both sides of the market. The commenters observed that

including end users would provide certainty of enforceability for a

broader range of netting contracts. They stated that this broader range

of coverage would enhance market liquidity, as dealers could do a

larger volume of business with end users without raising credit limits,

and would eliminate a competitive disadvantage for end users.

The Board has determined to retain the qualitative test, in a

modified form. Although the Board recognizes that end users (as well as

their counterparties) might benefit by the netting provisions and the

failure of certain end users could create systemic risk, the Board

believes it would be difficult to justify inclusion of many end users

as ``financial institutions.'' The Act defines ``financial

institution'' to include traditional financial market intermediaries

such as banks, broker-dealers, and futures commission merchants.

Expanding the definition to cover end users would include many non-

financial corporations and, potentially, even individuals. The Board

believes it would be a stretch of the statutory definition of

``financial institution'' to include institutions or individuals that

are not market intermediaries and are not in the financial services

business.

Eleven commenters offered suggestions on how to achieve certainty

that a given entity qualifies as a financial institution. The

commenters argued that market participants would have no choice but to

rely on the representations of their counterparties in many cases. Many

commenters suggested that market participants be allowed to rely in

good faith on the written representation of a counterparty, signed by

an appropriate officer, stating that the tests were met. The commenters

argued that this ``safe harbor'' would provide certainty in instances

where a participant might otherwise refuse to deal with an institution

solely because it cannot verify the institution's qualifications.

With regard to the qualitative test, five commenters noted that, as

a practical matter, it would be difficult for counterparties to verify

that an institution participates ``actively'' in the financial markets

and holds itself out as a market intermediary. In addition, one

commenter suggested that the rule should cover certain entities that do

not enter into transactions for their own account, such as collective

investment funds and master trust arrangements that act in a fiduciary

capacity. One commenter noted that a statement from an entity that it

meets the test could be considered the equivalent of ``holding itself

out'' as a market intermediary. Other commenters suggested eliminating

the ``participates actively'' clause.

The Board agrees that an institution that represents that it is

willing to engage in transactions on both sides of the market is, in

effect, holding itself out as a market intermediary. Accordingly, the

Board has revised the language of the qualitative test to provide that

such a representation would suffice to meet the test. The Board has

eliminated that part of the proposed rule that would have required a

financial institution to participate actively in a financial market for

its own account. The Board believes that the revised final rule

provides counterparties with greater certainty that an institution

meets the qualitative test because counterparties can rely on the

institution's representation.

Three commenters made drafting suggestions, such as (1) replacing

the reference to ``buyer and seller,'' which is appropriate in a

securities market, with the more generic ``participates on both sides''

of the market, and (2) clarifying that an institution may be active in

one or more financial markets simultaneously. The Board has revised the

rule to incorporate both of these suggestions. Under Sec. 231.3(a) of

the final rule, a person meets the qualitative test if it ``represents

that it will engage in financial contracts as a counterparty on both

sides of one or more financial markets.''

Quantitative Test

Fourteen commenters cited problems with the proposed quantitative

test. Seven commenters noted that financial market participants will

have difficulty verifying whether their counterparties meet the volume

thresholds because publicly available financial statements typically do

not present information in a format that would allow verification. Five

commenters stated that small-volume dealers would be placed at a

competitive disadvantage, resulting in concentration of trading at

large dealers and barriers to entry. In addition, two commenters noted

that the test would penalize business wind-downs, as financial

institutions would cease to be covered as their contracts expired. Two

commenters argued that counterparties could circumvent the test by

engaging in reciprocal transactions to raise their outstanding

principal amounts artificially.

As a solution to the problems cited above, eight commenters

suggested that the Board eliminate the quantitative test. These

commenters stated that the qualitative test would be sufficient to

guarantee coverage of parties with a material presence in the financial

markets, so a quantitative test is unnecessary.

The purpose of the rule, however, is to further the Act's

objectives of increasing efficiency and decreasing systemic risk in the

financial markets. The qualitative test targets institutions that are

market intermediaries in order to restrict coverage to those entities

that can reasonably be included in the Act's definition of ``financial

institution.'' The qualitative test alone does not necessarily focus on

those institutions whose coverage would help achieve the Act's

objectives. The purpose of the quantitative test is to ensure that a

covered institution engages in a level of business such that its

failure to meet its obligations could create systemic risk.

The Board believes that most institutions that meet the qualitative

test engage in a volume of transactions substantially above the

quantitative test thresholds. Although institutions entering the market

may not be able to meet the quantitative test right away, the test

would aid in reducing systemic risk by helping to ensure the

creditworthiness of new market participants because they would have to

achieve a certain level of market participation without the benefit of

certainty of the validity of netting provided by the rule. In addition,

the quantitative test tends to encourage active market participation by

financial institutions by requiring them to meet certain volume

thresholds within a set period of time. The netting contracts of

institutions that are winding down their businesses would continue to

be covered as long as the institution entered into the contracts while

it qualified as a financial institution. (See discussion of timing

issues below and Sec. 231.3(b) of the final rule.) For these reasons,

the Board has retained the proposed quantitative test in Sec. 231.3(a)

(1) and (2) of the final rule.

The commenters also suggested changes in the event the quantitative

test is not eliminated. Five commenters asked that the volume

thresholds be reduced from $1 billion in notional principle to $500

million and from $100 million in gross mark-to-market positions to $50

million. As the Board does not believe these thresholds would be overly

limiting, it has not decreased the threshold levels. The Board may

reexamine the thresholds if it finds that these levels prove to be

overly limiting.

One commenter suggested that the Board establish one set of

quantitative thresholds for dealers, but allow non-dealers to be

covered at higher thresholds. As discussed above, the Board believes

that inclusion of end users, even at higher volume thresholds, would be

a stretch of the term ``financial institution.''

Another commenter suggested that the quantitative test measure

average activity levels over a 24-month period to discourage short-run

attempts to increase activity. Although using average volumes could

help discourage artificial short-run increases in activity, it would

also add more complexity to the determination of whether an institution

meets the quantitative test. Rather than focusing on one day in a 15-

month period, averaging would require surveillance of activity on a

much more frequent basis. The final rule retains the proposed ``one-

day'' test.

Several commenters suggested that the Board allow counterparties to

rely on an external auditor's certificate or that the Board redesign

the test so that a party could verify its counterparty's qualifications

by examining publicly available information. The Board believes that

institutions desiring to qualify as financial institutions under the

rule will have a strong incentive to present information in publicly

available documents, such as financial reports, showing that the

institution meets the quantitative test. These reports could be

verified by an outside auditor, if the participants so desire.

One commenter suggested that, for the purposes of the quantitative

test, the Board should treat the aggregate risk of an affiliated group

as one entity, i.e. an institution would qualify as a financial

institution if it meets the qualitative test and it and/or its

affiliates meet the quantitative test. If an institution fails to meet

its obligations, however, those obligations are not automatically

assumed by its affiliates, even though in some cases a holding company,

for example, may make contributions to a troubled subsidiary. The Board

believes that treating each institution separately under the rule

reflects more closely the risk that institution poses for its

counterparties.

Two commenters requested that the Board allow the quantitative test

to be satisfied by financial contracts from several financial markets,

even though the institution may not satisfy the qualitative test for

each one of those financial markets. The rule would allow aggregation

of financial contracts across markets for purposes of the quantitative

test, but would not require an institution to meet the qualitative test

for each type of its financial contracts. For example, an institution

might meet the qualitative test by representing that it will engage in

foreign exchange contracts on both sides of the market and meet the

quantitative test with both its foreign exchange and interest rate

contracts. The institution would nevertheless qualify as a financial

institution, and all of its netting contracts would be subject to the

Act's protection.

Finally, in Sec. 231.3(a)(2), the Board has changed the word

``incurred'' to ``had'' to clarify that the contracts that yield mark-

to-market positions of $100 million need not be entered into on a

single day. Rather, the $100 million refers to positions in outstanding

contracts on a single day.

Charter Test

Six commenters suggested that the Board supplement the market

activity tests with charter tests. The commenters argued that charter

tests are consistent with the approach taken in the Act and are

competitively neutral for each charter type. The commenters did not

agree with the Board's statement that charter tests would foster

inaccurate presumptions about the riskiness of covered institutions.

Rather, they believed that charter tests would promote certainty

without harmful results. The commenters requested coverage for a

variety of charter types, including bank holding companies and their

subsidiaries, insurance companies, foreign banks (rather than solely

their U.S. branches and agencies), affiliates of registered broker-

dealers, trust companies, Federal Reserve Banks, Federal Home Loan

Banks, and certain government-sponsored entities.

The Board has determined not to expand the rule's coverage through

charter tests. Charter tests would include many end user institutions

that are not market intermediaries, which the Board believes would

stretch beyond the meaning of ``financial institution.'' A charter test

would also cover many institutions whose business volumes do not give

rise to systemic risk considerations. Although Congress used charter

tests in the Act, the Board does not believe that charter tests are

necessarily the most appropriate means to expand Congress' definition.

There may be certain end user institutions that reasonably can be

described as financial institutions even though they are not market

intermediaries. The Board has the ability to make case-by-case

determinations in these instances and has done so. For example, in

1992, the Board made individual determinations in the cases of three

CHIPS members. Similarly, there may be certain government-sponsored

entities or international organizations that do not meet the

requirements of the rule yet could reasonably be considered financial

institutions due to their roles in the financial markets. The Board

would consider making individual determinations in such cases.

Definitions

The commenters also made various technical suggestions concerning

the definitions. One commenter suggested that, in the definition of

``affiliate,'' the Board replace the word ``dealer'' with ``person.''

The Board has revised the definition in Sec. 231.2(b) accordingly.

Two commenters requested that the Board revise the definition of

``gross mark-to-market positions'' to replace the word ``price'' with

``value'' to clarify that market participants may use their normal

market valuation methods rather than the method used to price each

transaction at its inception. Section 231.2(e) of the final rule

reflects this revision.

Six commenters requested that the definition of ``person''

explicitly include an entity organized outside the U.S., thereby

assuring that foreign banks and other foreign market participants could

qualify as financial institutions. Another commenter asked that the

definition explicitly include trusts and that ``similar entity'' be

changed to the more general ``other entity.'' The Board intends that

``person'' be defined broadly to include all entities, foreign and

domestic, and has revised the definition in Sec. 231.2(f) to

incorporate both of these comments.

One commenter suggested that the Board include a comprehensive

description of the financial institutions defined by the Act as well as

those defined by the regulation. However, to keep the rule as simple as

possible, the Board has not included the Act's definitions. Section

231.1(b) of the rule specifically states that the rule does not affect

the status of those financial institutions defined by the Act.

One commenter suggested that the Act's definition of netting

contract also be used in the regulation, rather than the proposed

``financial contract'' definition, which is based on the Federal

Deposit Insurance Act's (FDIA's) definition of qualified financial

contract. The commenter believed that using a common definition would

reduce confusion and avoid litigation. The final rule retains the

concept of a financial contract based on the FDIA. The concept of a

financial contract narrows the focus of the rule to participants in the

financial markets and is relevant only to the determination of whether

a particular institution qualifies as a financial institution under the

rule. Once an institution qualifies, the Act's netting provisions would

apply to all of that institution's netting contracts, as defined by the

Act.

The Board has expanded upon the FDIA to include spot forward

contracts (contracts with maturities of two days or less) as financial

contracts for purposes of the qualitative and quantitative tests.

Arguably, the FDIA definition of swap agreement already includes spot

forward contracts, however, for purposes of clarity, the Board has

included spot contracts expressly in the forward contract definition.

Timing Issues

Many commenters raised timing-related issues regarding the rule's

coverage. Eight commenters requested that the Board clarify that the

Act's netting provisions will apply for the life of a contract as long

as the parties qualify as financial institutions at the time they enter

into the contract. The Board has revised the rule to clarify that a

person will continue to be considered a financial institution for the

purposes of any contract entered into during the period it qualifies,

even if the person subsequently fails to qualify. (See Sec. 231.3(b).)

Four commenters suggested that the Board clarify that an

institution's status as a financial institution will be determined at

the time it enters into a netting contract because that is when the

counterparty will evaluate the institution's creditworthiness. On the

other hand, two commenters suggested that the netting provisions should

be applied retroactively to an institution's existing contracts once it

qualifies as a financial institution. One commenter requested

clarification as to whether existing contracts will be grandfathered

when the rule takes effect. Under the final rule, the Act's netting

provisions will apply only to those netting contracts entered into

after a person qualifies as a financial institution. However, the Board

has revised the rule to grandfather those contracts in existence on the

effective date of the final rule for entities qualifying under the rule

at that time. (See Sec. 231.3(c).)

One commenter requested that the Board define the 15-month rolling

period in the quantitative test with reference to the time parties

enter into a master agreement, not the time of the first transaction

under that agreement. In the absence of a master agreement, the

commenter suggested that the period be measured with reference to a

particular netting transaction. In practice, to determine whether a

party meets the quantitative test, the 15-month period will date back

from the day a party enters into a netting contract, whether or not

that netting contract is a master agreement. Thus, on a particular day

(``Day X''), a party meets the quantitative test if its financial

contracts, as defined in the rule, met one of the rule's threshold

levels on any day during the previous 15 months. Assuming the party

qualifies as a financial institution and enters into a netting

contract, as defined in the Act, on Day X, Sec. 231.3(b) of the rule

provides that the netting contract will be covered by the Act's

provisions regardless of whether the party ceases to qualify as a

financial institution on a subsequent day. If the netting contract that

the party enters into on Day X is a master agreement, e.g., an

agreement to net specified types of underlying transactions that the

counterparties may enter into in the future, Sec. 231.3(b) would

provide that netting under that master agreement would continue to be

protected under the Act even though the party enters into individual

underlying transactions after it ceases to qualify as a financial

institution. The Act's provisions would not extend to netting under any

new master agreement entered into after the party ceases to qualify as

a financial institution.

Board List.

Two commenters requested that the Board keep a list of entities

that have declared themselves to be financial institutions. The Board

believes that the commenters' concerns about lack of certainty are

largely addressed by allowing counterparties to rely on an

institution's representation that it will act as a market intermediary

and creating an incentive for institutions to publish volume threshold

information to establish that they meet the quantitative test. Thus,

the Board does not believe an ``official'' list is necessary.

Automatic Stays.

Section 405 of the Act provides that no injunction or similar order

issued by a court or agency will interfere with the application of

netting. One commenter believed that section 405 could be interpreted

so as not to override provisions for automatic stays in bankruptcy

under federal or state law. The commenter asked that the Board indicate

its view on this matter. Although the Board cannot authoritatively

interpret the provisions of the Act, the Board believes the intent of

the Act is to override the automatic statutory bankruptcy stays for

valid netting contracts. Sections 403 and 404 of the Act explicitly

provide that netting is effective ``notwithstanding any other provision

of law.'' The Board believes that section 405 was included to clarify

that the netting provisions override court or agency actions in

addition to overriding statutory law.

CFTC Comment.

The Commodity Futures Trading Commission (CFTC) noted that it can

exempt certain contracts between ``appropriate persons'' from the

Commodity Exchange Act's (CEA's) exchange-trading requirement and has

done so for certain swaps, hybrid instruments, and energy contracts.

The CFTC may also exempt appropriate multilateral netting arrangements,

in which case the arrangement may not meet the Act's definition of

clearing organization, which refers to an organization that ``performs

clearing functions for a contract market designated pursuant to the

CEA.'' The CFTC stated that it would like to work with the Board to

ensure that a clearing organization exempted by the CFTC would be

covered by the Act's netting provisions. The Board is willing to work

with the CFTC in this area.

Final Regulatory Flexibility Analysis

Two of the three requirements of a final regulatory flexibility

analysis (5 U.S.C. 604), (1) a succinct statement of the need for and

the objectives of the rule and (2) a summary of the issues raised by

the public comments, the agency's assessment of the issues, and a

statement of the changes made in the final rule in response to the

comments, are discussed above. The third requirement of a final

regulatory flexibility analysis is a description of significant

alternatives to the rule that would minimize the rule's economic impact

on small entities and reasons why the alternatives were rejected.

The rule, however, should not have an economic impact on small

entities. The rule will apply only to entities with financial contracts

of $1 billion in gross notional principal amount or gross mark-to-

market positions of $100 million over a period of 15 months. Entities

with a smaller level of market activity would not be covered by the

Board's expanded definition of ``financial institution.'' Many small

market participants are included in the Act's definition of ``financial

institution'' and thus are already covered by the netting provisions.

The Board limited its expansion of the Act's definition to entities

with a relatively large volume of activity because the lack of netting

coverage for small entities is unlikely to affect overall market

efficiency or systemic risk.

List of Subjects in 12 CFR Part 231

Banks, banking, Financial institutions, Netting.

For the reasons set out in the preamble, the Board adds a new part

231 to Title 12, Chapter II of the Code of Federal Regulations to read

as follows:

PART 231--NETTING ELIGIBILITY FOR FINANCIAL INSTITUTIONS REGULATION

EE

Sec.

231.1 Authority, purpose, and scope.

231.2 Definitions.

231.3 Qualification as a financial institution.

Authority: 12 U.S.C. 4402(1)(B) and 4402(9).

Sec. 231.1 Authority, purpose, and scope.

(a) Authority. This part (Regulation EE; 12 CFR part 231) is issued

by the Board of Governors of the Federal Reserve System under the

authority of sections 402(1)(B) and 402(9) of the Federal Deposit

Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and

4402(9)).

(b) Purpose and scope. The purpose of the Act and this part is to

enhance efficiency and reduce systemic risk in the financial markets.

This part expands the Act's definition of ``financial institution'' to

allow more financial market participants to avail themselves of the

netting provisions set forth in sections 401-407 of the Act (12 U.S.C.

4401-4407). This part does not affect the status of those financial

institutions specifically defined in the Act.

Sec. 231.2 Definitions.

As used in this part, unless the context requires otherwise:

(a) Act means the Federal Deposit Insurance Corporation Improvement

Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.

(b) Affiliate, with respect to a person, means any other person

that controls, is controlled by, or is under common control with the

person.

(c) Financial contract means a qualified financial contract as

defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12

U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract

includes a contract with a maturity date two days or less after the

date the contract is entered into (i.e., a ``spot'' contract).

(d) Financial market means a market for a financial contract.

(e) Gross mark-to-market positions in one or more financial

contracts means the sum of the absolute values of positions in those

contracts, adjusted to reflect the market values of those positions in

accordance with the methods used by the parties to each contract to

value the contract.

(f) Person means any legal entity, foreign or domestic, including a

corporation, unincorporated company, partnership, government unit or

instrumentality, trust, natural person, or any other entity or

organization.

Sec. 231.3 Qualification as a financial institution.

(a) A person qualifies as a financial institution for purposes of

sections 401-407 of the Act if it represents that it will engage in

financial contracts as a counterparty on both sides of one or more

financial markets and either--

(1) Had one or more financial contracts of a total gross dollar

value of at least $1 billion in notional principal amount outstanding

on any day during the previous 15-month period with counterparties that

are not its affiliates; or

(2) Had total gross mark-to-market positions of at least $100

million (aggregated across counterparties) in one or more financial

contracts on any day during the previous 15-month period with

counterparties that are not its affiliates.

(b) If a person qualifies as a financial institution under

paragraph (a) of this section, that person will be considered a

financial institution for the purposes of any contract entered into

during the period it qualifies, even if the person subsequently fails

to qualify.

(c) If a person qualifies as a financial institution under

paragraph (a) of this section on March 7, 1994, that person will be

considered a financial institution for the purposes of any outstanding

contract entered into prior to March 7, 1994.

By order of the Board of Governors of the Federal Reserve

System, January 27, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-2324 Filed 2-1-94; 8:45 am]

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