[Federal Register Volume 80, Number 20 (Friday, January 30, 2015)]
[Proposed Rules]
[Pages 5063-5069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01324]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324 and 329

RIN 3064-AE30


Regulatory Capital Rules, Liquidity Coverage Ratio: Proposed 
Revisions to the Definition of Qualifying Master Netting Agreement and 
Related Definitions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC invites comment on a notice of proposed rulemaking 
(NPR or proposed rule) that would amend the definition of ``qualifying 
master netting agreement'' under the regulatory capital rules, and the 
liquidity coverage ratio rule. The FDIC also is proposing to amend the 
definitions of ``collateral agreement,'' ``eligible margin loan,'' and 
``repo-style transaction'' under the regulatory capital rules. The 
amendments are designed to ensure that the regulatory capital and 
liquidity treatment of certain financial contracts generally would not 
be affected by implementation of special resolution regimes in foreign 
jurisdictions if such regimes are substantially similar to Title II of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act and the 
Federal Deposit Insurance Act in the United States, or by the 
International Swaps and Derivative Association Resolution Stay Protocol 
that provide for contractual submission to such regimes. In December 
2014, the Office of the Comptroller of the Currency (OCC) and the Board 
of Governors of the Federal Reserve System (Board) adopted a joint 
interim final rule that is related to this proposed rule.

DATES: Comments must be received March 31, 2015.

ADDRESSES: You may submit comments, identified by RIN 3064-AE30, by any 
of the following methods:
    <bullet> Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the Agency Web 
site.
    <bullet> Email: <a href="/cdn-cgi/l/email-protection#41022e2c2c242f353201272528226f262e37"><span class="__cf_email__" data-cfemail="cb88a4a6a6aea5bfb88badafa2a8e5aca4bd">[email protected]</span></a>. Include the RIN 3064-AE30 on the 
subject line of the message.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.
    <bullet> Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7:00 a.m. and 5:00 p.m.
    Public Inspection: All comments received must include the agency 
name and RIN 3064-AE30 for this rulemaking. All comments received will 
be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. Paper copies of 
public comments may be ordered from the FDIC Public Information Center, 
3501 North Fairfax Drive, Room E-I002, Arlington, VA 22226 by telephone 
at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Bobby R. Bean, Associate Director, 
<a href="/cdn-cgi/l/email-protection#cfadadaaaea18fa9aba6ace1a8a0b9"><span class="__cf_email__" data-cfemail="63010106020d2305070a004d040c15">[email protected]</span></a>; Ryan Billingsley, Chief, Capital Policy Section, 
<a href="/cdn-cgi/l/email-protection#2456464d48484d4a435748415d6442404d470a434b52"><span class="__cf_email__" data-cfemail="a5d7c7ccc9c9cccbc2d6c9c0dce5c3c1ccc68bc2cad3">[email protected]</span></a>; Benedetto Bosco, Capital Markets Policy Analyst, 
<a href="/cdn-cgi/l/email-protection#0567676a76666a4563616c662b626a73"><span class="__cf_email__" data-cfemail="1d7f7f726e7e725d7b79747e337a726b">[email protected]</span></a>; Capital Markets Branch, Division of Risk Management 
Supervision, (202) 898-6888; or David Wall, Assistant General Counsel, 
<a href="/cdn-cgi/l/email-protection#781c0f191414381e1c111b561f170e"><span class="__cf_email__" data-cfemail="026675636e6e4264666b612c656d74">[email protected]</span></a>; Michael Phillips, Counsel, <a href="/cdn-cgi/l/email-protection#83eef3ebeaefefeaf3f0c3e5e7eae0ade4ecf5"><span class="__cf_email__" data-cfemail="8fe2ffe7e6e3e3e6fffccfe9ebe6eca1e8e0f9">[email protected]</span></a>; Ann 
Battle, Counsel, <a href="/cdn-cgi/l/email-protection#a8c9cac9dcdcc4cde8ceccc1cb86cfc7de"><span class="__cf_email__" data-cfemail="ef8e8d8e9b9b838aaf898b868cc1888099">[email protected]</span></a>; Rachel Ackmann, Senior Attorney, 
<a href="/cdn-cgi/l/email-protection#8efcefede5e3efe0e0cee8eae7eda0e9e1f8"><span class="__cf_email__" data-cfemail="c5b7a4a6aea8a4abab85a3a1aca6eba2aab3">[email protected]</span></a>; Grace Pyun, Senior Attorney, <a href="/cdn-cgi/l/email-protection#385f48414d56785e5c515b165f574e"><span class="__cf_email__" data-cfemail="bbdccbc2ced5fbdddfd2d895dcd4cd">[email protected]</span></a>; 
Supervision Branch, Legal Division, Federal Deposit Insurance 
Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: 

I. Summary

    The regulatory capital rules of the Board, the OCC, and the FDIC 
(collectively, the agencies) permit a banking organization to measure 
exposure from certain types of financial contracts on a net basis and 
recognize the risk-mitigating effect of financial collateral for other 
types of exposures, provided that the contracts are subject to a 
``qualifying master netting agreement'' that provides for certain 
rights upon a counterparty default.\1\ The agencies, by rule, have 
defined a qualifying master netting agreement as a netting agreement 
that permits a banking organization to terminate, apply close-out 
netting, and promptly liquidate or set-off collateral upon an event of 
default of the counterparty (default rights), thereby reducing its 
counterparty exposure and market risks.\2\ On the whole, measuring the 
amount of exposure of these contracts on a net basis, rather than a 
gross basis, results in a lower measure of exposure, and thus, a lower 
capital requirement, under the regulatory capital rules.
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    \1\ See 12 CFR part 3 (OCC), 12 CFR part 217 (Board); 12 CFR 
part 324 (FDIC). The term ``banking organization'' includes national 
banks, state member banks, state nonmember banks, savings 
associations, and top-tier bank holding companies domiciled in the 
United States not subject to the Board's Small Bank Holding Company 
Policy Statement (12 CFR part 225, appendix C), as well as top-tier 
savings and loan holding companies domiciled in the United States, 
except for certain savings and loan holding companies that are 
substantially engaged in insurance underwriting or commercial 
activities.
    \2\ See section 2 of the regulatory capital rules.
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    The current definition of ``qualifying master netting agreement'' 
recognizes that default rights may be stayed if the financial company 
is in receivership, conservatorship, or resolution under Title II of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act),\3\ or under the Federal Deposit Insurance Act (FDI Act).\4\ 
Accordingly, transactions conducted under netting agreements where 
default rights may be stayed under Title II of the Dodd-Frank Act or 
the FDI Act may qualify for the favorable capital treatment described 
above. However, the current definition of ``qualifying master netting 
agreement'' does not recognize that default rights may be stayed where 
a master netting agreement is subject to limited stays under foreign 
special resolution regimes or where counterparties agree through 
contract that a special resolution regime would apply. When the 
agencies adopted the current definition of ``qualifying master netting 
agreement,'' no other jurisdiction had adopted a special resolution 
regime relevant to the definition, and no banking organizations

[[Page 5064]]

had communicated to the agencies an intent to enter into contractual 
amendments to clarify that bilateral over-the-counter (OTC) derivatives 
transactions are subject to certain provisions of certain U.S. and 
foreign special resolution regimes.
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    \3\ See 12 U.S.C. 5390(c)(8) through (16).
    \4\ See 12 U.S.C. 1821(e)(8) through (13). The definition also 
recognizes that default rights may be stayed under any similar 
insolvency law applicable to government sponsored enterprises 
(GSEs). Generally under the agencies' regulatory capital rules, 
government-sponsored enterprise means an entity established or 
chartered by the U.S. government to serve public purposes specified 
by the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government. See 
regulatory capital rules Section 2.
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    In recent months, the European Union (EU) finalized the Bank 
Recovery and Resolution Directive (BRRD), which prescribes aspects of a 
special resolution regime that EU member nations should implement. On 
January 1, 2015, most of the provisions of the BRRD are expected to 
take effect in a number of the EU member states. In addition, several 
U.S. banking organizations have opted to adhere to the International 
Swaps and Derivatives Association's (ISDA) Resolution Stay Protocol 
(ISDA Protocol),\5\ which provides for amendments to the terms of ISDA 
Master Agreements \6\ between counterparties that adhere to the ISDA 
Protocol to stay certain default rights and other remedies provided 
under the agreement. The effective date of certain provisions of the 
ISDA Protocol also is January 1, 2015. This expected implementation 
would generally mirror steps taken in the United States to implement a 
special resolution regime under Title II of the Dodd-Frank Act.
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    \5\ See ISDA Protocol at http://assets.isda.org/media/f253b540-25/958e4aed.pdf/.
    \6\ The ISDA Master Agreement is a form of agreement that 
governs OTC derivatives transactions and is used by a significant 
portion of the parties to bilateral OTC derivatives transactions, 
including large, internationally active banking organizations. 
Furthermore, the ISDA Master Agreement generally creates a single 
legal obligation that provides for the netting of all individual 
transactions covered by the agreement.
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    A master netting agreement under which default rights may be stayed 
under the BRRD or that incorporates the ISDA Protocol would no longer 
qualify as a qualifying master netting agreement under the agencies' 
current regulatory capital and liquidity rules. This would result in 
considerably higher capital and liquidity requirements.
    Accordingly, under this NPR, the FDIC proposes to permit an 
otherwise qualifying master netting agreement to qualify if (i) default 
rights under the agreement may be stayed under a qualifying foreign 
special resolution regime or (ii) the agreement incorporates a 
qualifying special resolution regime by contract. Through these 
proposed revisions, the proposed rule would maintain the existing 
treatment for these contracts for purposes of the regulatory capital 
and liquidity rules, while recognizing the recent changes contemplated 
by the BRRD and the ISDA Protocol.
    The proposed rule also would revise certain other definitions of 
the regulatory capital rules to make various conforming changes 
designed to ensure that a banking organization may continue to 
recognize the risk mitigating effects of financial collateral \7\ 
received in a secured lending transaction, repo-style transaction, or 
eligible margin loan for purposes of the regulatory capital and 
liquidity rules, while recognizing the recent changes contemplated by 
the BRRD and banking organizations that have adhered to the ISDA 
Protocol. Specifically, the proposed rule would revise the definition 
of ``collateral agreement,'' ``eligible margin loan,'' \8\ and ``repo-
style transaction'' \9\ to provide that a counterparty's default rights 
may be stayed under a foreign special resolution regime or, if 
applicable, under a special resolution regime incorporated by 
contract.\10\ The FDIC requests comment on all aspects of these 
definitions.
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    \7\ Generally, under the agencies' regulatory capital rules, 
financial collateral means collateral in the form of: (i) Cash on 
deposit with the banking organization (including cash held for the 
banking organization by a third-party custodian or trustee); (ii) 
gold bullion; (iii) long-term debt securities that are not 
resecuritization exposures and that are investment grade; (iv) 
short-term debt instruments that are not resecuritization exposures 
and that are investment grade; (v) equity securities that are 
publicly traded; (vi) convertible bonds that are publicly traded; or 
(vii) money market fund shares and other mutual fund shares if a 
price for the shares is publicly quoted daily. In addition, the 
regulatory capital rules also require that the banking organization 
have a perfected, first-priority security interest or, outside of 
the United States, the legal equivalent thereof (with the exception 
of cash on deposit and notwithstanding the prior security interest 
of any custodial agent). See regulatory capital rule, Section 2.
    \8\ Generally under the agencies' regulatory capital rules, 
eligible margin loan means an extension of credit where: (i) The 
extension of credit is collateralized exclusively by liquid and 
readily marketable debt or equity securities, or gold; (ii) the 
collateral is marked-to-fair value daily, and the transaction is 
subject to daily margin maintenance requirements; and (iii) the 
extension of credit is conducted under an agreement that provides 
the banking organization with default rights, provided that any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs. See regulatory capital rule, 
Section 2. In addition, in order to recognize an exposure as an 
eligible margin loan a banking organization must comply with the 
requirements of section 3(b) of the regulatory capital rules with 
respect to that exposure.
    \9\ Generally, under the agencies' regulatory capital rules, 
repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the banking 
organization acts as agent for a customer and indemnifies the 
customer against loss, provided that: (1) The transaction is based 
solely on liquid and readily marketable securities, cash, or gold; 
(2) the transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements; (3) the transaction provides 
certain default rights. See regulatory capital rule, Section 2. In 
addition, in order to recognize an exposure as a repo-style 
transaction for purposes of this subpart, a banking organization 
must comply with the requirements of section 3(e) of the regulatory 
capital rules.
    \10\ See 12 CFR part 32.
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II. Background

A. U.S. Resolution Regime

    It is common market practice for bilateral derivatives and certain 
other types of financial contracts entered into by large banking 
organizations to permit a non-defaulting counterparty to exercise early 
termination rights and other contractual remedies upon a counterparty 
(or a related entity) experiencing an event of default. These 
contractual provisions are generally recognized as a credit risk 
mitigant because the provisions allow a non-defaulting party the 
uninterrupted right to close-out, net, and liquidate any collateral 
securing its claim under the contract upon a counterparty's default.
    However, as the failure of Lehman Brothers demonstrated, the 
uninterrupted exercise of such rights by counterparties of a globally-
active financial company with a significant derivatives portfolio could 
impede the orderly resolution of the financial company and pose risks 
to financial stability. The United States has enacted laws that impose 
a limited stay on the exercise of early termination rights and other 
remedies with regard to qualified financial contracts (such as OTC 
derivatives, securities financing transactions, and margin loans) with 
insured depository institutions in resolution under the FDI Act and, in 
2010, with financial companies in resolution under Title II of the 
Dodd-Frank Act.

B. Foreign Special Resolution Procedures and the ISDA Protocol

    In recognition of the issues faced in the financial crisis 
concerning resolution of globally-active financial companies, the EU 
issued the BRRD on April 15, 2014, which requires EU member states to 
implement a resolution mechanism by December 31, 2014, in order to 
increase the likelihood for successful national or cross-border 
resolutions of a financial company organized in the EU.\11\ The BRRD 
contains special resolution powers, including a limited stay on certain 
financial contracts that is similar to the stays provided under Title 
II of the Dodd-Frank Act and the FDI Act.

[[Page 5065]]

Therefore, the operations of U.S. banking organizations located in 
jurisdictions that have implemented the BRRD could become subject to an 
orderly resolution under the BRRD, including the application of a 
limited statutory stay of a counterparty's right to exercise early 
termination rights and other remedies with respect to certain financial 
contracts. The BRRD is generally designed to be consistent with the Key 
Attributes of Effective Resolution Regimes for Financial Institutions 
(Key Attributes),\12\ which were initially adopted by the Financial 
Stability Board (FSB) \13\ of the G-20\14\ member nations in October 
2011, and is designed to provide a standard for the responsibilities 
and powers that national resolution regimes should have to resolve a 
failing systemically important financial institution.
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    \11\ On January 1, 2015, most of the provisions of the BRRD are 
expected to take effect in a number of the EU member states.
    \12\ The Key Attributes are available at 
www.financialstabilityboard.org/publications/r_111104cc.pdf. See 
specifically Key Attributes 4.1-4.4 regarding set-off, netting, 
collateralization and segregation of client assets and Appendix I 
Annex 5 regarding temporary stays on early termination rights. In 
October 2014, the FSB adopted a 2014 version of the Key Attributes 
that incorporates new annexes to provide additional guidance with 
respect to specific Key Attributes. No changes were made to the text 
of the twelve Key Attributes of October 2011.
    \13\ The FSB is an international body that monitors and makes 
recommendations about the global financial system. The FSB 
coordinates the regulatory, supervisory, and other financial sector 
policies of national financial authorities and international 
standard-setting bodies.
    \14\ The G-20 membership comprises a mix of the world's largest 
advanced and emerging economies. The G-20 members are Argentina, 
Australia, Brazil, Canada, China, France, Germany, India, Indonesia, 
Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South 
Africa, Turkey, the United Kingdom, the United States, and the 
European Union. Following the most recent financial crisis, leaders 
of the G-20 member nations recognized that the orderly cross-border 
resolution of a globally-active financial company requires all 
countries to have effective national resolution regimes to resolve 
failing financial companies in an orderly manner and that national 
resolution regimes should be consistent with one another. Subjecting 
the same financial company to conflicting legal rules, procedures, 
and mechanisms across jurisdictions can create uncertainty, 
instability, possible systemic contagion, and higher costs of 
resolution.
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    ISDA published the ISDA Protocol on November 12, 2014, which 
provides for amendments to ISDA Master Agreements to stay certain early 
termination rights and other remedies provided under the agreement. As 
of November 12, 2014, 18 global financial institutions, including 
several of the largest U.S. banking organizations,\15\ have opted to 
adhere to the ISDA Protocol and thereby would modify ISDA Master 
Agreements among those adhering parties. Like other qualified financial 
contracts, OTC derivatives transactions executed under standard ISDA 
Master Agreements allow a party to terminate the agreement immediately 
upon an event of default of its counterparty, including if its 
counterparty (or a related entity) \16\ enters insolvency or similar 
proceedings.
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    \15\ As of November 12, 2014, the U.S. banking organizations 
that have agreed to adhere to the ISDA Protocol are Bank of America 
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan 
Chase & Co., and Morgan Stanley, and certain subsidiaries thereof. 
See current list of adhering parties to the ISDA Protocol at http://www2.isda.org/functional-areas/protocol-management/protocol-adherence/20.
    \16\ Under the ISDA Resolution Stay Protocol, a related entity 
is defined to include (i) each parent or (ii) an affiliate that is 
(a) a creditor support provider or (b) a specified entity.
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    The contractual amendments effectuated pursuant to the ISDA 
Protocol would apply the provisions of Title II of the Dodd-Frank Act 
and the FDI Act concerning limited stays of termination rights and 
other remedies in qualified financial contracts to ISDA Master 
Agreements between adhering counterparties, including adhering 
counterparties that are not otherwise subject to U.S. law. The 
amendments also would apply substantially similar provisions of certain 
non-U.S. laws, to ISDA Master Agreements between adhering 
counterparties that are not otherwise subject to such laws.\17\ The 
contractual amendments effectuated pursuant to the ISDA Protocol would 
permit a party that has agreed to adhere to the ISDA Protocol to 
exercise early termination rights and other remedies only to the extent 
that it would be entitled to do so under the special resolution regime 
applicable to its adhering counterparties (or related entities, as 
applicable).\18\
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    \17\ The provisions of the ISDA Protocol relating to the special 
resolution regimes in these jurisdictions will become effective on 
January 1, 2015, for ISDA Master Agreements between the 18 adhering 
financial companies (as of November 12, 2014). The ISDA Protocol 
also covers special resolution regimes in other FSB member 
jurisdictions so long as the regimes meet conditions specified in 
the ISDA Protocol relating to creditor safeguards, which are 
consistent with the Key Attributes.
    \18\ Parties adhering to the ISDA Protocol would initially be 
contractually subject to the statutory special resolution regimes of 
France, Germany, Japan, Switzerland, the United Kingdom and the 
United States.
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C. Description of Relevant Provisions of the Regulatory Capital and the 
Liquidity Coverage Ratio Rules

    As noted above, the agencies' regulatory capital rules permit a 
banking organization to measure exposure from certain types of 
financial contracts on a net basis, provided that the contracts are 
subject to a qualifying master netting agreement or other agreement 
that contains specific provisions. Specifically, under the current 
regulatory capital rules, a banking organization with multiple OTC 
derivatives that are subject to a qualifying master netting agreement 
would be able to calculate a net exposure amount by netting the sum of 
all positive and negative fair values of the individual OTC derivative 
contracts subject to the qualifying master netting agreement and 
calculating a risk-weighted asset amount based on the net exposure 
amount. For purposes of the current supplementary leverage ratio (as 
applied only to advanced approaches banking organizations), a banking 
organization that has one or more OTC derivatives with the same 
counterparty that are subject to a qualifying master netting agreement 
would be permitted to not include in total leverage exposure cash 
variation margin received from such counterparty that has offset the 
mark-to-fair value of the derivative asset or cash collateral that is 
posted to such counterparty that has reduced the banking organization's 
on-balance sheet assets.\19\
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    \19\ Under the agencies' regulatory capital rules, the general 
framework consists of two approaches: (1) The standardized approach, 
which, beginning on January 1, 2015, will apply to all banking 
organizations regardless of total asset size, and (2) the advanced 
approaches, which currently apply to large internationally active 
banking organizations (defined as those banking organizations with 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance sheet foreign exposure, depository 
institution subsidiaries of those banking organizations that use the 
advanced approaches rule, and banking organizations that elect to 
use the advanced approaches). As a general matter, the standardized 
approach sets forth standardized risk weights for different asset 
types for regulatory capital calculations, whereas, for certain 
assets, the advanced approaches make use of risk assessments 
provided by banking organizations' internal systems as inputs for 
regulatory capital calculations. Consistent with section 171 of the 
Dodd-Frank Act (codified at 12 U.S.C. 5371), a banking organization 
that is required to calculate its risk-based capital requirements 
under the advanced approaches (i.e., an advanced approaches banking 
organization) also must determine its risk-based capital 
requirements under the generally applicable risk-based capital 
rules, which will be the standardized approach beginning on January 
1, 2015). The lower--or more binding--ratio for each risk-based 
capital requirement is the ratio that the advanced approaches 
banking organization must use to determine its compliance with 
minimum regulatory capital requirements. See generally 12 CFR part 
324.
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    In addition, the agencies' current rules permit a banking 
organization to recognize the risk-mitigating effect of financial 
collateral for other types of collateralized exposures. Specifically, 
for risk-based capital purposes, a banking organization with a 
securities financing transaction that meets the definition of a repo-
style transaction with financial collateral, a margin loan that meets 
the definition of an eligible margin loan with financial collateral, or 
an OTC derivative contract

[[Page 5066]]

collateralized with financial collateral may determine a net exposure 
amount to its counterparty according to section 37 or section 132 of 
the regulatory capital rules. A banking organization with multiple 
repo-style transactions or eligible margin loans with a counterparty 
that are subject to a qualifying master netting agreement may net the 
exposure amounts of the individual transactions under that agreement. 
In addition, for purposes of the supplementary leverage ratio, an 
advanced approaches banking organization with multiple repo-style 
transactions with the same counterparty that are subject to a 
qualifying master netting agreement would be permitted to net for 
purposes of calculating the counterparty credit risk component of its 
total leverage exposure. In general, recognition of netting results in 
a lower measure of risk-weighted assets and total leverage exposure 
than if a banking organization were to calculate its OTC derivatives, 
repo-style transactions, and eligible margin loans on a gross basis.
    The agencies also use the concept of a qualifying master netting 
agreement in the current liquidity coverage ratio rule (LCR).\20\ The 
LCR rule requires a banking organization to maintain an amount of high-
quality liquid assets (the numerator) to match at least 100 percent of 
its total net cash outflows over a prospective 30 calendar-day period 
(the denominator). For derivative transactions subject to a qualifying 
master netting agreement, a banking organization would be able to 
calculate the net derivative outflow or inflow amount by netting the 
contractual payments and collateral that it would give to, or receive 
from, the counterparty over a prospective 30-day period.\21\ If the 
derivative transactions are not subject to a qualifying master netting 
agreement, then the derivative cash outflows for that counterparty 
would be included in the net derivative cash outflow amount and the 
derivative cash inflows for that counterparty would be included in the 
net derivative cash inflow amount, without any netting and subject to 
the LCR rule's cap on total inflows. Recognition of netting may result 
in lower net cash outflows, and thus a lower LCR denominator and 
liquidity requirement, than if a banking organization were to calculate 
its inflows and outflows on its derivatives transactions on a gross 
basis.
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    \20\ The agencies' LCR rules are provided in 12 CFR part 50 
(OCC); 12 CFR part 249 (Board); and 12 CFR part 329 (FDIC).
    \21\ The LCR final rule provides that foreign currency 
transactions that meet certain criteria can be netted regardless of 
whether those transactions are covered by a qualified master netting 
agreement. 79 FR 61440, 61532-33 (October 10, 2014).
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III. The Proposed Rule

    The proposed rule would amend the definitions of ``collateral 
agreement, ``eligible margin loan,'' ``qualifying master netting 
agreement,'' and ``repo-style transaction'' in the FDIC's regulatory 
capital rules and ``qualifying master netting agreement'' in the FDIC's 
LCR rules to ensure that the regulatory capital and liquidity treatment 
of OTC derivatives, repo-style transactions, eligible margin loans, and 
other collateralized transactions would be unaffected by the adoption 
of various foreign special resolution regimes and the ISDA Protocol. In 
particular, the proposed rule would amend these definitions to provide 
that a relevant netting agreement or collateral agreement may provide 
for a limited stay or avoidance of rights where the agreement is 
subject by its terms to, or incorporates, certain resolution regimes 
applicable to financial companies, including Title II of the Dodd-Frank 
Act, the FDI Act, or any foreign resolution regime that is 
substantially similar to Title II of the Dodd-Frank Act or the FDI Act.
    In determining whether the laws of foreign jurisdictions are 
``similar'' to the FDI Act and Title II of the Dodd-Frank Act, the 
FDIC, jointly with the Board and OCC, intends to consider all aspects 
of these U.S. laws, including all aspects of stays provided 
thereunder.\22\ Relevant factors include, for instance, creditor 
safeguards or protections provided under a special foreign resolution 
regime as well as the length of stay.\23\
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    \22\ See 12 U.S.C. 1821(e)(8) through (13) and 5390(c)(8) 
through (16). As noted above, the ISDA Protocol covers only 
resolution regimes that are considered to be consistent with the 
principles of the Key Attributes. Therefore, it is also expected 
that any limited statutory stay under foreign law determined for 
purposes of this proposed rule to be similar to the FDI Act and 
Title II of the Dodd-Frank Act would also be consistent with the 
relevant principles of the Key Attributes.
    \23\ Under Title II of the Dodd-Frank Act, counterparties are 
stayed until 5:00 p.m. on the business day following the date of 
appointment of a receiver from exercising termination, liquidation, 
or netting rights under the qualified financial contract. 12 U.S.C. 
5390(c)(10)(B)(i)(I). If the qualified financial contracts are 
transferred to a solvent third party before the stay expires, the 
counterparty is permanently enjoined from exercising such rights 
based upon the appointment of the receiver, but is not stayed from 
exercising such rights based upon other events of default. See 12 
U.S.C. 5390(c)(10)(B)(i)(II).
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    Without the proposed rule, several banking organizations would no 
longer be permitted to recognize financial contracts as subject to a 
qualifying master netting agreement or satisfying the criteria 
necessary for the current regulatory capital and liquidity treatment, 
and would be required to measure exposure from these contracts on a 
gross, rather than net, basis. The proposed rule would allow for 
continuation of the existing netting treatment for these contracts for 
purposes of the regulatory capital and liquidity rules. Implementation 
of consistent, national resolution regimes on a global basis furthers 
the orderly resolution of internationally active financial companies, 
and enhances financial stability. Moreover, the development of the ISDA 
Protocol furthers certain principles of Title II of the Dodd-Frank Act 
and the FDI Act (in instances where a counterparty is a U.S. entity or 
its subsidiary) with respect to counterparties who are not otherwise 
subject to U.S. law.
    In addition, the FDIC intends to incorporate the definition of 
``qualifying master netting agreement'', once finalized, into rules 
that establish minimum margin requirements for registered swap dealers, 
major swap participants, security-based swap dealers, and major 
security-based swap participants (covered swap entities) subject to 
FDIC supervision. On September 24, 2014, the OCC, Board, FDIC, the Farm 
Credit Administration, and the Federal Housing Finance Agency published 
a notice of proposed rulemaking that would establish minimum margin 
requirements for covered swap entities subject to agency supervision 
(2014 swap margin NPR).\24\ The 2014 swap margin NPR would permit a 
covered swap entity to calculate variation margin requirements on an 
aggregate, net basis under an eligible master netting agreement (EMNA) 
with a counterparty. The comment period for the 2014 swap margin NPR 
closed on November 24, 2014. The OCC, Board, FDIC, Farm Credit 
Administration and Federal Housing Finance Agency are reviewing the 
comments received and drafting a final rule. Ultimately, the Federal 
banking agencies intend to align, as appropriate, the definitions of 
EMNA and qualifying master netting agreement in their respective 
regulations pertaining to swap margin requirements, regulatory capital 
requirements, liquidity requirements, and lending limits.
---------------------------------------------------------------------------

    \24\ 79 FR 57348 (September 24, 2014).
---------------------------------------------------------------------------

    In December 2014, the OCC and the Board adopted a joint interim 
final rule that is identical to this proposed rule.

IV. Request for Comments

    The FDIC is interested in receiving comments on all aspects of the 
proposed

[[Page 5067]]

rule. In particular, do the amendments to the definitions of 
``qualifying master netting agreement,'' ``collateral agreement,'' 
``repo-style transaction,'' and ``eligible margin loan'' ensure that 
the regulatory capital and liquidity treatment of OTC derivatives, 
repo-style transactions, eligible margin loans and other collateralized 
transactions is unaffected by the ISDA Protocol and the BRRD? Is there 
any reason why the FDIC should not revise the above mentioned 
definitions?
    The ISDA Protocol also provides for limited stays of termination 
rights for cross-defaults resulting from affiliate insolvency 
proceedings under a limited number of U.S. general insolvency regimes, 
including the U.S. Bankruptcy Code.\25\ The proposed rule does not 
address this portion of the ISDA Protocol because this portion of the 
ISDA Protocol does not take effect on January 1, 2015. Instead it takes 
effect upon the effective date of implementing regulations in the 
United States. The FDIC requests comment on whether the definitions of 
``qualifying master netting agreement,'' ``collateral agreement,'' 
``repo-style transaction,'' and ``eligible margin loan'' should also be 
amended to recognize the stay of default rights in this context.
---------------------------------------------------------------------------

    \25\ Under the ISDA Protocol, upon commencement of such 
proceedings, adhering counterparties would be subject to a limited 
stay of their termination rights and other remedies. The limited 
stay does not apply if a direct counterparty is subject to general 
insolvency proceedings. The stay also does not apply to payment or 
delivery defaults or to defaults that are not directly or indirectly 
related to the affiliate insolvency proceedings.
---------------------------------------------------------------------------

    Question 1: The proposed rule would prevent an increase in 
regulatory capital by allowing a ``qualifying master netting 
agreement'' to include stays that may be imposed by the laws of a 
foreign jurisdiction as a result of the receivership, conservatorship, 
or resolution of a foreign financial entity. Given the recent 
introduction of stays through contracts under the ISDA protocol, as 
well as in foreign jurisdictions, the FDIC seeks comment on the 
appropriateness of the proposed rule's effect on regulatory capital.
    Question 2: What was the effectiveness of netting agreements during 
the financial crisis?
    Question 3: How were cross-border netting agreements treated by 
U.S. and foreign courts?
    Question 4: What legal and operational impediments to netting exist 
today?
    Question 5: Does netting of exposures present an accurate 
reflection of the risk of the underlying transactions and assets 
covered by this proposal?
    Question 6: What criteria should be considered when determining 
whether a foreign resolution regime or legal framework is substantially 
similar to Title II of the Dodd-Frank Act and the FDI Act provisions 
for the insolvency of insured depository institutions?
    Question 7: Would the Total Loss Absorbing Capacity requirement as 
set forth by the Financial Stability Board ensure the presence of 
sufficient debt that may be bailed in to effectuate the resolution of a 
foreign counterparty to a U.S. bank as contemplated under the BRRD?
    Question 8: What sources are available to provide funding for the 
resolution of a foreign counterparty to an affected U.S. bank?
    Question 9: What length of stay in a resolution regime is 
appropriate to balance avoidance of market disruption against creditor 
protection?

V. Regulatory Analysis

A. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency, in connection with a notice of proposed rulemaking, 
to prepare an Initial Regulatory Flexibility Act analysis describing 
the impact of the proposed rule on small entities (defined by the Small 
Business Administration for purposes of the RFA to include banking 
entities with total assets of $550 million or less) or to certify that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities. The FDIC believes that the 
proposed rule would not have a significant economic impact on a 
substantial number of small entities.
    Under regulations issued by the Small Business Administration, a 
small entity includes a depository institution, bank holding company, 
or savings and loan holding company with total assets of $550 million 
or less (a small banking organization).\26\ As of June 30, 2014, there 
were approximately 3,267 small state nonmember banks and 306 small 
state savings associations under the FDIC's supervisory jurisdiction.
---------------------------------------------------------------------------

    \26\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

    The proposed rule is expected only to apply to banking 
organizations that adhere to the ISDA Protocol, which generally are 
entities that engage in a substantial amount of cross-border 
derivatives transactions. Small entities generally would not fall into 
this category. Accordingly, the FDIC believes that this proposed rule 
would not have a significant economic impact on small banking 
organizations supervised by the FDIC and therefore believes that there 
are no significant alternatives to the issuance of this proposed rule 
that would reduce the economic impact on small banking organizations 
supervised by the FDIC.
    The FDIC requests comment on its conclusion that the proposed rule 
would not have a significant economic impact on a substantial number of 
small entities.

B. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the FDIC to use 
plain language in all proposed and final rules published after January 
1, 2000. The FDIC invites comment on how to make this proposed rule 
easier to understand. For example:
    <bullet> Has the FDIC organized the material to suit your needs? If 
not, how could the proposed rule be more clearly stated?
    <bullet> Are the proposed requirements in the rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
    <bullet> Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
    <bullet> Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would make the regulation easier to 
understand?
    <bullet> Would more, but shorter, sections be better? If so, which 
sections should be changed?
    <bullet> What else could the FDIC do to make the regulation easier 
to understand?

C. Paperwork Reduction Act

Request for Comment on Proposed Information Collection

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501 through 3521) (``PRA''), the FDIC may not 
conduct or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (``OMB'') control number. The FDIC reviewed the 
proposed rule and determined that it would not produce any new 
collection of information pursuant to the PRA.

[[Page 5068]]

List of Subjects

12 CFR Part 324

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

12 CFR Part 329

    Administrative practice and procedure, Banks, banking, Federal 
Deposit Insurance Corporation, FDIC, Liquidity, Reporting and 
recordkeeping requirements.

Federal Deposit Insurance Corporation

12 CFR CHAPTER III

Authority and Issuance

    For the reasons set forth in the supplementary information, the 
Federal Deposit Insurance Corporation proposes to amend 12 CFR chapter 
III parts 324 and 329 to read as follows:

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

0
1. The authority citation for part 324 continues to read as follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819 (Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

0
2. Amend Sec.  324.2 by:
0
a. Revising the definitions of ``Collateral agreement,'' ``Eligible 
margin loan,'' ``Qualifying master netting agreement,'' and ``Repo-
style transaction''; and
0
b. Renumbering the remaining footnotes throughout the part.
    The revisions read as follows:
* * * * *
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a FDIC-supervised institution for a single 
financial contract or for all financial contracts in a netting set and 
confers upon the FDIC-supervised institution a perfected, first-
priority security interest (notwithstanding the prior security interest 
of any custodial agent), or the legal equivalent thereof, in the 
collateral posted by the counterparty under the agreement. This 
security interest must provide the FDIC-supervised institution with a 
right to close out the financial positions and liquidate the collateral 
upon an event of default of, or failure to perform by, the counterparty 
under the collateral agreement. A contract would not satisfy this 
requirement if the FDIC-supervised institution's exercise of rights 
under the agreement may be stayed or avoided under applicable law in 
the relevant jurisdictions, other than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \4\ to the U.S. laws 
referenced in this paragraph (1) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \4\ The FDIC expects to evaluate jointly with the Board and OCC 
whether foreign special resolution regimes meet the requirements of 
this proposed rule.
---------------------------------------------------------------------------

    (2) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1) of this definition.
* * * * *
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked to fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the FDIC-supervised institution the right to accelerate and 
terminate the extension of credit and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, conservatorship, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, or resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs, or laws of foreign jurisdictions 
that are substantially similar \5\ to the U.S. laws referenced in this 
paragraph in order to facilitate the orderly resolution of the 
defaulting counterparty.
---------------------------------------------------------------------------

    \5\ The FDIC expects to evaluate jointly with the Board and OCC 
whether foreign special resolution regimes meet the requirements of 
this proposed rule.
---------------------------------------------------------------------------

    (2) In order to recognize an exposure as an eligible margin loan 
for purposes of this subpart, an FDIC-supervised institution must 
comply with the requirements of Sec.  324.3(b) with respect to that 
exposure.
* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, insolvency, 
conservatorship, liquidation, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the FDIC-supervised institution the 
right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \6\ to the U.S. laws 
referenced in this paragraph (i) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \6\ The FDIC expects to evaluate jointly with the Board and OCC 
whether foreign special resolution regimes meet the requirements of 
this proposed rule.
---------------------------------------------------------------------------

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a FDIC-supervised 
institution must comply with the requirements of Sec.  324.3(d) with 
respect to that agreement.
* * * * *

[[Page 5069]]

    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the FDIC-supervised 
institution acts as agent for a customer and indemnifies the customer 
against loss, provided that:
    (1) The transaction is based solely on liquid and readily 
marketable securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting 
contract between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides 
the FDIC-supervised institution the right to accelerate, terminate, and 
close-out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, or resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs, or laws of foreign jurisdictions that are 
substantially similar \7\ to the U.S. laws referenced in this paragraph 
in order to facilitate the orderly resolution of the defaulting 
counterparty; or
---------------------------------------------------------------------------

    \7\ The FDIC expects to evaluate jointly with the Board, FDIC, 
and OCC whether foreign special resolution regimes meet the 
requirements of this proposed rule.
---------------------------------------------------------------------------

    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the FDIC-supervised institution; and
    (2) Executed under an agreement that provides the FDIC-supervised 
institution the rights to accelerate, terminate, and close-out the 
transaction on a net basis and to liquidate or set off collateral 
promptly upon an event of counterparty default.
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, an FDIC-supervised institution must 
comply with the requirements of Sec.  324.3(e) of this part with 
respect to that exposure.
* * * * *

PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS

0
3. The authority citation for part 329 continues to read as follows:

    Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1, 
5412.

0
4. Amend Sec.  329.3 by revising the definition of ``Qualifying master 
netting agreement'' and renumbering the remaining footnotes throughout 
the part to read as follows:


Sec.  329.3  Definitions.

* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, insolvency, 
conservatorship, liquidation, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the FDIC-supervised institution the 
right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \1\ to the U.S. laws 
referenced in this paragraph (2)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \1\ The FDIC expects to evaluate jointly with the Board and OCC 
whether foreign special resolution regimes meet the requirements of 
this proposed rule.
---------------------------------------------------------------------------

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, a FDIC-supervised 
institution must comply with the requirements of Sec.  329.4(a) with 
respect to that agreement.
* * * * *

    Dated: January 21, 2015.

    By order of the Board of Directors of the Federal Deposit 
Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2015-01324 Filed 1-29-15; 8:45 am]
BILLING CODE 6714-01-P


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