[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Rules and Regulations]
[Pages 66618-66621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28074]


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DEPARTMENT OF THE TREASURY

31 CFR Part 148


Qualified Financial Contracts Recordkeeping Related to Orderly 
Liquidation Authority

AGENCY: Department of the Treasury.

ACTION: Notification of exemption.

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SUMMARY: The Secretary of the Treasury (the ``Secretary''), as 
Chairperson of the Financial Stability Oversight Council, after 
consultation with the Federal Deposit Insurance Corporation (the 
``FDIC''), is issuing a determination regarding a request for an 
exemption from certain requirements of the rule implementing the 
qualified financial contracts (``QFC'') recordkeeping requirements of 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (the ``Dodd-Frank Act'' or the ``Act'').

DATES: The exemption granted is effective December 27, 2018.

FOR FURTHER INFORMATION CONTACT: Peter Phelan, Deputy Assistant 
Secretary for Capital Markets, (202) 622-1746; Peter Nickoloff, 
Financial Economist, Office of Capital Markets,

[[Page 66619]]

(202) 622-1692; Steven D. Laughton, Assistant General Counsel (Banking 
& Finance), (202) 622-8413; or Stephen T. Milligan, Acting Deputy 
Assistant General Counsel (Banking & Finance), (202) 622-4051.

SUPPLEMENTARY INFORMATION: 

Background

    On October 31, 2016, the Secretary published a final rule pursuant 
to section 210(c)(8)(H) of the Dodd-Frank Act requiring certain 
financial companies to maintain records with respect to their QFC 
positions, counterparties, legal documentation, and collateral that 
would assist the FDIC as receiver in exercising its rights and 
fulfilling its obligations under Title II of the Act (the ``rule'').\1\
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    \1\ 31 CFR part 148; 81 FR 75624 (Oct. 31, 2016).
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    Section 148.3(c)(3) of the rule provides that one or more records 
entities may request an exemption from one or more of the requirements 
of the rule by writing to the Department of the Treasury 
(``Treasury''), the FDIC, and the applicable primary financial 
regulatory agency or agencies, if any.\2\ The written request for an 
exemption must: (i) Identify the records entity or records entities or 
the types of records entities to which the exemption would apply; (ii) 
specify the requirements from which the records entities would be 
exempt; (iii) provide details as to the size, risk, complexity, 
leverage, frequency and dollar amount of QFCs, and interconnectedness 
to the financial system of each records entity, to the extent 
appropriate, and any other relevant factors; and (iv) specify the 
reasons why granting the exemption will not impair or impede the FDIC's 
ability to exercise its rights or fulfill its statutory obligations 
under sections 210(c)(8), (9), and (10) of the Act.\3\
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    \2\ 31 CFR 148.3(c)(3).
    \3\ 12 U.S.C. 5390(c)(8), (9), and (10).
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    The rule provides that, upon receipt of a written recommendation 
from the FDIC, prepared in consultation with the primary financial 
regulatory agency or agencies for the applicable records entity or 
entities, that takes into consideration each of the factors referenced 
in section 210(c)(8)(H)(iv) of the Act \4\ and any other factors the 
FDIC considers appropriate, the Secretary may grant, in whole or in 
part, a conditional or unconditional exemption from compliance with one 
or more of the requirements of the rule to one or more records 
entities.\5\ The rule further provides that, in determining whether to 
grant an exemption, the Secretary will consider any factors deemed 
appropriate by the Secretary, including whether application of one or 
more requirements of the rule is not necessary to achieve the purpose 
of the rule.
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    \4\ 12 U.S.C. 5390(c)(8)(H)(iv).
    \5\ 31 CFR 148.3(c)(4)(i).
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Request for Exemption

    On April 19, 2017, Morgan Stanley submitted, on behalf of Morgan 
Stanley Smith Barney LLC (``MSSB''), a request for an exemption from 
the rule to Treasury, the FDIC, and, as the primary financial 
regulatory agencies for MSSB, the Securities and Exchange Commission 
(``SEC'') and the Commodity Futures Trading Commission (``CFTC''), 
which Morgan Stanley supplemented with information provided on March 
26, 2018.\6\ Morgan Stanley requested an exemption for MSSB from 
compliance with sections 148.3 and 148.4 of the rule for MSSB's current 
and future QFC portfolio consisting of QFCs entered into by MSSB on 
behalf of customers and booked and carried in accounts for the benefit 
of customers, referred to in the request as ``client activity QFCs,'' 
and QFCs with central counterparties under which client transactions 
executed by MSSB are cleared and settled. Morgan Stanley also requested 
that the exemption apply to inter-affiliate QFCs entered into for the 
purpose of fulfilling client activity QFCs, funding its client activity 
QFCs, or hedging risks arising from such QFCs or for similar purposes 
in support of its business relating to such QFCs. As an alternative, 
Morgan Stanley requested that the Secretary allow MSSB to comply with 
the recordkeeping requirements of the rule by maintaining the records 
that MSSB already maintains on its QFCs for business reasons and 
pursuant to other regulatory requirements.
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    \6\ MSSB is registered with the SEC as a broker-dealer under the 
Securities Exchange Act of 1934 and as an investment adviser under 
the Investment Advisers Act of 1940 and is registered with the CFTC 
as an introducing broker under the Commodity Exchange Act.
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    In support of its request, Morgan Stanley submitted information 
detailing the types and large volume of client activity and related 
QFCs, measured by both number of QFCs and market value, to which MSSB 
is a party. Morgan Stanley represented that the client activity QFCs 
are generally cash transactions entered into by retail customers, 
including individuals and small and medium sized businesses, that are 
executed on standardized terms, and loans to retail customers such as 
margin loans and demand lines of credit that are subject to 
standardized terms and documentation. Morgan Stanley represented that 
MSSB's client activity QFCs are typically not leveraged and that with 
respect to client activity QFCs that are margin loans or foreign 
exchange (``FX'') products whereby MSSB extends credit, such QFCs are 
typically over-collateralized in compliance with applicable law. Morgan 
Stanley also stated that MSSB's interconnectedness to the rest of the 
financial system is limited, given that it serves retail customers and 
given the limited complexity of the products it offers. Morgan Stanley 
has a separate U.S. broker-dealer subsidiary, Morgan Stanley & Co. LLC, 
that serves institutional clients. Morgan Stanley noted that only a 
very small percentage of MSSB customers are also customers of Morgan 
Stanley & Co. LLC.\7\ Furthermore, MSSB is not registered with the CFTC 
as a swap dealer or a futures commission merchant; the lack of these 
registrations restricts its ability to transact in certain types of 
QFCs, including OTC derivatives. Finally, Morgan Stanley asserted that 
the extent and nature of its business with respect to client activity 
QFCs, as described above, support its view that granting the requested 
exemption would not impair or impede the FDIC's ability to exercise its 
rights under section 210(c)(8), (9), and (10) of the Act.
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    \7\ Morgan Stanley & Co. LLC was not included within the 
exemption request.
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    Treasury received a final recommendation from the FDIC, prepared in 
consultation with the SEC and CFTC, regarding the exemption request, 
and, after consultation with the FDIC, Treasury is making the 
determination discussed below.\8\
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    \8\ All exemptions to the recordkeeping requirements of the rule 
are made at the discretion of the Secretary, and the Secretary's 
discretion is not limited by any recommendations received from other 
agencies. Exemptions to the FDIC's recordkeeping rules under 12 CFR 
part 371 (Recordkeeping Requirements for Qualified Financial 
Contracts) are at the discretion of the board of directors of the 
FDIC and entail a separate request and process and separate policy 
considerations. References to the FDIC in this notice should not be 
taken to imply that the FDIC has determined that similar exemptions 
under Part 371 would be available.
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Evaluation of the Exemption Request

    As discussed more fully in the preamble to the final rule,\9\ the 
FDIC has the authority under Title II of the Dodd-Frank Act to transfer 
the assets and liabilities of any financial company for which it has 
been appointed receiver under Title II (a ``covered financial 
company'') to either a bridge financial company established by the FDIC 
or to another financial institution.\10\ The

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FDIC generally has broad discretion under Title II as to which QFCs it 
transfers to the bridge financial company or to another financial 
institution subject to certain limitations, including the requirement 
that, if the FDIC is to transfer a QFC with a particular counterparty, 
it must transfer to a single financial institution (i) all QFCs between 
the covered financial company and such counterparty and (ii) all QFCs 
between the covered financial company and any affiliate of such 
counterparty.\11\ Similarly, if the FDIC determines to disaffirm or 
repudiate any QFC with a particular counterparty, it must disaffirm or 
repudiate (i) all QFCs between the covered financial company and such 
counterparty and (ii) all QFCs between the covered financial company 
and any affiliate of such counterparty.\12\ This requirement is 
referred to as the ``all or none rule.''
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    \9\ See 81 FR at 75624-25.
    \10\ See, e.g., 12 U.S.C. 5390(a)(1)(G)(i).
    \11\ 12 U.S.C. 5390(c)(9)(A)
    \12\ 12 U.S.C. 5390(c)(11).
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    Separately, if the FDIC is appointed receiver of a covered 
financial company that is a broker-dealer and the FDIC establishes a 
bridge financial company to assist with the resolution of that broker-
dealer, the FDIC must, pursuant to section 210(a)(1)(O) of the Act,\13\ 
unless certain conditions are met, transfer to the bridge financial 
company all ``customer accounts'' of the broker-dealer and all 
associated ``customer name securities'' and ``customer property,'' as 
those terms are defined by reference to the Securities Investor 
Protection Act of 1970, as amended (``SIPA'').\14\ There are two 
conditions under which the FDIC is permitted not to transfer all such 
customer accounts, customer name securities, and customer property to 
the bridge financial company: (i) If the FDIC determines, after 
consulting with the Securities Investor Protection Corporation and the 
SEC, that such customer accounts, customer securities, and customer 
property are likely to be promptly transferred to another registered 
broker-dealer or (ii) if the transfer would materially interfere with 
the ability of the FDIC to avoid or mitigate serious adverse effects on 
financial stability or economic conditions in the United States.\15\ If 
neither such condition is met and a bridge financial company is 
established by the FDIC, the QFCs that would be transferred to the 
bridge financial company pursuant to section 210(a)(1)(O) would include 
QFCs entered into by the broker-dealer with its customers.
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    \13\ 12 U.S.C. 5390(a)(1)(O).
    \14\ 15 U.S.C. 78aaa et seq. See also section 201(a)(10) of the 
Dodd-Frank Act (12 U.S.C. 5381(a)(10)) (providing that the terms 
``customer,'' ``customer name securities,'' and ``customer 
property'' as used in Title II shall have the same meaning as 
provided in SIPA).
    \15\ 12 U.S.C. 5390(a)(1)(O)(i)(I)-(II).
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    Not all of a broker-dealer's clients are treated as ``customers'' 
of that broker-dealer under SIPA. For instance, a client of a broker-
dealer that engaged in an FX spot transaction or an FX forward would 
not be a ``customer'' under SIPA with respect to those 
transactions.\16\ Even if such a client were otherwise to have a 
customer relationship with the broker-dealer under SIPA, such as by 
virtue of having a brokerage account for the trading of securities, 
then, although that customer account would be required to be 
transferred pursuant to section 210(a)(1)(O) of the Act, the FX spot 
transaction or forward would not be required to be transferred pursuant 
to section 210(a)(1)(O) of the Act. However, pursuant to the all or 
none rule, if the FDIC were to transfer a customer account that held 
QFCs between the broker-dealer and the client, the FDIC would be 
required to transfer (i) all QFCs between the broker-dealer and the 
client and, if the client is a non-natural person, (ii) all QFCs 
between the broker-dealer and any affiliates of such client. For 
example, if the broker-dealer were a party to a margin loan with a 
client, the client would be deemed to be a customer for purposes of 
SIPA and thus the margin loan would be transferred pursuant to section 
210(a)(1)(O) of the Act. If, in addition, the broker-dealer were also a 
party to an FX spot agreement with that same client, the client would 
not be deemed to be a customer for purposes of SIPA with respect to 
that FX spot agreement. Nevertheless, because the FDIC, pursuant to 
section 210(a)(1)(O) of the Act, would be required to transfer the 
margin loan to the bridge financial company, the FDIC also would be 
required to transfer the FX spot transaction, pursuant to the all or 
none rule.
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    \16\ See 15 U.S.C. 78lll(2) (defining ``customer'' as ``. . . 
any person (including any person with whom the debtor deals as 
principal or agent) who has a claim on account of securities 
received, acquired, or held . . .'' (emphasis added); 15 U.S.C. 
78lll(14) (defining ``security'' to exclude currency and rights to 
buy and sell currency other than FX options and other derivatives 
executed on a national securities exchange).
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    In a contrasting example, a client could be a ``customer'' of MSSB 
under SIPA, such as by having a brokerage account with MSSB, yet not 
have any QFCs outstanding with MSSB in that account. If such a client 
had a QFC with MSSB that was not the type of QFC that would make it a 
customer under SIPA (such as an FX spot agreement) and if the client 
(and, in the case of a non-natural person, its affiliates) had no other 
QFCs outstanding with MSSB, then that QFC would not be required to be 
transferred to the bridge financial company pursuant to either section 
210(a)(1)(O) of the Act, because section 210(a)(1)(O) would not apply 
to that QFC, or the all or none rule, because the all or none rule 
would not apply if there were no other outstanding QFCs between the 
parties. However, given the limited nature of MSSB's business and the 
limited types of QFCs entered into by MSSB with its clients, as 
represented by Morgan Stanley, the likelihood that the FDIC would 
determine to retain such a QFC in the receivership despite transferring 
the customer account, customer name securities, and customer property 
of such customer would seem relatively low.

Determination of Exemption

    Given the above-discussed restrictions on the FDIC's discretion as 
to whether or not to transfer QFCs from a broker-dealer, the limited 
nature of MSSB's business, and the limited types of QFCs entered into 
by MSSB with its clients, Treasury has determined to exempt MSSB from 
the recordkeeping requirements of the rule with respect to any QFCs of 
MSSB with clients that are customers of MSSB under SIPA with respect to 
any transactions or accounts they have with MSSB, subject to the 
conditions stipulated below.\17\ Treasury does not expect that granting 
this exemption will unduly interfere with the FDIC's ability to avoid 
or mitigate serious adverse effects on financial stability or economic 
conditions in the United States. In MSSB's case, the size, risk, 
complexity, and leverage of its QFCs with its customers do not present 
a high likelihood that the financial stability exception to the 
transfer requirement of section 210(a)(1)(O) of the Act would be met. 
If the financial stability exception is not met, the FDIC would likely 
either transfer, pursuant to section 210(a)(1)(O), all of a broker-
dealer's customer accounts, customer name securities, and customer 
property included in such customer accounts and any other QFCs with 
such customer to the bridge financial company or transfer all such 
accounts, securities, and property to another broker-dealer. In either 
case, the FDIC would not need the detailed records required by the rule 
with respect to QFCs to accomplish the transfer.
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    \17\ As used in the remainder of this notification of exemption, 
the term ``customer'' means a person who is a customer as defined in 
SIPA with respect to any transaction or account it has with MSSB.

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    Treasury is also exempting MSSB from the recordkeeping requirements 
of the rule with respect to any QFC entered into by MSSB with a 
clearing organization for the purpose of facilitating the clearance or 
settlement of any QFC subject to the exemption discussed above. As used 
in the exemption, the term ``clearing organization'' includes, among 
other things, clearing agencies registered with the SEC and derivatives 
clearing organizations registered with the CFTC.\18\ The records 
required by the rule regarding such clearing organization QFCs should 
not be needed by the FDIC to address the clearance or settlement of 
MSSB's exempted customer QFCs.
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    \18\ The exemption cross-references the definition from section 
402 of the Federal Deposit Insurance Corporation Improvement Act of 
1991, 12 U.S.C. 4402.
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    Further, given the limited nature of MSSB's business and the 
limited types of QFCs entered into by MSSB with its clients, Treasury 
is exempting MSSB from the recordkeeping requirements of the rule with 
respect to any QFC between MSSB and an affiliate of MSSB if (i) the 
affiliate is required to maintain the records described in section 
148.4 of the rule and (ii) the QFC is entered into by MSSB in order to 
enable MSSB to fulfill its obligations under QFCs with its customers or 
to hedge risk arising from QFCs with its customers. Such QFCs could 
include, for example, a securities lending agreement MSSB may enter 
into with an affiliate in order to obtain securities to lend to MSSB's 
customers or a QFC MSSB may enter into with an affiliate to hedge risk 
arising from QFCs MSSB engages in with its customers. Treasury is 
limiting the scope of this exemption to QFCs with affiliates of MSSB 
that are themselves records entities because if the FDIC is appointed 
as receiver of MSSB, the FDIC would, by reference to records of the 
inter-affiliate QFCs maintained by such affiliated records entities, be 
able to decide whether or not to transfer such QFCs to a bridge 
financial company. Treasury has determined not to provide an exemption 
with respect to such QFCs with affiliates of MSSB that are not records 
entities because the size of such QFCs and the risks they impose could 
be such that the FDIC would need the records required by the rule to 
make a transfer determination.

Conditions of the Exemption

    The exemption granted below is based on the factual representations 
made by Morgan Stanley on behalf of MSSB to Treasury, the FDIC, the 
SEC, and the CFTC in its submissions, including the factual 
representations regarding MSSB's registration as a broker-dealer, 
investment advisor, and introducing broker, the limitations on its 
business lines, the limitations on the types of clients it serves and 
the types of products and services it offers its clients, the 
frequency, size, and dollar amounts of QFCs with clients, the lack of 
complexity of the QFCs it has with clients, and the number of client 
accounts it maintains.
    Treasury reserves the right to rescind or modify the exemption at 
any time. Further, Treasury intends to reassess the exemption in five 
years. At that time, Treasury, in consultation with the FDIC and the 
primary financial regulatory agencies, would evaluate any material 
changes in the nature of MSSB's business as well as any relevant 
changes to market structure or applicable law or other relevant factors 
that might affect the reasons for granting the exemptions. Treasury may 
request an updated submission from MSSB as to its business at that 
time. Treasury expects that it would provide notice to MSSB prior to 
any modification or rescission of the exemption and that, in the event 
of a rescission or modification, Treasury would grant MSSB a limited 
period of time in which to come into compliance with the applicable 
recordkeeping requirements of the rule.

Terms and Conditions of the Exemption

    MSSB is hereby granted an exemption from the requirements of 31 CFR 
148.3 and 148.4 for (i) any QFC entered into by MSSB with or on behalf 
of any customer of MSSB that is booked and carried in accounts at MSSB 
maintained for the benefit of such customer; (ii) any QFC entered into 
by MSSB with a clearing organization in order to facilitate the 
clearance or settlement of any QFC referenced in clause (i); and (iii) 
any QFC entered into by MSSB with an affiliate of MSSB in order to 
enable MSSB to fulfill its obligations under QFCs referenced in clause 
(i) or to hedge risk arising from QFCs referenced in clause (i), 
provided that such affiliate is a records entity required to maintain 
the records specified in 31 CFR 148.4. For purposes of the exemption, 
``customer'' means a person who is a customer as defined in 15 U.S.C. 
78lll(2) with respect to any transactions or accounts it has with MSSB, 
and ``clearing organization'' has the meaning provided in 12 U.S.C. 
4402.
    The exemption is subject to modification or revocation at any time 
the Secretary determines that such action is necessary or appropriate 
in order to assist the FDIC as receiver for a covered financial company 
in being able to exercise its rights and fulfill its obligations under 
sections 210(c)(8), (9), or (10) of the Act. The exemption extends only 
to MSSB and to no other entities.

    Dated: December 17, 2018.
Peter Phelan,
Deputy Assistant Secretary for Capital Markets.
[FR Doc. 2018-28074 Filed 12-26-18; 8:45 am]
 BILLING CODE 4810-25-P