[Federal Register Volume 60, Number 248 (Wednesday, December 27, 1995)]
[Rules and Regulations]
[Pages 66863-66866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31247]



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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AB69


Definition of Qualified Financial Contracts

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC or 
Corporation) has adopted a rule to include spot and other short-term 
foreign exchange agreements and repurchase agreements on qualified 
foreign government securities within the definition of ``qualified 
financial contracts'' under the Federal Deposit Insurance Act (FDI 
Act). The FDI Act authorizes the FDIC to expand the definition of 
qualified financial contract by promulgation of regulations to include 
agreements similar to those currently identified as qualified financial 
contracts within the FDI Act. The FDIC has determined that spot and 
other short-term foreign exchange agreements are similar to swap 
agreements, which are included within the qualified financial contract 
provisions of the statute and that repurchase agreements on qualified 
foreign government securities are similar to those repurchase 
agreements already recognized as qualified financial contracts under 
the statute.

EFFECTIVE DATE: December 27, 1995.

FOR FURTHER INFORMATION CONTACT: Sharon Powers Sivertsen, Assistant 
General Counsel, Legal Division, (202) 736-0112; Keith A. Ligon, Senior 
Counsel, Legal Division, (202) 736-0160; or Christine M. Bradley, 
Attorney, Legal Division, (202) 736-0106, Legal Division.

SUPPLEMENTARY INFORMATION:

Background

    Sections 11(e)(8) through (10) of the FDI Act, 12 U.S.C. 1821(e)(8) 
through (10), provide special rules for the treatment of qualified 
financial contracts in the event the FDIC is appointed receiver or 
conservator for an insured depository institution. The statute seeks, 
among other things, to protect parties to qualified financial contracts 
by allowing for the liquidation, termination, and netting of their 
agreements. The statute defines certain securities contracts, commodity 
contracts, forward contracts, repurchase agreements and swap agreements 
as qualified financial contracts.
    Section 11(e)(8)(D) of the FDI Act identifies in some detail the 
types of contracts to be treated as qualified financial contracts, but 
additionally affords the FDIC express authority to adopt regulations 
extending the definition to any similar agreement. 12 U.S.C. 
1821(e)(8)(D)(i).

Proposed Rule

    In September 1995, the FDIC requested comment on a proposed 
regulation that would expand the definition of qualified financial 
contract to include agreements similar to the agreements identified 
within the FDI Act as qualified financial contracts. (60 FR 48935, 
Sept. 21, 1995). The FDIC proposed that spot and other short-term 
foreign exchange agreements and that repurchase agreements on 
securities issued or guaranteed by the central governments belonging to 
the Organization for Economic Cooperation and Development (OECD), or 
that have concluded special lending arrangements with the International 
Monetary Fund (IMF) associated with the IMF's General Arrangements to 
Borrow, be considered as qualified financial contracts under the FDI 
Act.
    The FDIC intended that the definition of qualified financial 
contract be expanded to include certain instruments that facilitate 
appropriate liquidity, hedging and financial intermediation operations 
in financial institutions. Adoption of the regulation to include spot 
and other short-term foreign exchange contracts and repurchase 
agreements on qualified foreign government securities within the 
definition of qualified financial contract is not intended to exclude 
other agreements that may otherwise qualify to be qualified financial 
contracts under the language of section 11(e)(8)(D) itself.

Final Rule

    The final rule adopted by the Corporation includes spot and other 
short-term foreign exchange agreements within the definition of 
qualified financial contract. The final rule clarifies that short-dated 
foreign exchange transactions such as spots, tomorrow/next day and same 
day/tomorrow transactions are similar agreements to those agreements 
identified within the statute as swap agreements.
    The final rule also expands the definition of qualified financial 
contract to include repurchase agreements on securities issued or 
guaranteed by the central governments of countries that are either full 
members of the OECD or that have concluded special lending arrangements 
with the International Monetary Fund (IMF) associated with the IMF's 
General Arrangements to Borrow (repurchase agreement on qualified 
foreign government securities). The final rule incorporates by 
reference the definition of ``central government'' as set forth in 12 
CFR part 325, appendix A, II.C note 17 \1\ and ``OECD-based group of 
countries'' as set forth in 12 CFR part 325, appendix A, II.B.2, note 
12 (and incorporating any changes to these definitions that should 
occur by future amendment).

    \1\ The definition of central government includes departments 
and ministries of the central government, as well as central banks, 
but does not extend to state, provincial, or local governments or 
commercial enterprises owned by central governments. Nor does it 
extend to securities of local government entities or commercial 
enterprises guaranteed by the central government. 12 CFR part 325, 
II.C., note 17 (1995).
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Summary of Comments

    The FDIC received 8 comment letters on the proposed regulation on 
the Definition of Qualified Financial Contracts. All commenters 
strongly support the Corporation's expansion of the definition of 
qualified financial contract to include spot and other short-term 
foreign exchange agreements and repurchase agreements on qualified 
foreign government securities. The commenters generally agree that 
promulgation of the proposed regulation 

[[Page 66864]]
clarifies the treatment these contracts would receive in the event the 
FDIC were appointed receiver or conservator of an insured depository 
institution. Five of the commenters provided additional suggestions on 
the proposed rule, which are summarized below.

Definition of Spot Foreign Exchange Agreements

    Two of the commenters suggested that the final regulation recognize 
spot and other short-term foreign exchange agreements as qualified 
financial contracts through the expansion of the existing definition of 
``swap agreement'' as provided in 12 U.S.C. 1821(e)(8)(D)(vi), rather 
than by creating a definition specific to these short-term agreements. 
The commenters stated that by including spot and other short-term 
foreign exchange agreements within the definition of swap agreement, 
counterparties to the agreements would be assured that a master 
agreement for any such agreement would be treated as one swap agreement 
under 12 U.S.C. 1821(e)(8)(D)(vii).
    Additionally, the commenters noted that expansion of the definition 
of swap agreement to include spot foreign exchange agreements is 
consistent with the manner in which the Bankruptcy Code was amended as 
a part of the Bankruptcy Reform Act of 1994. 11 U.S.C. 101(53B).
    The Corporation agrees with this recommendation and has revised the 
final regulation to provide that ``spot foreign exchange agreements'' 
as defined in the regulation are to be considered qualified financial 
contracts through the specific expansion of the definition of swap 
agreement contained at 12 U.S.C. 1821(e)(8)(D)(vi). In light of this 
revision, the Corporation has determined that the phrase ``or 
combination of agreements (including master agreements)'', which 
appeared in the proposed regulation at Sec. 360.5(b)(1), is 
unnecessary. Accordingly, this phrase is deleted in Sec. 360.5(c)(1) of 
the final regulation. A swap agreement includes any combination of such 
agreements and a master agreement for such agreements is treated as one 
swap agreement under 12 U.S.C. 1821(e)(8) (vi) and (vii).

Repurchase Agreements on Qualified Foreign Government Securities

    The Corporation received 4 comments on the proposal to expand the 
definition of repurchase agreements which are recognized as qualified 
financial contracts to include repurchase agreements on securities 
issued or guaranteed by the central governments of OECD countries. 
Although all of the commenters supported promulgation of the proposed 
regulation, three of the commenters suggested that they would prefer 
that the Corporation not restrict the expansion of the definition of 
repurchase agreement under 12 U.S.C. 1821(e)(8)(D)(v) to repurchase 
agreements on securities issued or guaranteed by the OECD countries. 
The fourth commenter endorsed the Corporation's proposed expansion of 
the definition of repurchase agreements to include repurchase 
agreements issued or guaranteed by the OECD countries, and commented 
that the proposed scope of the definition was appropriate in order to 
limit potential exposure to the deposit insurance funds.
    One commenter asserted that because repurchase agreements on the 
securities of any issuer should be recognized as qualified financial 
contracts through the definition of ``securities contract'' provided at 
12 U.S.C. 1821(e)(8)(D)(ii), the regulation should not be restricted to 
repurchase agreements on securities issued or guaranteed by the central 
governments of the OECD countries, and, as a result, any repurchase 
agreement involving any type of security should be considered a 
qualified financial contract.
    The FDI Act identifies the repurchase agreements which are 
qualified financial contracts with reference to the Bankruptcy Code 
definition of repurchase agreement. The Bankruptcy Code defines 
repurchase agreement as:

an agreement, including related terms, which provides for the 
transfer of certificates of deposit, eligible bankers' acceptances, 
or securities that are direct obligations of, or that are fully 
guaranteed as to principal and interest by, the United States or any 
agency of the United States against the transfer of funds by the 
transferee of such certificates of deposit, eligible bankers' 
acceptances, or securities with a simultaneous agreement by such 
transferee to transfer to the transferor thereof certificates of 
deposit, eligible bankers' acceptances, or securities as described 
above, at a date certain not later than one year after such 
transfers or on demand, against the transfer of funds.

11 U.S.C. 101(47). Consequently, the Bankruptcy Code definition and by 
incorporation the FDI Act definition of repurchase agreement does not 
include repurchase agreements on qualified foreign government 
securities. In order for such repurchase agreements to be treated as 
qualified financial contracts under the current statute, the FDIC is 
required to promulgate this final regulation under its regulatory 
authority. 12 U.S.C. 1821(e)(8)(D)(i).
    The second comment on the FDIC's limited expansion of the 
definition of repurchase agreement under 12 U.S.C. 1821(e)(8)(D)(v) 
concentrates on the growth of the international market for repurchase 
agreements on foreign government securities. One commenter stated that 
the growth of this market is not limited to securities issued or 
guaranteed by the central governments of the OECD countries. Another 
commenter submitted that non-OECD government securities were becoming a 
growing portion of the market for repurchase agreements on foreign 
government securities. These commenters conclude that there is no 
difference between repurchase agreements on OECD government securities 
and repurchase agreements on non-OECD government securities other than 
the nature of the risks posed by the underlying securities.
    Qualified financial contracts are accorded special status under the 
FDI Act and are treated differently from other contracts upon 
appointment of the FDIC as conservator or receiver for an insured 
depository institution. Any expansion of the definition of qualified 
financial contract results in a commensurate potential increase in cost 
to the receivership or conservatorship, which indirectly creates 
potential losses to the deposit insurance funds. By limiting the 
expansion of the definition of repurchase agreements, the FDIC is 
balancing the growing internationalization of major banking and 
financial markets with the potential risks posed to the deposit 
insurance funds arising from the credit risk inherent in such an 
expansion.
    In 1989, the FDIC implemented risk-based capital guidelines in 
order to implement the International Convergence of Capital Measurement 
and Capital Standards of July 1988, as reported by the Basle Committee 
on Banking Supervision (the Basle Accord).<SUP>2 The Basle Committee 
concluded that claims unconditionally guaranteed by governments of 
countries that are full members of the OECD should be distinguished 
from claims similarly guaranteed by governments of non-OECD 
countries.<SUP>3 The Basle 

[[Page 66865]]
Committee analyzed the credit risk and country transfer risk associated 
with government securities and determined that membership in OECD was 
an appropriate basis for granting a more favorable risk 
weighting.<SUP>4

    \2\ The Basle Accord is a risk-based framework that was 
originally proposed by the Basle Committee on Banking Supervision 
(Basle Supervisors' Committee) and endorsed by the central bank 
governors of the Group of 10 (G-10) countries in July 1988. The 
Basle Supervisors' Committee was comprised at that time of 
representatives of the central bank and supervisory authorities from 
the G-10 countries (Belgium, Canada, France, Germany, Italy, Japan, 
the Netherlands, Sweden, Switzerland, the United Kingdom, and the 
United States) and Luxembourg.
    \3\ Long-term claims on banks of OECD countries also generally 
receive lower risk weights than corresponding claims on the banks of 
non-OECD countries. See , e.g., Proposed Rule for Capital 
Maintenance Guidelines, 60 FR 8582 (1995).
    \4\ Transfer risk generally refers to the possibility that an 
asset cannot be serviced in the currency of payment because of a 
lack of, or restraints on, the availability of needed foreign 
exchange in the country of the obligor. See, e.g., 60 FR 8582 
(1995).
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    The OECD is an international organization of countries which are 
committed to market-oriented economic policies, including the promotion 
of private enterprise and free market prices, liberal trade policies, 
and the absence of exchange controls. These commitments are expressed 
in the Code of Liberalisation of Capital Movements and the Code of 
Liberalisation of Current Invisible Operations (collectively, the 
Codes). OECD members are expected to ensure that the obligations 
accepted under either Code are honored, including the removal of legal 
or administrative regulations that would otherwise frustrate the 
movement of capital from one member country to another. The OECD 
countries' adherence to the Codes is generally associated with a 
relatively low transfer risk when considering transactions between 
member countries.
    The same considerations which were analyzed by the Basle Committee 
and the FDIC in establishing its risk-based capital guidelines, 
including the commitments of the OECD countries under the Codes, are 
important in determining how the definition of qualified financial 
contract should be expanded under 12 U.S.C. 1821(e)(8)(D)(i). 
Consequently, the FDIC is retaining the provision restricting the 
repurchase agreements recognized as qualified financial contracts to 
repurchase agreements on securities issued or guaranteed by the central 
governments of the countries belonging to the OECD or that have 
concluded special lending arrangements with the IMF associated with the 
IMF's General Arrangements to Borrow.

Other Comments

    One commenter suggested that the FDIC conform its definition of 
qualified financial contract to the definition of ``financial 
contract'' as used by the Board of Governors of the Federal Reserve 
System (Board) in Regulation EE, Netting Eligibility for Financial 
Institutions, 12 CFR part 231 (59 FR 4780, Feb. 2, 1995). Regulation EE 
defines financial contract with reference to the definition of 
qualified financial contract contained in the FDI Act (12 U.S.C. 
1821(e)(8)(D), as amended), except that Regulation EE specifies that a 
forward contract includes a contract with a maturity date of two days 
or less after the date the contract is entered into (i.e., a ``spot'' 
contract). 12 CFR 231.2(c)(1995).
    The FDIC has determined that the definition of financial contract 
as used by the Board in Regulation EE does not affect the FDIC's 
definition of qualified financial contract under the FDI Act. As the 
Board stated in the final publication of Regulation EE, the definition 
of financial contract within Regulation EE is relevant only to a 
determination of whether a particular institution qualifies as a 
``financial institution'' under the regulation. Once an institution 
qualifies as a financial institution under Regulation EE, its ability 
to avail itself of the netting provisions as set forth in 12 U.S.C. 
4401-4407 is determined with reference to the definition of ``netting 
contract'' contained at 12 U.S.C. 4402(14). (59 FR 4780, 4783, Feb. 2, 
1994). The FDIC has determined that its proposed regulation on the 
Definition of Qualified Financial Contracts does not change the 
interpretation of Regulation EE or the netting provisions of sections 
4401-4407 of title 12.
    Finally, one commenter requested that the FDIC delete the provisos 
outlined in paragraph (d) of the Sec. 360.5.<SUP>5 The FDIC has 
determined that paragraph (d) should be retained to clarify that 
nothing in this regulation is intended to affect any rights and powers 
the Corporation might otherwise have in its capacity of insurer and 
regulator of certain depository institutions.

    \5\ Paragraph (d) of Sec. 360.5 appeared as paragraph (c) in the 
Proposed Rule.
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    In order to facilitate the continued participation of United States 
financial institutions in major financial markets after January 1, 
1996, the Board of Directors has determined that good cause exists for 
waiving the 30-day delayed effective date ordinarily required by the 
Administrative Procedures Act (5 U.S.C. 553). The Board of Directors 
has also determined that section 302 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325, 
108 Stat. 2160)(1994) (RCDRIA) does not apply to the issuance of the 
final rule.<SUP>6

    \6\ Section 302 of RCDRIA provides that any new regulations and 
amendments to existing regulations which impose reporting, 
disclosure or other requirements on insured depository institutions 
may only take effect on the first day of a calendar quarter unless 
certain exceptions are satisfied.
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List of Subjects in 12 CFR Part 360

    Banks, banking, Saving associations.

    For the reasons set out in the preamble, the FDIC Board of 
Directors amends 12 CFR part 360 as follows:

PART 360--RESOLUTION AND RECEIVERSHIP RULES

    1. The authority citation for part 360 is revised to read as 
follows:

    Authority: 12 U.S.C. 1821(d)(11), 1821(e)(8)(D)(i), 1823(c)(4); 
Sec. 401(h), Pub. L. 101-73, 103 Stat. 357.

    2. Section 360.5 is added to part 360 to read as follows:


Sec. 360.5  Definition of qualified financial contracts.

    (a) Authority and purpose. Sections 11(e) (8) through (10) of the 
Federal Deposit Insurance Act, 12 U.S.C. 1821(e) (8) through (10), 
provide special rules for the treatment of qualified financial 
contracts of an insured depository institution for which the FDIC is 
appointed conservator or receiver, including rules describing the 
manner in which qualified financial contracts may be transferred or 
closed out. Section 11(e)(8)(D)(i) of the Federal Deposit Insurance 
Act, 12 U.S.C. 1821(e)(8)(D)(i), grants the Corporation authority to 
determine by regulation whether any agreement, other than those 
identified within section 11(e)(8)(D), should be recognized as 
qualified financial contracts under the statute. The purpose of this 
section is to identify additional agreements which the Corporation has 
determined to be qualified financial contracts.
    (b) Repurchase agreements. The following agreements shall be deemed 
``repurchase agreements'' under section 11(e)(8)(D)(v) of the Federal 
Deposit Insurance Act, as amended (12 U.S.C. 1821(e)(8)(D)(v)): A 
repurchase agreement on qualified foreign government securities is an 
agreement or combination of agreements (including master agreements) 
which provides for the transfer of securities that are direct 
obligations of, or that are fully guaranteed by, the central 
governments (as set forth at 12 CFR part 325, appendix A, section II.C, 
n. 17, as may be amended from time to time) of the OECD-based group of 
countries (as set forth at 12 CFR part 325, appendix A, section 
II.B.2., note 12 as may be amended from time to time) against the 
transfer of funds by the transferee of such securities with a 
simultaneous agreement by such transferee to transfer to the transferor 
thereof securities as described above, at a date certain not later than 
one year after such transfers or on demand, against the transfer of 
funds. 

[[Page 66866]]

    (c) Swap agreements. The following agreements shall be deemed 
``swap agreements'' under section 11(e)(8)(D)(vi) of the Federal 
Deposit Insurance Act, as amended (12 U.S.C. 1821(e)(8)(D)(vi)): A spot 
foreign exchange agreement is any agreement providing for or effecting 
the purchase or sale of one currency in exchange for another currency 
(or a unit of account established by an intergovernmental organization 
such as the European Currency Unit) with a maturity date of two days or 
less after the agreement has been entered into, and includes short-
dated transactions such as tomorrow/next day and same day/tomorrow 
transactions.
    (d) Nothing in this section shall be construed as limiting or 
changing a party's obligation to comply with all reasonable trading 
practices and requirements, non-insolvency law requirements and any 
other requirements imposed by other provisions of the FDI Act. This 
section in no way limits the authority of the Corporation to take 
supervisory or enforcement actions, or to otherwise manage the affairs 
of a financial institution for which the Corporation has been appointed 
conservator or receiver.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 19th day of December, 1995.

Federal Deposit Insurance Corporation
Robert E. Feldman,
Deputy Executive Secretary.
[FR Doc. 95-31247 Filed 12-26-95; 8:45 am]
BILLING CODE 6714-01-P