42882 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

1 81 FR 29169 (May 11, 2016). 

2The Dodd-Frank Act was enacted on July 21, 

2010 (Pub. L. 111–203). According to its preamble, 

the Dodd-Frank Act is intended ‘‘[t]o promote the 

financial stability of the United States by improving 

accountability and transparency in the financial 

system, to end ‘too big to fail’, [and] to protect the 

American taxpayer by ending bailouts.’’ 

FEDERAL RESERVE SYSTEM 

12 CFR Parts 217, 249, and 252 

[Regulations Q, WW, and YY; Docket No. 

R–1538] 

RIN 7100–AE52 

Restrictions on Qualified Financial 

Contracts of Systemically Important 

U.S. Banking Organizations and the 

U.S. Operations of Systemically 

Important Foreign Banking 

Organizations; Revisions to the 

Definition of Qualifying Master Netting 

Agreement and Related Definitions 

AGENCY: Board of Governors of the 

Federal Reserve System (Board), Federal 

Reserve System. 

ACTION: Final rule. 

SUMMARY: The Board is adopting a final 

rule to promote U.S. financial stability 

by improving the resolvability and 

resilience of systemically important U.S. 

banking organizations and systemically 

important foreign banking organizations 

pursuant to section 165 of the DoddFrank Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). Under 

the final rule, any U.S. top-tier bank 

holding company identified by the 

Board as a global systemically important 

banking organization (GSIB), the 

subsidiaries of any U.S. GSIB (other 

than national banks, federal savings 

associations, state nonmember banks, 

and state savings associations), and the 

U.S. operations of any foreign GSIB 

(other than national banks, federal 

savings associations, state nonmember 

banks, and state savings associations) 

would be subjected to restrictions 

regarding the terms of their non-cleared 

qualified financial contracts (QFCs). 

First, a covered entity generally is 

required to ensure that QFCs to which 

it is party provide that any default rights 

and restrictions on the transfer of the 

QFCs are limited to the same extent as 

they would be under the Dodd-Frank 

Act and the Federal Deposit Insurance 

Act. Second, a covered entity generally 

is prohibited from being party to QFCs 

that would allow a QFC counterparty to 

exercise default rights against the 

covered entity, directly or indirectly, 

based on the entry into a resolution 

proceeding under the Dodd-Frank Act 

or Federal Deposit Insurance Act, or any 

other resolution proceeding, of an 

affiliate of the covered entity. The final 

rule also amends certain definitions in 

the Board’s capital and liquidity rules; 

these amendments are intended to 

ensure that the regulatory capital and 

liquidity treatment of QFCs to which a 

covered entity is party is not affected by 

the final rule’s restrictions on such 

QFCs. The Office of the Comptroller of 

the Currency (OCC) and the Federal 

Deposit Insurance Corporation (FDIC) 

are expected to issue final rules that 

would subject GSIB subsidiaries for 

which the OCC and FDIC are the 

appropriate Federal banking agency to 

requirements substantively identical to 

those in this final rule. 

DATES: The final rule is effective on 

November 13, 2017. 

FOR FURTHER INFORMATION CONTACT: 

Anna Harrington, Senior Supervisory 

Financial Analyst (202) 452–6406, or 

Sean Campbell, Associate Director, 

(202) 452–3760, Division of Supervision 

and Regulation; or Will Giles, Senior 

Counsel, (202) 452–3351, or Lucy 

Chang, Senior Attorney, (202) 475–6331, 

Legal Division, Board of Governors of 

the Federal Reserve System, 20th and C 

Streets NW., Washington, DC 20551. For 

the hearing impaired only, 

Telecommunications Device for the Deaf 

(TDD) users may contact (202) 263– 

4869. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Background 

B. Notice of Proposed Rulemaking and 

General Summary of Comments 

C. Overview of Final Rule 

D. Consultation With U.S. Financial 

Regulators, the Council, and Foreign 

Authorities 

II. Restrictions on QFCs of GSIBs 

A. Covered Entities (Section 252.82(b) of 

the Final Rule) 

B. Covered QFCs (Section 252.82(c) of the 

Final Rule) 

C. Definition of ‘‘Default Right’’ (Section 

252.81 of the Final Rule) 

D. Required Contractual Provisions Related 

to the U.S. Special Resolution Regimes 

(Section 252.83 of the Final Rule) 

E. Prohibited Cross-Default Rights (Section 

252.84 of the Final Rule) 

F. Process for Approval of Enhanced 

Creditor Protections (Section 252.85 of 

the Final Rule) 

III. Transition Periods 

IV. Costs and Benefits 

V. Revisions to Certain Definitions in the 

Board’s Capital and Liquidity Rules 

VI. Regulatory Analysis 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act: Final 

Regulatory Flexibility Analysis 

C. Riegle Community Development and 

Regulatory Improvement Act of 1994 

D. Use of Plain Language 

I. Introduction 

A. Background 

In May 2016, the Board invited 

comment on a notice of proposed 

rulemaking (‘‘proposal’’ or ‘‘proposed 

rule’’) to impose restrictions on the 

qualified financial contracts (QFCs)— 

such as derivatives contracts and 

repurchase agreements—of U.S. global 

systemically important banking 

organizations (GSIBs) and the U.S. 

operations of global systemically 

important foreign banking organizations 

or ‘‘foreign GSIBs’’ (collectively, 

‘‘covered entities’’).1 The proposal 

would have required the QFCs of 

covered entities to contain contractual 

provisions that opt into the temporary 

stay-and-transfer treatment of the 

Federal Deposit Insurance Act (FDI Act) 

and the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (DoddFrank Act), thereby reducing the risk 

that the stay-and-transfer treatment 

would be challenged by a QFC 

counterparty or a court in a foreign 

jurisdiction. The FDI Act and Title II of 

the Dodd-Frank Act create special 

resolution frameworks for failed 

financial firms that provide that the 

rights of a failed firm’s counterparties to 

terminate their QFCs are temporarily 

stayed when the firm enters a resolution 

proceeding to allow for the transfer of 

the relevant obligations under the QFC 

to a solvent party. The proposal also 

would have prohibited the exercise of 

default rights in QFCs related, directly 

or indirectly, to the entry into resolution 

of an affiliate of a covered entity (crossdefault rights), subject to certain 

creditor protection exceptions that 

would not be expected to interfere with 

an orderly resolution. 

This final rule, which is part of a set 

of actions by the Board to address the 

‘‘too-big-to-fail’’ problem, addresses one 

of the ways in which the severe distress 

or failure of a major financial firm can 

destabilize the U.S. financial system. 

Protecting the financial stability of the 

United States by helping to address this 

too-big-to-fail problem is a core 

objective of the Dodd-Frank Act,2 which 

Congress passed in response to the 

2007–2009 financial crisis and the 

ensuing recession. As illustrated by the 

failure of Lehman Brothers in 

September of 2008, the failure of a large, 

interconnected financial company could 

cause severe damage to the U.S. 

financial system and, ultimately, to the 

economy as a whole. The Dodd-Frank 

Act and the actions that U.S. financial 

regulators have taken to implement it 

and to otherwise protect U.S. financial 

stability help to address the too-big-tomstockstill on DSK30JT082PROD with RULES2

Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42883 

3The Dodd-Frank Act itself pursues this goal 

through numerous provisions, including by 

requiring systemically important financial 

companies to develop resolution plans (also known 

as ‘‘living wills’’) that lay out how they could be 

resolved in an orderly manner if they were to fail 

and by creating a new resolution regime, the 

Orderly Liquidation Authority, applicable to 

systemically important financial companies. 12 

U.S.C. 5365(d), 5381–5394. Moreover, section 165 

of the Dodd-Frank Act directs the Board to promote 

financial stability through regulation by subjecting 

large bank holding companies and nonbank 

financial companies designated for Board 

supervision to enhanced prudential standards ‘‘[i]n 

order to prevent or mitigate risks to the financial 

stability of the United States that could arise from 

the material financial distress or failure, or ongoing 

activities, of large, interconnected financial 

institutions.’’ 12 U.S.C. 5365(a)(1). 

4 82 FR 8266 (Jan. 24, 2017). 

5See ‘‘The Orderly Liquidation of Lehman 

Brothers Holdings Inc. under the Dodd-Frank Act’’ 

3, FDIC Quarterly (2011) (‘‘The Lehman bankruptcy 

had an immediate and negative effect on U.S. 

financial stability and has proven to be a disorderly, 

time-consuming, and expensive process.’’), https:// 

www.fdic.gov/bank/analytical/quarterly/2011_vol5_

2/lehman.pdf. 

6See Michael J. Fleming and Asani Sarkar, ‘‘The 

Failure Resolution of Lehman Brothers,’’ FRBNY 

Economic Policy Review 185 (Dec. 2014), https:// 

www.newyorkfed.org/medialibrary/media/research/

epr/2014/1412flem.pdf. 

7See id. 

8 ‘‘The Orderly Liquidation of Lehman Brothers 

Holdings Inc. under the Dodd-Frank Act’’ 3, FDIC 

Quarterly (2011), https://www.fdic.gov/bank/

analytical/quarterly/2011_vol5_2/lehman.pdf. 

9Michael J. Fleming and Asani Sarkar, ‘‘The 

Failure Resolution of Lehman Brothers,’’ FRBNY 

Economic Policy Review 185 (Dec. 2014), https:// 

www.newyorkfed.org/medialibrary/media/research/

epr/2014/1412flem.pdf. 

10See Mark J. Roe and Stephen D. Adams, 

‘‘Restructuring Failed Financial Firms in 

Bankruptcy: Selling Lehman’s Derivatives 

Portfolio,’’ Yale Journal on Regulation (2015) 

(‘‘Lehman’s failure exacerbated the financial crisis, 

especially after AIG’s collapse in the days 

afterwards prompted counterparties to close out 

positions, sell collateral, and thereby depress and 

freeze markets. Many financial players stopped 

trading for fear that their counterparty would be the 

next Lehman or that their counterparty had large 

unseen exposures to Lehman that would make the 

counterparty itself fail. Such was the case with the 

Reserve Primary Fund, a money market fund that 

held too many defaulting obligations of Lehman. 

That reaction led to a further panic, a threat of a 

run on money market funds, and a government 

guarantee of all money market funds to stem the 

ongoing financial degradation throughout the 

economy.’’). 

11 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 

1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 

1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 

4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. 

fail problem in two ways: By reducing 

the probability that a systemically 

important financial company will fail, 

and by reducing the damage that such 

a company’s failure would do if it were 

to occur. The second of these strategies, 

which is supported by this final rule, 

centers on measures designed to help 

ensure that a failed company’s passage 

through a resolution proceeding—such 

as bankruptcy or the special resolution 

process created by the Dodd-Frank 

Act—would be more orderly, thereby 

helping to mitigate destabilizing effects 

on the rest of the financial system.3

This final rule represents a further 

step to increase the resolvability and 

resilience of U.S. GSIBs and foreign 

GSIBs that operate in the United States. 

The final rule complements the Board’s 

final rulemaking on total loss-absorbing 

capacity, long-term debt, and clean 

holding company requirements for 

GSIBs (TLAC final rule) 4 and the 

ongoing work of the Board and the 

Federal Deposit Insurance Corporation 

(FDIC) on resolution planning 

requirements for GSIBs. The final rule 

focuses on improving the orderly 

resolution of a GSIB by limiting 

disruptions to a failed GSIB through its 

financial contracts with other 

companies. In particular, the 

requirements of the final rule seek to 

facilitate the orderly resolution of a 

failed GSIB by limiting the ability of the 

firm’s QFC counterparties to terminate 

such contracts immediately upon entry 

of the GSIB or one of its affiliates into 

resolution. Given the large volume of 

QFCs to which covered entities are a 

party, the exercise of default rights en 

masse as a result of the failure or 

significant distress of a covered entity 

could lead to failure and a disorderly 

resolution if the failed firm were forced 

to sell off assets, which could spread 

contagion by increasing volatility and 

lowering the value of similar assets held 

by other firms, or to withdraw liquidity 

that it had provided to other firms. 

The largest financial firms are 

interconnected with other financial 

firms through large volumes of financial 

contracts of various types, including 

derivatives transactions. The severe 

distress or failure of one entity within 

a large financial firm can trigger 

disruptive terminations of these 

contracts, as the counterparties of both 

the failed entity and other entities 

within the same firm exercise their 

contractual rights to terminate the 

contracts and liquidate collateral. These 

terminations, especially if 

counterparties lose confidence in the 

GSIB quickly and in large numbers, can 

destabilize the financial system and 

potentially spark a financial crisis 

through several channels. They can 

destabilize the failed entity’s otherwise 

solvent affiliates, causing them to fail 

and thereby destabilizing the entire 

organization, as well as potentially 

causing their counterparties to fail in a 

chain reaction that can ripple through 

the system. They also may result in fire 

sales of large volumes of financial 

assets, such as the collateral that secures 

the contracts, which can in turn weaken 

and cause stress for other firms by 

lowering the value of similar assets that 

they hold. 

For example, the triggering of default 

rights by counterparties of Lehman 

Brothers (Lehman) in 2008 was a key 

driver of the destabilization that 

resulted from its failure.5 At the time of 

its failure, Lehman was party to very 

large volumes of financial contracts, 

including over-the-counter derivatives 

contracts.6 When its holding company 

declared bankruptcy, Lehman’s 

counterparties exercised their default 

rights.7 Lehman’s default ‘‘caused 

disruptions in the swaps and derivatives 

markets and a rapid, market-wide 

unwinding of trading positions.’’ 8

Meanwhile, ‘‘out-of-the-money 

counterparties, which owed Lehman 

money, typically chose not to terminate 

their contracts’’ and instead suspended 

payment, reducing the liquidity 

available to the bankruptcy estate.9 The 

complexity and disruption associated 

with Lehman’s portfolios of financial 

contracts led to a disorderly resolution 

of Lehman.10 This final rule is meant to 

help avoid a repeat of the systemic 

disruptions caused by the Lehman 

failure by preventing the exercise of 

default rights in financial contracts from 

leading to such disorderly and 

destabilizing severe distress or failures 

in the future. 

This final rule responds to the threat 

to financial stability posed by such 

default rights in two ways. First, the 

final rule reduces the risk that courts in 

foreign jurisdictions would disregard 

statutory provisions that would stay the 

rights of a failed firm’s counterparties to 

terminate their contracts when the firm 

enters a resolution proceeding under 

one of the special resolution frameworks 

for failed financial firms created by 

Congress under the FDI Act and the 

Dodd-Frank Act. Second, the final rule 

facilitates the resolution of a large 

financial entity under the U.S. 

Bankruptcy Code and other resolution 

frameworks by ensuring that the 

counterparties of solvent affiliates of the 

failed entity cannot unravel their 

contracts with the solvent affiliate based 

solely on the failed entity’s resolution. 

The Board is issuing this final rule 

under section 165 of the Dodd-Frank 

Act, as well as its safety and soundness 

and other relevant authorities.11 Section 

165 instructs the Board to impose 

enhanced prudential standards on bank 

holding companies with total 

consolidated assets of $50 billion or 

more ‘‘[i]n order to prevent or mitigate 

risks to the financial stability of the 

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42884 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

12 12 U.S.C. 5365(a)(1). 

13 12 U.S.C. 5365(a)(1)(B), (b)(3)(A)–(D). 

14 12 U.S.C. 5365(b)(1)(B)(iv). 

15As discussed in detail in this SUPPLEMENTARY

INFORMATION section, this rule is intended to help 

prevent systemic disruptions that may arise as a 

result of the exercise of certain contractual rights 

contained in QFCs entered into by GSIBs or their 

subsidiaries. This rule includes certain limitations 

on the exercise of these rights with a view to 

preventing such systemic disruptions. Separate 

from these limitations, both Title II of the DoddFrank Act and the FDI Act include various 

restrictions on the exercise of rights by parties to 

QFCs and provide the FDIC, as receiver of a 

company subject to resolution under Title II or the 

FDI Act, with special authorities. None of the 

provisions of this rule should be construed as being 

intended to modify or limit, in any manner, the 

rights and powers of the FDIC as receiver under 

Title II or the FDI Act, including, without 

limitation, the rights of the FDIC as receiver to 

enforce provisions of Title II or the FDI Act that 

limit the enforceability of certain contractual 

provisions. 

16The final rule adopts the definition of 

‘‘qualified financial contract’’ set out in section 

210(c)(8)(D) of the Dodd-Frank Act, 12 U.S.C. 

5390(c)(8)(D). See final rule § 252.81. 

17The definition of ‘‘qualified financial contract’’ 

is broader than this list of examples, and the default 

rights discussed are not common to all types of 

QFC. See final rule § 252.81. 

18See ‘‘The Orderly Liquidation of Lehman 

Brothers Holdings Inc. under the Dodd-Frank Act’’ 

8, FDIC Quarterly (2011), https://www.fdic.gov/

bank/analytical/quarterly/2011_vol5_2/lehman.pdf 

(‘‘A disorderly unwinding of [qualified financial 

contracts] triggered by an event of insolvency, as 

each counterparty races to unwind and cover 

unhedged positions, can cause a tremendous loss of 

value, especially if lightly traded collateral covering 

a trade is sold into an artificially depressed, 

unstable market. Such disorderly unwinding can 

have severe negative consequences for the financial 

company, its creditors, its counterparties, and the 

financial stability of the United States.’’). 

United States that could arise from the 

material financial distress or failure, or 

ongoing activities, of large, 

interconnected financial institutions.’’ 12

These enhanced prudential standards 

must increase in stringency based on the 

systemic footprint and risk 

characteristics of covered firms.13

Section 165 requires the Board to 

impose enhanced prudential standards 

of several specified types and also 

authorizes the Board to establish ‘‘such 

other prudential standards as the Board 

of Governors, on its own or pursuant to 

a recommendation made by the Council, 

determines are appropriate.’’ 14

The enhanced prudential standards in 

this final rule are intended to prevent or 

mitigate risks to the financial stability of 

the United States that could arise from 

the material financial distress or failure 

of a GSIB. In particular, the final rule’s 

requirements are intended to improve 

the resolvability and resilience of U.S. 

GSIBs under the U.S. Bankruptcy Code, 

Title II of the Dodd-Frank Act, or, with 

reference to insured depository 

institutions that are GSIB subsidiaries, 

the FDI Act, and reduce the potential 

that resolution of the firm will be 

disorderly and lead to disruptive asset 

sales and liquidations. 

The final rule should also improve the 

resilience of the U.S. operations of 

foreign GSIBs, and thereby increase the 

likelihood that a failed foreign GSIB 

with U.S. operations would be 

successfully resolved by its home 

jurisdiction authorities without the 

severe distress or failure of the foreign 

GSIB’s U.S. operating entities and with 

limited effect on the financial stability 

of the United States.15

The Board has tailored this final rule 

to apply only to those banking 

organizations whose disorderly failure 

or severe distress would be likely to 

pose the greatest risk to U.S. financial 

stability: The U.S. GSIBs and the U.S. 

operations of foreign GSIBs. The Board 

believes that limiting the application of 

this final rule in this way sensibly 

balances the costs and benefits of the 

rule by effectively managing systemic 

risk while at the same time limiting the 

burden of compliance by not requiring 

non-GSIB firms with total assets in 

excess of $50 billion to comply with any 

part of this final rule. 

Qualified financial contracts, default 

rights, and financial stability. The final 

rule pertains to several important 

classes of financial transactions that are 

collectively known as ‘‘qualified 

financial contracts.’’ 16 QFCs include 

derivatives, repurchase agreements (also 

known as ‘‘repos’’), reverse repos, and 

securities lending and borrowing 

agreements.17 GSIBs enter into QFCs for 

a variety of purposes, including to 

borrow money to finance their 

investments, to lend money, to manage 

risk, and to enable their clients and 

counterparties to hedge risks, make 

markets in securities and derivatives, 

and take positions in financial 

investments. 

QFCs play a role in economically 

valuable financial intermediation when 

markets are functioning normally. But 

they are also a major source of financial 

interconnectedness, which can pose a 

threat to financial stability in times of 

market stress. The final rule focuses on 

a context in which that threat is 

especially great: The severe distress or 

failure of a GSIB that is party to large 

volumes of QFCs, which are likely to 

include QFCs with counterparties that 

are themselves systemically important. 

By contract, a party to a QFC 

generally has the right to take certain 

actions if its counterparty defaults on 

the QFC (that is, if it fails to meet certain 

contractual obligations). Common 

default rights include the right to 

suspend performance of the nondefaulting party’s obligations, the right 

to terminate or accelerate the contract, 

the right to set off amounts owed 

between the parties, and the right to 

seize and liquidate the defaulting 

party’s collateral. In general, default 

rights allow a party to a QFC to reduce 

the credit risk associated with the QFC 

by granting it the right to exit the QFC 

and thereby reduce its exposure to its 

counterparty upon the occurrence of a 

specified condition, such as its 

counterparty’s entry into a resolution 

proceeding. 

Where the defaulting party is a GSIB 

entity, the private benefit of allowing 

counterparties of GSIBs to take certain 

actions must be weighed against the 

harm that these actions may cause by 

contributing to the severe distress or 

disorderly failure of a GSIB and 

increasing the threat to the stability of 

the U.S. financial system as a whole. For 

example, if a significant number of QFC 

counterparties exercise their default 

rights precipitously and in a manner 

that would impede an orderly resolution 

of a GSIB, all QFC counterparties and 

the financial system may potentially be 

worse off and less stable. 

This may occur through several 

channels. First, the exits may drain 

liquidity from a troubled GSIB, forcing 

the GSIB to rapidly sell off assets at 

depressed prices, both because the sales 

must be done within a short timeframe 

and because the elevated supply may 

push prices down. These asset fire sales 

may cause or deepen balance-sheet 

insolvency at the GSIB, causing a GSIB 

to fail more suddenly and reducing the 

amount that its other creditors can 

recover, thereby imposing losses on 

those creditors and threatening their 

solvency. The GSIB may also respond to 

a QFC run by withdrawing liquidity that 

it had offered to other firms, forcing 

them to engage in fire sales. 

Alternatively, if the GSIB’s QFC 

counterparty itself liquidates the QFC 

collateral at fire sale prices, the effect 

will again be to weaken the GSIB’s 

balance sheet as the GSIB marks those 

assets down to the new fire sale induced 

price level.18 The counterparty’s rights 

to set-off amounts owed, terminate the 

contract, or suspend payments may 

allow it to further drain the GSIB’s 

capital and liquidity by withholding 

payments that it would otherwise owe 

to the GSIB. The GSIB may also have 

rehypothecated collateral that it 

received from QFC counterparties, for 

instance in repo or securities lending 

transactions that fund other client 

arrangements, in which case demands 

from those counterparties for the early 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42885 

19See generally Adam Kirk, James McAndrews, 

Parinitha Sastry, and Phillip Weed, ‘‘Matching 

Collateral Supply and Financing Demands in Dealer 

Banks,’’ FRBNY Economic Policy Review 127 (Dec. 

2014), http://www.newyorkfed.org/medialibrary/

media/research/epr/2014/1412kirk.pdf. 

20 12 U.S.C. 5365(d). 

21Board and FDIC, ‘‘Agencies Provide Feedback 

on Second Round Resolution Plans of ‘First-Wave’ 

Filers’’ (Aug. 5, 2014), http://

www.federalreserve.gov/newsevents/press/bcreg/

20140805a.htm. See also Board and FDIC, 

‘‘Guidance for 2018 § 165(d) Annual Resolution 

Plan Submissions By Foreign-based Covered 

Companies that Submitted Resolution Plans in July 

2015,’’ (Mar. 24, 2017), https://www.federal

reserve.gov/newsevents/pressreleases/files/bcreg

20170324a21.pdf; Board and FDIC, ‘‘Guidance for 

2017 § 165(d) Annual Resolution Plan Submissions 

By Domestic Covered Companies that Submitted 

Resolution Plans in July 2015,’’ (Apr. 13, 2016), 

https://www.federalreserve.gov/newsevents/press

releases/files/bcreg20160413a1.pdf; Board and 

FDIC, ‘‘Agencies Provide Feedback on Resolution 

Plans of Three Foreign Banking Organizations,’’ 

(Mar. 23, 2015), http://www.federalreserve.gov/news

events/press/bcreg/20150323a.htm; Board and 

FDIC, ‘‘Guidance for 2013 165(d) Annual 

Resolution Plan Submissions by Domestic Covered 

Companies that Submitted Initial Resolution Plans 

in 2012’’ (Apr. 15, 2013), http://www.federal

reserve.gov/newsevents/press/bcreg/bcreg

20130415c2.pdf. 22 In general, a ‘‘direct party’’ refers to a party to 

a financial contract other than a credit enhancement 

(such as a guarantee). The definition of ‘‘direct 

party’’ and related definitions are discussed in more 

detail below. 

23This preamble uses phrases such as ‘‘entering 

a resolution proceeding’’ and ‘‘going into 

resolution’’ to encompass the concept of ‘‘becoming 

subject to a receivership, insolvency, liquidation, 

resolution, or similar proceeding.’’ These phrases 

refer to proceedings established by law to deal with 

a failed legal entity. In the context of the failure of 

a systemically important banking organization, the 

most relevant types of resolution proceeding 

include the following: For most U.S.-based legal 

entities, the bankruptcy process established by the 

U.S. Bankruptcy Code (Title 11, United States 

Code); for U.S. insured depository institutions, a 

receivership administered by the FDIC under the 

FDI Act (12 U.S.C. 1821); for companies whose 

‘‘resolution under otherwise applicable Federal or 

State law would have serious adverse effects on the 

financial stability of the United States,’’ the DoddFrank Act’s Orderly Liquidation Authority (12 

U.S.C. 5383(b)(2)); and, for entities based outside 

the United States, resolution proceedings created by 

foreign law. 

24See Michael J. Fleming and Asani Sarkar, ‘‘The 

Failure Resolution of Lehman Brothers,’’ FRBNY 

Economic Policy Review 185 (Dec. 2014), https:// 

www.newyorkfed.org/medialibrary/media/research/

epr/2014/1412flem.pdf. 

25The Board’s final rule regarding total lossabsorbing capacity, long term debt and clean 

holding company requirements (TLAC rule) 

addresses the need for adequate external lossabsorbing capacity at the holding company level by 

requiring the top-tier holding companies of the U.S. 

GSIBs and the U.S. intermediate holding companies 

of foreign GSIBs to maintain outstanding required 

levels of unsecured long-term debt and TLAC, 

which is defined to include both tier 1 capital and 

eligible long-term debt. See 82 FR 8266, 8287 (Jan. 

24, 2017). 

return of their rehypothecated collateral 

could be especially disruptive.19

The asset fire sales discussed above 

can also spread contagion throughout 

the financial system by increasing 

volatility and by lowering the value of 

similar assets held by other firms, 

potentially causing these firms to suffer 

mark-to-market losses, diminished 

market confidence in their own 

solvency, margin calls, and creditor 

runs (which could lead to further fire 

sales, worsening the contagion). Finally, 

the early terminations of derivatives 

upon which the surviving entities of the 

failed GSIB relied to hedge their risks 

could leave those entities with major 

risks unhedged, increasing the entities’ 

potential losses going forward. 

Where there are significant 

simultaneous terminations and these 

effects occur contemporaneously, such 

as upon the failure or severe distress of 

a GSIB that is party to a large volume 

of QFCs, they may pose a substantial 

risk to financial stability. In short, QFC 

continuity is important for the orderly 

resolution of a GSIB because it helps to 

ensure that the GSIB entities remain 

viable and to avoid instability caused by 

asset fire sales. 

Consequently, the Board and the FDIC 

have identified the exercise of certain 

default rights in financial contracts as a 

potential obstacle to orderly resolution 

in the context of resolution plans filed 

pursuant to section 165(d) of the DoddFrank Act 20 and have instructed the 

most systemically important firms to 

demonstrate that they are ‘‘amending, 

on an industry-wide and firm-specific 

basis, financial contracts to provide for 

a stay of certain early termination rights 

of external counterparties triggered by 

insolvency proceedings.’’ 21

Direct defaults and cross-defaults. 

This final rule focuses on two distinct 

scenarios in which a non-defaulting 

party to a QFC is commonly able to 

exercise the rights described above. 

These two scenarios involve a default 

that occurs when either the GSIB legal 

entity that is a direct party 22 to the QFC 

or an affiliate of that legal entity enters 

a resolution proceeding.23 The first 

scenario occurs when a GSIB entity that 

is itself a direct party to the QFC enters 

a resolution proceeding; this preamble 

refers to such a scenario as a ‘‘direct 

default’’ and refers to the default rights 

that arise from a direct default as ‘‘direct 

default rights.’’ The second scenario 

occurs when an affiliate of the GSIB 

entity that is a direct party to the QFC 

(such as the direct party’s parent 

holding company) enters a resolution 

proceeding; this preamble refers to such 

a scenario as a ‘‘cross-default’’ and 

refers to default rights that arise from a 

cross-default as ‘‘cross-default rights.’’ 

For example, a GSIB parent entity might 

guarantee the derivatives transactions of 

its subsidiaries, and those derivatives 

contracts could contain cross-default 

rights against a subsidiary of the GSIB 

that would be triggered by the 

bankruptcy filing of the GSIB parent 

entity even though the subsidiary 

continues to meet all of its financial 

obligations.24

Importantly, this final rule does not 

affect all types of default rights. 

Moreover, the final rule is concerned 

only with default rights that run against 

a GSIB—that is, direct default rights and 

cross-default rights that arise from the 

entry into resolution of a GSIB entity. 

The final rule does not affect default 

rights that a GSIB entity (or any other 

entity) may have against a counterparty 

that is not a GSIB entity. This limited 

scope is appropriate because, as 

described above, the risk posed to 

financial stability by the exercise of QFC 

default rights is greatest when the 

defaulting counterparty is a GSIB entity. 

Single-point-of-entry resolution. 

Cross-default rights are especially 

significant in the context of a GSIB 

failure because GSIBs typically enter 

into large volumes of QFCs through 

different entities controlled by the GSIB. 

For example, a U.S. GSIB is made up of 

a U.S. bank holding company and 

numerous operating subsidiaries that 

are owned, directly or indirectly, by the 

bank holding company. From the 

standpoint of financial stability, the 

most important of these operating 

subsidiaries are generally a U.S. insured 

depository institution, a U.S. brokerdealer, and similar entities organized in 

other countries. 

Many complex GSIBs have developed 

resolution strategies that rely on a 

single-point-of-entry (SPOE) resolution 

strategy. In an SPOE resolution of a 

GSIB, only a single legal entity—the 

GSIB’s top-tier bank holding company— 

would enter a resolution proceeding. 

The losses that led to the GSIB’s failure 

would be passed up from the operating 

subsidiaries that incurred the losses to 

the holding company and would then be 

imposed on the equity holders and 

unsecured creditors of the holding 

company through the resolution 

process.25 This strategy is designed to 

help ensure that the GSIB subsidiaries 

remain adequately capitalized and that 

operating subsidiaries of the GSIB are 

able to continue to meet their financial 

obligations without defaulting or 

entering resolution themselves. The 

expectation that the holding company’s 

equity holders and unsecured creditors 

would absorb the GSIB’s losses in the 

event of failure would help to maintain 

the confidence of the operating 

subsidiaries’ creditors and 

counterparties (including their QFC 

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42886 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

26See 82 FR 8266 (Jan. 24, 2017). 

27See 11 U.S.C. 362. 

28See, e.g., Aiello v. Providian Financial Corp., 

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

29The U.S. Bankruptcy Code does not use the 

term ‘‘qualified financial contract,’’ but the set of 

transactions covered by its safe harbor provisions 

closely tracks the set of transactions that fall within 

the definition of ‘‘qualified financial contract’’ used 

in Title II of the Dodd-Frank Act and in this final 

rule. 

30 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 

556, 559, 560, 561. The U.S. Bankruptcy Code 

specifies the types of parties to which the safe 

harbor provisions apply, such as financial 

institutions and financial participants. Id. 

31See 11 U.S.C. 362(a). 

32Section 204(a) of the Dodd-Frank Act, codified 

at 12 U.S.C. 5384(a). 

33See section 203 of the Dodd-Frank Act, codified 

at 12 U.S.C. 5383. 

34See 12 U.S.C. 5390(c)(9). 

35 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary 

stay generally lasts until 5:00 p.m. eastern time on 

the business day following the appointment of the 

FDIC as receiver. 

36 12 U.S.C. 5390(c)(10)(B)(i)(II). 

37 12 U.S.C. 5390(c)(16). 

counterparties), reducing their incentive 

to engage in potentially destabilizing 

funding runs or margin calls and thus 

lowering the risk of asset fire sales. A 

successful SPOE resolution would also 

avoid the need for separate resolution 

proceedings for separate legal entities 

run by separate authorities across 

multiple jurisdictions, which would be 

more complex and could therefore 

destabilize the resolution of a GSIB. 

The Board’s TLAC rule is intended to 

help, though not exclusively, to lay the 

foundation necessary for the SPOE 

resolution of a GSIB by requiring the 

top-tier holding companies of U.S. 

GSIBs and the U.S. intermediate holding 

companies of foreign GSIBs to maintain 

sufficient amounts of loss-absorbing 

capacity that could be used for 

resolution and to adopt a ‘‘clean holding 

company’’ structure, under which 

certain financial activities that could 

pose obstacles to orderly resolution 

would be impermissible for the holding 

company and could only be conducted 

by its operating subsidiaries.26

Other orderly resolution strategies. 

This final rule is also intended to yield 

benefits for other approaches to 

resolution. For example, preventing 

early terminations of QFCs would 

increase the prospects for an orderly 

resolution under a multiple-point-ofentry (MPOE) strategy involving a 

foreign GSIB’s U.S. intermediate 

holding company going into resolution 

or a resolution plan that calls for a 

GSIB’s U.S. insured depository 

institution to enter resolution under the 

FDI Act. As discussed above, the final 

rule should help support the continued 

operation of one or more affiliates of an 

entity that has entered resolution to the 

extent the affiliate continues to perform 

on its QFCs. 

U.S. Bankruptcy Code. When an 

entity goes into resolution under the 

U.S. Bankruptcy Code, attempts by the 

debtor entity’s creditors to enforce their 

debts through any means other than 

participation in the bankruptcy 

proceeding (for instance, by suing in 

another court, seeking enforcement of a 

preexisting judgment, or seizing and 

liquidating collateral) are generally 

blocked by the imposition of an 

automatic stay.27 A key purpose of the 

automatic stay, and of bankruptcy law 

in general, is to maximize the value of 

the bankruptcy estate and the creditors’ 

ultimate recoveries by facilitating an 

orderly liquidation or restructuring of 

the debtor. The automatic stay thus 

solves a collective action problem in 

which the creditors’ individual 

incentives to become the first to recover 

as much from the debtor as possible, 

before other creditors can do so, 

collectively cause a value-destroying 

disorderly liquidation of the debtor.28

However, the U.S. Bankruptcy Code 

largely exempts QFC29 counterparties of 

the debtor from the automatic stay 

through special ‘‘safe harbor’’ 

provisions.30 Under these provisions, 

any rights that a QFC counterparty has 

to terminate the contract, set-off 

obligations, or liquidate collateral in 

response to a direct default are not 

subject to the stay and may be exercised 

against the debtor immediately upon 

default. (The U.S. Bankruptcy Code 

does not itself confer default rights upon 

QFC counterparties; it merely permits 

QFC counterparties to exercise certain 

rights created by other sources, such as 

contractual rights created by the terms 

of the QFC.) 

The U.S. Bankruptcy Code’s 

automatic stay also does not prevent the 

exercise of cross-default rights against 

an affiliate of the party entering 

resolution. The stay generally applies 

only to actions taken against the party 

entering resolution or the bankruptcy 

estate,31 whereas a QFC counterparty 

exercising a cross-default right is 

instead acting against a distinct legal 

entity that is not itself in resolution— 

the debtor’s affiliate. 

Title II of the Dodd-Frank Act and the 

Orderly Liquidation Authority. Title II of 

the Dodd-Frank Act imposes stay 

requirements on QFCs of financial 

companies that enter resolution under 

that Title. In general, no financial firm 

(regardless of size) is too-big-to-fail and 

a U.S. bank holding company (such as 

the top-tier holding company of a U.S. 

GSIB) that fails would be resolved under 

the U.S. Bankruptcy Code. Congress 

recognized, however, that a financial 

company might fail under extraordinary 

circumstances in which an attempt to 

resolve it through the bankruptcy 

process would have serious adverse 

effects on financial stability in the 

United States. Title II of the Dodd-Frank 

Act establishes the Orderly Liquidation 

Authority (OLA), an alternative 

resolution framework intended to be 

used in rare circumstances to manage 

the failure of a firm that poses a 

significant risk to the financial stability 

of the United States in a manner that 

mitigates such risk and minimizes moral 

hazard.32 Title II authorizes the 

Secretary of the Treasury, upon the 

recommendation of other government 

agencies and a determination that 

several preconditions are met, to place 

a financial company into a receivership 

conducted by the FDIC as an alternative 

to bankruptcy.33

Title II empowers the FDIC to transfer 

the QFCs to a bridge financial company 

or some other financial company that is 

not in a resolution proceeding and 

should therefore be capable of 

performing under the QFCs.34 To give 

the FDIC time to effect this transfer, 

Title II temporarily stays QFC 

counterparties of the failed entity from 

exercising termination, netting, and 

collateral liquidation rights ‘‘solely by 

reason of or incidental to’’ the failed 

entity’s entry into OLA resolution, its 

insolvency, or its financial condition.35

Once the QFCs are transferred in 

accordance with the statute, Title II 

permanently stays the exercise of 

default rights for those reasons.36

Title II addresses cross-default rights 

through a similar procedure. It 

empowers the FDIC to enforce contracts 

of subsidiaries or affiliates of the failed 

covered financial company that are 

‘‘guaranteed or otherwise supported by 

or linked to the covered financial 

company, notwithstanding any 

contractual right to cause the 

termination, liquidation, or acceleration 

of such contracts based solely on the 

insolvency, financial condition, or 

receivership of’’ the failed company, so 

long as, if such contracts are guaranteed 

or otherwise supported by the covered 

financial company, the FDIC takes 

certain steps to protect the QFC 

counterparties’ interests by the end of 

the business day following the 

company’s entry into OLA resolution.37

These stay-and-transfer provisions of 

the Dodd-Frank Act are intended to 

mitigate the threat posed by QFC default 

rights. At the same time, the provisions 

allow appropriate protections for QFC 

counterparties of the failed financial 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42887 

38 12 U.S.C. 1821(c). 

39See 12 U.S.C. 1821(e)(8)–(10). 

40 12 CFR 217.402; 80 FR 49106 (Aug. 14, 2015). 

41See proposed rule § 252.81. 

42 12 U.S.C. 5390(c)(8)(D). See proposed rule 

§ 252.81. 

43See proposed rule § 252.83. 

44See, e.g., Bank of England Prudential 

Regulation Authority, Policy Statement, 

‘‘Contractual stays in financial contracts governed 

by third-country law’’ (Nov. 2015), http://www.bank

ofengland.co.uk/pra/Documents/publications/ps/

2015/ps2515.pdf. 

45Financial Stability Board, ‘‘Principles for Crossborder Effectiveness of Resolution Actions’’ (Nov. 3, 

2015), http://www.fsb.org/wp-content/uploads/

Principles-for-Cross-border-Effectiveness-ofResolution-Actions.pdf. 

The Financial Stability Board (FSB) was 

established in 2009 to coordinate the work of 

national financial authorities and international 

standard-setting bodies and to develop and promote 

the implementation of effective regulatory, 

supervisory, and other financial sector policies to 

advance financial stability. The FSB brings together 

national authorities responsible for financial 

stability in 24 countries and jurisdictions, as well 

as international financial institutions, sectorspecific international groupings of regulators and 

supervisors, and committees of central bank 

experts. See generally Financial Stability Board, 

http://www.fsb.org. 

46See proposed rule § 252.83(b). 

47 ISDA, ‘‘Attachment to the ISDA 2015 Universal 

Resolution Stay Protocol,’’ (Nov. 4, 2015), http://

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

See proposed rule § 252.85(a). 

company. The provisions stay only the 

exercise of default rights based on the 

failed company’s entry into resolution, 

the fact of its insolvency, or its financial 

condition. Further, the stay period is 

brief, unless the FDIC transfers the QFCs 

to another financial company that is not 

in resolution (and should therefore be 

capable of performing under the QFCs) 

or, if applicable, provides adequate 

protection that the QFCs will be 

performed. 

The Federal Deposit Insurance Act. 

Under the FDI Act, a failing insured 

depository institution would generally 

enter a receivership administered by the 

FDIC.38 The FDI Act addresses direct 

default rights in the failed bank’s QFCs 

with stay-and-transfer provisions that 

are substantially similar to the 

provisions of Title II of the Dodd-Frank 

Act discussed above.39 However, the 

FDI Act does not address cross-default 

rights, leaving the QFC counterparties of 

the failed depository institution’s 

affiliates free to exercise any contractual 

rights they may have to terminate, net, 

or liquidate collateral based on the 

depository institution’s entry into 

resolution. Moreover, as with Title II of 

the Dodd-Frank Act, there is a 

possibility that a court of a foreign 

jurisdiction might decline to enforce the 

FDI Act’s stay-and-transfer provisions 

under certain circumstances. 

B. Notice of Proposed Rulemaking and 

General Summary of Comments 

The proposal was intended to 

increase GSIB resolvability and 

resiliency by addressing two QFCrelated issues. First, the proposal sought 

to address the risk that a court in a 

foreign jurisdiction may decline to 

enforce the QFC stay-and-transfer 

provisions of Title II and the FDI Act 

discussed above. Second, the proposal 

sought to address the potential 

disruption that may occur if a 

counterparty to a QFC with an affiliate 

of a GSIB entity that goes into resolution 

under the U.S. Bankruptcy Code or the 

FDI Act exercises cross-default rights. 

Scope of application. The proposal’s 

requirements would have applied to all 

‘‘covered entities.’’ Under the proposal, 

‘‘covered entity’’ included: Any U.S. 

top-tier bank holding company 

identified as a GSIB under the Board’s 

rule establishing risk-based capital 

surcharges for GSIBs (GSIB surcharge 

rule); 40 any subsidiary of such a bank 

holding company; and any U.S. 

subsidiary, U.S. branch, or U.S. agency 

of a foreign GSIB.41 ‘‘Covered entity’’ 

did not include national banks and 

Federal savings associations that are 

supervised by the Office of the 

Comptroller of the Currency (OCC), 

because the OCC was expected to issue, 

and ultimately did issue, a proposed 

rule that would subject those 

institutions to requirements 

substantively identical to those 

proposed by the Board’s rule for covered 

entities. 

In the proposal, ‘‘qualified financial 

contract’’ or ‘‘QFC’’ was defined to have 

the same meaning as in section 

210(c)(8)(D) of the Dodd-Frank Act,42

and included, among other things, 

derivatives, repos, and securities 

borrowing and lending agreements. 

Subject to the exceptions discussed 

below, the proposal’s requirements 

would have applied to any QFC to 

which a covered entity is party (covered 

QFC). Under the proposal, a covered 

entity would have been required to 

conform pre-existing QFCs if a covered 

entity enters into a new QFC with a 

counterparty or its affiliate. 

Required contractual provisions 

related to the U.S. Special Resolution 

Regimes. Under the proposal, covered 

entities would have been required to 

ensure that covered QFCs include 

contractual terms explicitly providing 

that any default rights or restrictions on 

the transfer of the QFC are limited to at 

least the same extent as they would be 

pursuant to the OLA and the FDI Act 

(U.S. Special Resolution Regimes).43

The proposed requirements were not 

intended to imply that the statutory 

stay-and-transfer provisions would not 

in fact apply to a given QFC, but rather 

to help ensure that all covered QFCs 

would be treated the same way in the 

context of an FDIC receivership under 

the Dodd-Frank Act or the FDI Act. This 

provision was intended to address the 

first issue listed above and to decrease 

the QFC-related threat to financial 

stability posed by the failure and 

resolution of an internationally active 

GSIB. This section of the proposal was 

also consistent with analogous legal 

requirements that have been imposed in 

other national jurisdictions 44 and with 

the Financial Stability Board’s 

‘‘Principles for Cross-border 

Effectiveness of Resolution Actions.’’ 45

Prohibited cross-default rights. Under 

the proposal, a covered entity would 

have been prohibited from entering into 

covered QFCs that would allow the 

exercise of cross-default rights—that is, 

default rights related, directly or 

indirectly, to the entry into resolution of 

an affiliate of the direct party—against 

it.46 Covered entities would have been 

similarly prohibited from entering into 

covered QFCs that included a restriction 

on the transfer of a credit enhancement 

supporting the QFC from the covered 

entity’s affiliate to a transferee upon the 

entry into resolution of the affiliate. 

The Board did not propose to prohibit 

a covered entity from entering into 

QFCs that allow its counterparties to 

exercise direct default rights against the 

covered entity. Under the proposal, a 

covered entity also could, to the extent 

not inconsistent with Title II or the FDI 

Act, enter into a QFC that grants its 

counterparty the right to terminate the 

QFC if the covered entity fails to 

perform its obligations under the QFC. 

Industry-developed protocol. As an 

alternative to bringing their covered 

QFCs into compliance with the 

requirements set out in the proposed 

rule, covered entities would have been 

permitted to comply with the 

requirements of the proposed rule by 

adhering to the International Swaps and 

Derivatives Association (ISDA) 2015 

Universal Resolution Stay Protocol, 

including the Securities Financing 

Transaction Annex and the Other 

Agreements Annex (together, the 

‘‘Universal Protocol’’).47 The preamble 

to the proposal explained that the Board 

viewed the Universal Protocol as 

achieving an outcome consistent with 

the outcome intended by the 

requirements of the proposed rule by 

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42888 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

48See proposed rule § 252.85. 

49See proposed rule § 252.85(c). 

similarly limiting direct default rights 

and cross-default rights. 

Process for approval of enhanced 

creditor protection conditions. The 

proposal also would have allowed the 

Board, at the request of a covered entity, 

to approve as compliant with the 

proposal covered QFCs with creditor 

protections other than those that would 

otherwise be permitted under section 

252.84 of the proposal.48 The Board 

would have been permitted to approve 

such a request if, in light of several 

enumerated considerations,49 the 

alternative creditor protections would 

mitigate risks to the financial stability of 

the United States presented by a GSIB’s 

failure to at least the same extent as the 

proposed requirements. 

Amendments to certain definitions in 

the Board’s capital and liquidity rules. 

The proposal also would have amended 

certain definitions in the Board’s capital 

and liquidity rules to help ensure that 

the regulatory capital and liquidity 

treatment of QFCs to which a covered 

entity is party would not be affected by 

the proposed restrictions on such QFCs. 

Specifically, the proposal would have 

amended the definition of ‘‘qualifying 

master netting agreement’’ in the 

Board’s regulatory capital and liquidity 

rules and would similarly amend the 

definitions of the terms ‘‘collateral 

agreement,’’ ‘‘eligible margin loan,’’ and 

‘‘repo-style transaction’’ in the Board’s 

regulatory capital rules. 

Comments on the Proposal. The 

Board received approximately 30 

comments on the proposed rule from 

banking organizations, trade 

associations, public interest advocacy 

groups, and private individuals. Board 

staff also met with some commenters at 

their request to discuss their comments 

on the proposal, and summaries of these 

meetings may be found on the Board’s 

public Web site. 

A number of commenters, including 

GSIBs that would be subject to the 

requirements of the proposal, expressed 

strong support for the proposed rule as 

a well-considered effort to reduce 

systemic risk with minimal burden and 

as one of the last important steps to 

ensure a more efficient and orderly 

resolution process for all covered 

entities and thereby to protect the 

stability of the U.S. financial system. 

Other commenters, however, expressed 

concern with the proposed rule. These 

commenters generally argued that the 

proposal should not restrict contractual 

rights of GSIB counterparties and 

contended that the proposal shifts the 

costs of resolving the covered entities to 

non-defaulting counterparties. Some 

commenters argued that the proposal 

would not assuredly mitigate systemic 

risk, as the requirements could result in 

increased market and credit risk for QFC 

counterparties of a GSIB. Commenters 

also argued that it would be more 

appropriate for Congress to impose the 

proposal’s restrictions on contractual 

rights through the legislative process 

rather than for the Board to do so 

through a regulation. 

As described above, the proposal 

applied to ‘‘covered entities,’’ which 

was defined to mean all U.S. GSIBs and 

their subsidiaries, as well as the U.S. 

operations (subsidiaries, branches, and 

agencies) of GSIBs that are foreign 

banking organizations. The proposal 

generally defined ‘‘subsidiary’’ as an 

entity controlled by a GSIB under the 

Bank Holding Company Act (BHC Act). 

Commenters urged the Board to move to 

a financial consolidation standard to 

define the subsidiaries of covered 

entities, arguing that the concept of 

control under the BHC Act includes 

entities (1) that are not under the 

operational control of the GSIB and over 

whom the GSIB does not have the 

practical ability to require remediation 

and (2) which are unlikely to raise the 

types of concerns for the orderly 

resolution of GSIBs targeted by the 

proposal. For similar reasons, these 

commenters argued that, for purposes of 

the requirement that a covered entity 

conform existing QFCs if a covered 

entity enters into a new QFC with a 

counterparty or its affiliate, a 

counterparty’s ‘‘affiliate’’ should also be 

defined by reference to financial 

consolidation rather than BHC Act 

control. 

Commenters also expressed concern 

that the definition of ‘‘covered QFCs’’ 

under the proposal was overly broad. 

The proposal required a covered QFC to 

explicitly provide that it is subject to the 

stay-and-transfer provisions of Title II 

and the FDI Act and prohibited a 

covered entity from being a party to a 

QFC that would allow the exercise of 

cross-default rights. Commenters argued 

that the final rule should exclude QFCs 

that do not contain any contractual 

transfer restrictions, direct default 

rights, or cross-default rights, as these 

QFCs do not give rise to the risk that 

counterparties will exercise their 

contractual rights in a manner that is 

inconsistent with the provisions of the 

U.S. Special Resolution Regimes. 

Commenters also urged the Board to 

exclude QFCs governed by U.S. law 

from the requirement that QFCs 

explicitly ‘‘opt in’’ to the U.S. Special 

Resolution Regimes since it is already 

sufficiently clear that such QFCs are 

subject to the stay-and-transfer 

provisions of Title II and the FDI Act. 

With respect to the proposal’s 

prohibition against provisions that 

would allow the exercise of crossdefault rights in covered QFCs of a 

GSIB, commenters argued that the final 

rule should clarify that QFCs that do not 

contain such cross-default rights or 

transfer restrictions regarding related 

credit enhancements are not within the 

scope of the prohibition. 

Commenters also requested that 

certain types of contracts that may 

include transfer or default rights subject 

to the proposal’s requirements (e.g., 

warrants; certain commodity contracts, 

including commodity swaps; certain 

utility and gas supply contracts; certain 

retail customer and investment advisory 

agreements; securities underwriting 

agreements; securities lending 

authorization agreements) be excluded 

from all requirements of the final rule 

because these types of contracts do not 

raise the risks to the resolution of a 

covered entity or financial stability that 

are the target of this final rule and 

because certain existing contracts of 

these types would be difficult, if not 

impossible, to amend. Commenters also 

requested that securities contracts that 

typically settle in the short term or that 

typically include only transfer 

restrictions and not default rights 

similarly be excluded from all 

requirements of the final rule because 

they do not impose ongoing or 

continuing obligations on either party 

after settlement. In all of the above 

cases, commenters argued that 

remediation of such outstanding 

contracts would be burdensome with no 

meaningful resolution benefits. Certain 

commenters also urged the Board to 

apply the final rule only to contracts 

entered into after the final rule’s 

effective date and not to contracts 

existing as of the final rule’s effective 

date. 

As noted above, the proposal would 

have deemed compliant covered QFCs 

amended by the existing Universal 

Protocol (which allows for creditor 

protections in addition to those 

otherwise permitted by the proposed 

rule). Commenters generally supported 

this aspect of the proposal, although 

they requested express clarification that 

adherence to the existing Universal 

Protocol would satisfy all of the 

requirements of the final rule. 

Commenters urged that the final rule 

should also provide a safe harbor for a 

future ISDA protocol that would be 

substantially similar to the existing 

Universal Protocol except that it would 

seek to address the specific needs of 

buy-side market participants, such as 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42889 

50See final rule § 252.81 for definitions of 

‘‘excluded bank’’ and ‘‘FSI.’’ See also 12 U.S.C. 

1813. 

51 12 U.S.C. 5390(c)(8)(D). 

52See final rule § 252.81; proposed rule § 252.81. 

53See final rule § 252.84(a). 

54See final rule § 252.88(c). 

55See final rule § 252.88(d). 

asset managers, insurance companies, 

and pension funds who are 

counterparties to QFCs with GSIBs, to 

allow, for example, entity-by-entity 

adherence and the exclusion of certain 

foreign special resolution regimes. 

Commenters expressed support for 

the exemption in the proposal for 

cleared QFCs but requested that this 

exemption be broadened to extend to 

the client leg of a cleared back-to-back 

transaction and also to exclude any 

contract cleared, processed, or settled 

on a financial market utility (FMU) as 

well as any QFC conducted according to 

the rules of an FMU. Commenters also 

requested an exemption for QFCs with 

sovereign entities and central banks. 

Commenters further requested a longer 

period of time for covered entities to 

conform covered QFCs with certain 

types of counterparties to comply with 

the requirements of the final rule. 

Commenters also requested that the 

Board coordinate with other regulatory 

agencies, consider comments submitted 

to the OCC regarding its proposal and 

from entities not regulated by the Board, 

and finalize a rule with conformance 

periods consistent with the OCC’s final 

rule. In addition, commenters requested 

confirmation that modifications to 

contracts to comply with this rule 

would not trigger other regulatory 

requirements (e.g., margin requirements 

for non-cleared swaps) or impact the 

enforceability of QFCs. The Board has 

considered the comments received on 

this proposal, including those of entities 

not regulated by the Board, as well as 

the comments submitted to the OCC and 

FDIC regarding their respective 

proposals, and these comments and 

changes in the final rule are described 

in more detail throughout the remainder 

of this SUPPLEMENTARY INFORMATION. 

C. Overview of Final Rule 

The Board is adopting this final rule 

to improve the resolvability and 

resilience of GSIBs and thereby reduce 

threats to financial stability. The Board 

has made a number of changes to the 

proposal in response to concerns raised 

by commenters, as further described 

below. 

The final rule is intended to facilitate 

the orderly resolution of the most 

systemically important banking firms— 

the GSIBs—by limiting the ability of the 

firms’ counterparties to terminate QFCs 

upon the entry of the GSIB or one or 

more of its affiliates into resolution. The 

rule requires the inclusion of 

contractual restrictions on the exercise 

of certain default rights in those QFCs. 

In particular, the final rule requires the 

QFCs of covered entities to contain 

contractual provisions that opt into the 

stay-and-transfer treatment of the FDI 

Act and the Dodd-Frank Act to reduce 

the risk that the stay-and-transfer 

treatment would be challenged by a 

QFC counterparty or a court in a foreign 

jurisdiction. The final rule also 

prohibits covered entities from entering 

into QFCs that contain cross-default 

rights, subject to certain creditor 

protection exceptions that would not be 

expected to interfere with an orderly 

resolution. 

The final rule also facilitates the 

implementation of the Universal 

Protocol, which can extend, through 

contractual agreement, the application 

of the resolution frameworks of the FDI 

Act and the Dodd-Frank Act to all QFCs 

entered into by a GSIB and its 

subsidiaries, including QFCs entered 

into by covered entities outside of the 

United States, and establishes 

restrictions on cross-default rights that 

are similar to those in the final rule. The 

final rule is necessary to implement the 

Universal Protocol provisions regarding 

the resolution of a GSIB under the U.S. 

Bankruptcy Code, as these provisions do 

not become effective until implemented 

by U.S. regulations. To support further 

adherence to the Universal Protocol, the 

final rule creates a safe harbor allowing 

covered entities to sign up to the 

Universal Protocol and thereby amend 

their QFCs pursuant to the Universal 

Protocol as an alternative to 

implementing the restrictions of the 

final rule on a counterparty-bycounterparty basis. In addition, the final 

rule provides that covered QFCs 

amended pursuant to adherence of a 

covered entity to a new protocol (the 

‘‘U.S. Protocol’’) would be deemed to 

conform to the requirements of the final 

rule. The U.S. Protocol may differ from 

the Universal Protocol in the certain 

respects discussed below, but otherwise 

must be substantively identical to the 

Universal Protocol. 

The final rule requires covered 

entities to conform certain covered 

QFCs to the requirements of the final 

rule on the first day of the first calendar 

quarter that begins a year after issuance 

of the final rule (first compliance date) 

and phases in conformance 

requirements with respect to all covered 

QFCs over a two-year period depending 

on the type of counterparty. As 

explained below, a covered entity 

generally is required to conform preexisting QFCs only if the covered entity 

or an affiliate of the covered entity 

enters into a new QFC with the same 

counterparty or a consolidated affiliate 

of the counterparty on or after the first 

compliance date. 

1. Covered Entities 

The final rule continues to apply to 

‘‘covered entities,’’ which generally are 

U.S. GSIBs and their subsidiaries and 

the U.S. operations of foreign GSIBs. 

‘‘Subsidiary’’ continues to be defined in 

the final rule by reference to BHC Act 

control. Because the FDIC and OCC are 

expected to finalize substantively 

identical final rules to that of the Board, 

the definition of ‘‘covered entity’’ in the 

final rule excludes state savings 

associations and state nonmember banks 

(FSIs), which are supervised by the 

FDIC, and GSIB subsidiaries (e.g., 

national banks), U.S. branches, and U.S. 

agencies that are supervised by the OCC. 

The final rule refers to FSIs and entities 

supervised by the OCC (e.g., national 

banks) that would be covered entities 

but for this exclusion as ‘‘excluded 

banks.’’ 50 As discussed below, certain 

other types of GSIB subsidiaries, such as 

merchant banking portfolio companies, 

are also excluded from the final rule. 

2. Covered Qualified Financial 

Contracts 

The final rule, like the proposal, 

defines ‘‘qualified financial contract’’ or 

‘‘QFC’’ to have the same meaning as in 

section 210(c)(8)(D) of the Dodd-Frank 

Act 51 and would include, among other 

things, derivatives, repos, and securities 

lending agreements.52 Subject to the 

exceptions discussed below, the final 

rule’s requirements apply to any QFC to 

which a covered entity is party (covered 

QFC). The final rule makes clear that 

covered entities do not need to conform 

QFCs that have no transfer restrictions, 

direct default rights, or cross-default 

rights, as these QFCs have no provisions 

that the rule is intended to address.53

The final rule also excludes retail 

investment advisory agreements and 

certain existing warrants.54 It also 

provides the Board with authority to 

exempt one or more covered entities 

from conforming certain contracts or 

types of contracts to the requirements of 

the final rule after considering, in 

addition to any other factor the Board 

deems relevant, the burden the 

exemption would relieve and the 

potential impact of the exemption on 

the resolvability of the covered entity or 

its affiliates.55

The final rule also makes clear that a 

covered entity must conform existing 

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56See final rule § 252.82(c). 

57See final rule § 252.81. 

58See final rule § 252.83. 

59See final rule § 252.83(a). 

60See final rule § 252.84(b). 

61See id. 

62See final rule § 252.85(a). 

63See final rule § 252.85(c). 

64See final rule § 252.85(c)–(d). 

65One commenter also requested that the Board 

consult with other agencies with entities under 

their jurisdiction affected by the final rule. Several 

commenters requested that the Board consult with 

the OCC in developing its final rule and coordinate 

its final rule with that of the OCC. Board staff has 

consulted with the Council as well as the FDIC and 

OCC in developing this final rule. 

66Certain commenters also requested that the 

Board consult with foreign regulatory authorities in 

developing its final rule. 

QFCs with a counterparty if the GSIB 

group (i.e., the covered entity or its 

affiliates that are covered entities or 

excluded banks) enters into a new QFC 

with that counterparty or its affiliate, 

defined by reference to financial 

consolidation principles. In particular, 

the final rule provides that a covered 

QFC includes a QFC that the covered 

entity entered, executed, or otherwise 

became a party to before the first 

compliance date of this final rule if the 

covered entity or any affiliate that is a 

covered entity or excluded bank also 

enters, executes, or otherwise becomes a 

party to a QFC with the same person or 

a consolidated affiliate of that person on 

or after the first compliance date.56

‘‘Consolidated affiliate’’ is a defined 

term in the final rule that is defined by 

reference to financial consolidation 

principles.57

3. Required Contractual Provisions 

Related to the U.S. Special Resolution 

Regimes 

Under the final rule, covered entities 

are required to ensure that covered 

QFCs include contractual terms 

explicitly providing that any default 

rights or restrictions on the transfer of 

the QFC are limited to the same extent 

as they would be pursuant to the U.S. 

Special Resolution Regimes.58 However, 

any covered QFC that is governed under 

U.S. law and involves only parties 

(other than the covered entity) that are 

domiciled in, incorporated in, organized 

under, or whose principal place of 

business is located in the United States, 

including any state, or that is a U.S. 

branch or agency (U.S. counterparties) is 

also excluded from the requirements of 

the final rule relating to Title II of the 

Dodd-Frank Act and the FDI Act 

because it is sufficiently clear that the 

stay-and-transfer provisions of those 

acts would be enforceable.59

4. Prohibited Cross-Default Rights 

Under the final rule, a covered entity 

is prohibited from entering into covered 

QFCs that would allow the exercise of 

cross-default rights—that is, default 

rights related, directly or indirectly, to 

the entry into resolution of an affiliate 

of the direct party—against it.60 Covered 

entities are similarly prohibited from 

entering into covered QFCs that would 

restrict the transfer of a credit 

enhancement supporting the QFC from 

the covered entity’s affiliate to a 

transferee upon the entry into resolution 

of the affiliate.61

The final rule does not prohibit 

covered entities from entering into QFCs 

that provide their counterparties with 

direct default rights against the covered 

entity. Under the final rule, a covered 

entity may be party to a QFC that, to the 

extent not inconsistent with Title II or 

the FDI Act, provides the counterparty 

with the right to terminate the QFC if 

the covered entity fails to perform its 

obligations under the QFC. 

5. Industry-Developed Protocol 

As an alternative to bringing their 

covered QFCs into compliance with the 

requirements of the final rule, the final 

rule allows covered entities to comply 

with the rule by adhering to the 

Universal Protocol.62 The final rule also 

permits compliance with the final rule 

through adherence to a new protocol 

(the U.S. Protocol) that is the same as 

the existing Universal Protocol but for 

minor changes intended to encourage a 

broader range of QFC counterparties to 

adhere only with respect to covered 

entities and excluded banks. The 

Universal Protocol and the U.S. Protocol 

differ from the requirements of this final 

rule in certain respects. Nevertheless, as 

described in greater detail below, the 

final rule allows compliance through 

adherence to these protocols in light of 

the fact that the protocols contain 

certain desirable features that the final 

rule lacks and produce outcomes 

substantially similar to this final rule. 

6. Process for Approval of Enhanced 

Creditor Protection Conditions 

The final rule also allows the Board, 

at the request of a covered entity, to 

approve as compliant with the final rule 

covered QFCs with creditor protections 

other than those that would otherwise 

be permitted under section 252.84 of the 

final rule.63 The Board could approve 

such a request if, in light of several 

enumerated considerations, the 

alternative approach would prevent or 

mitigate risks to the financial stability of 

the United States presented by a GSIB’s 

failure and would protect the safety and 

soundness of bank holding companies 

and state member banks to at least the 

same extent as the final rule’s 

requirements.64

7. Amendments to Certain Definitions in 

the Board’s Capital and Liquidity Rules 

The final rule also amends certain 

definitions in the Board’s capital and 

liquidity rules to help ensure that the 

regulatory capital and liquidity 

treatment of QFCs to which a covered 

entity is party is not affected by the 

proposed restrictions on such QFCs. 

Specifically, the final rule amends the 

definition of ‘‘qualifying master netting 

agreement’’ in the Board’s regulatory 

capital and liquidity rules and similarly 

amends the definitions of the terms 

‘‘collateral agreement,’’ ‘‘eligible margin 

loan,’’ and ‘‘repo-style transaction’’ in 

the Board’s regulatory capital rules. 

D. Consultation With U.S. Financial 

Regulators, the Council, and Foreign 

Authorities 

In developing this final rule, the 

Board consulted with the FDIC, the 

OCC, and the Financial Stability 

Oversight Council (Council).65 The final 

rule reflects input received by the Board 

during this consultation process. 

Furthermore, the Board has consulted 

with, and expects to continue to consult 

with, foreign financial regulatory 

authorities regarding this final rule and 

the establishment of other standards 

that would maximize the prospects for 

the cooperative and orderly cross-border 

resolution of a failed GSIB on an 

international basis.66

The OCC is expected to finalize a 

rulemaking that would subject national 

banks, Federal savings associations, 

Federal branches, and Federal agencies 

of GSIBs to requirements substantively 

identical to those proposed here for 

covered entities. Similarly, the FDIC is 

expected to finalize a rulemaking that 

would subject state nonmember bank 

and state savings association 

subsidiaries of GSIBs to requirements 

substantively identical to those 

proposed here for covered entities. The 

Board has consulted with the OCC and 

FDIC in the development of their 

respective final rules. The banking 

agencies have endeavored to harmonize 

their respective rules to the extent 

possible and to provide specificity and 

clarity in the final rule to minimize the 

possibility of conflicting interpretations 

or uncertainty in their application. 

Moreover, the banking agencies intend 

to consult with each other and 

coordinate as needed regarding 

implementation of the final rule. 

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67Section 252.88 of the Board’s proposal also 

clarified that covered entities would not be required 

to conform covered QFCs with respect to a part of 

a covered QFC that a covered bank also would be 

required to conform under the proposed rule that 

the OCC subsequently issued. 

68Commenters requested further clarification on 

the interaction between the final rules of the Board 

and the OCC to avoid legal uncertainty. As noted 

above, the OCC and FDIC are expected to finalize 

rules that are substantively identical to this final 

rule, and the banking agencies are expected to 

coordinate in the interpretation of the rules. Section 

252.88(b) of the final rule, which addresses 

potential overlap between the agencies’ final rules, 

has been clarified in response to commenters’ 

requests. Section 252.88(b) is discussed in more 

detail below. 

69 12 CFR 217.402. See also 80 FR 49082 (Aug. 

14, 2015). 

70See proposed rule § 252.82(a)(1). 

71See 12 CFR 252.2. 

72See 12 U.S.C. 1841(a). 

73Commenters generally expressed a similar view 

with respect to the definition of ‘‘affiliate’’ of a 

covered entity as the term is used in sections 252.83 

and 84 of the proposed rule. That term which was 

similarly defined by reference to BHC Act control 

under the proposal. 

74See, e.g., 12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 

CFR 225.12(b), 225.22(d)(1). 

75 12 U.S.C. 1843(k)(4)(H)(iv); 12 CFR 225.171(a). 

76Board orders granting requests from FBOs for 

such treatment can be found at Regulation YY 

Foreign Banking Organization Requests, https://

www.federalreserve.gov/supervisionreg/regulationyy-foreign-banking-organization-requests.htm. 

II. Restrictions on QFCs of GSIBs 

A. Covered Entities (Section 252.82(b) of 

the Final Rule) 

The proposed rule applied to 

‘‘covered entities,’’ which included (a) 

any U.S. GSIB top-tier bank holding 

company, (b) any subsidiary of such a 

bank holding company that is not a 

‘‘covered bank,’’ and (c) the U.S. 

operations of any foreign GSIB, with the 

exception of any ‘‘covered bank.’’ In the 

proposal, the term ‘‘covered bank’’ was 

defined to include certain entities, such 

as certain national banks, that are 

supervised by the OCC. Covered banks 

would have been exempt from the 

requirements of the proposal because 

the OCC was expected to issue a 

proposed rule that would impose 

substantively identical requirements on 

covered banks.67 Commenters 

supported this exemption for QFCs of 

covered banks on the basis that these 

banks should not have to comply with 

two sets of rules.68

Under the proposal, covered entities 

included the entities identified as U.S. 

GSIB top-tier holding companies under 

the Board’s GSIB surcharge rule 69 as 

well as all subsidiaries of U.S. GSIBs 

(other than covered banks, as defined in 

the proposal).70 The definition of 

‘‘subsidiary’’ under the proposal 

included any company that is owned or 

controlled directly or indirectly by 

another company, where the term 

‘‘control’’ was defined by reference to 

the BHC Act.71 The BHC Act definition 

of control includes ownership, control 

or the power to vote 25 percent of any 

class of voting securities; control in any 

manner of the election of a majority of 

the directors or trustees; or exercise of 

a controlling influence over the 

management or policies.72

A few commenters urged the Board 

not to expand the scope of covered 

entity to include non-GSIBs, arguing 

that such an expansion would exceed 

the Board’s statutory authority under 

the Dodd-Frank Act. The Board is not 

including non-GSIBs as covered entities 

in its final rule. 

A number of commenters urged the 

Board to move to a financial 

consolidation standard to define a 

‘‘subsidiary’’ of a covered entity instead 

of BHC Act control.73 These 

commenters argued that, under 

Generally Accepted Accounting 

Principles, a company generally would 

consolidate an entity in which it holds 

a majority voting interest or over which 

it has the power to direct the most 

significant economic activities, to the 

extent it also holds a variable interest in 

the entity. In addition, commenters 

pointed out that financially 

consolidated subsidiaries are often 

subject to operational control and 

generally fully integrated into the 

parent’s enterprise-wide governance, 

policies, procedures, control 

frameworks, business strategies, 

information technology systems, and 

management systems. These 

commenters pointed out that the 

concept of BHC Act control was 

designed to serve other policy purposes 

(e.g., separation between banking and 

commercial activities). A number of 

commenters argued that BHC Act 

control may include an entity that is not 

under the day-to-day operational control 

of the GSIB and over whom the GSIB 

does not have the practical ability to 

require remediation of that entity’s 

QFCs to comply with the proposed rule. 

Moreover, commenters contended that 

entities that are not consolidated with a 

GSIB for financial reporting purposes 

are unlikely to raise the types of 

concerns for the orderly resolution of 

GSIBs targeted by the proposal. 

Commenters also noted that the ISDA 

master agreements and the Universal 

Protocol define ‘‘affiliate’’ by reference 

to ownership of a majority of the voting 

power of an entity or person. For these 

reasons, commenters urged the Board to 

define the term ‘‘subsidiary’’ of a 

covered entity based on financial 

consolidation under the final rule. 

Commenters urged that, regardless of 

whether a financial consolidation 

standard is adopted for the purpose of 

defining ‘‘subsidiary,’’ the final rule 

should exclude from the definition of 

‘‘covered entity’’ entities over which the 

covered entity does not exercise 

operational control, such as merchant 

banking portfolio companies, section 

2(h)(2) companies, joint ventures, 

sponsored funds as distinct from their 

sponsors or investment advisors, 

securitization vehicles, entities in which 

the covered entity holds only a minority 

interest and does not exert a controlling 

influence, and subsidiaries held 

pursuant to provisions for debt 

previously contracted in good faith 

(DPC subsidiaries).74 With respect to 

merchant banking authority, which 

allows a financial holding company to 

make a majority or minority investment 

in a portfolio company that is engaged 

in activity that is not financial in nature, 

certain commenters noted that section 

4(k) of the BHC Act prohibits the 

financial holding company from 

routinely managing or operating the 

portfolio company except as may be 

necessary or required to obtain a 

reasonable return on investment upon 

resale or other disposition of the 

portfolio company.75 Regarding 

sponsored funds, commenters argued 

that each sponsored or advised fund is 

a separate legal entity that is distinct 

from its sponsor or investment advisor 

regardless of whether the fund is 

consolidated and that the sponsor or 

advisor has no claim on the fund’s 

assets and may not use the fund’s assets 

for its benefit. 

In terms of foreign GSIBs, certain 

commenters argued that foreign banking 

organization (FBO) subsidiaries for 

which the FBO has been given special 

relief by Board order not to hold the 

subsidiary under an intermediate 

holding company should not be 

included in the definition of covered 

entity, even if such entities would be 

consolidated under financial 

consolidation principles.76 These 

commenters argued that, since neither 

the covered entity nor the foreign GSIB 

parent would provide credit support to 

these entities or name such entities in 

a cross-default provision in a QFC or 

related agreement, the failure of any of 

these types of entities would be unlikely 

to affect QFCs entered into by the 

covered entity or any other affiliate. 

These commenters further noted that 

the few such requests that have been 

granted by the Board often involved 

situations in which the FBO did not 

have sufficient operational control over 

the entity to ensure its compliance. 

Commenters also requested that U.S. 

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77 In the alternative, these commenters requested 

that the requirements only apply to U.S. branches 

of foreign GSIBs insofar as the home resolution 

regime and group resolution strategy would not 

adequately ensure that early termination rights, 

including cross-default rights against the U.S. IHC 

or subsidiaries, will not be triggered in resolution. 

78See final rule § 252.82(b). 

79The terms ‘‘state non-member bank’’ and ‘‘state 

savings association’’ are defined in the final rule by 

reference to section 3 of the Federal Deposit 

Insurance Act, 12 U.S.C. 1813. See final rule 

§ 252.81. 

80See final rule § 252.81. However, excluded 

banks do not include subsidiaries of a GSIB that are 

DPC subsidiaries or portfolio companies owned 

under the Small Business Investment Act of 1956, 

or public welfare investments. 

81Section 252.88(b) of the final rule, like the 

proposal, clarifies that covered entities are not 

required to conform covered QFCs with respect to 

a part of a covered QFC that an excluded bank also 

would be required to conform under the final rules 

that the OCC and FDIC are expected to issue. Such 

overlap could occur, for example, where a bank 

holding company that is a covered entity provides, 

as part of a master agreement governing swaps, a 

guaranty for a swap between a subsidiary that is an 

excluded bank and the excluded bank’s 

counterparty. See also 12 U.S.C 5390(c)(8)(D)(vi)(V), 

(viii). As requested by commenters, this provision 

in the final rule has been revised to further clarify 

its application. 82See final rule § 252.82(b)(1); 12 CFR 217.402. 83 12 CFR part 217, subpart E. 84 12 CFR 217.402, 217.404. 85 12 CFR 217.404. 86 12 U.S.C. 5365(a)(1)(B). 87See final rule § 252.82(b)(2). 

88Under the clean holding company component 

of the Board’s recent TLAC final rule, the top-tier 

holding companies of U.S. GSIBs would be 

prohibited from entering into direct QFCs with 

third parties. See 82 FR 8266, 8298 (Jan. 24, 2017). 

89See 12 CFR 252.2. 

90 12 U.S.C. 5390(c)(16). 

branches and agencies of FBOs be 

excluded from the definition of 

‘‘covered entity’’ and ‘‘U.S. operations’’ 

of foreign GSIBs where the foreign 

GSIB’s home country legal framework 

meets the objectives of the final rule. 

These commenters argued that the 

requirements of the final rule would be 

duplicative of requirements on a foreign 

GSIB’s U.S. branches and agencies if 

those entities’ QFCs are already subject 

to existing and substantially equivalent 

resolution powers in the home country, 

without a proportionate incremental 

benefit to their resolvability or 

reduction in risk to U.S. financial 

stability.77

Under the final rule, a ‘‘covered 

entity’’ is generally (a) any U.S. GSIB 

top-tier bank holding company; (b) any 

subsidiary of such a company that is not 

a national bank, Federal savings 

association, Federal branch, Federal 

agency, or FSI; and (c) the U.S. 

operations of any foreign GSIB that is 

not a national bank, Federal savings 

association, Federal branch, Federal 

agency, or FSI, with certain specified 

exceptions.78 ‘‘FSI’’ is defined to 

include state nonmember banks and 

state savings associations, which are 

supervised by the FDIC.79 National 

banks, Federal savings associations, 

Federal branches, Federal agencies, and 

FSIs that are exempt from the final rule 

are ‘‘excluded banks’’ under the final 

rule.80 Excluded banks are exempt from 

the requirements of this final rule 

because the OCC and FDIC are expected 

to issue final rules that would impose 

substantively identical requirements on 

excluded banks in the near future.81

U.S. GSIB bank holding companies. 

As in the proposal, covered entities 

include the entities identified as U.S. 

GSIB top-tier holding companies under 

the Board’s GSIB surcharge rule.82

Under the GSIB surcharge rule, a U.S. 

top-tier bank holding company subject 

to the advanced approaches rule 83 must 

determine whether it is a GSIB by 

applying a multifactor methodology 

established by the Board.84 The 

methodology evaluates a banking 

organization’s systemic importance on 

the basis of its attributes in five broad 

categories: Size, interconnectedness, 

cross-jurisdictional activity, 

substitutability, and complexity.85

Accordingly, the methodology 

provides a tool for identifying those 

banking organizations whose failure or 

material distress would pose especially 

large risks to the financial stability of 

the United States. Improving the orderly 

resolution and resolvability of such 

firms, including by reducing risks 

associated with their QFCs, would be an 

important step toward achieving the 

goals of the Dodd-Frank Act. The final 

rule’s focus on GSIBs is also in keeping 

with the Dodd-Frank Act’s mandate that 

more stringent prudential standards be 

applied to the most systemically 

important bank holding companies.86

Moreover, several of the attributes that 

feed into the determination of whether 

a given firm is a GSIB incorporate 

aspects of the firm’s QFC activity. These 

attributes include the firm’s total 

exposures, its intra-financial system 

assets and liabilities, its notional 

amount of over-the-counter derivatives, 

and its cross-jurisdictional claims and 

liabilities. 

Under the GSIB surcharge rule’s 

methodology, there are currently eight 

U.S. GSIBs: Bank of America 

Corporation, The Bank of New York 

Mellon Corporation, Citigroup Inc., 

Goldman Sachs Group, Inc., JPMorgan 

Chase & Co., Morgan Stanley Inc., State 

Street Corporation, and Wells Fargo & 

Company. This list may change in the 

future in light of changes to the relevant 

attributes of the current U.S. GSIBs and 

of other large U.S. bank holding 

companies. 

U.S. GSIB subsidiaries. Covered 

entities also include all subsidiaries of 

the U.S. GSIBs (other than excluded 

banks and the exceptions described 

below).87 U.S. GSIBs generally enter 

into QFCs through subsidiary legal 

entities rather than through the top-tier 

holding company.88 Therefore, in order 

to increase GSIB resilience and 

resolvability by addressing the potential 

obstacles to orderly resolution posed by 

QFCs, it is necessary to apply the 

restrictions to the U.S. GSIBs’ 

subsidiaries. In particular, to facilitate 

the resolution of a GSIB under an SPOE 

strategy, in which only the top-tier 

holding company would enter a 

resolution proceeding while its 

subsidiaries would continue to meet 

their financial obligations, or an MPOE 

strategy where an affiliate of an entity 

that is otherwise performing under a 

QFC enters resolution, it is necessary to 

ensure that those subsidiaries or 

affiliates do not enter into QFCs that 

contain cross-default rights that the 

counterparty could exercise based on 

the holding company’s or an affiliate’s 

entry into resolution (or that any such 

cross-default rights are stayed when the 

holding company enters resolution). 

Moreover, including U.S. and non-U.S. 

entities of a U.S. GSIB as covered 

entities should help ensure that such 

cross-default rights do not affect the 

ability of performing and solvent 

entities of a GSIB—regardless of 

jurisdiction—to remain outside of 

resolution proceedings. 

‘‘Subsidiary’’ in the final rule 

continues to be defined by reference to 

BHC Act control, as does the definition 

of ‘‘affiliate.’’ 89 The final rule does not 

define covered entities to include only 

those subsidiaries of GSIBs that are 

financially consolidated, as requested 

by certain commenters. Defining 

‘‘subsidiary’’ and ‘‘affiliate’’ by reference 

to BHC Act control is consistent with 

the definitions of those terms in the FDI 

Act and Title II of the Dodd-Frank Act. 

Specifically, Title II permits the FDIC, 

as receiver of a covered financial 

company or as receiver for its 

subsidiary, to enforce QFCs and other 

contracts of subsidiaries and affiliates, 

defined by reference to the BHC Act, 

notwithstanding cross-default rights 

based solely on the insolvency, financial 

condition, or receivership of the covered 

financial company.90 Therefore, 

maintaining consistent definitions of 

subsidiary and affiliate with Title II 

should better ensure that QFC stays may 

be effected in resolution under a U.S. 

Special Resolution Regime. As covered 

entities are subject to the activity 

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91For example, a covered entity may own more 

than 5 percent (and less than 25 percent) of the 

voting shares of a registered investment company 

for which the covered entity provides investment 

advisory, administrative, and other services, and 

has a number of director and officer interlocks, 

without controlling the fund for purposes of the 

BHC Act. See letter to H. Rodgin Cohen, Esq., 

Sullivan & Cromwell (First Union Corp.), from 

Jennifer J. Johnson, Secretary, Board of Governors 

of the Federal Reserve System (June 24, 1999) 

(finding that a bank holding company does not 

control a mutual fund for which it provides 

investment advisory and other services and that 

complies with the limitations of section 4(c)(7) of 

the BHC Act (12 U.S.C. 1843(c)(7)), so long as (i) 

the bank holding company reduces its interest in 

the fund to less than 25 percent of the fund’s voting 

shares after a six-month period, and (ii) a majority 

of the fund’s directors are independent of the bank 

holding company and the bank holding company 

cannot select a majority of the board); see also 12 

CFR 225.86(b)(3) (authorizing a financial holding 

company to organize, sponsor, and manage a 

mutual fund so long as (i) the fund does not 

exercise managerial control over the entities in 

which the fund invests, and (ii) the financial 

holding company reduces its ownership in the 

fund, if any, to less than 25 percent of the equity 

of the fund within one year of sponsoring the fund 

or such additional period as the Board permits). 

92See final rule § 252.82(b). 

93See final rule § 252.87(a). The Basel Committee 

on Banking Supervision (BCBS) is a committee of 

bank supervisory authorities established by the 

central bank governors of the Group of Ten 

countries in 1975. The committee’s membership 

consists of senior representatives of bank 

supervisory authorities and central banks from 

Argentina, Australia, Belgium, Brazil, Canada, 

China, France, Germany, Hong Kong SAR, India, 

Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, 

the Netherlands, Russia, Saudi Arabia, Singapore, 

South Africa, Spain, Sweden, Switzerland, Turkey, 

the United Kingdom, and the United States. In 

2011, the BCBS adopted the global methodology to 

identify global systemically important banking 

organizations and assess their systemic importance. 

See ‘‘Global systemically important banks: 

Assessment methodology and the additional loss 

absorbency requirement,’’ (Nov. 2011), http://

www.bis.org/publ/bcbs207.htm. In 2013, the BCBS 

published a revised document, which provides 

certain revisions and clarifications to the global 

methodology. See ‘‘Global systemically important 

banks: Updated assessment methodology and the 

higher loss absorbency requirement,’’ (July 2013), 

http://www.bis.org/publ/bcbs255.htm. 

In November 2016, the FSB and the BCBS 

published an updated list of banking organizations 

that are GSIBs under the assessment methodology. 

The list includes the eight U.S. GSIBs and the 

following 22 foreign banking organizations: 

Agricultural Bank of China, Bank of China, 

Barclays, BNP Paribas, China Construction Bank, 

Credit Suisse, Deutsche Bank, Groupe BPCE, 

Groupe Cre ́dit Agricole, Industrial and Commercial 

Bank of China Limited, HSBC, ING Bank, 

Mitsubishi UFJ FG, Mizuho FG, Nordea, Royal Bank 

of Scotland, Santander, Socie ́te ́ Ge ́ne ́rale, Standard 

Chartered, Sumitomo Mitsui FG, UBS, and 

Unicredit Group. See FSB, ‘‘2016 update of list of 

global systemically important banks’’ (November 

21, 2016), http://www.fsb.org/wp-content/uploads/

2016-list-of-global-systemically-important-banks-GSIBs.pdf. 

94See final rule § 252.87(a). 

95See proposed rule § 252.87(b). 

96See final rule § 252.87(b). Like the proposal, the 

final rule requires top-tier foreign banking 

organizations that are or control covered companies 

under Regulation QQ and that prepare or report the 

indicator amounts necessary to determine whether 

the organization is a GSIB to use the data to 

determine whether the organization has the 

characteristics of a GSIB. See id. at § 252.87(c). 

97The final rule makes clear that foreign banking 

organizations that are subject to similar notice and 

determination requirements under the Board’s 

TLAC rule (12 CFR 252.153(b)(5)–(b)(6)) may 

comply with the final rule by complying with the 

similar requirements in the Board’s TLAC rule. See 

id. at § 252.87(d). 

98 12 U.S.C. 5365(a)(1)(B). 

99Section 2(h)(2) of the BHC Act provides that the 

activity and ownership restrictions of section 4 of 

the BHC Act do not apply to shares of any company 

organized under the laws of a foreign country (or 

to shares held by such company in any company 

engaged in the same general line of business as the 

investor company or in a business related to the 

Continued 

restrictions and other requirements of 

the BHC Act, they should already know 

all of their BHC Act-controlled 

subsidiaries and be familiar with BHC 

Act control principles.91 Moreover, 

GSIBs should be able to rely on 

governance rights and other negotiated 

mechanisms to ensure that such 

subsidiaries conform their QFCs to the 

final rule’s requirements. 

The final rule excludes from the scope 

of covered entity DPC subsidiaries and 

merchant banking portfolio companies, 

as requested by certain commenters. 

The final rule also excludes portfolio 

companies held under section 4(k)(4)(I) 

of the BHC Act, which is an investment 

authority for insurance companies that 

is similar to merchant banking 

authority; portfolio companies held 

under the Small Business Investment 

Act of 1956; and certain companies 

engaged in the business of making 

public welfare investments.92 In 

general, subsidiaries held under these 

authorities are temporary, and there are 

legal restrictions and other limitations 

on the involvement of the GSIB in the 

operations of these kinds of 

subsidiaries. Moreover, it is unlikely 

that the resolution of a GSIB would 

cause the disorderly unwind of the 

QFCs of these subsidiaries in a manner 

that would impair the orderly resolution 

of the GSIB. Therefore, the impact of 

these exclusions should be relatively 

small while responding to commenter 

concerns and reducing burden. 

U.S. operations of foreign GSIBs. 

Finally, covered entities include almost 

all U.S. operations of foreign GSIBs— 

their U.S. subsidiaries, U.S. branches, 

and U.S. agencies that are not national 

banks, Federal savings associations, 

Federal branches, Federal agencies, or 

FSIs. The term ‘‘global systemically 

important foreign banking organization’’ 

(which this preamble shortens to 

‘‘foreign GSIB’’) is defined to include 

any FBO that it or the Board determines 

has the characteristics of a GSIB under 

the methodology for identifying GSIBs 

adopted by the Basel Committee on 

Banking Supervision (global 

methodology).93 Foreign GSIB also is 

defined to include a foreign banking 

organization or U.S. intermediate 

holding company required to be formed 

by the Board’s Regulation YY (IHC) that 

the Board determines would be 

designated as a GSIB under the Board’s 

GSIB surcharge rule if the entity were 

subject to the rule.94

As discussed above, the Board’s GSIB 

surcharge rule identifies the most 

systemically important banking 

organizations on the basis of their 

attributes in the categories of size, 

interconnectedness, cross-jurisdictional 

activity, substitutability, and 

complexity. While the GSIB surcharge 

rule applies only to U.S. bank holding 

companies, its methodology is equally 

well-suited to evaluating the systemic 

importance of foreign banking 

organizations. The global methodology 

generally evaluates the same attributes 

and would identify the same set of 

GSIBs as the Board’s methodology. 

Moreover, the use of the GSIB surcharge 

rule to identify both foreign GSIBs and 

U.S. GSIBs promotes a level playing 

field between U.S. and foreign banking 

organizations. 

The proposal would have required a 

top-tier foreign banking organization 

that is, or controls, a covered company 

under the Board’s resolution plan rule 

(Regulation QQ) to submit by January 1 

of each calendar year a notice of 

whether its home country supervisor (or 

other appropriate home country 

authority) has adopted standards 

consistent with the global methodology; 

whether the foreign banking 

organization prepares or reports the 

indicators used by the global 

methodology to identify GSIBs; and, if 

it does, whether the foreign banking 

organization has determined that it has 

the characteristics of a GSIB.95 In order 

to reduce burden, the notice 

requirement of the final rule only 

applies to foreign banking organizations 

that determine that they have the 

characteristics of a GSIB.96 The first 

notice required under this provision of 

the final rule is due January 1, 2018.97

As with U.S. GSIBs, the final rule’s 

focus on those foreign banking 

organizations that qualify as GSIBs is in 

keeping with the Dodd-Frank Act’s 

mandate that more stringent prudential 

standards be applied to the most 

systemically important banking 

organizations.98 The final rule, like the 

proposal, covers only the U.S. 

operations of foreign GSIBs. Like the 

proposal, the final rule excludes section 

2(h)(2) companies 99 and DPC branch 

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42894 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

business of the investor company) that is 

principally engaged in business outside the United 

States if such shares are held or acquired by a bank 

holding company organized under the laws of a 

foreign country that is principally engaged in the 

banking business outside the United States. 12 

U.S.C. 1841(h)(2). As with the similar exclusion to 

the Board’s U.S. IHC requirement (12 CFR 

252.153(b)(1)), the Board has taken into account the 

nonfinancial activities and affiliations of a foreign 

banking organization in permitting the exclusion for 

section 2(h)(2) companies from the final rule. Cf. 79 

FR 17240 (Mar. 27, 2014). 

100 12 CFR 252.2(j) and (x). 

101See final rule § 252.82(b)(3). 

102See 12 CFR 252.153(c)(1)–(2). 

103The laws and regulations imposed in non-U.S. 

jurisdictions that commenters noted were similar to 

the requirements of the proposed rule do not 

address resolution under U.S. insolvency or the 

U.S. Special Resolution Regimes. 

104See proposed rule § 252.83(a). For 

convenience, this preamble generally refers to ‘‘a 

covered entity’s QFCs’’ or ‘‘QFCs to which a 

covered entity is party’’ as shorthand to encompass 

the definition of ‘‘covered QFC.’’ 

105See proposed rule § 252.81. See also 12 U.S.C. 

5390(c)(8)(D). 

106However, certain commenters noted that 

underwriting, purchase, subscription, or placement 

agency agreements may contain rights that could be 

construed as cross-default rights or default rights. 

107 In the alternative, the commenter requested 

that such securities market transactions be excluded 

to the extent they are cleared, processed, and settled 

through (or subject to the rules of) FMUs through 

expansion of the proposed exemption for 

transactions with central counterparties. This 

aspect of the comment is addressed in the 

subsequent section discussing requests for 

expansion of the proposed exemption for 

transactions with central counterparties. 

subsidiaries, which are also types of 

entities excluded by regulation from 

being held under an IHC.100 To provide 

the same treatment for foreign GSIBs 

and U.S. GSIBs, the final rule also 

excludes DPC subsidiaries, merchant 

banking portfolio companies, portfolio 

companies held under section 4(k)(4)(I) 

of the BHC Act, portfolio companies 

held under the Small Business 

Investment Act of 1956, and public 

welfare investments of foreign GSIBs.101

The final rule does not exempt U.S. 

branches and agencies of foreign GSIBs 

or U.S. subsidiaries of foreign GSIBs 

that are not held under an IHC pursuant 

to a Board order, as requested by certain 

commenters. The exemptions by Board 

order were provided in the context of 

another rule, and the same 

considerations do not apply in the 

context of this final rule as these 

subsidiaries could impact the 

resolvability of the U.S. operations of a 

foreign GSIB.102 As with the coverage of 

subsidiaries of U.S. GSIBs, coverage of 

the U.S. operations of foreign GSIBs will 

enhance the prospects for an orderly 

resolution of the foreign GSIB and its 

U.S. operations. In particular, covering 

QFCs that involve any U.S. subsidiary, 

U.S. branch, or U.S. agency of a foreign 

GSIB will reduce the potentially 

disruptive cancellation of those QFCs if 

the foreign GSIB or any of its 

subsidiaries enters resolution, including 

resolution under the U.S. Bankruptcy 

Code or the U.S. Special Resolution 

Regimes.103

B. Covered QFCs (Section 252.82(c) of 

the Final Rule) 

General definition. The proposal 

applied to any ‘‘covered QFC,’’ 

generally defined as any QFC that a 

covered entity enters into, executes, or 

otherwise becomes party to with the 

person or an affiliate of the same 

person.104 Under the proposal, 

‘‘qualified financial contract’’ or ‘‘QFC’’ 

was defined as in section 210(c)(8)(D) of 

Title II of the Dodd-Frank Act and 

included swaps, repo and reverse repo 

transactions, securities lending and 

borrowing transactions, commodity 

contracts, and forward agreements.105

The application of the rule’s 

requirements to a ‘‘covered QFC’’ was 

one of the most commented upon 

aspects of the proposal. Certain 

commenters argued that the definition 

of QFC in Title II of the Dodd-Frank Act 

was overly broad and imprecise and 

could include agreements that market 

participants may not expect to be 

subject to the stay-and-transfer 

provisions of the U.S. Special 

Resolution Regimes. More generally, 

commenters argued that the proposed 

definition of QFC was too broad and 

would capture contracts that do not 

present any obstacles to an orderly 

resolution. Commenters urged the Board 

to exclude a variety of types of QFCs 

from the requirements of the final rule. 

In particular, a number of commenters 

urged the Board to exclude QFCs that do 

not contain any transfer restrictions or 

default rights, because these types of 

QFCs do not give rise to the risk that 

counterparties will exercise their 

contractual rights in a manner that is 

inconsistent with the provisions of the 

U.S. Special Resolution Regimes. 

Commenters named several examples of 

contracts that fall into this category, 

including cash market securities 

transactions, certain spot FX 

transactions (including securities 

conversion transactions), retail 

brokerage agreements, retirement/IRA 

account agreements, margin agreements, 

options agreements, FX forward master 

agreements, and delivery versus 

payment client agreements. Commenters 

contended that these types of QFCs 

number in the millions at some firms 

and that remediating these contracts to 

include the express provisions required 

by the final rule would require an 

enormous client outreach effort that 

would be extremely burdensome and 

costly while providing no meaningful 

resolution benefits. For example, 

commenters pointed out that for certain 

types of transaction, such as cash 

securities transactions, FX spot 

transactions, and retail QFCs, such a 

requirement could require an overhaul 

of existing market practice and 

documentation that affects hundreds of 

thousands, if not millions, of 

transactions occurring on a daily basis 

and significant education of the general 

market. 

Commenters also urged the Board to 

exclude QFCs that do not contain any 

default or cross-default rights but that 

may contain transfer restrictions. 

Commenters contended that examples 

of these types of agreements included 

investment advisory account agreements 

with retail customers, which contain 

transfer restrictions as required by 

section 205(a)(2) of the Investment 

Advisers Act of 1940, but no direct 

default or cross-default rights; 

underwriting agreements; 106 and client 

onboarding agreements. A few 

commenters provided prime brokerage 

or margin loan agreements as examples 

of transactions that generally do not 

have default or cross-default rights but 

may have transfer restrictions. Another 

commenter also requested the exclusion 

of securities market transactions that 

generally settle in the short term, do not 

impose ongoing or continuing 

obligations on either party after 

settlement, and do not typically include 

default rights.107 In these cases, 

commenters contended that remediation 

of these agreements would be 

burdensome with no meaningful 

resolution benefits. 

Commenters also argued for the 

exclusion of a number of other types of 

contracts from the definition of covered 

QFC in the final rule. In particular, a 

number of commenters urged the Board 

to exclude contracts issued in the 

capital markets or related to a capital 

market issuance, like warrants or a 

certificate representing a call option, 

typically on a security or a basket of 

securities. Although warrants issued in 

capital markets may contain direct 

default and cross-default rights as well 

as transfer restrictions, commenters 

argued that remediation of outstanding 

warrant agreements would be difficult, 

if not impossible, since remediation 

would require the affirmative vote of a 

substantial number of separate voting 

groups of holders to amend the terms of 

the instruments and that obtaining such 

consent could be expensive due to 

‘‘hold-out’’ premiums. Commenters also 

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108For example, some commenters urged the 

exclusion of all contracts requiring physical 

delivery between commercial entities in the course 

of regulatory business such as (i) contracts subject 

to a Federal Energy Regulatory Commission-filed 

tariff; (ii) contracts that are traded in markets 

overseen by independent system operators or 

regional transmission operators; (iii) retail electric 

contracts; (iv) contracts for storage or transportation 

of commodities; (v) contracts for financial services 

with regulated financial entities (e.g., brokerage 

agreements and futures account agreements); and 

(vi) public utility contracts. 

109One commenter also argued that utility and 

gas supply contracts are covered sufficiently in 

section 366 of the U.S. Bankruptcy Code. This 

section of the U.S. Bankruptcy Code places 

restrictions on the ability of a utility to ‘‘alter, 

refuse, or discontinue service to, or discriminate 

against, the trustee or the debtor solely on the basis 

of the commencement of a case under [the U.S. 

Bankruptcy Code] or that a debt owed by the debtor 

to such utility for service rendered before the order 

for relief was not paid when due.’’ 11 U.S.C. 366. 

The purpose and effect of section 252.84 of the final 

rule and section 366 of the U.S. Bankruptcy Code 

are different and therefore do not serve as 

substitutes. Section 366 of the U.S. Bankruptcy 

Code does not address cross-defaults or provide 

additional clarity regarding the application of the 

U.S. Special Resolution Regimes. Similarly, section 

252.84 of the final rule does not prevent a covered 

entity from entering into a covered QFC that allows 

the counterparty to exercise default rights once a 

covered entity that is a direct party either enters 

bankruptcy or fails to pay or perform under the 

QFC. 

110One commenter also requested exclusion of 

overnight transactions, particularly overnight 

repurchase agreements, arguing that such 

transactions present little risk of creating negative 

liquidity effects and that an express exclusion for 

such transactions may increase the likelihood that 

such contracts would remain viable funding sources 

in times of liquidity stress. Although the final rule 

does not exempt overnight repo transactions, the 

final rule may have limited if any effect on such 

transactions. As described below, the final rule 

provides a number of exemptions that may apply 

to overnight repo and similar transactions. 

Moreover, the restrictions on default rights in 

section 252.84 of the final rule do not apply to any 

right under a contract that allows a party to 

terminate the contract on demand or at its option 

at a specified time, or from time to time, without 

the need to show cause. See final rule § 252.81 

(defining ‘‘default right’’). Therefore, section 252.84 

does not restrict the ability of QFCs, including 

overnight repos, to terminate at the end of the term 

of the contract. 

111See final rule § 252.82(c). 

112See final rule § 252.81. See also 12 U.S.C. 

5390(c)(8)(D). 

113See final rule § 252.82(d). 

114See final rule § 252.88(c)(1). The final rule 

defines retail customer or counterparty by reference 

to the Board’s Regulation WW. See 12 CFR 249.3; 

see also FR 2052a, https://www.federalreserve.gov/ 

reportforms/forms/FR_2052a20161231_f.pdf. 

Covered entities should be familiar with this 

definition and its application. 

argued that since these instruments are 

traded in the markets, it is not possible 

for an issuer to ascertain whether a 

particular investor in such instruments 

has also entered into other QFCs with 

the dealer or any of its affiliates (or vice 

versa) for purposes of complying with 

the proposed mechanism for 

remediation of existing QFCs. 

Commenters argued that issuers would 

be able to comply if the final rule’s 

requirements applied only on a 

prospective basis with respect to new 

issuances, since new investors could be 

informed of the terms of the warrant at 

the time of purchase and no after-thefact consent would be required, as is the 

case with existing outstanding warrants. 

Commenters expressed the view that 

prospective application of the final 

rule’s requirements to warrants would 

allow time for firms to develop new 

warrant agreements and warrant 

certificates, to engage in client outreach 

efforts, and to make any appropriate 

public disclosures. Commenters 

suggested that the requirements of the 

final rule should only apply to such 

instruments issued after the effective 

date of the final rule and that the 

compliance period for such new 

issuances be extended to allow time to 

establish new issuance programs that 

comply with the final rule’s 

requirements. Other examples of 

contracts in this category given by 

commenters include contracts with 

special purpose vehicles that are multiissuance note platforms, which 

commenters urged would be difficult to 

remediate for similar reasons to 

warrants other than on a prospective 

basis. 

Commenters also urged the exclusion 

of contracts for the purchase of 

commodities in the ordinary course of 

business (e.g., utility and gas energy 

supply contracts) or physical delivery 

commodity contracts more broadly.108

In general, commenters argued that 

exempting these contracts would not 

increase systemic risk but would help 

ensure the smooth operation of utilities 

and the physical commodities 

markets.109 Commenters indicated that 

failure to make commodity deliveries on 

time can result in the accrual of 

damages and penalties beyond the 

accrual of interest (e.g., demurrage and 

other fines in shipping) and that 

counterparties may not be able to obtain 

appropriate compensation for 

amendment of default rights due to the 

difficulty of pricing the risk associated 

with an operational failure due to the 

failure to deliver a commodity on time. 

Commenters also contended that 

agreements with power operators 

governed by regulatory tariffs would be 

difficult, if not impossible, to 

remediate.110

The final rule applies to any ‘‘covered 

QFC,’’ which generally is defined as any 

‘‘in-scope QFC’’ that a covered entity 

enters into, executes, or to which the 

covered entity otherwise becomes a 

party.111 As under the proposal, 

‘‘qualified financial contract’’ or ‘‘QFC’’ 

is defined in the final rule as in section 

210(c)(8)(D) of Title II of the Dodd-Frank 

Act and includes swaps, repo and 

reverse repo transactions, securities 

lending and borrowing transactions, 

commodity contracts, and forward 

agreements.112 Parties that enter into 

contracts with covered entities have 

been potentially subject to the stay-andtransfer provisions of Title II of the 

Dodd-Frank Act since its enactment. 

Consistent with Title II, the final rule 

does not exempt QFCs involving 

physical commodities. However, as 

explained below, the final rule responds 

to concerns regarding the smooth 

operation of physical commodities end 

users and markets by allowing 

counterparties to terminate QFCs based 

on the failure to pay or perform. 

In response to concerns raised by 

commenters, the final rule exempts 

QFCs that have no transfer restrictions 

or default rights, as these QFCs have no 

provisions that the rule is intended to 

address. The final rule effects this 

exemption by limiting the scope of 

QFCs potentially subject to the rule to 

those QFCs that explicitly restrict the 

transfer of a QFC from a covered entity 

or explicitly provide default rights that 

may be exercised against a covered 

entity (in-scope QFCs).113 This change 

addresses a major concern raised by 

commenters regarding the overbreadth 

of the definition of ‘‘covered QFC’’ in 

the proposal. The change also mitigates 

the burden of complying with the 

proposed rule without undermining its 

purpose by not requiring covered 

entities to conform contracts that do not 

contain the types of default rights and 

transfer restrictions that the final rule is 

intended to address. The Board has 

declined, however, to exclude QFCs that 

have transfer restrictions (but no default 

rights or cross-default rights), as 

requested by certain commenters, as 

such QFCs would have provisions (i.e., 

transfer restrictions) that are subject to 

the requirements of the final rule and 

could otherwise impede the orderly 

resolution of a covered entity or its 

affiliate. 

The final rule provides that a covered 

entity is not required to conform certain 

investment advisory contracts described 

by commenters (i.e., investment 

advisory contracts with retail advisory 

customers 114 of the covered entity that 

only contain the transfer restrictions 

required by section 205(a) of the 

Investment Advisers Act). The final rule 

also exempts existing warrants 

evidencing a right to subscribe or to 

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115See final rule § 252.88(c)(2). Warrants issued 

after the effective date of the final rule are not 

excluded from the requirements of the final rule. 

116These exemptions are not interpretations of 

the definition of QFC. 

117See final rule § 252.88(d). 

118See proposed rule §§ 252.83(a), 225.84(a). 

119See 12 CFR 252.2 (defining ‘‘affiliate’’). 

120See 12 U.S.C. 1841(k). 

121One commenter believed that the burden of 

conforming contracts with all affiliates of a 

counterparty would be too great, whether defined 

in terms of BHC Act control or financial 

consolidation principles, even though the burden 

would be reduced by definition in terms of 

financial consolidation principles. 

122See final rule § 252.82(c). 

123See final rule § 252.81. 

124See proposed rule § 252.88(a). 

125Commenters argued that, in the Europeanstyle principal-to-principal clearing model, the 

clearing member faces the CCP on one swap (the 

‘‘CCP-facing leg’’), and the clearing member, 

frequently a covered entity, faces the client on an 

otherwise identical, offsetting swap (the ‘‘clientfacing leg’’). Under the proposed rule, only the CCPfacing leg of the transaction was excluded, even 

though the client-facing leg is necessary to the 

mechanics of clearing and is only entered into by 

the clearing member to effectuate the cleared 

transaction. Commenters argued that the proposed 

rule thus treated two pieces of the same transaction 

differently, which could result in an imbalance in 

insolvency or resolution and that the possibility of 

such an imbalance for the clearing member could 

expose the clearing member to unnecessary and 

undesired market risk. Commenters urged the Board 

to adopt the same approach taken under Section 2 

of the Universal Protocol, which allows the clientfacing leg of the cleared swap with the clearing 

member that is a covered entity to be closed out 

substantially contemporaneously with the CCPfacing leg in the event the CCP were to take action 

to close out the CCP-facing leg. 

Some commenters requested clarification that 

transactions between a covered entity client and its 

clearing member (as opposed to transactions where 

the covered entity is the clearing member) would 

be subject to the rule’s requirements, since this 

would be consistent with the Universal Protocol. As 

explained in this section, the exemption in the final 

rule regarding CCPs does not depend on whether 

the covered entity is a clearing member or a client. 

A covered QFC—generally a QFC to which a 

covered entity is a party—is exempted from the 

requirements of the final rule if a CCP is also a 

party. 

otherwise acquire a security of a 

covered entity or its affiliate.115 The 

Board has determined to exclude these 

types of agreements since there is 

persuasive evidence that these types of 

contracts would be burdensome to 

conform and that it is unlikely that 

excluding such contracts from the 

requirements of the final rule would 

impair the orderly resolution of a 

GSIB.116

The final rule also provides the Board 

with authority to exempt one or more 

covered entities from conforming 

certain contracts or types of contracts to 

the final rule after considering, in 

addition to any other factor the Board 

deems relevant, the burden the 

exemption would relieve and the 

potential impact of the exemption on 

the resolvability of the covered entity or 

its affiliates.117 Covered entities that 

request that the Board exempt 

additional contracts from the final rule 

should be prepared to provide 

information in support of their requests. 

The Board expects to consult as 

appropriate with the FDIC and OCC 

during its consideration of any such 

request. 

Definition of counterparty. As noted 

above, the proposal applied to any 

‘‘covered QFC,’’ generally defined as a 

QFC that a covered entity enters after 

the effective date and a QFC entered 

earlier, but only if the covered entity or 

its affiliate enters a new QFC with the 

same person or an affiliate of the same 

person.118 ‘‘Affiliate’’ in the proposal 

was defined in the same manner as 

under the BHC Act to mean any 

company that controls, is controlled by, 

or is under common control with 

another company.119 As noted above, 

‘‘control’’ under the BHC Act means the 

power to vote 25 percent or more of any 

class of voting securities; control in any 

manner the election of a majority of the 

directors or trustees; or exercise of a 

controlling influence over the 

management or policies.120

Commenters argued that requiring 

remediation of existing QFCs of a 

person if the GSIB entered into a new 

QFC with an affiliate of the person 

would make compliance with the 

proposed rule overly burdensome.121

These arguments were similar to 

commenters’ arguments regarding the 

definition of ‘‘subsidiary’’ of a covered 

entity, which were discussed above. 

Commenters pointed out that this 

requirement would demand that the 

GSIB track each counterparty’s 

organizational structure by relying on 

information provided by counterparties, 

which would subject counterparties to 

enhanced tracking and reporting 

burdens. Commenters requested that the 

phrase ‘‘or affiliate of the same person’’ 

be deleted from the definition of 

covered QFC and argued that such a 

modification would not undermine the 

ultimate goals of the rule since existing 

QFCs with the counterparty’s affiliate 

would still have be remediated if the 

covered entity or its affiliate enters into 

a new QFC with that counterparty 

affiliate. In the alternative, commenters 

argued that an affiliate of a counterparty 

be established by reference to financial 

consolidation principles rather than 

BHC Act control, since counterparties 

may not be familiar with BHC Act 

control. Commenters argued that many 

counterparties are not regulated bank 

holding companies and would be 

unfamiliar with BHC Act control. 

Certain commenters also argued that a 

new QFC with one fund in a fund 

family should not result in other funds 

in the fund family being required to 

conform their pre-existing QFCs with 

the covered entity or an affiliate. 

The final rule’s definition of ‘‘covered 

QFC’’ has been modified to address the 

concerns raised by commenters. In 

particular, the final rule provides that a 

covered QFC includes a QFC that the 

covered entity entered, executed, or 

otherwise became a party to before 

January 1, 2019, if the covered entity or 

any affiliate that is a covered entity or 

excluded bank also enters, executes, or 

otherwise becomes a party to a QFC 

with the same person or a consolidated 

affiliate of the same person on or after 

January 1, 2019.122 The final rule 

defines ‘‘consolidated affiliate’’ by 

reference to financial consolidation 

principles.123 As commenters pointed 

out, counterparties will already track 

and monitor financially consolidated 

affiliates. Moreover, exposures to a nonconsolidated affiliate may be captured 

as a separate counterparty (e.g., when 

the non-consolidated affiliate enters a 

new QFC with the covered entity). As a 

consequence, modifying the coverage of 

affiliates in this manner addresses 

concerns raised by commenters 

regarding burden while still providing 

sufficient incentives to remediate 

existing covered QFCs. 

The definition of ‘‘covered QFC’’ is 

intended to limit the restrictions of the 

final rule to those financial transactions 

whose disorderly unwind has 

substantial potential to frustrate the 

orderly resolution of a GSIB, as 

discussed above. By adopting the DoddFrank Act’s definition of QFC, with the 

modifications described above, the final 

rule generally extends stay-and-transfer 

protections to the same types of 

transactions as Title II of the DoddFrank Act. In this way, the final rule 

enhances the prospects for an orderly 

resolution in bankruptcy and under the 

U.S. Special Resolution Regimes. 

Exclusion of cleared QFCs. The 

proposal excluded from the definition of 

‘‘covered QFC’’ all QFCs that are cleared 

through a central counterparty (CCP).124

Commenters generally expressed 

support for this exclusion, but some 

commenters requested that the Board 

broaden this exclusion in the final rule. 

In particular, a number of commenters 

urged the Board to exclude the ‘‘clientfacing leg’’ of a cleared swap where a 

clearing member faces a CCP on one leg 

of the transaction and faces the client on 

an otherwise identical offsetting 

transaction.125 One commenter 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42897 

126Letter to Robert deV. Frierson, Secretary, 

Board of Governors of the Federal Reserve System, 

from James M. Cain, Sutherland Asbill & Brennan 

LLP, writing on behalf of the eleven Federal Home 

Loan Banks, at 2 (Aug. 5, 2016). 

127 12 CFR 217.2. 

128Letter to Robert deV. Frierson, Secretary, 

Board of Governors of the Federal Reserve System, 

from Walt L. Lukken, President and CEO, Futures 

Industry Association, at 8–9 (Aug. 5, 2016) (citing 

Principles of Financial Market Infrastructures (Apr. 

2012), published by the Committee on Payment and 

Settlement Systems and the International 

Organization of Securities Commissions, at 9). 

129 Id. at 9. 

130 12 U.S.C. 5462(6). In general, Title VIII of the 

Dodd-Frank Act defines ‘‘financial market utility’’ 

to mean any person that manages or operates a 

multilateral system for the purpose of transferring, 

clearing, or settling payments, securities, or other 

financial transactions among financial institutions 

or between financial institutions and the person. Id. 131As discussed above, one commenter who 

recommended an exclusion of securities market 

transactions that generally settle in the short term, 

do not impose ongoing or continuing obligations on 

either party after settlement, and do not typically 

include the default rights targeted by this rule, 

requested this treatment in the alternative. 132Letter to Robert deV. Frierson, Secretary, 

Board of Governors of the Federal Reserve System, 

from Larry E. Thompson, Vice Chairman and 

General Counsel, The Depository Trust & Clearing 

Corporation, at 6 (Aug. 5, 2016). 

133See final rule § 252.81. See also 12 CFR 217.2. 

134See final rule § 252.88(a)(2). In response to 

commenters, the final rule uses the definition of 

FMU in Title VIII of the Dodd-Frank Act and may 

apply, for purposes of the final rule, to entities 

regardless of jurisdiction. The definition of FMU in 

the final rule includes a broader set of entities, in 

addition to CCPs. However, the definition in the 

final rule does not include depository institutions 

that are engaged in carrying out banking-related 

activities, including providing custodial services for 

tri-party repurchase agreements. The definition also 

explicitly excludes certain types of entities (e.g., 

registered futures associations, swap data 

repositories) and other types of entities that perform 

certain functions for or related to FMUs (e.g., 

futures commission merchants). 

requested the Board confirm its 

understanding that ‘‘FCM agreements,’’ 

which the commenter defined as futures 

and cleared swaps agreements with a 

futures commission merchant, are 

excluded because FCM agreements ‘‘are 

only QFCs to the extent that they relate 

to futures and swaps and, since futures 

and cleared swaps are excluded, the 

FCM Agreements are also excluded.’’ 126

The commenter requested, in the 

alternative, that the final rule expressly 

exclude such agreements. 

A few commenters requested that the 

Board modify the definition of ‘‘central 

counterparty,’’ which was defined to 

mean ‘‘a counterparty (for example, a 

clearing house) that facilitates trades 

between counterparties in one or more 

financial markets by either guaranteeing 

trades or novating trades’’ in the 

proposal.127 These commenters argued 

that a CCP does far more than 

‘‘facilitate’’ or ‘‘guarantee’’ trades and 

that a CCP ‘‘interposes itself between 

counterparties to contacts traded in one 

or more financial markets, becoming the 

buyer to every seller and the seller to 

every buyer and thereby ensuring the 

performance of open contracts.’’ 128 As 

an alternative definition of CCP, these 

commenters suggested the final rule 

should define central counterparty to 

mean: ‘‘an entity (for example, a 

clearinghouse or similar facility, system, 

or organization) that, with respect to an 

agreement, contract, or transaction: (i) 

Enables each party to the agreement 

contract, or transaction to substitute, 

through novation or otherwise, the 

credit of the CCP for the credit of the 

parties; and (ii) arranges or provides, on 

a multilateral basis, for the settlement or 

netting of obligations resulting from 

such agreements, contracts, or 

transactions executed by participants in 

the CCP.’’ 129

Commenters also urged the Board to 

exclude from the requirements of the 

final rule all QFCs that are cleared, 

processed, or settled through the 

facilities of an FMU, as defined in 

section 803(6) of the Dodd-Frank Act,130

or that are entered into subject to the 

rules of an FMU.131 For example, 

commenters argued that QFCs with 

FMUs, such as the provision of an 

extension of credit by a central 

securities depository (CSD) to a covered 

entity that is a member of the CSD in 

connection with the settlement of 

securities transactions, should be 

excluded from the requirements of the 

final rule. Commenters contended that, 

similar to CCPs, the relationship 

between a covered entity and FMU is 

governed by the rules of the FMU and 

that there are no market alternatives to 

continuing to transact with FMUs. 

Commenters argued that FMUs 

generally should be excluded for the 

same reasons as CCPs and that a broader 

exemption to cover FMUs would serve 

to mitigate the systemic risk of a GSIB 

in distress, an underlying objective of 

the rule’s requirements. Commenters 

contended that such an exclusion would 

be consistent with the treatment of 

FMUs under U.K. regulations and 

German law. Some commenters also 

requested that related or underlying 

agreements to CCP-cleared QFCs and 

QFCs entered into with other FMUs also 

be excluded, since such agreements 

‘‘form an integrated whole with [those] 

QFCs’’ and such an exemption would 

facilitate the continued expansion of the 

clearing and settlement framework and 

the benefits of such a framework.132 One 

commenter urged that the final rule 

should not in any manner restrict an 

FMU’s ability to close out a defaulting 

clearing member’s portfolio, including 

potential liquidation of cleared 

contracts. 

The issues that the final rule is 

intended to address with respect to noncleared QFCs may also exist in the 

context of centrally cleared QFCs. 

However, clearing through a CCP 

provides unique benefits to the financial 

system while presenting unique issues 

related to the cancellation of cleared 

contracts. Accordingly, the Board 

continues to believe it is appropriate to 

exclude centrally cleared QFCs, in light 

of differences between cleared and noncleared QFCs with respect to contractual 

arrangements, counterparty credit risk, 

default management, and supervision. 

The Board has not extended the 

exclusion for CCPs to the client-facing 

leg of a cleared transaction because 

bilateral trades between a GSIB and a 

non-CCP counterparty are the types of 

transactions that the final rule intends 

to address and because nothing in the 

final rule would prohibit a covered 

entity clearing member and a client 

from agreeing to terminate or novate a 

trade to balance the clearing member’s 

exposure. The final rule continues to 

define central counterparty as a 

counterparty that facilitates trades 

between counterparties in one or more 

financial markets by either guaranteeing 

trades or novating trades, which is a 

broad definition that should be familiar 

to market participants as it is used in 

the regulatory capital rules.133

The final rule also makes clear that, 

if one or more FMUs are the only 

counterparties to a covered QFC, the 

covered entity is not required to 

conform the covered QFC to the final 

rule.134 Therefore, an FMU’s default 

rights and transfer restrictions under the 

covered QFC are not affected by the 

final rule. However, this exclusion 

would not include a covered QFC with 

a non-FMU counterparty, even if the 

QFC is settled by an FMU or if the FMU 

is a party to such QFC, because the final 

rule is intended to address default rights 

of non-FMU parties. For example, if two 

covered entities engage in a bilateral 

QFC that is facilitated by an FMU and, 

in the course of this facilitation each 

covered entity maintains a QFC solely 

with the FMU, then the final rule would 

not apply to each QFC between the 

FMU and each covered entity but the 

requirements of the final rule would 

apply to the bilateral QFC between the 

two covered entities. This approach 

ensures that QFCs that are directly with 

FMUs are treated in a manner similar to 

transactions between covered entities 

and CCPs, but also ensures that QFCs 

conducted by covered entities that are 

related to the direct QFC with the FMU 

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42898 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

135See proposed rule § 252.86. 

136See proposed rule § 252.81. 

137 12 U.S.C. 5390(c)(8)(D)(viii); see also 12 U.S.C. 

1821(e)(8)(D)(vii); 109 H. Rpt. 31, Prt. 1 (April 8, 

2005) (explaining that a ‘‘master agreement for one 

or more securities contracts, commodity contracts, 

forward contracts, repurchase agreements or swap 

agreements will be treated as a single QFC under 

the FDIA or the [Federal Credit Union Act] (but 

only with respect to the underlying agreements are 

themselves QFCs)’’). 

138See proposed rule § 252.86(a). With respect to 

a U.S. branch or U.S. agency of a foreign GSIB, a 

multi-branch master agreement that is a covered 

QFC solely because the master agreement permits 

agreements or transactions that are QFCs to be 

entered into at one or more U.S. branches or U.S. 

agencies of the foreign GSIB was considered a 

covered QFC for purposes of the proposal only with 

respect to such agreements or transactions booked 

at such U.S. branches and U.S. agencies or for 

which a payment or delivery may be made at such 

U.S. branches or U.S. agencies. 139See final rule § 252.86. 

remain subject to the final rule’s 

requirements. 

The final rule does not explicitly 

exclude futures and cleared swaps 

agreements with a futures commission 

merchant, as requested by a commenter. 

The nature and scope of the requested 

exclusion is unclear, and, therefore, it is 

unclear whether the exclusion would be 

necessary, on the one hand, or 

overbroad, on the other hand. However, 

the final rule makes a number of other 

clarifications and exemptions that may 

help address the commenter’s concern 

regarding FCM agreements. 

Exclusion of certain QFCs under 

multi-branch master agreements of 

foreign banking organizations. To avoid 

imposing unnecessary restrictions on 

QFCs that are not closely connected to 

the United States, the proposal excluded 

from the definition of ‘‘covered QFC’’ 

certain QFCs of foreign GSIBs that lack 

a close connection to the foreign GSIB’s 

U.S. operations.135 The proposed 

definition of ‘‘QFC’’ included master 

agreements that apply to QFCs.136

Master agreements are contracts that 

contain general terms that the parties 

wish to apply to multiple transactions 

between them; having executed the 

master agreement, the parties can then 

include those terms in future contracts 

through reference to the master 

agreement. Moreover, the Dodd-Frank 

Act’s definition of ‘‘qualified financial 

contract,’’ which the proposal would 

adopt, treats master agreements for 

QFCs together with all supplements to 

the master agreement (including 

underlying transactions) as a single 

QFC.137

Foreign GSIBs have master 

agreements that permit transactions to 

be entered into both at a U.S. branch or 

U.S. agency of the foreign GSIB and at 

a non-U.S. location of the foreign GSIB 

(such as a foreign branch). 

Notwithstanding the proposal’s general 

treatment of a master agreement and all 

QFCs thereunder as a single QFC, the 

proposal would have excluded QFCs 

under such a ‘‘multi-branch master 

agreement’’ that are not booked at a 

covered entity and for which no 

payment or delivery may be made at a 

covered entity.138 Under the proposal, a 

multi-branch master agreement was a 

covered QFC with respect to QFC 

transactions that are booked at a covered 

entity or for which payment or delivery 

may be made at a covered entity. 

Commenters expressed support for 

this exclusion, but requested that the 

requirement exclude from the definition 

of covered QFC those transactions under 

master agreements where payment and 

deliveries may be made by or to the U.S. 

branch or agency so long as the 

transactions or assets are not booked in 

the U.S. branch or agency. These 

commenters argued that the ability to 

make payments or delivery alone does 

not make a QFC sufficiently closely 

connected to the United States to raise 

the concerns about resolution that the 

rule is intended to address. Commenters 

also argued that the requirement to 

include new contractual terms in a QFC 

where payment or delivery may occur in 

the United States would require foreign 

GSIBs to amend many additional QFCs 

booked abroad, many of which must 

also be amended to comply with 

contractual stay requirements of the 

foreign GSIBs’ home country regulatory 

regimes. Commenters argued that 

amending such QFCs under multibranch master agreements that are not 

booked in the United States would 

require some foreign GSIBs to amend 

thousands of contracts at significant cost 

and would impose a disproportionate 

burden on foreign GSIBs as compared to 

U.S. GSIBs. These commenters argued 

this would impose a significant burden 

on non-U.S. covered entities with no 

benefit to U.S. financial stability, as 

these QFCs would not be expected to be 

subject to a U.S. resolution regime. 

One commenter also recommended 

that multi-branch master agreements be 

treated as a single QFC, rather than 

requiring the application of different 

requirements to different transactions 

thereunder, so as to align the rule’s 

requirements with current industrystandard documentation and to avoid 

additional implementation hurdles and 

costs. The commenter recommended 

that the entirety of a multi-branch 

master agreement and underlying 

transactions be a covered QFC if a new 

QFC with the counterparty or its 

consolidated affiliates is booked to the 

U.S. branch or agency after the 

compliance date or if a new QFC is 

entered into with an affiliate of the U.S. 

branch or agency that is also subject to 

the requirements. 

The final rule has been modified from 

the proposal to address the concerns 

raised by commenters. In particular, the 

final rule provides that, with respect to 

a U.S. branch or U.S. agency of a foreign 

GSIB, a foreign GSIB multi-branch 

master agreement that is a covered QFC 

solely because the master agreement 

permits agreements or transactions that 

are QFCs to be entered into at one or 

more U.S. branches or U.S. agencies of 

the foreign GSIB will be considered a 

covered QFC for purposes of this 

subpart only with respect to such 

agreements or transactions booked at 

such U.S. branches and U.S. 

agencies.139 The final rule does not 

provide that such an agreement will be 

a covered QFC solely because payment 

or delivery may be made at such U.S. 

branch or agency. These modifications 

will avoid imposing unnecessary 

restrictions on QFCs that are not closely 

connected to the United States and will 

mitigate burden and reduce costs on 

foreign GSIBs without undermining the 

purpose of the final rule. The purpose 

of this exclusion is to help ensure that, 

where a foreign GSIB has a multi-branch 

master agreement, the foreign GSIB will 

only have to conform those QFCs 

entered into under the multi-branch 

master agreement that could have the 

most direct effect on the covered U.S. 

branch or U.S. agency of the foreign 

GSIB and that could therefore have the 

most direct effect on the resolution of 

the foreign GSIB and the financial 

stability of the United States. 

The final rule does not, as requested 

by one commenter, deem the entirety of 

a multi-branch master agreement to be 

a covered QFC if a new QFC with the 

counterparty (or its consolidated 

affiliate) is booked to the covered entity 

or its affiliate. Many commenters 

supported excluding transactions from 

multi-branch master netting agreements 

that are not closely connected to the 

United States. In contrast to the 

proposal and these comments, the 

modification requested by this 

commenter would require transactions 

that are not booked in the United States 

or otherwise connected to the United 

States to be conformed to the 

requirements of the final rule. The 

commenter’s concerns regarding costs 

associated with potentially breaking 

netting sets may nonetheless be 

addressed through adherence to the 

Universal Protocol or the U.S. Protocol, 

which are discussed below. 

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140These commenters argued that, to the extent 

central banks and sovereign entities are unable or 

unwilling to agree to limitations on their QFC 

default rights, application of the rule’s requirements 

to QFCs with these entities creates a significant 

disincentive for these entities to enter into QFCs 

with covered entities, resulting in the loss of 

valuable counterparties in a way that will hinder 

market liquidity and covered entity risk 

management. 

141See proposed rule § 252.81. 

142See id. 

143See id. 

144See id. 

145See proposed rule §§ 252.81, 252.84. 

QFCs with Central Banks and 

Sovereign Entities. The proposal 

included covered QFCs with sovereign 

entities and central banks, consistent 

with Title II of the Dodd-Frank Act and 

the FDI Act. Commenters urged the 

Board to exclude QFCs with central 

bank and sovereign counterparties from 

the final rule. Commenters argued that 

sovereign entities might not be willing 

to agree to limitations on their QFC 

default rights and noted that other 

countries’ measures, such as those of the 

United Kingdom and Germany, 

consistent with their governing laws, 

exclude central banks and sovereign 

entities. Commenters contended that 

central banks and sovereign entities are 

sensitive to financial stability concerns 

and resolvability goals, thus reducing 

the concern that they would exercise 

default rights in a way that would 

undermine resolvability of a GSIB or 

financial stability. Commenters 

indicated it was unclear whether central 

banks or sovereign entities would be 

permitted under applicable statutes to 

enter into QFCs with limited default 

rights, but did not provide specific 

examples of such statutes.140

Commenters further noted that these 

entities did not participate in the 

development of the Universal Protocol 

and that the Universal Protocol does not 

provide a viable mechanism for 

compliance with the final rule by these 

entities. 

The Board continues to believe that 

covering QFCs with sovereigns and 

central banks under the final rule is an 

important requirement and has not 

modified the final rule to address the 

requests made by commenters. 

Excluding QFCs with sovereigns and 

central banks would be inconsistent 

with Title II of the Dodd-Frank Act and 

the FDI Act. Moreover, the mass 

termination of such QFCs has the 

potential to undermine the resolution of 

a GSIB and the financial stability of the 

United States. The final rule provides 

covered entities two years to conform 

covered QFCs with central banks and 

sovereigns (as well as certain other 

counterparties, as discussed below). 

This additional time should provide 

covered entities sufficient time to 

develop separate conformance 

mechanisms for sovereigns and central 

banks, if necessary. 

C. Definition of ‘‘Default Right’’ (Section 

252.81 of the Final Rule) 

As discussed above, a party to a QFC 

generally has a number of rights that it 

can exercise if its counterparty defaults 

on the QFC by failing to meet certain 

contractual obligations. These rights are 

generally, but not always, contractual in 

nature. One common default right is a 

setoff right: The right to reduce the total 

amount that the non-defaulting party 

must pay by the amount that its 

defaulting counterparty owes. A second 

common default right is the right to 

liquidate pledged collateral and use the 

proceeds to pay the defaulting party’s 

net obligation to the non-defaulting 

party. Other common rights include the 

ability to suspend or delay the nondefaulting party’s performance under 

the contract or to accelerate the 

obligations of the defaulting party. 

Finally, the non-defaulting party 

typically has the right to terminate the 

QFC, meaning that the parties would 

not make payments that would have 

been required under the QFC in the 

future. The phrase ‘‘default right’’ in the 

proposed rule was broadly defined to 

include these common rights as well as 

‘‘any similar rights.’’ 141 Additionally, 

the definition included all such rights 

regardless of source, including rights 

existing under contract, statute, or 

common law. 

However, the proposed definition of 

default right excluded two rights that 

are typically associated with the 

business-as-usual functioning of a QFC. 

First, same-day netting that occurs 

during the life of the QFC in order to 

reduce the number and amount of 

payments each party owes the other was 

excluded from the definition of ‘‘default 

right.’’ 142 Second, contractual margin 

requirements that arise solely from the 

change in the value of the collateral or 

the amount of an economic exposure 

were also excluded from the 

definition.143 The reason for these 

exclusions was to leave such rights 

unaffected by the proposed rule. The 

proposal’s preamble explained that such 

exclusions were appropriate because the 

proposal was intended to improve 

resolvability by addressing default 

rights that could disrupt an orderly 

resolution, not to interrupt the parties’ 

business-as-usual interactions under a 

QFC. 

However, certain QFCs are also 

commonly subject to rights that would 

increase the amount of collateral or 

margin that the defaulting party (or a 

guarantor) must provide upon an event 

of default. The financial impact of such 

default rights on a covered entity could 

be similar to the impact of the 

liquidation and acceleration rights 

discussed above. Therefore, the 

proposed definition of ‘‘default right’’ 

included such rights (with the exception 

discussed in the previous paragraph for 

margin requirements based solely on the 

value of collateral or the amount of an 

economic exposure).144

Finally, contractual rights to 

terminate without the need to show 

cause, including rights to terminate on 

demand and rights to terminate at 

contractually specified intervals, were 

excluded from the definition of ‘‘default 

right’’ under the proposal for purposes 

of the proposed rule’s restrictions on 

cross-default rights.145 This exclusion 

was consistent with the proposal’s 

objective of restricting only default 

rights that are related, directly or 

indirectly, to the entry into resolution of 

an affiliate of the covered entity, while 

leaving other default rights unrestricted. 

Commenters expressed support for a 

number of aspects of the definition of 

default rights. For example, a number of 

commenters supported the proposed 

exclusion from the definition of ‘‘default 

right’’ of contractual rights to terminate 

without the need to show cause, noting 

that such rights exist for a variety of 

reasons and that reliance on these rights 

is unlikely to result in a fire sale of 

assets during a GSIB resolution. At least 

one commenter requested that this 

exclusion be expanded to include force 

majeure events. Commenters also 

expressed support for the exclusion for 

what commenters referred to as 

‘‘business-as-usual’’ payments 

associated with a QFC. However, these 

commenters requested clarification that 

certain ‘‘business-as-usual’’ actions 

would not be included in the definition 

of default right, such as payment 

netting, posting and return of collateral, 

procedures for the substitution of 

collateral and modification to the terms 

of the QFC, and also requested 

clarification that the definition of 

‘‘default right’’ would not include offsetting transactions to third parties by 

the non-defaulting counterparty. One 

commenter urged that, if the Board’s 

goal is to provide that a party cannot 

enforce a provision that requires more 

margin because of a credit downgrade 

but may demand more margin for 

market price changes, the rule should 

state so explicitly. Another commenter 

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42900 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

146See final rule § 252.81. 

147See final rule § 252.84(b). 

148See proposed rule § 252.83(b). 149See final rule § 252.83(c). 

150See id. 

151These commenters noted that it would be 

unlikely that any court interpreting a QFC governed 

by U.S. law could have a reasonable basis for 

disregarding the stay-and-transfer provisions of the 

FDI Act or Title II of the Dodd-Frank Act. 152See generally Financial Stability Board, 

‘‘Principles for Cross-border Effectiveness of 

Resolution Actions’’ (Nov. 3, 2015), http://

www.fsb.org/wp-content/uploads/Principles-forCross-border-Effectiveness-of-ResolutionActions.pdf. 

expressed concern that the definition of 

default right in the proposal would 

permit a defaulting covered entity to 

demand collateral from its QFC 

counterparty as margin due to a market 

price change, but would not allow the 

non-covered entity to demand collateral 

from the covered entity. 

The final rule retains the same 

definition of ‘‘default right’’ as that of 

the proposal.146 The Board believes that 

the definition of default right is 

sufficiently clear and that additional 

modifications are not needed to address 

the concerns raised by commenters. The 

final rule does not adopt a particular 

exclusion for force majeure events, as 

requested by certain commenters, as it 

is not clear—without reference to 

particular contractual provisions—what 

this term would encompass. Moreover, 

it should be clear that events typically 

considered to be captured by force 

majeure clauses (e.g., natural disasters) 

would not be related, directly or 

indirectly, to the resolution of an 

affiliate.147

‘‘Business-as-usual’’ rights regarding 

changes in collateral or margin would 

not be included within the definition of 

default right to the extent that the right 

or operation of a contractual provision 

arises solely from either a change in the 

value of collateral or margin or a change 

in the amount of an economic exposure. 

In response to commenters’ requests for 

clarification, this exception includes 

changes in margin due to changes in 

market price, but does not include 

changes due to counterparty credit risk 

(e.g., credit rating downgrades). 

Therefore, the right of either party to a 

covered QFC to require margin due to 

changes in market price would be 

unaffected by the definition of default 

right. Moreover, default rights that arise 

before a covered entity or its affiliate 

enter resolution and that would not be 

affected by the stay-and-transfer 

provisions of the U.S. Special 

Resolution Regimes also would not be 

affected. 

Regarding transactions with third 

parties, the final rule, like the proposal, 

does not require covered entities to 

address default rights in QFCs solely 

between parties that are not covered 

entities (e.g., off-setting transactions to 

third parties by the non-defaulting 

counterparty, to the extent none are 

covered entities). 

D. Required Contractual Provisions 

Related to the U.S. Special Resolution 

Regimes (Section 252.83 of the Final 

Rule) 

The proposed rule generally would 

have required a covered QFC to 

explicitly provide both (a) that the 

transfer of the QFC (and any interest or 

obligation in or under it and any 

property securing it) from the covered 

entity to a transferee would be effective 

to the same extent as it would be under 

the U.S. Special Resolution Regimes if 

the covered QFC were governed by the 

laws of the United States or of a state 

of the United States and (b) that default 

rights with respect to the covered QFC 

that could be exercised against a 

covered entity could be exercised to no 

greater extent than they could be 

exercised under the U.S. Special 

Resolution Regimes if the covered QFC 

were governed by the laws of the United 

States or of a state of the United 

States.148 The final rule contains these 

same provisions.149

A number of commenters noted that 

the wording of these requirements in 

proposed section 252.83(b) was 

confusing and could be read to be 

inconsistent with the intent of the 

section. In response to comments, the 

final rule makes clearer that the 

substantive restrictions apply only in 

the event the covered entity (or, in the 

case of the requirement regarding 

default rights, its affiliate) becomes 

subject to a proceeding under a U.S. 

Special Resolution Regime.150

A number of commenters argued that 

QFCs should be exempt from the 

requirements of proposed section 252.83 

if the QFC is governed by U.S. law. An 

example of such a QFC provided by 

commenters includes the standard form 

repurchase and securities lending 

agreement published by the Securities 

Industry and Financial Markets 

Association. These commenters argued 

that counterparties to such agreements 

are already required to observe the stayand-transfer provisions of the FDI Act 

and Title II of the Dodd-Frank Act, as 

mandatory provisions of U.S. federal 

law, and that requiring an amendment 

of these types of QFCs to include the 

express provisions required under 

section 252.83 would be redundant and 

would not provide any material 

resolution benefit, but would 

significantly increase the remediation 

burden on covered entities. 

Other commenters proposed a threeprong test of ‘‘nexus with the United 

States’’ for purposes of recognizing an 

exclusion from the express 

acknowledgment of the requirements of 

proposed section 252.83. In particular, 

these commenters argued that the 

presence of two factors, in addition to 

the contract being governed by U.S law, 

would provide greater certainty that 

courts would apply the stay-and-transfer 

provisions of the FDI Act and Title II of 

the Dodd-Frank Act: (1) If a contract is 

entered into between entities organized 

in the United States; and (2) to the 

extent the GSIB’s obligations under the 

QFC are collateralized, if the collateral 

is held with a U.S. custodian or 

depository pursuant to an account 

agreement governed by U.S. law.151

Other commenters contended that only 

whether the contract is under U.S. law, 

and not the location of the counterparty 

or the collateral, is relevant to the 

analysis of whether the FDI Act and the 

Dodd-Frank Act would govern the 

contract. Commenters also requested 

that if the first additional factor (i.e., 

that the QFC be entered into between 

entities organized in the United States) 

were to be included within the 

exception, it should be broadened to 

include counterparties that have 

principal places of business or that are 

otherwise domiciled in the United 

States. 

The requirements of the final rule 

seek to provide certainty that all 

covered QFCs would be treated the 

same way in the context of a resolution 

of a covered entity under the DoddFrank Act or the FDI Act. The stay-andtransfer provisions of the U.S. Special 

Resolution Regimes should be enforced 

with respect to all contracts of any U.S. 

GSIB entity that enters resolution under 

a U.S. Special Resolution Regime, as 

well as all transactions of the 

subsidiaries of such an entity. 

Nonetheless, it is possible that a court 

in a foreign jurisdiction would decline 

to enforce those provisions. In general, 

the requirement that the effect of the 

statutory stay-and-transfer provisions be 

incorporated directly into the QFC 

contractually helps to ensure that a 

court in a foreign jurisdiction would 

enforce the effect of those provisions, 

regardless of whether the court would 

otherwise have decided to enforce the 

U.S. statutory provisions.152 Further, the 

knowledge that a court in a foreign 

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153See final rule § 252.83(a). 

154However, a contract that explicitly provides 

that one or both of the U.S. Special Resolution 

Regimes, including a broader set of laws that 

includes a U.S. special resolution regime, is 

excluded from the laws governing the QFC would 

not meet this exemption under the final rule. For 

example, a covered QFC would not meet this 

exemption if the contract stated that it was 

governed by the laws of the state of New York but 

also stated that it was not governed by U.S. federal 

law. In contrast, a contract that stated that it was 

governed by the laws of the state of New York but 

opted out of a specific, non-mandatory federal law 

(e.g., the Federal Arbitration Act) would meet this 

exemption. Cf. Volt Info. Scis. v. Bd. Of Trs., 489 

U.S. 468 (1989). 

155Although many QFCs only explicitly state that 

the contract is governed by the laws of a specific 

state of the United States, it has been made clear 

on numerous occasions that the laws of each state 

include federal law. See, e.g., Hauenstain v. 

Lynham, 100 U.S. 483, 490 (1979) (stating that 

federal law is ‘‘as much a part of the law of every 

State as its own local laws and the Constitution’’); 

Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 

U.S. 141, 157 (1982) (same); Testa v. Katt, 330 U.S. 

386, 393 (1947) (‘‘For the policy of the federal Act 

is the prevailing policy in every state.’’). 

156For purposes of this requirement of the 

exemption, ‘‘State’’ means any state, 

commonwealth, territory, or possession of the 

United States, the District of Columbia, the 

Commonwealth of Puerto Rico, the Commonwealth 

of the Northern Mariana Islands, American Samoa, 

Guam, or the United States Virgin Islands. 12 CFR 

252.2(y). 

157See Hertz Corp. v. Friend, 559 U.S. 77 (2010) 

(describing the appropriate test for principal place 

of business). 

158See final rule § 252.83(a)(1)(ii). 

159See id. 

160See, e.g., Daimler AG v. Bauman, 134 S. Ct. 

746 (2014); Goodyear Dunlop Tires Operations, S.A. 

v. Brown, 564 U.S. 915 (2011); Hertz Corp. v. 

Friend, 559 U.S. 77 (2010). 

161See PRA Rulebook: CRR Firms and NonAuthorised Persons: Stay in Resolution Instrument 

2015, (Nov. 12, 2015), http://

www.bankofengland.co.uk/pra/Documents/

publications/ps/2015/ps2515app1.pdf; see also 

Bank of England, Prudential Regulation Authority, 

‘‘Contractual stays in financial contracts governed 

by third-country law’’ (PS25/15), (Nov. 2015), 

http://www.bankofengland.co.uk/pra/Documents/

publications/ps/2015/ps2515.pdf. These PRA rules 

apply to PRA-authorized banks, building societies, 

PRA-designated investment firms, and their 

qualifying parent undertakings, including UK 

financial holding companies and UK mixed 

financial holding companies. 

162See Gesetz zur Sanierung und Abwicklung 

von Instituten und Finanzgruppen, Sanierungs-und 

Abwicklungsgesetz [SAG] [German Act on the 

Reorganisation and Liquidation of Credit 

Institutions], Dec. 10, 2014, § 60a, https://

www.gesetze-im-internet.de/bundesrecht/sag/

gesamt.pdf, as amended by Gesetz zur Anpassung 

des nationalen Bankenabwicklungsrechts an den 

Einheitlichen Abwicklungsmechanismus und die 

europa ̈ischen Vorgaben zur Bankenabgabe, Nov. 2, 

2015, Artikel 1(17). 

163See Verordnung u ̈ ber die 

Finanzmarktinfrastrukturen und das 

Marktverhalten im Effekten- und Derivatehandel 

[FinfraV] [Ordinance on Financial Market 

Infrastructures and Market Conduct in Securities 

and Derivatives Trading] Nov. 25, 2015, amending 

Bankenverordnung vom 30. April 2014 [BankV] 

[Banking Ordinance of 30 April 2014] Apr. 30, 

2014, SR 952.02, art. 12 paragraph 2bis, translation 

at http://www.news.admin.ch/NSBSubscriber/

message/attachments/42659.pdf; see also 

Erla ̈uterungsbericht zur Verordnung u ̈ ber die 

Finanzmarktinfrastrukturen und das 

Marktverhalten im Effekten- und Derivatehandel 

(Nov. 25, 2015) (providing commentary). 

164See section III–11 of Comprehensive 

Guidelines for Supervision of Major Banks, etc., 

http://www.fsa.go.jp/common/law/guide/city.pdf. 

jurisdiction would reject the purported 

exercise of default rights in violation of 

the required contractual provisions 

would deter covered entities’ 

counterparties from attempting to 

exercise such rights. 

In response to comments, the final 

rule exempts from the requirements of 

section 252.83 a covered QFC that meets 

two requirements.153 First, the covered 

QFC must state that it is governed by the 

laws of the United States or a state of 

the United States.154 It has long been 

clear that the laws of the United States 

and the laws of a state of the United 

States both include U.S. federal law, 

such as the U.S. Special Resolution 

Regimes.155 Therefore, this requirement 

ensures that contracts that meet this 

exemption also contain language that 

helps ensure that foreign courts will 

enforce the stay-and-transfer provisions 

of the U.S. Special Resolution Regimes. 

Second, the QFC counterparty to the 

covered entity must be organized under 

the laws of the United States or a 

State,156 have its principal place of 

business 157 located in the United States, 

or be a U.S. branch or agency.158

Similarly, a counterparty that is an 

individual must be domiciled in the 

United States.159 This requirement 

helps ensure that the FDIC will be able 

to quickly and easily enforce the stayand-transfer provisions of the U.S. 

Special Resolution Regimes.160 This 

exemption is expected to significantly 

reduce the burden associated with 

complying with the final rule while 

continuing to provide assurance that the 

stay-and-transfer provisions of the U.S. 

Special Resolution Regimes may be 

enforced. 

This section of the final rule is 

consistent with efforts by regulators in 

other jurisdictions to address similar 

risks by requiring that financial firms 

within their jurisdictions ensure that the 

effect of the similar provisions under 

these foreign jurisdictions’ respective 

special resolution regimes would be 

enforced by courts in other 

jurisdictions, including the United 

States. For example, the U.K.’s 

Prudential Regulation Authority (PRA) 

recently required certain financial firms 

to ensure that their counterparties to 

newly created obligations agree to be 

subject to stays on early termination that 

are similar to those that would apply 

upon a U.K. firm’s entry into resolution 

if the financial arrangements were 

governed by U.K. law.161 Similarly, the 

German parliament passed a law in 

November 2015 requiring German 

financial institutions to have provisions 

in financial contracts that are subject to 

the law of a country outside of the 

European Union that acknowledge the 

provisions regarding the temporary 

suspension of termination rights and 

accept the exercise of the powers 

regarding such temporary suspension 

under the German special resolution 

regime.162 Additionally, the Swiss 

Federal Council requires that banks 

‘‘ensure at both the individual 

institution and group level that new 

agreements or amendments to existing 

agreements which are subject to foreign 

law or envisage a foreign jurisdiction are 

agreed only if the counterparty 

recognises a postponement of the 

termination of agreements in accordance 

with’’ the Swiss special resolution 

regime.163 Japan’s Financial Services 

Agency also revised its supervisory 

guidelines for major banks to require 

those banks to ensure that the effect of 

the statutory stay decision and statutory 

special creditor protections under 

Japanese resolution regimes extends to 

contracts governed by foreign laws.164

Commenters also argued that it would 

be more appropriate for Congress to act 

to obtain cross-border recognition of 

U.S. Special Resolution Regimes, rather 

than for the Board to do so through this 

final rule. The Board believes it is 

appropriate to adopt this final rule in 

order to promote U.S. financial stability 

by improving the resolvability and 

resilience of U.S. GSIBs and foreign 

GSIBs pursuant to section 165 of the 

Dodd-Frank Act. Because of the current 

risk that the stay-and-transfer provisions 

of U.S. Special Resolution Regimes may 

not be recognized under the laws of 

other jurisdictions, section 252.83 of the 

final rule requires similar contractual 

recognition to help ensure that courts in 

foreign jurisdictions will recognize 

these provisions. 

This requirement would advance the 

goal of the final rule of removing QFCrelated obstacles to the orderly 

resolution of a GSIB. As discussed 

above, restrictions on the exercise of 

QFC default rights are an important 

prerequisite for an orderly GSIB 

resolution. Congress recognized the 

importance of such restrictions when it 

enacted the stay-and-transfer provisions 

of the U.S. Special Resolution Regimes. 

As demonstrated by the 2007–2009 

financial crisis, the modern financial 

system is global in scope, and covered 

entities are party to large volumes of 

QFCs with connections to foreign 

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42902 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

165See final rule § 252.84(c)(2). 

166See final rule § 252.84(c)(1). 

167See final rule § 252.84(c)(3). 

168See final rule § 252.84(e)(2)–(3). 

169See final rule § 252.84(e)(4). 

170See final rule § 252.84(b)(1). A few 

commenters requested that the Board clarify that 

covered QFCs that do not contain the cross-default 

rights or transfer restrictions on credit enhancement 

that are prohibited by section 252.84 would not be 

required to be remediated. This reading of section 

252.84 of the proposed and final rule is correct. In 

addition, section 252.84(a) of the final rule provides 

the requested clarity. 

171See final rule § 252.84(b)(2). This prohibition 

is subject to an exception that would allow 

supported parties to exercise default rights with 

respect to a QFC if the supported party is prohibited 

from being the beneficiary of a credit enhancement 

provided by the transferee under any applicable 

law, including the Employee Retirement Income 

Security Act of 1974 and the Investment Company 

Act of 1940. This exception is substantially similar 

to an exception to the transfer restrictions in section 

2(f) of the ISDA 2014 Resolution Stay Protocol 

(2014 Protocol) and the Universal Protocol, which 

was added to address concerns expressed by asset 

managers during the drafting of the 2014 Protocol. 

One commenter requested that the exception be 

broadened to include transfers that would result in 

the supported party being unable, without further 

action, to satisfy the requirements of any law 

applicable to the supported party. As an example 

of a type of transfer that the commenter intended 

to be included within the broadened exception, the 

commenter stated that the supported party would 

be able to prevent the transfer if it would result in 

less favorable tax treatment. The exception would 

seem to also include filing requirements that may 

arise as a result of transfer or other requirements 

that could be satisfied with minimal ‘‘action’’ by, 

or cost to, the supported party. More generally, the 

scope of the laws that supported parties deem 

themselves to satisfy and the method of such 

satisfaction is unclear and potentially very broad. 

The final rule retains the exception as proposed. 

The requested exception would add uncertainty as 

to whether transfers may be made during the stay 

period and potentially subsume the transfer 

prohibition. 

172This commenter also expressed support for 

Congressional amendment of the U.S. Bankruptcy 

Code. 

173One commenter stated that, to the extent the 

final rule prevents an insurer from terminating QFC 

transactions upon the credit rating downgrade of a 

GSIB counterparty, the insurer may be in violation 

of state insurance laws that typically impose strict 

jurisdictions. The stay-and-transfer 

provisions of the U.S. Special 

Resolution Regimes would not achieve 

their purpose of facilitating orderly 

resolution in the context of the failure 

of a GSIB with large volumes of QFCs 

if such QFCs could escape the effect of 

those provisions. To remove doubt 

about the scope of coverage of these 

provisions, the requirements of section 

252.83 of the final rule would ensure 

that the stay-and-transfer provisions 

apply as a matter of contract to all 

covered QFCs, wherever the transaction. 

This will advance the resolvability goals 

of the Dodd-Frank Act and the FDI Act 

and improve the resiliency of firms 

subject to the requirements. 

E. Prohibited Cross-Default Rights 

(Section 252.84 of the Final Rule) 

Definitions. Section 252.84 of the final 

rule, like the proposal, pertains to crossdefault rights in QFCs between covered 

entities and their counterparties, many 

of which are subject to credit 

enhancements (such as a guarantee) 

provided by an affiliate of the covered 

entity. Because credit enhancements on 

QFCs are themselves ‘‘qualified 

financial contracts’’ under the DoddFrank Act’s definition of that term 

(which this final rule adopts), the final 

rule includes the following additional 

definitions in order to facilitate a 

precise description of the relationships 

to which it would apply. These 

definitions are the same as under the 

proposal since no comments were 

received on these definitions. 

First, the final rule distinguishes 

between a credit enhancement and a 

‘‘direct QFC,’’ defined as any QFC that 

is not a credit enhancement.165 The 

final rule also defines ‘‘direct party’’ to 

mean a covered entity that is itself a 

party to the direct QFC, as distinct from 

an entity that provides a credit 

enhancement.166 In addition, the final 

rule defines ‘‘affiliate credit 

enhancement’’ to mean ‘‘a credit 

enhancement that is provided by an 

affiliate of a party to the direct QFC that 

the credit enhancement supports,’’ as 

distinct from a credit enhancement 

provided by either the direct party itself 

or by an unaffiliated party.167 Moreover, 

the final rule defines ‘‘covered affiliate 

credit enhancement’’ to mean an 

affiliate credit enhancement provided 

by a covered entity or excluded bank 

and defines ‘‘covered affiliate support 

provider’’ to mean the affiliate of the 

covered entity that provides the covered 

affiliate credit enhancement.168 Finally, 

the final rule defines the term 

‘‘supported party’’ to mean any party 

that is the beneficiary of the covered 

affiliate support provider’s obligations 

under a covered affiliate credit 

enhancement (that is, the QFC 

counterparty of a direct party, assuming 

that the direct QFC is subject to a 

covered affiliate credit enhancement).169

General prohibitions. The final rule, 

like the proposal, prohibits a covered 

entity from being party to a covered 

QFC that allows for the exercise of any 

default right that is related, directly or 

indirectly, to the entry into resolution of 

an affiliate of the covered entity, subject 

to the exceptions discussed below.170

The final rule also generally prohibits a 

covered entity from being party to a 

covered QFC that would prohibit the 

transfer of any credit enhancement 

applicable to the QFC (such as another 

entity’s guarantee of the covered entity’s 

obligations under the QFC), along with 

associated obligations or collateral, 

upon the entry into resolution of an 

affiliate of the covered entity.171

One commenter expressed strong 

support for these provisions.172 Another 

commenter expressed support for this 

provision as currently limited in scope 

under the proposal to prohibited crossdefault rights and requested that the 

scope not be expanded. The Board’s 

final rule retains the same scope as the 

proposal. 

A number of commenters representing 

counterparties to covered entities 

objected to section 252.84 of the 

proposal and requested the elimination 

of this provision. These commenters 

expressed concern about limitations on 

counterparties’ exercise of default rights 

during insolvency proceedings and 

argued that rights should not be taken 

away from contracting parties other than 

where limitation of such rights is 

necessary for public policy reasons and 

the resolution process is controlled by a 

regulatory authority with particular 

expertise in the resolution of the type of 

entity subject to the proceedings. 

Certain commenters argued that 

eliminating cross-default termination 

rights undermines the ability of QFC 

counterparties to effectively manage and 

mitigate their exposure to market and 

credit risk to a GSIB and interferes with 

market forces. One commenter similarly 

argued that, unless the Board takes 

appropriate measures to strengthen the 

financial condition and 

creditworthiness of a failing GSIB 

during and after the temporary stay, the 

stay will only expose QFC 

counterparties to an additional 48 hours 

of credit risk exposure without 

achieving the orderly resolution goals of 

the rule. Another commenter argued 

that non-defaulting counterparties 

should not be prevented from filing 

proofs of claim or other pleadings in a 

bankruptcy case during the stay period, 

since bankruptcy deadlines might pass 

and leave the counterparty unable to 

collect the unsecured creditor dividend. 

Commenters contended that restrictions 

on cross-default rights may lead to procyclical behavior with asset managers 

moving funds away from covered 

entities as soon as those entities show 

signs of distress, and perhaps even in 

normal situations, and would 

disadvantage non-GSIB parties (e.g., end 

users who rarely receive initial margin 

from GSIB counterparties and are less 

well protected against a GSIB 

default).173

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counterparty credit rating guidelines and limits. 

This commenter did not give any specific examples 

of such laws. Counterparties, including insurance 

companies, should evaluate and comply with all 

relevant applicable requirements. 

174Certain commenters also indicated that these 

provisions should only apply to U.S. Special 

Resolution Regimes, which provide certain 

protections for counterparties, or, at most, to U.S. 

Special Resolution Regimes, resolution under the 

Securities Investor Protection Act, and insolvency 

under Chapter 11 of the U.S. Bankruptcy Code. That 

commenter noted that liquidation and insolvency 

under Chapter 7 of the Bankruptcy Code do not 

seek to preserve the GSIB as a viable entity, which 

is an objective of this proposal. As discussed later, 

the rule seeks to facilitate the resolution of a GSIB 

outside of U.S. Special Resolution Regimes, 

including under the U.S. Bankruptcy Code, and is 

intended to facilitate other approaches to GSIB 

resolution. Therefore, the final rule applies these 

provisions in the same way as the proposal. In 

addition, the additional creditor protections for 

supported parties under the final rule permit 

contractual requirements that any transferee not be 

in bankruptcy proceedings and that the credit 

support provider not be in bankruptcy proceedings 

other than a Chapter 11 proceeding. See final rule 

§ 252.84(f). 

175 In particular, these commenters requested 

that, when a covered entity defaults on any physical 

delivery obligation to any counterparty following 

the insolvency of an affiliate of a covered entity, its 

counterparties with obligations to deliver or take 

delivery of physical commodities within a short 

time frame after the default should be able to 

immediately terminate all trades (both physical and 

financial) with the covered entity. The final rule, 

like the proposal, allows covered QFCs to permit a 

counterparty to exercise its default rights under a 

covered QFC if the covered entity has failed to pay 

or perform its obligations under the covered QFC. 

See final rule § 252.84(d). The final rule, like the 

proposal, also allows covered QFCs to permit a 

counterparty to exercise its default rights under a 

covered QFC if the covered entity has failed to pay 

or perform on other contracts between the same 

parties and the failure gives rise to a default right 

in the covered QFC. See id. These exceptions 

should help reduce credit risk and ensure the 

smooth operation of the physical commodities 

markets without permitting one failure to pay or 

perform by a covered entity to allow a potentially 

large number of its counterparties that are not 

directly affected by the failure to exercise their 

default rights and thereby endanger the viability of 

the covered entity. 

176See final rule § 252.84(b). 

177As discussed above, the FDI Act would limit 

the exercise of direct default rights against the 

depository institution, but does not address the 

threat posed to orderly resolution by cross-default 

rights in the QFCs of the depository institution’s 

subsidiaries. This final rule would facilitate orderly 

resolution under the FDI Act by filling that gap. See 

final rule § 252.84(h). 

Some commenters argued that, if 

these rights must be restricted by law, 

Congress should impose such 

restrictions and that the requirements of 

the proposed rule circumvented the 

legislative process by creating a de facto 

amendment to the U.S. Bankruptcy 

Code that forecloses countless QFC 

counterparties from exercising their 

rights of cross-default protection under 

section 362 of the U.S. Bankruptcy 

Code. Some of these commenters argued 

that parties cannot by contract alter the 

U.S. Bankruptcy Code’s provisions, 

such as the administrative priority of a 

claim in bankruptcy, and one 

commenter suggested that non-covered 

entity counterparties may challenge the 

legality of contractual stays on the 

exercise of default rights if a GSIB 

becomes distressed. Certain commenters 

also questioned the Board’s ability to 

rely on section 165 of the Dodd-Frank 

Act in imposing these requirements and 

argued that making SPOE resolution 

possible under the U.S. Bankruptcy 

Code was not an appropriate 

justification for this rule. Other 

commenters, however, argued that the 

provisions of the proposed rule were 

necessary to address systemic risks 

posed by the exemption for QFCs in the 

U.S. Bankruptcy Code. 

As an alternative to eliminating these 

requirements, these commenters 

expressed the view that, if the Board 

moves forward with these provisions, 

the final rule should include at least 

those minimum creditor protections 

established by the Universal Protocol. 

Certain commenters also argued that 

this provision was overly broad in that 

it covered not only U.S. federal 

resolution and insolvency proceedings 

but also state and foreign resolution and 

insolvency proceedings.174 Certain 

commenters also urged the Board to 

provide a limited exception to these 

restrictions, if retained in the final rule, 

to help ensure the continued 

functioning of physical commodities 

markets.175

Some commenters argued that the 

Board should eliminate the stay on 

default rights that are related 

‘‘indirectly’’ to an affiliate of the direct 

party becoming subject to insolvency 

proceedings, claiming it is unclear what 

constitutes a right related ‘‘indirectly’’ 

to insolvency and noting that any 

default right exercised by a counterparty 

after an affiliate of that counterparty 

enters resolution could arguably be 

motivated by the affiliate’s entry into 

resolution. 

A primary purpose of these 

restrictions is to facilitate the resolution 

of a GSIB outside of Title II of the DoddFrank Act, including under the U.S. 

Bankruptcy Code. As discussed above, 

the potential for mass exercises of QFC 

default rights is one reason why a 

GSIB’s failure could cause severe 

damage to financial stability. In the 

context of an SPOE resolution, if the 

GSIB parent’s entry into resolution led 

to the mass exercise of cross-default 

rights by the subsidiaries’ QFC 

counterparties, then the subsidiaries 

could themselves fail or experience 

financial distress. Moreover, the mass 

exercise of QFC default rights could 

entail asset fire sales, which likely 

would affect other financial companies 

and undermine financial stability. 

Similar disruptive results can occur 

with an MPOE resolution of a GSIB 

affiliate if an otherwise performing GSIB 

entity is subject to having its QFCs 

terminated or accelerated as a result of 

the default of its affiliate. 

In an SPOE resolution, this damage 

can be avoided if actions of the 

following two types are prevented: The 

exercise of direct default rights against 

the top-tier holding company that has 

entered resolution, and the exercise of 

cross-default rights against the operating 

subsidiaries based on their parent’s 

entry into resolution. (Direct default 

rights against the subsidiaries would not 

be exercisable, because the subsidiaries 

would not enter resolution.) In an 

MPOE resolution, this damage occurs 

from exercise of default rights against a 

performing entity based on the failure of 

an affiliate. 

Title II of the Dodd-Frank Act’s stayand-transfer provisions would address 

both direct default rights and crossdefault rights. But, as explained above, 

no similar statutory provisions would 

apply to a resolution under the U.S. 

Bankruptcy Code. The final rule 

attempts to address these obstacles to 

orderly resolution by extending the stayand-transfer provisions to any type of 

resolution of a covered entity. Similarly, 

the final rule would facilitate a transfer 

of the GSIB parent’s interests in its 

subsidiaries, along with any credit 

enhancements it provides for those 

subsidiaries, to a solvent financial 

company by prohibiting covered entities 

from having QFCs that would allow the 

QFC counterparty to prevent such a 

transfer or to use it as a ground for 

exercising default rights.176

The final rule also is intended to 

facilitate other approaches to GSIB 

resolution. For example, it would 

facilitate a similar resolution strategy in 

which a U.S. depository institution 

subsidiary of a GSIB enters resolution 

under the FDI Act while its subsidiaries 

continue to meet their financial 

obligations outside of resolution.177

Similarly, the final rule would facilitate 

the orderly resolution of a foreign GSIB 

under its home jurisdiction resolution 

regime by preventing the exercise of 

cross-default rights against the foreign 

GSIB’s U.S. operations. The final rule 

would also facilitate the resolution of an 

IHC of a foreign GSIB, and the 

recapitalization of its U.S. operating 

subsidiaries, as part of a broader MPOE 

resolution strategy under which the 

foreign GSIB’s operations in other 

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42904 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

178See 12 U.S.C. 5365(d). 

179See final rule § 252.84(d)(1). 

180See final rule § 252.84(d). 

181See final rule § 252.84(d)(1). The proposal 

exempted from this creditor protection provision 

proceedings under a U.S. or foreign special 

resolution regime. As explained in the proposal, 

special resolution regimes typically stay direct 

default rights, but may not stay cross-default rights. 

For example, as discussed above, the FDI Act stays 

direct default rights, see 12 U.S.C. 1821(e)(10)(B), 

but does not stay cross-default rights, whereas the 

Dodd-Frank Act’s OLA stays direct default rights 

and cross-defaults arising from a parent’s 

receivership, see 12 U.S.C. 5390(c)(10)(B) and 

5390(c)(16). The proposed exemption of special 

resolution regimes from the creditor protection 

provisions was intended to help ensure that special 

resolution regimes that do not stay cross-defaults, 

such as the FDI Act, would not disrupt the orderly 

resolution of a GSIB under the U.S. Bankruptcy 

Code or other ordinary insolvency proceedings. 

One commenter requested the Board revise this 

provision to clarify that default rights based on a 

covered entity or an affiliate entering resolution 

under the FDI Act or Title II of the Dodd-Frank Act 

are not prohibited but instead are merely subject to 

the terms of such regimes. The commenter 

requested the Board clarify that such default rights 

are permitted so long as they are subject to the 

provisions of the FDI Act or Title II of the DoddFrank Act as required under section 225.83. The 

final rule eliminates this proposed exemption for 

special resolution regimes because the rule 

separately addresses cross-defaults arising from the 

FDI Act and because foreign special resolution 

regimes, along with efforts in other jurisdictions to 

contractually recognize stays of default rights under 

those regimes, should reduce the risk that such a 

regime should pose to the orderly resolution of a 

GSIB under the U.S. Bankruptcy Code or other 

ordinary insolvency proceedings. 

182See final rule § 252.84(d)(2)–(3). These 

provisions should respond to comments requesting 

that the final rule confirm the ability of a covered 

entity’s counterparty to exercise default rights 

arising from the failure of a direct party to satisfy 

a payment or delivery obligation during the stay 

period. But see final rule § 252.83(c). 

183See final rule § 252.84(d)(2). 

regions would enter separate resolution 

proceedings. Finally, the final rule 

would broadly prevent the 

unanticipated failure of any one GSIB 

entity from bringing about the 

disorderly failures of its affiliates by 

preventing the affiliates’ QFC 

counterparties from using the first 

entity’s failure as a ground for 

exercising default rights against those 

affiliates that continue to meet their 

obligations. 

The final rule is intended to enhance 

the potential for orderly resolution of a 

GSIB under the U.S. Bankruptcy Code, 

the FDI Act, or a similar resolution 

regime. The risks to an orderly 

resolution under the U.S. Bankruptcy 

Code include separate resolution or 

insolvency proceedings, including 

proceedings in non-U.S. jurisdictions. 

Therefore, by staying default rights 

arising from affiliates entering such 

proceedings, the final rule would 

advance the Dodd-Frank Act’s goal of 

making orderly GSIB resolution 

workable under the U.S. Bankruptcy 

Code.178

Likewise, the final rule retains the 

prohibition against contractual 

provisions that permit the exercise of 

default rights that are indirectly related 

to the resolution of an affiliate. QFCs 

may include a number of default rights 

triggered by an event that is not the 

resolution of an affiliate but is caused by 

the resolution, such as a credit rating 

downgrade in response to the 

resolution. A primary purpose of the 

final rule is to prevent early 

terminations caused by the resolution of 

an affiliate. A regulation that specifies 

each type of early termination provision 

that should be stayed would be overinclusive, under-inclusive, and easy to 

evade. Similarly, a stay of default rights 

that are only directly related to the 

resolution of an affiliate could increase 

the likelihood of litigation to determine 

if the relationship between the default 

right and the affiliate resolution was 

sufficient to be considered ‘‘directly’’ 

related. The final rule attempts to 

decrease such uncertainty and litigation 

risk by including default rights that are 

related (i.e., directly or indirectly) to the 

resolution of an affiliate. 

Moreover, the final rule does not 

affect parties’ rights under the U.S. 

Bankruptcy Code. As explained above, 

the regulation does not prohibit a 

covered QFC from permitting the 

exercise of default rights against a 

covered entity that has entered 

bankruptcy proceedings.179 Therefore, 

counterparties to a covered entity in 

bankruptcy would be able to exercise 

their existing contractual default rights 

to the full extent permitted under any 

applicable safe harbor to the automatic 

stay of the U.S. Bankruptcy Code. 

The final rule should also benefit the 

counterparties of a subsidiary of a failed 

GSIB by preventing the severe distress 

or disorderly failure of the subsidiary 

and allowing it to continue to meet its 

obligations. While it may be in the 

individual interest of any given 

counterparty to exercise any available 

rights to run on a subsidiary of a failed 

GSIB, the mass exercise of such rights 

could harm the counterparties’ 

collective interest by causing an 

otherwise-solvent subsidiary to fail. 

Therefore, like the automatic stay in 

bankruptcy, which serves to maximize 

creditors’ ultimate recoveries by 

preventing a disorderly liquidation of 

the debtor, the final rule seeks to 

mitigate this collective action problem 

to the benefit of the failed firm’s 

creditors and counterparties by 

preventing a disorderly resolution. And 

because many creditors and 

counterparties of GSIBs are themselves 

systemically important financial firms, 

improving outcomes for those creditors 

and counterparties should further 

protect the financial stability of the 

United States. 

General creditor protections. While 

the restrictions of the final rule are 

intended to facilitate orderly resolution, 

they may also diminish the ability of 

covered entities’ QFC counterparties to 

include certain protections for 

themselves in covered QFCs, as noted 

by certain commenters. In order to 

reduce this effect, the final rule, like the 

proposal, includes several substantial 

exceptions to the restrictions.180 These 

permitted creditor protections are 

intended to allow creditors to exercise 

cross-default rights outside of an orderly 

resolution of a GSIB (as described 

above) and therefore would not be 

expected to undermine such a 

resolution. 

First, in order to ensure that the 

proposed prohibitions would apply only 

to cross-default rights (and not direct 

default rights), the final rule provides 

that a covered QFC may permit the 

exercise of default rights based on the 

direct party’s entry into a resolution 

proceeding.181 This provision helps to 

ensure that, if the direct party to a QFC 

were to enter bankruptcy, its QFC 

counterparties could exercise any 

relevant direct default rights. Thus, a 

covered entity’s direct QFC 

counterparties would not risk the delay 

and expense associated with becoming 

involved in a bankruptcy proceeding 

and would be able to take advantage of 

default rights that would fall within the 

U.S. Bankruptcy Code’s safe harbor 

provisions. 

The final rule also allows covered 

QFCs to permit the exercise of default 

rights based on the failure of the direct 

party, a covered affiliate support 

provider, or a transferee that assumes a 

credit enhancement to satisfy its 

payment or delivery obligations under 

the direct QFC or credit 

enhancement.182 Moreover, the final 

rule allows covered QFCs to permit the 

exercise of a default right in one QFC 

that is triggered by the direct party’s 

failure to satisfy its payment or delivery 

obligations under another contract 

between the same parties.183 This 

exception takes appropriate account of 

the interdependence that exists among 

the contracts in effect between the same 

counterparties. 

As explained in the proposal, the 

exceptions in the final rule for the 

creditor protections described above are 

intended to help ensure that the final 

rule permits a covered entity’s QFC 

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184See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii) 

(suspending payment and delivery obligations for 

one business day or less). 

185See final rule § 252.84(f). 

186Note that the exception in section 252.84(f) of 

the final rule would not apply with respect to credit 

enhancements that are not covered affiliate credit 

enhancements. In particular, it would not apply 

with respect to a credit enhancement provided by 

a non-U.S. entity of a foreign GSIB, which would 

not be a covered entity or excluded bank under the 

final rule. See final rule § 252.84(e)(2) (defining 

‘‘covered affiliate credit enhancement’’). 

187See final rule § 252.84(g)(1). 

188See 12 U.S.C. 1821(e)(10)(B)(I), 

5390(c)(10)(B)(i), 5390(c)(16)(A). While the final 

rule’s stay period is similar to the stay periods that 

would be imposed by the U.S. Special Resolution 

Regimes, it could run longer than those stay periods 

under some circumstances. 

189See final rule § 252.84(f)(1). Chapter 11 (11 

U.S.C. 1101–1174) is the portion of the U.S. 

Bankruptcy Code that provides for the 

reorganization of the failed company, as opposed to 

its liquidation, and is generally well-understood by 

market participants. 

190See final rule § 252.84(f)(2). 

191See final rule § 252.84(f)(3). 

192See final rule § 252.84(f)(4). 

193See 12 U.S.C. 5390(c)(16)(A). 

counterparties to protect themselves 

from imminent financial loss and does 

not create a risk of delivery gridlocks or 

daisy-chain effects, in which a covered 

entity’s failure to make a payment or 

delivery when due leaves its 

counterparty unable to meet its own 

payment and delivery obligations (the 

daisy-chain effect would be prevented 

because the covered entity’s 

counterparty would be permitted to 

exercise its default rights, such as by 

liquidating collateral). These exceptions 

are generally consistent with the 

treatment of payment and delivery 

obligations under the U.S. Special 

Resolution Regimes.184

These exceptions also help to ensure 

that a covered entity’s QFC counterparty 

would not risk the delay and expense 

associated with becoming involved in a 

bankruptcy proceeding, since, unlike a 

typical creditor of an entity that enters 

bankruptcy, the QFC counterparty 

would retain its ability under the U.S. 

Bankruptcy Code’s safe harbors to 

exercise direct default rights. This 

should further reduce the counterparty’s 

incentive to run. Reducing incentives to 

run in the period leading up to 

resolution promotes orderly resolution, 

since a QFC creditor run (such as a mass 

withdrawal of repo funding) could lead 

to a disorderly resolution and pose a 

threat to financial stability. 

Additional creditor protections for 

supported QFCs. The final rule, like the 

proposal, allows the inclusion of 

additional creditor protections for a 

non-defaulting counterparty that is the 

beneficiary of a credit enhancement 

from an affiliate of the covered entity 

that is also a covered entity or excluded 

bank.185 The final rule allows these 

creditor protections in recognition of the 

supported party’s interest in receiving 

the benefit of its credit enhancement. 

These creditor protections would not 

undermine an SPOE resolution of a 

GSIB. 

Where a covered QFC is supported by 

a covered affiliate credit 

enhancement,186 the covered QFC and 

the credit enhancement would be 

permitted to allow the exercise of 

default rights under the circumstances 

discussed below after the expiration of 

a stay period. Under the final rule, the 

applicable stay period would begin 

when the credit support provider enters 

resolution and would end at the later of 

5:00 p.m. (eastern time) on the next 

business day and 48 hours after the 

entry into resolution.187 This portion of 

the final rule is similar to the stay 

treatment provided in a resolution 

under the OLA or the FDI Act.188

Under the final rule, contractual 

provisions may permit the exercise of 

default rights at the end of the stay 

period if the covered affiliate credit 

enhancement has not been transferred 

away from the covered affiliate support 

provider and that support provider 

becomes subject to a resolution 

proceeding other than a proceeding 

under Chapter 11 of the U.S. 

Bankruptcy Code.189 QFCs may also 

permit the exercise of default rights at 

the end of the stay period if the 

transferee (if any) of the credit 

enhancement enters a resolution 

proceeding, protecting the supported 

party from a transfer of the credit 

enhancement to a transferee that is 

unable to meet its financial 

obligations.190

QFCs may also permit the exercise of 

default rights at the end of the stay 

period if the original credit support 

provider does not remain, and no 

transferee becomes, obligated to the 

same (or substantially similar) extent as 

the original credit support provider was 

obligated immediately prior to entering 

a resolution proceeding (including a 

Chapter 11 proceeding) with respect to 

(a) the covered affiliate credit 

enhancement, (b) all other covered 

affiliate credit enhancements provided 

by the credit support provider on any 

other covered QFCs between the same 

parties, and (c) all credit enhancements 

provided by the credit support provider 

between the direct party and affiliates of 

the direct party’s QFC counterparty.191

Such creditor protections are permitted 

in order to prevent the support provider 

or the transferee from ‘‘cherry picking’’ 

by assuming only those QFCs of a given 

counterparty that are favorable to the 

support provider or transferee. Title II of 

the Dodd-Frank Act and the FDI Act 

contain similar provisions to prevent 

cherry picking. 

Finally, if the covered affiliate credit 

enhancement is transferred to a 

transferee, the QFC may permit the nondefaulting counterparty to exercise 

default rights at the end of the stay 

period unless either (a) all of the 

covered affiliate support provider’s 

ownership interests in the direct party 

are also transferred to the transferee or 

(b) reasonable assurance is provided 

that substantially all of the covered 

affiliate support provider’s assets (or the 

net proceeds from the sale of those 

assets) will be transferred or sold to the 

transferee in a timely manner.192 These 

conditions help to assure the supported 

party that the transferee would be at 

least roughly as financially capable of 

providing the credit enhancement as the 

covered affiliate support provider. Title 

II of the Dodd-Frank Act similarly 

requires that certain conditions be met 

with respect to affiliate credit 

enhancements.193

Commenters generally expressed 

strong support for these exclusions but 

also requested that these exclusions be 

broadened in a number of ways. Certain 

commenters urged the Board to broaden 

the exclusions to permit, after trigger of 

the stay-and-transfer provisions, the 

exercise of default rights by a 

counterparty against a direct 

counterparty or covered support 

provider with respect to any default 

right under the QFC (other than a 

default right explicitly based on the 

failure of an affiliate) and not just with 

respect to defaults resulting from 

payment or delivery failure or the direct 

party becoming subject to certain 

resolution or insolvency proceedings 

(e.g., failure to maintain a license or 

certain capital level, materially 

breaching its representations under the 

QFC). Certain commenters contended 

that, at a minimum, the final rule 

should provide for creditor protections 

that meet the minimum standards set 

forth by the Universal Protocol. One 

commenter specifically identified three 

creditor protections found in the 

Universal Protocol that it argued the 

Board should include in section 252.84: 

(1) Priority rights in a bankruptcy 

proceeding against the transferee or 

original credit support provider (if the 

QFC providing credit support was not 

transferred); (2) a right to submit claims 

in the insolvency proceeding of the 

insolvent credit support provider if the 

transferee becomes insolvent; and (3) 

the ability to declare a default and close 

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194See 81 FR 29169, 29182 (May 11, 2016). 195To the extent the commenter’s reference to 

‘‘bridge financial company’’ was not only to a 

bridge financial company under Title II of the 

Dodd-Frank Act, the requested amendment would 

not appear to provide a meaningful reduction in 

credit risk to counterparties compared to the 

creditor protections permitted under section 252.84 

of the final rule and those available under the 

Universal Protocol and U.S. Protocol, discussed 

below. 

196 81 FR 29169, 29180 n.92 (May 11, 2016) 

(‘‘Note that the exception in § 252.84(g) of the 

proposed rule would not apply with respect to 

credit enhancements that are not covered affiliate 

credit enhancements. In particular, it would not 

apply with respect to a credit enhancement 

provided by a non-U.S. entity of a foreign GSIB, 

which would not be a covered entity under the 

proposal. Such credit enhancements would be 

excluded in order to help ensure that the resolution 

of a non-U.S. entity would not negatively affect the 

financial stability of the United States by allowing 

for the exercise of default rights against a covered 

entity.’’). See also final rule § 252.84(f). 

197As discussed above, the FDI Act stays direct 

default rights against the failed depository 

institution but does not stay the exercise of crossdefault rights against its affiliates. 

198Under the FDI Act, the relevant stay period 

runs until 5:00 p.m. (eastern time) on the business 

day following the appointment of the FDIC as 

receiver. 12 U.S.C. 1821(e)(10)(B)(I). See also final 

rule § 252.81. 

199 12 U.S.C. 1821(e)(9)–(10). 

out of both the original QFC with the 

direct counterparty as well as QFCs 

with the transferee if the transferee 

defaults under the transferred QFC or 

under any other QFC with the nondefaulting counterparty, subject to the 

contractual terms and consistent with 

applicable law. Another commenter 

argued for creditor protections not 

found in the Universal Protocol, 

including that the transferee be required 

to be a U.S. person and be registered 

with and licensed by the primary 

regulator of either the direct 

counterparty or transferor entity. 

The final rule does not include the 

additional creditor protections of the 

Universal Protocol or other creditor 

protections requested by commenters. 

As explained in the proposal and below, 

the additional creditor protections of the 

Universal Protocol do not appear to 

materially diminish the prospects for an 

orderly resolution of a GSIB because the 

Universal Protocol includes a number of 

desirable features that the final rule 

otherwise lacks.194 Providing additional 

circumstances under which default 

rights may be exercised during and 

immediately after the stay period, in the 

absence of any counterbalancing 

benefits to resolution, would increase 

the risk of a disorderly resolution of a 

GSIB in contravention of the purposes 

of the rule. 

One commenter also argued that 

transfer should be limited to a bridge 

bank under the FDI Act or a bridge 

financial company under Title II of the 

Dodd-Frank Act to ensure that the 

transferee is more likely to be able to 

satisfy the obligations of a credit 

support provider and is subject to 

regulatory oversight. Section 252.84 of 

the final rule permits QFCs to include 

provisions allowing a counterparty to 

exercise its default rights against a 

direct party that enters resolution under 

the FDI Act or Title II of the Dodd-Frank 

Act, other than the limited case 

contemplated by section 252.84(h) of 

the final rule. The Board is not adopting 

the proposed additional creditor 

protection because it would defeat in 

large part the purpose of section 252.84 

and potentially create confusion 

regarding the requirements and 

purposes of sections 252.83 and 252.84 

of the final rule.195

A few commenters expressed concern 

that the additional creditor protections 

applied only to QFCs supported by a 

credit enhancement provided by a 

‘‘covered affiliate support provider’’ 

(i.e., an affiliate that is a covered entity) 

and noted that foreign GSIBs often will 

have their QFCs supported by a nonU.S. affiliate that is not a covered entity. 

Such non-U.S. affiliate credit supporter 

providers would not be able to rely on 

the additional creditor protections for 

supported QFCs. As the proposal 

explained, ‘‘Such credit enhancements 

[are] excluded in order to help ensure 

that the resolution of a non-U.S. entity 

would not negatively affect the financial 

stability of the United States by 

allowing for the exercise of default 

rights against a covered entity.’’ 196

One commenter requested 

clarification that the creditors of a nonU.S. credit support provider are 

permitted to exercise any and all rights 

against that non-U.S. credit support 

provider that they could exercise under 

the non-U.S. resolution regime 

applicable to that non-U.S. credit 

support provider. In general, covered 

entities may be entities organized or 

operating in the United States or, with 

respect to U.S. GSIBs, abroad. The final 

rule, like the proposal, is limited to 

QFCs to which a covered entity is a 

party. Section 252.84 of the final rule 

generally prohibits QFCs to which a 

covered entity is a party from allowing 

the exercise of cross-default rights of the 

covered QFC, regardless of whether the 

affiliate entering resolution and/or the 

credit support provider is organized or 

operates in the United States. 

Another commenter expressed 

concern that the proposed section 

252.84(g)(3) (section 252.84(f)(3) of the 

final rule) would provide a right 

without a remedy because, if the 

covered affiliate credit support provider 

is no longer obligated and no transferee 

has taken on the obligation, the noncovered entity counterparty may have 

only a breach of contract claim against 

an entity that has transferred all of its 

assets to a third party. The creditor 

protections of section 252.84, if 

triggered, permit contractual provisions 

allowing the exercise of existing default 

rights against the direct party to the 

covered QFC, as well as any existing 

rights against the credit enhancement 

provider. 

Another commenter suggested 

revising section 252.84(g) (section 

252.84(f) of the final rule) to clarify that, 

for a covered direct QFC supported by 

a covered affiliate credit enhancement, 

the covered direct QFC and the covered 

affiliate credit enhancement may permit 

the exercise of a default right after the 

stay period that is related, directly or 

indirectly, to the covered affiliate 

support provider entering into 

resolution proceedings. This reading is 

incorrect and revising the rule as 

requested would largely defeat the 

purpose of section 252.84 of the final 

rule by merely delaying QFC 

termination en masse. 

Some commenters also requested 

specific provisions related to physical 

commodity contracts, including a 

provision that would allow regulators to 

override a stay if necessary to avoid 

disruption of the supply or prevent 

exacerbation of price movements in a 

commodity or a provision that would 

allow the exercise of default rights of 

counterparties delivering or taking 

delivery of physical commodities if a 

covered entity defaults on any physical 

delivery obligation to any counterparty. 

As noted above, QFCs may permit a 

counterparty to exercise its default 

rights immediately, even during the stay 

period, if the covered entity fails to pay 

or perform on the covered QFC with the 

counterparty (or another contract 

between the same parties that gives rise 

to a default under the covered QFC). 

Creditor protections related to FDI Act 

proceedings. In the case of a covered 

QFC that is supported by a covered 

affiliate credit enhancement, both the 

covered QFC and the credit 

enhancement would be permitted to 

allow the exercise of default rights 

related to the credit support provider’s 

entry into resolution proceedings under 

the FDI Act 197 only under the following 

circumstances: (a) After the FDI Act stay 

period,198 if the credit enhancement is 

not transferred under the relevant 

provisions of the FDI Act 199 and 

associated regulations, and (b) during 

the FDI Act stay period, to the extent 

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200See final rule § 252.84(h). 

201The reference to a ‘‘similar’’ burden of proof 

is intended to allow covered QFCs to provide for 

the application of a standard that is analogous to 

clear and convincing evidence in jurisdictions that 

do not recognize that particular standard. A covered 

QFC is not permitted to provide for a lower 

standard. 

202See final rule § 252.84(i). 

203The definition of QFC under Title II of the 

Dodd-Frank Act, which is adopted in the final rule, 

includes security agreements and other credit 

enhancements as well as master agreements 

(including supplements). 12 U.S.C. 5390(c)(8)(D); 

see also final rule § 252.81. 

204See proposed rule § 252.83(a)(3). 

205See proposed rule §§ 252.84(a)(3), 252.84(d). 

206Commenters argued this should be the case 

even where an agent has entered an umbrella 

master agreement on behalf of more than one 

principal, but only with respect to the contract of 

any principals that are excluded counterparties. 

that the default right permits the 

supported party to suspend performance 

under the covered QFC to the same 

extent as that party would be entitled to 

do if the covered QFC were with the 

credit support provider itself and were 

treated in the same manner as the credit 

enhancement.200 This provision is 

intended to ensure that a QFC 

counterparty of a subsidiary of a bank 

that goes into FDI Act receivership can 

receive the same level of protection that 

the FDI Act provides to QFC 

counterparties of the bank itself. No 

comments were received on this aspect 

of the proposal and the final rule 

contains no changes from the proposal. 

Prohibited terminations. In case of a 

legal dispute as to a party’s right to 

exercise a default right under a covered 

QFC, the final rule, like the proposal, 

requires that a covered QFC must 

provide that, after an affiliate of the 

direct party has entered a resolution 

proceeding, (a) the party seeking to 

exercise the default right bears the 

burden of proof that the exercise of that 

right is indeed permitted by the covered 

QFC, and (b) the party seeking to 

exercise the default right must meet a 

‘‘clear and convincing evidence’’ 

standard, a similar standard,201 or a 

more demanding standard.202 The 

purpose of this requirement is to deter 

the QFC counterparty of a covered 

entity from thwarting the purpose of the 

final rule by exercising a default right 

because of an affiliate’s entry into 

resolution under the guise of other 

default rights that are unrelated to the 

affiliate’s entry into resolution. 

A few commenters requested 

guidance on how to satisfy the burden 

of proof of clear and convincing 

evidence so that they may avoid seeking 

such clarity through litigation. Other 

commenters urged that this standard 

was not appropriate and should be 

eliminated. In particular, a number of 

commenters expressed concern that the 

burden of proof requirements, which are 

more stringent than the burden of proof 

requirements for typical contractual 

disputes adjudicated in a court, unduly 

hamper the creditor protections of 

counterparties and impose a burden 

directly on non-covered entities, who 

should be able to exercise default rights 

if it is commercially reasonable in the 

context. One commenter contended that 

this burden, combined with the stay on 

default rights related ‘‘indirectly’’ to an 

affiliate entering insolvency 

proceedings, effectively prohibits 

counterparties from exercising any 

default rights during the stay period. 

These commenters argued that it is 

inappropriate for the Board in a 

rulemaking to alter the burden of proof 

for contractual disputes. One 

commenter suggested that, in a scenario 

involving a master agreement with some 

transactions out of the money and 

others in the money, the defaulting 

GSIB will have a lower burden of proof 

for demonstrating that it is owed money 

than for demonstrating that it owes 

money, should the non-GSIB 

counterparty exercise its termination 

rights. Certain commenters suggested 

instead that the final rule shift the 

burden and instead adopt a rebuttable 

presumption that the non-defaulting 

counterparty’s exercise of default rights 

is permitted under the QFC unless the 

defaulting covered entity demonstrates 

otherwise. One commenter requested 

that the burden of proof not apply to the 

exercise of direct default rights. 

The final rule retains the proposed 

burden of proof requirements. The 

requirement is based on a primary goal 

of the final rule—to avoid the disorderly 

termination of QFCs in response to the 

failure of an affiliate of a GSIB. The 

requirement accomplishes this goal by 

making clear that a party that exercises 

a default right when an affiliate of its 

direct party enters receivership of 

insolvency proceedings is unlikely to 

prevail in court unless there is clear and 

convincing evidence that the exercise of 

the default right against a covered entity 

is not related to the insolvency or 

resolution proceeding. The requirement 

therefore should discourage the 

impermissible exercise of default rights 

without prohibiting the exercise of all 

default rights. Moreover, the burden of 

proof requirement should not 

discourage the exercise of default rights 

after or in response to a failure to satisfy 

a creditor protection provision (e.g., 

direct default rights); such a failure 

should be easily evidenced, even under 

a heightened burden of proof, such that 

clarification through court proceedings 

should not be necessary. 

Agency transactions. In addition to 

entering into QFCs as principals, GSIBs 

may engage in QFCs as agent for other 

principals. For example, a GSIB 

subsidiary may enter into a master 

securities lending arrangement with a 

foreign bank as agent for a U.S.-based 

pension fund. The GSIB would 

document its role as agent for the 

pension fund, often through an annex to 

the master agreement, and would 

generally provide to its customer (the 

principal party) a securities replacement 

guarantee or indemnification for any 

shortfall in collateral in the event of the 

default of the foreign bank.203 A covered 

entity may also enter into a QFC as 

principal where there is an agent acting 

on its behalf or on behalf of its 

counterparty. 

This proposal would have applied to 

a covered QFC regardless of whether the 

covered entity or the covered entity’s 

direct counterparty is acting as a 

principal or as an agent. Sections 252.83 

and 252.84 of the proposal did not 

distinguish between agents and 

principals with respect to default rights 

or transfer restrictions applicable to 

covered QFCs. Under the proposal, 

section 252.83 would have limited 

default rights and transfer restrictions 

that the principal and its agent may 

have against a covered entity consistent 

with the U.S. Special Resolution 

Regimes.204 Section 252.84 of the 

proposed rule would have ensured that, 

subject to the enumerated creditor 

protections, neither the agent nor the 

principal could exercise cross-default 

rights under the covered QFC against 

the covered entity based on the 

resolution of an affiliate of the covered 

entity.205

Commenters argued that the 

provisions of sections 252.83 and 252.84 

that relate to transactions entered into 

by the covered entity as agent should 

exclude QFCs where the covered entity 

or its affiliate does not have any liability 

(including contingent liability) under or 

in connection with the contract, or any 

payment or delivery obligations with 

respect thereto. Commenters also argued 

that the proposed agent provisions 

should not apply to circumstances 

where the covered entity acts as agent 

for a counterparty whose transactions 

are excluded from the requirements of 

the rule.206 Commenters provided as an 

example where an agent simply 

executes an agreement on behalf of the 

principal but bears no liability 

thereunder, such as where an 

investment manager signs an agreement 

on behalf of a client. Commenters noted 

that such agreements could contain 

events of default relating to the 

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42908 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

207See final rule § 252.82(e)(1). 

208Such a QFC would nonetheless be a covered 

QFC with respect to a principal that also was a 

covered entity. In response to comments, the Board 

notes that covered entities do not include non-U.S. 

subsidiaries of a foreign GSIB. 

209See 81 FR 29169, 29186 (May 11, 2016). 

210See final rule § 252.85(a). 

insolvency of the agent or an affiliate of 

the agent but that such default rights 

would be difficult to track and that 

close-out of such QFCs would not result 

in any loss or liquidity impact to the 

agent. Rather, early termination under 

the agreements would subject the cash 

and securities of the principals—not the 

agent—to realization and liquidation. 

Therefore, the agent would not be 

exposed to the liquidity and asset fire 

sale risks the proposal was intended to 

address. 

Commenters contended that the 

requirement to conform QFCs with all 

affiliates of a counterparty when an 

agent is acting on behalf of the 

counterparty would be particularly 

burdensome, as the agent may not have 

information about the counterparty’s 

affiliates or their contracts with covered 

entities. Commenters also requested 

clarification that conformance is not 

required of contracts between a covered 

entity as agent on behalf of a non-U.S. 

affiliate of a foreign GSIB that would not 

be a covered entity under the proposal, 

since default rights related to the nonU.S. operations of foreign GSIBs are not 

the focus of the rule and do not bear a 

sufficient connection to U.S. financial 

stability to warrant the burden and cost 

of compliance. 

One commenter also urged that 

securities lending authorization 

agreements (SLAAs) should also be 

exempt from the rule. The commenter 

explained that SLAAs are banking 

services agreements that establish an 

agency relationship with the lender of 

securities and an agent and may be 

considered credit enhancements for 

securities lending transactions (and 

therefore QFCs) because the SLAAs 

typically require the agent to indemnify 

the lender for any shortfall between the 

value of the collateral and the value of 

the securities in the event of a borrower 

default. The commenter explained that 

SLAAs typically do not contain 

provisions that may impede the 

resolution of a GSIB, but may contain 

termination rights or contractual 

restrictions on assignability. However, 

the commenter argued that the 

beneficiaries under SLAAs lack the 

incentive to contest the transfer of the 

SLAA to a bridge institution in the 

event of GSIB insolvency. 

To respond to concerns raised by 

commenters, the agency provisions of 

the proposed rule have been modified in 

the final rule. The final rule provides 

that a covered entity does not become a 

party to a QFC solely by acting as agent 

to a QFC.207 Therefore, an in-scope QFC 

would not be a covered QFC solely 

because a covered entity was acting as 

the agent of a principal with respect to 

the QFC.208 For example, the final rule 

would not require a covered entity to 

conform a master securities lending 

arrangement (or the transactions under 

the agreement) to the requirements of 

the final rule if the only obligations of 

the covered entity under the agreement 

are to act as an agent on behalf of one 

or more principals. This modification 

should address many of the concerns 

raised by commenters. 

The final rule does not specifically 

exempt SLAAs because the agreements 

provide the beneficiaries with 

contractual rights that may hinder the 

orderly resolution of a GSIB and 

because it is unclear how such 

beneficiaries would act in response to 

the failure of their agent. More 

generally, the final rule does not exempt 

a QFC with respect to which an agent 

also acts in another capacity, such as 

guarantor. Continuing the example 

regarding the covered entity acting as 

agent with respect to a master securities 

lending agreement, if the covered entity 

also provided a SLAA that included the 

typical indemnification provision 

discussed above, the agency exemption 

of the final rule would not exclude the 

SLAA but would still exclude the 

master securities lending agreement. 

This is because the covered entity is 

acting solely as agent with respect to the 

master securities lending agreement but 

is acting as agent and guarantor with 

respect to the SLAA. However, SLAAs 

would be exempted under the final rule 

to the extent that they are not ‘‘in-scope 

QFCs’’ or otherwise meet the 

exemptions for covered QFCs of the 

final rule. 

Enforceability. Commenters also 

requested that the final rule should 

clarify that obligations under a QFC 

would still be enforceable even if its 

terms do not comply with the 

requirements of the final rule, similar to 

assurances provided in respect of the 

UK rule and German legislation. The 

enforceability of a contract is beyond 

the scope of this rule. 

Interaction with Other Regulatory 

Requirements. Certain commenters 

requested clarification that amending 

covered QFCs as required by this final 

rule should not trigger other regulatory 

requirements for covered entities, such 

as the swap margin requirements issued 

by the Board, other prudential 

regulators (the OCC, FDIC, Farm Credit 

Administration, and Federal Housing 

Financing Agency), and the U.S. 

Commodity Futures Trading 

Commission (CFTC). In particular, 

commenters urged that amending a 

swap to conform to this final rule 

should not jeopardize the status of the 

swap as a legacy swap for purposes of 

the swap margin requirements for noncleared swaps. These issues are outside 

the scope of this rule as they relate to 

the requirements of another rule issued 

by the Board jointly with the other 

prudential regulators, as well as a rule 

issued by the CFTC. As commenters 

pointed out, addressing such issues may 

require consultation with the other 

prudential regulators as well as the 

CFTC and the U.S. Securities and 

Exchange Commission to determine the 

impact of the amendments required by 

this final rule for purposes of the 

regulatory requirements under Title VII. 

However, as the proposal noted, the 

Board is considering an amendment to 

the definition of ‘‘eligible master netting 

agreement’’ to account for the 

restrictions on covered QFCs and is 

consulting with the other prudential 

regulators and the CFTC on this aspect 

of the final rule.209 The Board does not 

expect that compliance with this final 

rule would trigger the swap margin 

requirements for non-cleared swaps. 

Compliance with the Universal and 

U.S. Protocols. The final rule, like the 

proposal, allows covered entities to 

conform covered QFCs to the 

requirements of the proposed rule 

through adherence to the Universal 

Protocol.210 The two primary operative 

provisions of the Universal Protocol are 

Section 1 and Section 2. Under Section 

1, adhering parties essentially ‘‘opt in’’ 

to the U.S. Special Resolution Regimes 

and certain other special resolution 

regimes. Therefore, Section 1 is 

generally responsive to the concerns 

addressed in section 252.83 of the final 

rule. Under Section 2, adhering parties 

essentially forego, subject to the creditor 

protections of Section 2, cross-default 

rights and transfer restrictions on 

affiliate credit enhancements. Therefore, 

Section 2 is generally responsive to the 

concerns addressed in section 252.84 of 

the final rule. 

The proposal noted that, while the 

scope of the stay-and-transfer provisions 

of the Universal Protocol are narrower 

than the stay-and-transfer provisions 

that would have been required under 

the proposal and the Universal Protocol 

provides a number of creditor protection 

provisions that would not otherwise 

have been available under the proposal, 

the Universal Protocol includes a 

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211 81 FR 29169, 29182–83 (May 11, 2016). 

212 ‘‘As between two Adhering Parties, the 

[Universal Protocol] only amends agreements 

between the Adhering Parties that have been 

entered into as of the date that the Adhering Parties 

adhere (as well as any subsequent transactions 

thereunder), but it does not amend agreements that 

Adhering Parties enter into after that date. . . . If 

Adhering Parties wish for their future agreements 

to be subject to the terms of the [Universal Protocol] 

or a Jurisdictional Module Protocol under the ISDA 

JMP, it is expected that they would incorporate the 

terms of the [relevant protocol] by reference into 

such agreements.’’ Letter to Robert deV. Frierson, 

Secretary, Board of Governors of the Federal 

Reserve System, from Katherine T. Darras, ISDA 

General Counsel, The International Swaps and 

Derivatives Association, Inc., at 8–9 (Aug. 5, 2016). 

This commenter noted that incorporation by 

reference was consistent with the proposal and 

asked that the text of the rule be clarified. Id. at 9. 

213Commenters argued that approval of the 

approved U.S. JMP should not require satisfaction 

of the administrative requirements of section 

252.85(b)(3), since the Board has already conducted 

that analysis in deciding to provide a safe harbor 

for the Universal Protocol. 

214The proposal defined the Universal Protocol 

as the ‘‘ISDA 2015 Universal Resolution Stay 

Protocol, including the Securities Financing 

Transaction Annex and Other Agreements Annex, 

published by the International Swaps and 

Derivatives Association, Inc., as of May 3, 2016, and 

minor or technical amendments thereto.’’ See 

proposed rule § 252.85(a). As of May 3, 2016, ISDA 

had not published any Country Annex for a 

Protocol-eligible Regime and such publication 

would not be a minor or technical amendment to 

the Universal Protocol. Consistent with the 

proposal, the final rule does not define the 

Universal Protocol to include any Country Annex. 

However, the final rule does not penalize adherence 

to any Country Annex. A covered QFC that is 

amended by the Universal Protocol—but not a 

Country Annex—will be deemed to conform to the 

requirements of the final rule. In addition, a 

covered QFC that is amended by the Universal 

Protocol—including one or more Country 

Annexes—is also deemed to conform to the 

requirements of the final rule. See final rule 

§ 252.85(a)(2). 

number of desirable features that the 

proposal lacked. The proposal 

explained that ‘‘when an entity 

(whether or not it is a covered entity) 

adheres to the [Universal] Protocol, it 

necessarily adheres to the [Universal] 

Protocol with respect to all covered 

entities that have also adhered to the 

Protocol rather than one or a subset of 

covered entities (as the proposal may 

otherwise permit). . . . This feature 

appears to allow the [Universal] 

Protocol to address impediments to 

resolution on an industry-wide basis 

and increase market certainty, 

transparency, and equitable treatment 

with respect to default rights of nondefaulting parties.’’ 211 This feature is 

referred to as ‘‘universal adherence.’’ 

The proposal explained that other 

favorable features of the Universal 

Protocol included that it amends all 

existing transactions of adhering parties, 

does not provide the counterparty with 

default rights in addition to those 

provided under the underlying QFC, 

applies to all QFCs, and includes 

resolution under bankruptcy as well as 

U.S. and certain non-U.S. Special 

Resolution Regimes. Because the 

features of the Universal Protocol, 

considered together, appeared to 

increase the likelihood that the 

resolution of a GSIB under a range of 

scenarios could be carried out in an 

orderly manner, the proposal stated that 

QFCs amended by the Universal 

Protocol would have been consistent 

with the proposal, notwithstanding 

differences from section 252.84 of the 

proposal. 

Commenters generally supported the 

proposal’s provisions to allow covered 

entities to comply with the 

requirements of the proposed rule 

through adherence to the Universal 

Protocol. For the reasons discussed 

above and in the proposal, the final rule 

continues to allow covered entities to 

comply with the rule through adherence 

to the Universal Protocol and makes 

other modifications to the proposal to 

address comments. 

A few commenters requested that the 

final rule clarify two technical aspects 

of adherence to the Universal Protocol. 

These commenters requested 

confirmation that adherence to the 

Universal Protocol would also satisfy 

the requirements of section 252.83. The 

commenters also requested confirmation 

that QFCs that incorporate the terms of 

the Universal Protocol by reference also 

would be deemed to comply with the 

terms of the proposed alternative 

method of compliance.212 By clarifying 

section 252.85(a), the final rule confirms 

that adherence to the Universal Protocol 

is deemed to satisfy the requirements of 

section 252.83 of the final rule (as well 

as section 252.84) and that conformance 

of a covered QFC through the Universal 

Protocol includes incorporation of the 

terms of the Universal Protocol by 

reference by protocol adherents. This 

clarification also applies to the U.S. 

Protocol, discussed below. 

One commenter indicated that many 

non-covered entity counterparties do 

not have ISDA master agreements for 

physically-settled forward and 

commodity contracts and, therefore, 

compliance with the rule’s requirements 

through adherence to the Universal 

Protocol would entail substantial time 

and educational effort. As in the 

proposal, the final rule simply permits 

adherence to the Universal Protocol as 

one method of compliance with the 

rule’s requirements, and parties may 

meet the rule’s requirements through 

bilateral negotiation, if they choose. 

Moreover, the Securities Financing 

Transaction Annex and Other 

Agreements Annex of the Universal 

Protocol, which are specifically 

identified in the proposed and final 

rule, are designed to amend QFCs that 

are not ISDA master agreements. 

Many commenters argued that the 

final rule should also allow compliance 

with the rule through a yet-to-be-created 

‘‘U.S. Jurisdictional Module to the ISDA 

Resolution Stay Jurisdictional Modular 

Protocol’’ (an ‘‘approved U.S. JMP’’) that 

is generally the same but narrower in 

scope than the Universal Protocol.213

Many non-GSIB commenters argued that 

they were not involved with the drafting 

of the Universal Protocol and that an 

approved U.S. JMP would create a level 

playing field between those that were 

involved in the drafting and those that 

were not. In general, commenters 

identified two aspects of the Universal 

Protocol that they argued should be 

narrowed in the approved U.S. JMP: The 

scope of the special resolution regimes 

and the universal adherence feature of 

the Universal Protocol. 

With respect to the scope of the 

special resolution regimes of the 

Universal Protocol, commenters’ 

concern focused on the special 

resolution regimes of ‘‘Protocol-eligible 

Regimes.’’ Some commenters also 

expressed concern with the scope of 

‘‘Identified Regimes’’ of the Universal 

Protocol. 

The Universal Protocol defines 

‘‘Identified Regimes’’ as the special 

resolution regimes of France, Germany, 

Japan, Switzerland, and the United 

Kingdom, as well as the U.S. Special 

Resolution Regimes. The Universal 

Protocol defines ‘‘Protocol-eligible 

Regimes’’ as resolution regimes of other 

jurisdictions specified in the protocol 

that satisfies the requirements of the 

Universal Protocol. The Universal 

Protocol provides a ‘‘Country Annex,’’ 

which is a mechanism by which 

individual adherents to the Universal 

Protocol may agree that a specific 

jurisdiction satisfies the requirements of 

a ‘‘Protocol-eligible Regime.’’ The 

Universal Protocol referred to in the 

proposal did not include any Country 

Annex for any Protocol-eligible 

Regime.214

Commenters requested the final rule 

include a safe harbor for an approved 

U.S. JMP that does not include Protocoleligible Regimes. Commenters argued 

that many counterparties may not be 

able to adhere to the Universal Protocol 

because they would not be able to 

adhere to a Protocol-eligible Regime in 

the absence of law or regulation 

mandating such adherence, as it would 

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42910 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

215The Protocol-eligible Regime requirements of 

the Universal Protocol do not include a requirement 

that a law or regulation, such as the final rule, 

require parties to contractually opt in to the regime. 216One commenter requested clarification that a 

QFC of a covered entity with a non-U.S. credit 

support provider for the covered entity complies 

with the requirements of the final rule to the extent 

the covered entity has adhered to the relevant 

jurisdictional modular protocol for the jurisdiction 

of the non-U.S. credit support provider. The 

jurisdictional modular protocols for other counties 

do not satisfy the requirements of the final rule. 

217The final rule also provides that the Board 

may determine otherwise based on specific facts 

and circumstances. See final rule § 252.85(a). 

218Commenters expressed support for having the 

U.S. Protocol apply to both existing and future 

QFCs. One commenter requested that an approved 

U.S. JMP should apply only to QFCs governed by 

non-U.S. law because the U.S. Special Resolution 

Regimes already apply to QFCs governed by U.S. 

law. As discussed above, the final rule does not 

exempt a QFC solely because the QFC explicitly 

states that is governed by U.S. law. Moreover, such 

a limited application would reduce the desirable 

additional benefits of the Universal Protocol, 

discussed above. 

219The proposal explained that a ‘‘jurisdictional 

module for the United States that is substantively 

identical to the [Universal] Protocol in all respects 

aside from exempting QFCs between adherents that 

are not covered entities or covered banks would be 

consistent with the current proposal.’’ 81 FR 29169, 

29181 n.106 (May 11, 2016). 

220The final rule does not require the U.S. 

Protocol to retain the same section numbering as 

the Universal Protocol. The final rule allows the 

U.S. protocol to have minor and technical 

differences from the Universal Protocol. See final 

rule § 252.85(a)(3)(ii)(F). 

221See final rule § 252.85(a)(3)(ii)(A). The U.S. 

Protocol is likewise not required to include 

definitions and adherence mechanisms related to 

Protocol-eligible Regimes. The final rule allows the 

U.S. Protocol to include minor and technical 

differences from the Universal Protocol and, 

similarly, differences necessary to conform the U.S. 

Protocol to the substantive differences allowed or 

required from the Universal Protocol. See final rule 

§ 252.85(a)(3)(ii)(E). 

222 81 FR 29169, 29183 (May 11, 2016). 

223See final rule § 252.85(a)(3)(ii)(A). 

224The final rule, however, does not prohibit the 

creation of a dynamic list identifying of all current 

‘‘Covered Parties,’’ as would be defined in the U.S. 

Protocol, to facilitate due diligence and provide 

additional clarity to the market. See final rule 

§ 252.85(a)(2)(ii)(E) (allowing minor and technical 

differences from the Universal Protocol). 

225Section 4(b) of the Universal Protocol. 

force counterparties to give up default 

rights in jurisdictions where that is not 

yet legally required.215 In support of 

their argument, commenters cited their 

fiduciary duties to act in the best 

interests of their clients or shareholders. 

Commenters also argued that an 

approved U.S. JMP should not include 

Identified Regimes and noted that the 

other Identified Regimes have already 

adopted measures to require contractual 

recognition of their special resolution 

regimes.216

With respect to the universal 

adherence feature of the Universal 

Protocol, commenters argued that 

universal adherence imposed significant 

monitoring burden since new adherents 

may join the Universal Protocol at any 

time. To address this concern, some 

commenters requested that an approved 

U.S. JMP allow a counterparty to adhere 

on a firm-by-firm or entity-by-entity 

basis. Other commenters suggested, or 

supported approval of, an approved U.S. 

JMP in which a counterparty would 

adhere to all current covered entities 

under the final rule (to be identified on 

a ‘‘static list’’) and would adhere to new 

covered entities on an entity-by-entity 

basis. This static list, commenters 

argued, would retain the ‘‘universal 

adherence mechanics’’ of the Universal 

Protocol and allow market participants 

to fulfill due diligence obligations 

related to compliance. Commenters also 

argued that universal adherence would 

be overbroad because the Universal 

Protocol could amend QFCs to which a 

covered entity or excluded bank was not 

a party. Certain commenters argued that 

adhering with respect to any 

counterparty would also be inconsistent 

with their fiduciary duties. 

In response to comments and to 

further facilitate compliance with the 

rule, the final rule provides that covered 

QFCs amended through adherence to 

the Universal Protocol or a new (and 

separate) protocol (the ‘‘U.S. Protocol’’) 

would be deemed to conform the 

covered QFCs to the requirements of the 

final rule.217 The U.S. Protocol may 

differ from the Universal Protocol in 

certain respects, as discussed below, but 

otherwise must be substantively 

identical to the Universal Protocol.218

Therefore, the reasons for deeming 

covered QFCs amended by the 

Universal Protocol to conform to the 

final rule, discussed above and in the 

proposal, apply to the U.S. Protocol. 

Consistent with the proposal 219 and 

requests by commenters, the U.S. 

Protocol may limit the application of the 

provisions the Universal Protocol 

identifies as Section 1 and Section 2 to 

only covered entities and excluded 

banks.220 As requested by commenters, 

this limitation on the scope of the U.S. 

Protocol may ensure that the U.S. 

Protocol would only amend covered 

QFCs under this final rule or the 

substantively identical final rules 

expected to be issued by the OCC and 

FDIC and not also QFCs outside the 

scope of the agencies’ final rules (i.e., 

QFCs between parties that are not 

covered entities or excluded banks). 

The final rule also provides that the 

U.S. Protocol is required to include the 

U.S. Special Resolution Regimes and the 

other Identified Regimes but is not 

required to include Protocol-eligible 

Regimes.221 As noted above, the 

Universal Protocol, as defined in the 

proposal, did not include any Country 

Annex for a Protocol-eligible Regime; 

the only special resolution regimes 

specifically identified in the Universal 

Protocol, as defined in the proposal, 

were the U.S. Special Resolution 

Regimes and the other Identified 

Regimes. As explained in the proposal, 

inclusion of the Identified Regimes 

should help facilitate the resolution of 

a GSIB across a broader range of 

circumstances.222 Inclusion of the 

Identified Regimes in the U.S. Protocol 

also should support laws and 

regulations similar to the final rule and 

help encourage GSIB entities in the 

United States to adhere to a protocol 

that includes all Identified Regimes. 

However, the final rule does not require 

the U.S. Protocol to include Protocoleligible Regimes, including definitions 

and adherence mechanisms related to 

Protocol-eligible Regimes.223 Inclusion 

of only the Identified Regimes in the 

U.S. Protocol, considered in light of the 

other benefits to the resolution of GSIBs 

provided by the Universal Protocol and 

U.S. Protocol as well as commenters’ 

concerns with potential adherence to 

Protocol-eligible Regimes, should 

sufficiently advance the objective of the 

final rule to increase the likelihood that 

a resolution of a GSIB could be carried 

out in an orderly manner under a range 

of scenarios. 

The U.S. Protocol does not permit 

parties to adhere on a firm-by-firm or 

entity-by-entity basis because such 

adherence mechanisms requested by 

commenters would obviate one of the 

primary benefits of the Universal 

Protocol: Universal adherence. 

Similarly, the final rule does not permit 

adherence to a ‘‘static list’’ of all current 

covered entities, which other 

commenters requested.224 Although the 

static list would initially provide for 

universal adherence, the static list 

would not provide for universal 

adherence with respect to entities that 

became covered entities after the static 

list was finalized. To help ensure that 

the additional creditor protections of the 

Universal Protocol and U.S. Protocol 

continue to be justified, both protocols 

must ensure that the desirable features 

of the protocols, including universal 

adherence, continue to be present as 

GSIBs acquire subsidiaries with existing 

QFCs and existing organizations become 

designated as GSIBs. 

The final rule also addresses 

provisions that allow an adherent to 

elect that Section 1 and/or Section 2 of 

the Universal Protocol do not apply to 

the adherent’s contracts.225 The 

Universal Protocol refers to these 

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226Under the final rule, if an adherent to the 

Universal Protocol or U.S. Protocol exercises an 

available opt-out, covered entities with covered 

QFCs affected by the exercise would be required to 

otherwise conform the covered QFCs to the 

requirements of the rule. 

227See Section 4(b)(i)(A) of the Universal 

Protocol. 

228Section 2 of the Universal Protocol provides 

an exemption for any client-facing leg of a cleared 

transaction. See Section 2(k) of the Universal 

Protocol and the definition of ‘‘Cleared Client 

Transaction.’’ The final rule does not amend the 

proposal’s treatment of QFCs that are ‘‘Cleared 

Client Transactions’’ under the Universal Protocol, 

but requires that the provisions of that section must 

not apply with respect to the U.S. Protocol. See 

final rule § 252.85(a)(3)(ii)(D). 

229See final rule § 252.85(b). 

230Final rule § 252.85(d)(1)–(10). 

231See final rule § 252.85(b)(3)(ii)–(iii). 

232See final rule § 252.85(c). 

provisions as ‘‘opt-outs.’’ The proposal 

explained that adherence to the 

Universal Protocol was an alternative 

method of compliance with the 

proposed rule and that covered QFCs 

that were not amended by the Universal 

Protocol must otherwise conform to the 

proposed rule. In other words, the 

proposal would have required that a 

covered QFC be conformed regardless of 

the method the covered entity and 

counterparty chooses to conform the 

QFC.226

Consistent with the basic purposes of 

the proposed and final rules, the U.S. 

Protocol requires that opt-outs exercised 

by its adherents will only be effective to 

the extent that the affected covered 

QFCs otherwise conform to the 

requirements of the final rule. 

Therefore, the U.S. Protocol allows 

counterparties to exercise available optout rights in a manner that also allows 

covered entities to ensure that their 

covered QFCs continue to conform to 

the requirements of the rule. 

The final rule also provides that, 

under the U.S. Protocol, the opt-out in 

Section 4(b)(i)(A) of the attachment to 

the Universal Protocol (Sunset Optout) 227 must not apply with respect to 

the U.S. Special Resolution Regimes 

because the opt-out is no longer relevant 

with respect to the U.S. Special 

Resolution Regimes. This final rule, 

along with the substantively identical 

rules expected to be issued by the FDIC 

and OCC, should prevent exercise of the 

Sunset Opt-out with respect to the U.S. 

Special Resolution Regimes under the 

Universal Protocol. Inapplicability of 

this opt-out with respect to U.S. Special 

Resolution Regimes in the U.S. Protocol 

should provide additional clarity to 

adherents that the U.S. Protocol will 

continue to provide for universal 

adherence after January 1, 2018. 

The final rule also expressly 

addresses a provision in the Universal 

Protocol that concerns the client-facing 

leg of a cleared transaction. As 

discussed above, the final rule, like the 

proposal, does not exempt the clientfacing leg of a cleared transaction. 

Therefore, the U.S. Protocol must not 

include the exemption in Section 2 of 

the Universal Protocol regarding the 

client-facing leg of the transaction.228

F. Process for Approval of Enhanced 

Creditor Protections (Section 252.85 of 

the Final Rule) 

As discussed above, the restrictions of 

the final rule leaves many creditor 

protections that are commonly included 

in QFCs unaffected. The final rule also 

allows any covered entity to submit to 

the Board a request to approve as 

compliant with the rule one or more 

QFCs that contain additional creditor 

protections—that is, creditor protections 

that would be impermissible under the 

restrictions set forth above.229 A covered 

entity making such a request would be 

required to provide an analysis of the 

contractual terms for which approval is 

requested in light of a range of factors 

that are set forth in the final rule and 

intended to facilitate the Board’s 

consideration of whether permitting the 

contractual terms would be consistent 

with the proposed restrictions.230 The 

Board also expects to consult with the 

FDIC and OCC during its consideration 

of such a request. 

The first two factors concern the 

potential impact of the requested 

creditor protections on GSIB resilience 

and resolvability. The next four concern 

the scope of the final rule: Adoption on 

an industry-wide basis, coverage of 

existing and future transactions, 

coverage of one or multiple QFCs, and 

coverage of some or all covered entities. 

Creditor protections that may be applied 

on an industry-wide basis may help to 

ensure that impediments to resolution 

are addressed on a uniform basis, which 

could increase market certainty, 

transparency, and equitable treatment. 

Creditor protections that apply broadly 

to a range of QFCs and covered entities 

would increase the chances that all of a 

GSIB’s QFC counterparties would be 

treated the same way during a 

resolution of that GSIB and may 

improve the prospects for an orderly 

resolution of that GSIB. By contrast, 

proposals that would expand 

counterparties’ rights beyond those 

afforded under existing QFCs would 

conflict with the proposal’s goal of 

reducing the risk of mass unwinds of 

GSIB QFCs. The final rule also includes 

three factors that focus on the creditor 

protections specific to supported 

parties. The Board may weigh the 

appropriateness of additional 

protections for supported QFCs against 

the potential impact of such provisions 

on the orderly resolution of a GSIB. 

In addition to analyzing the request 

under the enumerated factors, a covered 

entity requesting that the Board approve 

enhanced creditor protections would be 

required to submit a legal opinion 

stating that the requested terms would 

be valid and enforceable under the 

applicable law of the relevant 

jurisdictions, along with any additional 

relevant information requested by the 

Board.231

Under the final rule, the Board could 

approve a request for an alternative set 

of creditor protections if the terms of the 

QFC, as compared to a covered QFC 

containing only the limited creditor 

protections permitted by the final rule, 

would prevent or mitigate risks to the 

financial stability of the United States 

that could arise from the failure of a 

GSIB and would protect the safety and 

soundness of bank holding companies 

and state member banks to at least the 

same extent.232 Once approved by the 

Board, enhanced creditor protections 

could be used by other covered entities 

(in addition to the covered entity that 

submitted the request for Board 

approval), as appropriate. The requestand-approval process would improve 

flexibility by allowing for an industryproposed alternative to the set of 

creditor protections permitted by the 

final rule while ensuring that any 

approved alternative would serve the 

final rule’s policy goals to at least the 

same extent as a covered QFC that 

complies fully with the final rule. 

Commenters requested that this 

approval process be made less 

burdensome and more flexible and 

urged for additional clarifications on the 

process for submitting and approving 

such requests (e.g., whether approvals 

would be published in the Federal 

Register). For example, commenters 

requested the final rule include a 

reasonable timeline (e.g., 180 days) by 

which the Board would approve or deny 

a request. Certain commenters urged 

that counterparties and trade groups, in 

addition to covered entities, should be 

permitted to make such requests. One 

commenter noted that the proposal’s 

approval process would have created a 

free-rider problem, where parties that 

submit enhanced creditor protection 

conditions for Board approval bear the 

full cost of learning which remedies are 

available for creditors while other 

parties will gain that information for 

free. Commenters contended that the 

provision requiring a ‘‘written legal 

opinion verifying the proposed 

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42912 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

233One commenter also suggested permitting 

amendments to QFCs to be accomplished through 

a confirmation document for a new agreement or by 

email instead of a formal amendment of the QFC 

signed by the parties. The final rule does not 

prescribe a specific method for amending covered 

QFCs. 234See proposed rule § 252.82(b). Under section 

302(b) of the Riegle Community Development and 

Regulatory Improvement Act of 1994, new Board 

regulations that impose requirements on insured 

depository institutions generally must ‘‘take effect 

on the first day of a calendar quarter which begins 

on or after the date on which the regulations are 

published in final form.’’ 12 U.S.C. 4802(b). 

235See final rule § 252.82(f)(1)(i). The definition 

of covered QFC of the final rule has been revised 

to make clear that, consistent with the proposal, a 

covered QFC is a QFC that the covered entity 

becomes a party to on or after the first day of the 

calendar quarter immediately following one year 

from the effective date of this subpart. See final rule 

§ 252.82(c). As discussed above, a covered entity’s 

in-scope QFC that is entered into before this date 

may also be a covered QFC if the covered entity or 

any affiliate that is a covered entity or excluded 

bank also becomes a party to a QFC with the same 

counterparty or a consolidated affiliate of the same 

counterparty on or after the first compliance date. 

See id. 

236See final rule § 252.81 (defining ‘‘financial 

counterparty’’). 

237The final rule defines small financial 

institution as an insured bank, insured savings 

provisions and amendments would be 

valid and enforceable under applicable 

law of the relevant jurisdictions’’ should 

be eliminated as unnecessary.233

Additionally, commenters also urged 

that the provision should be broadened 

to allow approvals of provisions not 

directly related to enhanced creditor 

protections. 

The Board has clarified that the Board 

could approve an alternative proposal of 

additional creditor protections as 

compliant with sections 252.83 and 

252.84 of the final rule, but has not 

otherwise modified these provisions of 

the proposal in response to changes 

requested by commenters. The 

provisions contain flexibility and 

guidance on the process for submitting 

and approving enhanced creditor 

protections. The final rule directly 

places requirements only on covered 

entities, and thus only covered entities 

are eligible to submit requests pursuant 

to these provisions. In response to 

commenters’ concerns, the Board notes 

that the final rule does not prevent 

multiple covered entities from 

presenting one request and does not 

prevent covered entities from seeking 

the input of counterparties when 

developing a request. The final rule 

does not provide a maximum time to 

review proposals because proposals 

could vary greatly in complexity and 

novelty. The final rule also maintains 

the provision requiring a written legal 

opinion, which helps ensure that 

proposed provisions are valid and 

enforceable under applicable law. The 

final rule does not expand the approval 

process beyond additional creditor 

protections; however, revisions to 

aspects of the final rule may be made 

through the rulemaking process. 

III. Transition Periods 

Under the proposal, the rule would 

have required compliance on the first 

day of the first calendar quarter 

beginning at least one year after the 

issuance of the final rule, which the 

proposal referred to as the effective 

date.234 A number of commenters urged 

the Board to adopt a phased-in approach 

to compliance that would extend the 

compliance deadline for covered QFCs 

with certain types of counterparties in 

order to allow time for necessary client 

outreach and education, especially for 

non-GSIB counterparties that may be 

unfamiliar with the Universal Protocol 

or the final rule’s requirements. These 

commenters contended that the original 

compliance period of one year should 

be limited to counterparties that are 

banks, broker-dealers, swap dealers, 

security-based swap dealers, major swap 

participants, and major security-based 

swap participants. These commenters 

urged that the compliance period for 

QFCs with asset managers, commodity 

pools, private funds, and other entities 

that are predominantly engaged in 

activities that are financial in nature 

within the meaning of section 4(k) of the 

BHC Act should be extended for six 

months after the date of the original 

compliance period identified in the 

proposed rule. Finally, these 

commenters argued that the compliance 

period for QFCs with all other 

counterparties should be extended for 

12 months after the date of the original 

compliance period identified in the 

proposed rule as these counterparties 

are likely to be least familiar with the 

requirements of the final rule. 

One commenter suggested that the 

rule should take effect no sooner than 

one year from the date that an approved 

U.S. JMP is published and available for 

adherence, including any additional 

time it might take to seek the Board’s 

approval of it. Certain commenters 

requested that the compliance deadline 

for covered QFCs entered into by an 

agent on behalf of a principal be 

extended by six months as well. Other 

commenters, however, cautioned 

against an approach that would impose 

different deadlines with respect to 

different classes of QFCs, as opposed to 

counterparty types, since the main 

challenge in connection with the 

remediation is the need for outreach to 

and education of counterparties. These 

commenters contended that once a 

counterparty has become familiar with 

the requirements of the rule and the 

terms of the required amendments, it 

would be more efficient to remediate all 

covered QFCs with the counterparty at 

the same time. 

A number of commenters also 

requested that the Board confirm that 

entities acquired by a GSIB, and thereby 

become new covered entities, have until 

the first day of the first calendar quarter 

immediately following one year after 

becoming covered entities to conform 

their existing QFCs. Commenters argued 

that this would allow the GSIB to 

conform existing QFCs in an orderly 

fashion without impairing the ability of 

covered entities to engage in corporate 

activities. These commenters also 

requested clarification that, during that 

conformance period, affiliates of 

covered entities would not be 

prohibited from entering into new 

transactions or QFCs with 

counterparties of the newly acquired 

entity if the existing covered entities 

otherwise comply with the rule’s 

requirements. Some commenters urged 

the Board to exclude existing contracts 

from the final rule’s requirements and 

only apply the rule on a prospective 

basis. 

The effective date for the final rule is 

60 days following publication in the 

Federal Register. However, in order to 

reduce the compliance burden of the 

final rule, the Board has adopted a 

phased-in compliance schedule, as 

requested by commenters. The final rule 

provides that a covered entity must 

conform a covered QFC to the 

requirements of this final rule by the 

first day of the calendar quarter 

immediately following one year from 

the effective date of this subpart with 

respect to covered QFCs with other 

covered entities and excluded banks 

(referred to in this discussion as the 

‘‘first compliance date’’).235 This 

provision allows the counterparties that 

should be most familiar with the 

requirements of the final rule over one 

year to conform with the rule’s 

requirements. Moreover, this is a 

relatively small number of 

counterparties that would need to 

modify their QFCs in the first year 

following the effective date of the final 

rule, and many covered entities and 

excluded banks with covered QFCs have 

already adhered to the Universal 

Protocol. 

The final rule provides additional 

time for compliance with the 

requirements for other types of 

counterparties. In particular, for other 

types of financial counterparties 236

(other than small financial 

institutions) 237, the final rule provides 

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association, farm credit system institution, or credit 

union with assets of $10,000,000,000 or less. See 

final rule § 252.81. 238See final rule § 252.82(f)(1)(ii). 239See final rule § 252.82(f)(1)(iii). 240See final rule § 252.82(e)(1). 241See final rule §§ 252.82(c)(1), 252.82(f)(1). 

242See id. 

243See final rule § 252.82(f)(2). 

244See final rule § 252.82(c)(2). 

245The requirements of the final rule, particularly 

those of section 252.84, may have a different impact 

on netting, including close-out netting, than the 

U.K. and German requirements cited by 

commenters. 

246Subject to any compliance date applicable to 

the covered entity, the Board expects a covered 

entity to conform existing QFCs that become 

covered QFCs within a reasonable period. 

approximately 18 months from the 

effective date of the final rule for 

compliance with its requirements, as 

requested by commenters.238 For 

community banks and other nonfinancial counterparties, the final rule 

provides approximately two years from 

the effective date of the final rule for 

compliance with its requirements, as 

requested by commenters.239 Adopting a 

phased-in compliance approach based 

on the type (and, in some cases, size) of 

the counterparty will allow market 

participants time to adjust to the new 

requirements and make required 

changes to QFCs in an orderly manner. 

It will also give time for development of 

the U.S. Protocol or any other protocol 

that would meet the requirements of the 

final rule. 

The Board is giving this additional 

time for compliance to respond to 

concerns raised by commenters. The 

Board encourages covered entities to 

start planning and outreach efforts early 

in order to come into compliance with 

the rule on the time frames provided. 

The Board believes that this additional 

time for compliance should also address 

concerns raised by commenters 

regarding the burden of conforming 

existing contracts by allowing firms 

additional time to conform all covered 

QFCs to the requirements of the final 

rule. 

Although the phased-in compliance 

period does not contain special rules 

related to acting as an agent as requested 

by certain commenters, the rule has 

been modified as described above to 

clarify that a covered entity does not 

become a party to a QFC solely by acting 

as agent with respect to the QFC.240

Entities that are covered entities when 

the final rule is effective would be 

required to comply with the 

requirements of the final rule beginning 

on the first compliance date. Thus, a 

covered entity would be required to 

ensure that covered QFCs entered into 

on or after the first compliance date 

comply with the rule’s requirements but 

would be given more time to conform 

such covered QFCs with entities that are 

not covered entities or excluded 

banks.241 Moreover, a covered entity 

would be required to bring an in-scope 

QFC entered into prior to the first 

compliance date into compliance with 

the rule no later than the applicable date 

of the tiered compliance dates 

(discussed above) if the covered entity 

or an affiliate (that is also a covered 

entity or excluded bank) enters into a 

new covered QFC with the counterparty 

to the pre-existing covered QFC or a 

consolidated affiliate of the 

counterparty on or after the first 

compliance date.242 (Thus, a covered 

entity would not be required to conform 

a pre-existing QFC if that covered entity 

and its covered entity and excluded 

bank affiliates do not enter into any new 

QFCs with the same counterparty or its 

consolidated affiliates on or after the 

first compliance date.) 

In addition, an entity that becomes a 

covered entity after the effective date of 

the final rule (a ‘‘new covered entity’’ 

for purposes of this preamble) generally 

has the same period of time to comply 

as an entity that is a covered entity on 

the effective date (i.e., compliance will 

phase in over a two-year period based 

on the type of counterparty).243 The 

final rule also clarifies that a covered 

QFC, with respect to a new covered 

entity, means an in-scope QFC that the 

new covered entity becomes a party to 

(1) on the date the covered entity first 

becomes a covered entity, and (2) before 

that date, if the covered entity or one of 

its affiliates that is a covered entity or 

exempt bank also enters, executes, or 

otherwise becomes a party to a QFC 

with the same counterparty or a 

consolidated affiliate of the 

counterparty after that date.244 Under 

the final rule, a company that is a 

covered entity on the effective date of 

the final rule (an ‘‘existing covered 

entity’’ for purposes of this preamble) 

and becomes an affiliate of a new 

covered entity generally must conform 

any existing but non-conformed inscope QFC that the existing covered 

entity continues to have with a 

counterparty after the applicable initial 

compliance date by the date the new 

covered entity enters a QFC with the 

same counterparty (or any of its 

consolidated affiliates) or within a 

reasonable period thereafter. 

Acquisitions of new entities are planned 

in advance and should include 

preparing to comply with applicable 

laws and regulations. 

Certain commenters opposed 

application of the requirements of the 

rule to existing QFCs, requesting instead 

that the final rule only apply to QFCs 

entered into after the effective date of 

any final rule and that all pre-existing 

QFCs not be subject to the rule’s 

requirements. Commenters suggested 

that end users of QFCs with GSIB 

affiliates might not have entered into 

existing contracts without the default 

rights prohibited in the proposed rule 

and that revising existing QFCs would 

be time-consuming and expensive. 

Commenters pointed out that this 

treatment would be consistent with the 

final rules in the United Kingdom and 

the statutory requirements adopted by 

Germany. 

The Board does not believe it is 

appropriate to exclude all pre-existing 

QFCs because of the current and future 

risk that existing covered QFCs pose to 

the orderly resolution of a covered 

entity. Moreover, application of 

different default rights to existing and 

future transactions within a netting set 

could cause the netting set to be broken, 

which commenters noted could increase 

burden to both parties to the netting 

set.245 Therefore, the final rule requires 

an existing QFC between a covered 

entity and a counterparty to be 

conformed to the requirements of the 

final rule if the covered entity (or an 

affiliate that is a covered entity or 

excluded bank) enters into another QFC 

with the counterparty or its 

consolidated affiliate on or after the first 

day of the calendar quarter immediately 

following one year from the effective 

date of the final rule.246 By permitting 

a covered entity to remain a party to 

noncompliant QFCs entered before the 

effective date unless the covered entity 

or any affiliate (that is also a covered 

entity or excluded bank) enters into new 

QFCs with the same counterparty or its 

affiliates, the final rule strikes a balance 

between ensuring QFC continuity if the 

GSIB were to fail and ensuring that 

covered entities and their existing 

counterparties can manage any 

compliance costs and disruptions 

associated with conforming existing 

QFCs by refraining from entering into 

new QFCs. The requirement that a 

covered entity ensure that all existing 

QFCs with a particular counterparty and 

its affiliates are compliant before it or 

any affiliate of the covered entity (that 

is also a covered entity or excluded 

bank) enters into a new QFC with the 

same counterparty or its affiliates after 

the effective date will provide covered 

entities with an incentive to seek the 

modifications necessary to ensure that 

their QFCs with their most important 

counterparties are compliant. Moreover, 

the volume of noncompliant covered 

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42914 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

247See final rule § 252.88(c). 

248Some commenters requested that the rule be 

rewritten to be more understandable to non-covered 

entity counterparties and that the Board release 

FAQs regarding this final rule that are 

understandable to non-financial counterparties. The 

Board has endeavored to clarify the final rule as 

much as possible and has discussed those 

clarifications throughout this SUPPLEMENTARY

INFORMATION. The Board does not believe FAQs for 

this final rule are required at this time, but will 

consider the need for such FAQs in the future. 

QFCs outstanding can be expected to 

decrease over time and eventually to 

reach zero. In light of these 

considerations, and to avoid creating 

potentially inappropriate compliance 

costs with respect to existing QFCs with 

counterparties that, together with their 

consolidated affiliates, do not enter into 

new covered QFCs with the GSIB on or 

after the first day of the calendar quarter 

that is one year from the effective date 

of the final rule, it would be appropriate 

to permit a limited number of 

noncompliant QFCs to remain 

outstanding, in keeping with the terms 

described above. Moreover, the final 

rule also excludes existing warrants and 

retail investment advisory agreements to 

address concerns raised by commenters 

and mitigate burden.247 That said, the 

Board will monitor covered entities’ 

levels of noncompliant QFCs and 

evaluate the risk, if any, that they pose 

to the safety and soundness of the GSIBs 

or to U.S. financial stability. 

IV. Costs and Benefits 

The Board invited comment on its 

evaluation of the costs and benefits of 

the proposal. In response to comments 

received, the Board has made a number 

of changes to the proposal that are 

expected to reduce costs and burdens of 

compliance with the final rule while at 

the same time ensuring that the final 

rule serves its intended purposes. 

A number of commenters argued that 

particular aspects of the proposal were 

burdensome and costly as described 

throughout this SUPPLEMENTARY

INFORMATION. One commenter stated that 

the proposal was overly complex and 

difficult for market participants to 

evaluate and for courts to interpret, 

which could lead to potentially different 

or conflicting interpretations.248

Another commenter contended that the 

Board has not adequately considered the 

litigation costs that will result from the 

final rule’s heightened burden of proof. 

Certain commenters expressed the view 

that the proposal made unquantified 

assumptions about the costs, provided 

no evidence that benefits would 

outweigh the costs, and did not discuss 

the impact of the requirements for 

particular market segments (e.g., 

physical commodity markets). Certain 

commenters urged the Board to consider 

the costs of the contractual default 

rights lost under the rule and to 

consider the compliance costs and 

additional collateral costs the rule will 

impose on non-GSIB parties to QFCs 

(including parties not regulated by the 

Board), particularly in stress scenarios 

where the non-GSIB party cannot 

require the GSIB counterparty to post 

collateral. Some commenters contended 

that GSIB entities will have to 

compensate sophisticated non-covered 

entities for the additional risks they are 

forced to incur if forced to give up 

default rights and will bear the cost of 

the economic barriers to engaging in 

international finance that follow from 

this rule. A few commenters argued 

that, before the Board proceeds to 

finalize this rule, the Board should 

conduct a study and assessment of the 

costs and benefit as well as the market 

impact of the proposed rules, the TLAC 

rules, and the broader FSB initiatives, 

with a specific focus on application to 

existing default rights and the impact on 

all affected market participants. 

Other commenters pointed out that 

since large banks already adhere to the 

Universal Protocol, more than 90 

percent of outstanding notional swaps 

are already subject to stays. These 

commenters argued that further study 

and analysis was needed to determine 

whether it is necessary to restrict enduser default rights by subjecting them 

indirectly to the proposed rule to 

capture the remaining 10 percent of the 

swaps market, including why the 

benefits outweigh the costs. 

Commenters also urged further analysis 

of why other categories of QFCs present 

the same concerns as swaps such that it 

is necessary for the Board to alter 

default rights contained therein (e.g., 

commodity and forward contracts) and 

the likely effect of the proposed rule on 

the markets for such QFCs. 

One commenter argued that the 

benefits of the proposal likely 

substantially outweigh the costs. This 

commenter contended that the losses in 

the Lehman bankruptcy alone due to the 

ability of counterparties to close out 

QFCs and seize collateral destroyed 

millions if not billions of dollars and 

argued that the exemption of QFCs from 

the automatic stay of the U.S. 

Bankruptcy Code has effectively 

subsidized the cost of credit extended 

among QFC participants. In this 

commenter’s view, any increase in the 

cost of QFCs relative to other financial 

instruments does not reflect true 

additional cost but rather reflects the 

loss of this implicit subsidy. The 

commenter estimated that the 2008 

financial crisis following the Lehman 

bankruptcy had an estimated cost in lost 

or avoided gross domestic product of 

more than $20 trillion. 

The final rule is intended to yield 

substantial net benefits for the financial 

stability of the United States by 

reducing the potential that resolution of 

a GSIB, particularly a resolution in 

bankruptcy, will be disorderly and 

disruptive to financial stability. These 

benefits are expected to substantially 

outweigh the costs associated with the 

final rule. 

The costs of the final rule to covered 

entities and their QFC counterparties 

would generally be of three types. The 

first cost would be the cost to QFC 

counterparties arising from the 

relinquishment of certain rights, such as 

cross-default rights, that would have 

been permitted prior to the rule. 

However, the costs of restricting such 

rights are expected to be low as the 

nature of the rights that are restricted is 

narrow, the likelihood of exercising 

such rights is low, and other forms of 

protection are available that are not 

prohibited by the rule. 

The second cost associated with the 

rule is the cost of lost revenue for 

covered entities that might result if noncovered entity counterparties refuse to 

engage in QFCs with covered entities as 

a result of the reduction in rights 

required by the rule. This cost, however, 

only accrues in the aggregate to the 

financial system to the extent that noncovered entity counterparties refuse to 

engage in QFCs with any counterparty. 

Third and finally, this rule imposes 

costs on covered entities and noncovered entities to the extent that they 

are required to bear legal and 

administrative costs associated with 

drafting and negotiating compliant 

contracts. These costs are expected to be 

small relative to the costs of doing 

business in the financial sector 

generally. Moreover, the final rule 

explicitly allows for the use of 

standardized industry protocols in lieu 

of complying with the terms of the rule, 

which should reduce the legal and 

administrative costs associated with 

complying with the rule. 

The Board has taken into account the 

information regarding costs and benefits 

provided by commenters and modified 

the proposed rule to reduce costs. To 

reduce the overall burden, the final rule 

contains a number of changes to 

respond to commenter concerns. As 

described above, the final rule reduces 

compliance and negotiating costs by 

excluding contracts from the scope of 

‘‘covered QFCs’’ subject to the 

requirements of the final rule to the 

extent the contract contains no default, 

cross-default, or transfer restrictions. 

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249See 12 CFR part 217. 

250See id. 

251See 12 CFR 217.2. 

Commenters argued that remediating 

such contracts would be costly without 

an attendant benefit to resolution of a 

GSIB. The final rule also only requires 

remediation of existing contracts with a 

counterparty if the counterparty or a 

consolidated affiliate of the 

counterparty enters into a new QFC 

with the covered entity (or certain 

affiliates). This change to consolidated 

affiliate is in response to many 

commenters’ argument that burden 

would be mitigated by defining 

counterparties by reference to financial 

consolidation. Additionally, in certain 

cases, where remediation of existing 

contracts would be difficult, the Board 

excludes such existing contracts from 

the scope of coverage of the 

requirements of the final rule. Finally, 

the final rule allows for the application 

of two standardized industry protocols 

as a means of complying with the 

requirements of the final rule. Adhering 

to an industry protocol will provide for 

a low cost and efficient means of 

compliance that does not result in 

excessive amounts of legal or 

administrative costs. 

The final rule similarly excludes from 

section 252.83 contracts that are with 

U.S. counterparties and governed by 

U.S. law. Commenters argued that 

renegotiating these contracts would be 

burdensome with no benefit to 

resolution. The final rule has also been 

modified to address concerns raised by 

foreign GSIBs regarding QFCs under 

multi-branch master agreements by 

excluding from the rule QFCs where 

only payment or delivery may be made 

at a U.S. branch or agency. Foreign GSIB 

commenters urged that this change 

would eliminate the need under the 

proposal to modify thousands of 

contracts at great cost. 

The final rule also provides a longer 

transition period requested by 

commenters for certain counterparties 

in order to help mitigate the compliance 

burden on covered entities and their 

counterparties. 

The Board believes that the changes 

above address many of the significant 

concerns raised by commenters 

regarding the burdens of the proposed 

rule and should serve to mitigate the 

compliance costs of the final rule. The 

Board also notes that application of the 

final rule is limited to GSIBs and 

believes that this approach to limiting 

the application of this final rule sensibly 

balances the costs and benefits of the 

rule by effectively managing systemic 

risk while at the same time limiting the 

burden of compliance by not requiring 

non-GSIB firms to comply with any part 

of this final rule. 

Additionally, the stay-and-transfer 

provisions of the Dodd-Frank Act and 

the FDI Act are already in force, and the 

Universal Protocol is already partially 

effective. This observation provides 

further support for the view that any 

marginal costs created by the final 

rule—which is intended to extend the 

effects of the stay-and-transfer 

provisions under those acts and the 

Universal Protocol—are unlikely to be 

material. 

Thus, the costs of the final rule are 

likely to be small relative to its benefits. 

These relatively small costs appear to be 

significantly outweighed by the 

substantial benefits that the rule would 

produce for the U.S. economy. Financial 

crises impose enormous costs on the 

real economy, so even small reductions 

in the probability or severity of future 

financial crises create substantial 

economic benefits. The final rule would 

materially reduce the risk to the 

financial stability of the United States 

that could arise from the severe distress 

or failure of a GSIB by enhancing the 

prospects for the orderly resolution of 

such a firm and would thereby 

materially reduce the probability and 

severity of financial crises in the future. 

The final rule would therefore advance 

a key objective of the Dodd-Frank Act 

and help protect the American economy 

from the substantial costs associated 

with more frequent and severe financial 

crises. 

In addition, the final rule would 

likely benefit subsidiaries of a failed 

GSIB, as well as their counterparties and 

creditors, by helping to prevent the 

disorderly failure of the subsidiaries and 

allowing them to continue to meet their 

obligations. Moreover, non-covered 

entity counterparties may choose to 

engage in QFCs with non-GSIB 

counterparties, in which case revenue 

that is lost by a GSIB may be recouped 

by a non-GSIB and aggregate QFC 

activity by the financial system would 

not decline. 

V. Revisions to Certain Definitions in 

the Board’s Capital and Liquidity Rules 

The final rule also amends several 

definitions in the Board’s capital and 

liquidity rules to help ensure that the 

final rule would not have unintended 

effects for the treatment of covered 

entities’ netting sets under those rules. 

The amendments are similar to the 

proposed rule as well as revisions that 

the Board and the OCC made in a 2014 

interim final rule to prevent similar 

effects from foreign jurisdictions’ 

special resolution regimes and firms’ 

adherence to the 2014 Universal 

Protocol.249

The Board’s regulatory capital rules 

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’’ or agreement that 

provides for certain rights upon the 

default of a counterparty.250 The Board 

has defined ‘‘qualifying master netting 

agreement’’ to mean 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, thereby reducing its 

counterparty exposure and market 

risks.251 On the whole, measuring the 

amount of exposure of these contracts 

on a net basis, rather than on a gross 

basis, results in a lower measure of 

exposure and thus a lower capital 

requirement. 

The current definition of ‘‘qualifying 

master netting agreement’’ recognizes 

that default rights may be stayed if the 

financial company is in resolution 

under the Dodd-Frank Act, the FDI Act, 

a substantially similar law applicable to 

government-sponsored enterprises, or a 

substantially similar foreign law, or 

where the agreement is subject by its 

terms to any of those laws. Accordingly, 

transactions conducted under netting 

agreements where default rights may be 

stayed in those circumstances may 

qualify for the favorable capital 

treatment described above. However, 

the current definition of ‘‘qualifying 

master netting agreement’’ does not 

recognize the restrictions that the final 

rule would impose on the QFCs of 

covered entities. Thus, a master netting 

agreement that is compliant with the 

final rule would not qualify as a 

qualifying master netting agreement. 

This would result in considerably 

higher capital and liquidity 

requirements for QFC counterparties of 

covered entities, which is not an 

intended effect of the final rule. 

Accordingly, the final rule amends 

the definition of ‘‘qualifying master 

netting agreement’’ so that a master 

netting agreement could qualify for such 

treatment where 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 of the 

counterparty is consistent with the 

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42916 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

252As noted above, the FDIC and OCC are 

expected to issue substantively identical final rules 

in the near future. A Board-regulated instiution that 

amends a qualifying master netting agreement, 

collateral agreement, eligible margin loan, or repostyle transaction to the extent necessary for its 

counterparty to conform the agreement to any final 

rules issued by the FDIC or OCC would continue 

to meet such definition under the Board’s capital 

and/or liquidity rules, regardless of whether the 

agreement is amended before the effective date of 

any final rule issued by the FDIC or OCC. 

253 80 FR 74840, 74861–62 (Nov. 30, 2015). 

requirements of the final rule. This 

revision maintains the existing 

treatment for these contracts under the 

Board’s capital and liquidity rules by 

accounting for the restrictions that the 

final rule, or the substantively identical 

rules expected to be issued by the FDIC 

and OCC, would place on default rights 

related to covered entities’ and excluded 

banks’ QFCs. The Board does not 

believe that the disqualification of 

master netting agreements that would 

result in the absence of the amendment 

would accurately reflect the risk posed 

by the affected QFCs. As discussed 

above, the implementation of consistent 

restrictions on default rights in GSIB 

QFCs would increase the prospects for 

the orderly resolution of a failed GSIB 

and thereby protect the financial 

stability of the United States. 

The final rule similarly revises certain 

other definitions in the regulatory 

capital rules to make analogous 

conforming changes designed to account 

for the final rule’s restrictions and 

ensure that a banking organization may 

continue to recognize the risk-mitigating 

effects of financial collateral received in 

a secured lending transaction, repo-style 

transaction, or eligible margin loan for 

purposes of the Board’s rules. 

Specifically, the final rule revises the 

definitions of ‘‘collateral agreement,’’ 

‘‘eligible margin loan,’’ and ‘‘repo-style 

transaction’’ to provide that a 

counterparty’s default rights may be 

limited as required by the final rule 

without unintended effects.252

The rule establishing margin and 

capital requirements for covered swap 

entities (swap margin rule) defines the 

term ‘‘eligible master netting 

agreement’’ in a manner similar to the 

definition of ‘‘qualifying master netting 

agreement.’’ 253 Thus, it may also be 

appropriate to amend the definition of 

‘‘eligible master netting agreement’’ to 

account for the restrictions on covered 

entities’ QFCs. Because the Board issued 

the swap margin rule jointly with other 

U.S. regulatory agencies, however, the 

Board is consulting with the other 

prudential regulators regarding 

amending that rule’s definition of 

‘‘eligible master netting agreement.’’ 

Certain commenters requested 

technical modifications to the proposed 

modifications to the definitions to better 

distinguish the requirements of section 

252.84 and the provisions of Section 2 

of the Universal Protocol from 

provisions regarding ‘‘opt in’’ to special 

resolution regimes. In response to this 

comment, the final rule establishes an 

independent exception addressing the 

requirements of section 252.84 and the 

provisions of Section 2 of the Universal 

Protocol and makes other minor 

clarifying edits. 

One commenter requested that the 

definitions of the terms ‘‘collateral 

agreement,’’ ‘‘eligible margin loan,’’ 

‘‘qualifying master netting agreement,’’ 

and ‘‘repo-style transaction’’ include 

references to stays in state resolution 

regimes (such as insurance 

receiverships). The commenters did not 

identify, and the Board is not aware of, 

any state resolution regime that 

currently includes QFC stays similar to 

those of the U.S. Special Resolution 

Regimes. Neither the nature of the 

potential laws nor the extent of their 

effect on the regulatory capital 

requirements of Board-regulated 

institutions is known. Therefore, the 

final rule does not reference state 

resolution regimes. 

One commenter argued that neither 

the current nor the proposed definition 

of qualifying master netting agreement 

comports with section 302(a) of the 

Business Risk Mitigation and Price 

Stabilization Act of 2015, which 

exempts certain types of counterparties 

from initial and variation margin 

requirements, and that the proposed 

amendments to the definition add 

unnecessary complexity to the Board’s 

existing rules and therefore make 

compliance more difficult. Section 

302(a) of that act is not relevant to the 

definition of qualifying master netting 

agreement because the definition does 

not require initial or variation margin. 

Rather, the definition of qualifying 

master netting agreement requires that 

margin provided under the agreement, if 

any, be able to be promptly liquidated 

or set off under the circumstances 

specified in the definition. The Board 

continues to believe that the 

amendments are necessary and do not 

substantially add to the complexity of 

the Board’s rules. 

VI. Regulatory Analysis 

A. Paperwork Reduction Act 

Certain provisions of the final rule 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act (PRA) of 1995 

(44 U.S.C. 3501 through 3521). The 

Board reviewed the final rule under the 

authority delegated to the Board by the 

Office of Management and Budget 

(OMB). The reporting requirements are 

found in sections 252.85(b) and 

252.87(b) of the final rule. These 

information collection requirements 

would be implemented pursuant to 

section 165 of the Dodd-Frank Act, as 

well as its safety and soundness and 

other relevant authorities, as described 

in the Abstract below. In accordance 

with the requirements of the PRA, the 

Board may not conduct or sponsor, and 

the respondent is not required to 

respond to, an information collection 

unless it displays a currently valid OMB 

control number. 

The final rule would revise the 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Enhanced Prudential Standards 

(Regulation YY) (Reg YY; OMB No. 

7100–0350). In addition, as permitted by 

the PRA, the Board proposes to extend 

for three years, with revision, the 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Enhanced Prudential Standards 

(Regulation YY) (Reg YY; OMB No. 

7100–0350). The Board received no 

comments on the PRA. 

The Board has a continuing interest in 

the public’s opinions of collections of 

information. At any time, commenters 

may submit comments regarding the 

burden estimate, or any other aspect of 

this collection of information, including 

suggestions for reducing the burden, to 

the ADDRESSES section. All comments 

will become a matter of public record. 

Additionally, commenters may send a 

copy of their comments to the OMB 

desk officer for the agency by mail to the 

Office of Information and Regulatory 

Affairs, U.S. Office of Management and 

Budget, New Executive Office Building, 

Room 10235, 725 17th Street NW., 

Washington, DC 20503; by fax to (202) 

395–6974; or by email to oira_

submission@omb.eop.gov. 

Proposed Revision, With Extension, of 

the Following Information Collection 

Title of Information Collection: 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Enhanced Prudential Standards 

(Regulation YY). 

Agency Form Number: Reg YY. 

OMB Control Number: 7100–0350. 

Frequency of Response: Annual, 

semiannual, quarterly, one-time, and on 

occasion. 

Affected Public: Businesses or other 

for-profit. 

Respondents: State member banks, 

U.S. bank holding companies, savings 

and loan holding companies, nonbank 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42917 

254 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 

1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 

1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 

4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. 

255 Global methodology means the assessment 

methodology and the higher loss absorbency 

requirement for global systemically important banks 

issued by the Basel Committee on Banking 

Supervision, as updated from time to time. 12 CFR 

252.2(o). 

256See 81 FR 29169 (May 11, 2016). 

257See 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). 

financial companies, foreign banking 

organizations, U.S. intermediate holding 

companies, foreign savings and loan 

holding companies, and foreign 

nonbank financial companies 

supervised by the Board. 

Abstract: Section 165 of the DoddFrank Act requires the Board to 

implement enhanced prudential 

standards for bank holding companies 

with total consolidated assets of $50 

billion or more, including global 

systemically important foreign banking 

organizations with $50 billion or more 

in total consolidated assets. Section 165 

of the Dodd-Frank Act also permits the 

Board to establish such other prudential 

standards for such banking 

organizations as the Board determines 

are appropriate. This regulation is being 

implemented by the Board under 

section 165 of the Dodd-Frank Act, as 

well as its safety and soundness and 

other relevant authorities.254

Reporting Requirements 

Section 252.85(b) of the final rule 

would require a covered entity to 

request the Board to approve as 

compliant with the requirements of 

sections 252.83 and 252.84 of this 

subpart provisions of one or more forms 

of covered QFCs, or proposed 

amendments to one or more forms of 

covered QFCs, with enhanced creditor 

protection conditions. Enhanced 

creditor protection conditions means a 

set of limited exemptions to the 

requirements of section 252.84(b) of this 

subpart that are different than those of 

paragraphs (d), (f), and (h) of section 

252.84 of this subpart. A covered entity 

making a request must provide (1) an 

analysis of the proposal under each 

consideration of paragraph 252.85(d) of 

this subpart; (2) a written legal opinion 

verifying that proposed provisions or 

amendments would be valid and 

enforceable under applicable law of the 

relevant jurisdictions, including, in the 

case of proposed amendments, the 

validity and enforceability of the 

proposal to amend the covered QFCs; 

and (3) any additional relevant 

information that the Board requests. 

Section 252.87(b) of the final rule 

would require each top-tier foreign 

banking organization that determines 

that it has the characteristics of a global 

systemically important banking 

organization under the global 

methodology to notify the Board of the 

determination by January 1 of each 

calendar year.255

Estimated Paperwork Burden for 

Proposed Revisions 

Estimated Number of Respondents: 

Section 252.85(b)—10 respondents. 

Section 252.87(b)—22 respondents. 

Estimated Burden per Response: 

Section 252.85(b)—40 hours. 

Section 252.87(b)—1 hour. 

Current estimated annual burden for 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Enhanced Prudential Standards 

(Regulation YY): 118,842 hours. 

Proposed revisions estimated annual 

burden: 422 hours. 

Total estimated annual burden: 

119,264 hours. 

B. Regulatory Flexibility Act: Final 

Regulatory Flexibility Analysis 

The Regulatory Flexibility Act, 5 

U.S.C. 601 et seq. (RFA), generally 

requires that an agency prepare and 

make available an initial regulatory 

flexibility analysis in connection with a 

notice of proposed rulemaking. 

The Board solicited public comment 

on this rule in a notice of proposed 

rulemaking 256 and has considered the 

potential impact of this rule on small 

entities in accordance with section 604 

of the RFA. Based on the Board’s 

analysis, and for the reasons stated 

below, the Board believes the final rule 

will 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 assets of $550 

million or less (small banking 

entities).257 Based on data as of June 

2017, there are approximately 3,758 

bank holding companies, savings and 

loan holding companies, and state 

member banks that have total domestic 

assets of $550 million or less and thus 

are considered small entities for 

purposes of the RFA. Based on the 

Board’s analysis, and for the reasons 

stated below, the Board believes the 

final rule will not have a significant 

economic impact on a substantial 

number of small entities. 

1. Statement of the need for, and 

objectives of, the final rule. 

As discussed, the Board is issuing this 

final rule as part of its program to make 

GSIBs more resolvable in order to 

reduce the risk that their failure would 

pose to the financial stability of the 

United States, consistent with section 

165 of the Dodd-Frank Act. In 

particular, the primary purpose of the 

final rule is to reduce the risk that the 

exercise of default rights by a failing 

GSIB’s QFC counterparties would lead 

to a disorderly failure of the GSIB and 

would produce negative contagion and 

disruption that could destabilize the 

U.S. financial system. 

2. Significant issues raised by the 

public comments in response to the 

IRFA and comments filed by the Chief 

Counsel for Advocacy of the Small 

Business Administration in response to 

the proposed rule and summary of any 

changes made in the proposed rule as 

a result of such comments. 

Commenters did not raise any issues 

in response to the IRFA. The Chief 

Counsel for Advocacy of the Small 

Business Administration did not file 

any comments in response to the 

proposed rule. 

3. Description and estimate of the 

number of small entities to which the 

final rule will apply. 

The final rule’s requirements to 

conform covered QFCs would only 

apply to GSIBs, which are the largest, 

most systemically important banking 

organizations, and certain of their 

subsidiaries. More specifically, the final 

rule would apply to (a) any U.S. GSIB 

top-tier bank holding company, (b) any 

subsidiary of such a bank holding 

company other than the exceptions 

described in the SUPPLEMENTARY

INFORMATION above for institutions 

regulated by the FDIC and OCC and 

certain investments, and (c) the U.S. 

operations of any foreign GSIB other 

than the exceptions described in the 

SUPPLEMENTARY INFORMATION above for 

institutions regulated by the FDIC and 

OCC and certain investments. The 

Board estimates that these requirements 

would apply to approximately 30 

banking organizations: Eight U.S. bank 

holding companies (i.e., U.S. GSIBs) and 

approximately 22 foreign banking 

organizations (i.e., foreign GSIBs with 

U.S. operations). None of these banking 

organizations would qualify as a small 

banking entity for the purposes of the 

RFA. However, as discussed above, the 

final rule also applies to each covered 

GSIB’s subsidiary that meets the 

definition of a covered entity (regardless 

of the subsidiary’s size) because an 

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42918 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

258 Global methodology means the assessment 

methodology and the higher loss absorbency 

requirement for global systemically important banks 

issued by the Basel Committee on Banking 

Supervision, as updated from time to time. 12 CFR 

252.2(o). 259 12 U.S.C. 4809(a). 

4The Board expects to evaluate jointly with the 

OCC and Federal Deposit Insurance Corporation 

exemption for small entities would 

significantly impair the effectiveness of 

the proposed stay-and-transfer 

provisions and thereby undermine a key 

objective of the final rule: To reduce the 

execution risk of an orderly GSIB 

resolution. The Board anticipates that 

any small subsidiary of a GSIB that is 

covered by this final rule would rely on 

its parent GSIB or a large subsidiary of 

that GSIB for reporting, recordkeeping, 

or similar compliance requirements and 

would not bear additional costs. 

Section 252.87(b) of the final rule 

would require each top-tier foreign 

banking organization that determines 

that it has the characteristics of a global 

systemically important banking 

organization under the global 

methodology to notify the Board of the 

determination by January 1 of each 

calendar year.258 All of these 

organizations by definition have $50 

billion or more in total consolidated 

assets. None of these banking 

organizations would qualify as a small 

banking entity for the purposes of the 

RFA. 

4. Significant alternatives to the final 

rule. 

In light of the foregoing, the Board 

does not believe that this final rule will 

have a significant negative economic 

impact on any small entities and 

therefore believes that there are no 

significant alternatives to the final rule 

that would reduce the impact on small 

entities. 

5. Steps taken to minimize the 

significant economic impact on small 

entities. 

As noted, the Board believes that an 

exemption for small entities would 

significantly impair the effectiveness of 

the proposed stay-and-transfer 

provisions and thereby undermine a key 

objective of the final rule: To reduce the 

execution risk of an orderly GSIB 

resolution. The Board did not receive 

any comments from small entities 

suggesting alternatives specific to those 

entities or quantifying their projected 

costs. The Board received, however, 

general comments that suggested 

alternatives that would reduce the 

burden on entities without regard to 

size. The Board has considered those 

comments and changes in the final rule 

in response to such comments in other 

sections of this SUPPLEMENTARY

INFORMATION section. In addition, the 

Board anticipates that any small 

subsidiary of a GSIB that is covered by 

this final rule would rely on its parent 

GSIB or a large subsidiary of that GSIB 

for reporting, recordkeeping, or similar 

compliance requirements and would not 

bear additional costs. 

C. Riegle Community Development and 

Regulatory Improvement Act of 1994 

The Riegle Community Development 

and Regulatory Improvement Act of 

1994 (RCDRIA) requires that each 

Federal banking agency, in determining 

the effective date and administrative 

compliance requirements for new 

regulations that impose additional 

reporting, disclosure, or other 

requirements on insured depository 

institutions, consider, consistent with 

principles of safety and soundness and 

the public interest, any administrative 

burdens that such regulations would 

place on depository institutions, 

including small depository institutions, 

and customers of depository 

institutions, as well as the benefits of 

such regulations. The Board has 

considered comment on these matters in 

other sections of this SUPPLEMENTARY

INFORMATION section. 

In addition, new regulations that 

impose additional reporting, 

disclosures, or other new requirements 

on insured depository institutions 

generally must take effect on the first 

day of a calendar quarter that begins on 

or after the date on which the 

regulations are published in final form. 

Therefore, covered entities, which 

include certain insured depository 

institutions, are required to comply with 

the requirements of the final rule on the 

first day of calendar quarters after the 

effective date of the regulation. 

D. Use of Plain Language 

Section 722 of the Gramm-LeachBliley Act requires the U.S. banking 

agencies to use plain language in all 

proposed and final rulemakings 

published after January 1, 2000.259 The 

Board received no comment on these 

matters and believes that the final rule 

is written plainly and clearly. 

List of Subjects in 12 CFR Parts 217, 

249, and 252 

Administrative practice and 

procedure, Banks, Banking, Federal 

Reserve System, Holding companies, 

Reporting and recordkeeping 

requirements, Securities. 

Authority and Issuance 

For the reasons stated in the 

Supplementary Information, the Board 

of Governors of the Federal Reserve 

System amends 12 CFR parts 217, 249, 

and 252 as follows: 

PART 217—CAPITAL ADEQUACY OF 

BANK HOLDING COMPANIES, 

SAVINGS AND LOAN HOLDING 

COMPANIES, AND STATE MEMBER 

BANKS (REGULATION Q) 

■ 1. The authority citation for part 217 

continues to read as follows: 

Authority: 12 U.S.C. 248(a), 321–338a, 

481–486, 1462a, 1467a, 1818, 1828, 1831n, 

1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 

3904, 3906–3909, 4808, 5365, 5368, 5371. 

■ 2. Section 217.2 is amended by: 

■ a. Revising the definition of 

‘‘collateral agreement’’; 

■ b. Revising paragraph (1)(iii) of the 

definition of ‘‘eligible margin loan’’; 

■ c. Revising the definition of 

‘‘qualifying master netting agreement’’; 

■ d. Republishing the introductory text 

of the definition of ‘‘repo-style 

transaction’’; and 

■ e. Revising paragraph (3)(ii)(A) of the 

definition of ‘‘repo-style transaction’’. 

The revisions and republication are 

set forth below: 

§ 217.2 Definitions. 

* * * * * 

Collateral agreement means a legal 

contract that specifies the time when, 

and circumstances under which, a 

counterparty is required to pledge 

collateral to a Board-regulated 

institution for a single financial contract 

or for all financial contracts in a netting 

set and confers upon the Boardregulated institution a perfected, firstpriority 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 Board-regulated 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 

Board-regulated institution’s exercise of 

rights under the agreement may be 

stayed or avoided: 

(1) 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 DoddFrank 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 

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Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 42919 

whether foreign special resolution regimes meet the 

requirements of this paragraph. 

5This requirement is met where all transactions 

under the agreement are (i) executed under U.S. law 

and (ii) constitute ‘‘securities contracts’’ under 

section 555 of the Bankruptcy Code (11 U.S.C. 555), 

qualified financial contracts under section 11(e)(8) 

of the Federal Deposit Insurance Act, or netting 

contracts between or among financial institutions 

under sections 401–407 of the Federal Deposit 

Insurance Corporation Improvement Act or the 

Federal Reserve Board’s Regulation EE (12 CFR part 

231). 

6The Board expects to evaluate jointly with the 

OCC and Federal Deposit Insurance Corporation 

whether foreign special resolution regimes meet the 

requirements of this paragraph. 

7The Board expects to evaluate jointly with the 

OCC and Federal Deposit Insurance Corporation 

whether foreign special resolution regimes meet the 

requirements of this paragraph. 

8The Board expects to evaluate jointly with the 

OCC and Federal Deposit Insurance Corporation 

whether foreign special resolution regimes meet the 

requirements of this paragraph. 

referenced in this paragraph (1)(i) in 

order to facilitate the orderly resolution 

of the defaulting counterparty; 

(ii) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph (1)(i) of 

this definition; or 

(2) Other than to the extent necessary 

for the counterparty to comply with the 

requirements of subpart I of the Board’s 

Regulation YY (part 252 of this chapter), 

part 47 of this title, or part 382 of this 

title, as applicable. 

* * * * * 

Eligible margin loan means: 

(1) * * * 

(iii) The extension of credit is 

conducted under an agreement that 

provides the Board-regulated 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: 

(A) Any exercise of rights under the 

agreement will not 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 DoddFrank Act, or under any similar 

insolvency law applicable to GSEs,5 or 

laws of foreign jurisdictions that are 

substantially similar 6 to the U.S. laws 

referenced in this paragraph 

(1)(iii)(A)(1) in order to facilitate the 

orderly resolution of the defaulting 

counterparty; or 

(2) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph 

(1)(iii)(A)(1) of this definition; and 

(B) The agreement may limit 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 of the counterparty to the extent 

necessary for the counterparty to 

comply with the requirements of 

subpart I of the Board’s Regulation YY 

(part 252 of this chapter), part 47 of this 

title, or part 382 of this title, as 

applicable. 

* * * * * 

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, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

(2) The agreement provides the Boardregulated 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: 

(i) Any exercise of rights under the 

agreement will not be stayed or avoided 

under applicable law in the relevant 

jurisdictions, other than: 

(A) In receivership, conservatorship, 

or resolution under the Federal Deposit 

Insurance Act, Title II of the DoddFrank 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 (2)(i)(A) in 

order to facilitate the orderly resolution 

of the defaulting counterparty; or 

(B) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph (2)(i)(A) of 

this definition; and 

(ii) The agreement may limit 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 of the counterparty to the extent 

necessary for the counterparty to 

comply with the requirements of 

subpart I of the Board’s Regulation YY 

(part 252 of this chapter), part 47 of this 

title, or part 382 of this title, as 

applicable; 

* * * * * 

Repo-style transaction means a 

repurchase or reverse repurchase 

transaction, or a securities borrowing or 

securities lending transaction, including 

a transaction in which the Boardregulated institution acts as agent for a 

customer and indemnifies the customer 

against loss, provided that: 

(3) * * * 

(ii) * * * 

(A) The transaction is executed under 

an agreement that provides the Boardregulated 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: 

(1) 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 DoddFrank Act, or under any similar 

insolvency law applicable to GSEs, or 

laws of foreign jurisdictions that are 

substantially similar 8 to the U.S. laws 

referenced in this paragraph 

(3)(ii)(A)(1)(i) in order to facilitate the 

orderly resolution of the defaulting 

counterparty; 

(ii) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph 

(3)(ii)(A)(1)(i) of this definition; and 

(2) The agreement may limit 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 of the counterparty to the extent 

necessary for the counterparty to 

comply with the requirements of 

subpart I of the Board’s Regulation YY 

(part 252 of this chapter), part 47 of this 

title, or part 382 of this title, as 

applicable; or 

* * * * * 

PART 249—LIQUIDITY RISK 

MEASUREMENT STANDARDS 

(REGULATION WW) 

■ 3. The authority citation for part 249 

continues to read as follows: 

Authority: 12 U.S.C. 248(a), 321–338a, 

481–486, 1467a(g)(1), 1818, 1828, 1831p–1, 

1831o–1, 1844(b), 5365, 5366, 5368. 

■ 4. Section 249.3 is amended by 

revising the definition of ‘‘qualifying 

master netting agreement’’ to read as 

follows: 

§ 249.3 Definitions. 

* * * * * 

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42920 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

1The Board expects to evaluate jointly with the 

OCC and Federal Deposit Insurance Corporation 

whether foreign special resolution regimes meet the 

requirements of this paragraph. 

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, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

(2) The agreement provides the Boardregulated 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: 

(i) Any exercise of rights under the 

agreement will not be stayed or avoided 

under applicable law in the relevant 

jurisdictions, other than: 

(A) In receivership, conservatorship, 

or resolution under the Federal Deposit 

Insurance Act, Title II of the DoddFrank 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)(A) in 

order to facilitate the orderly resolution 

of the defaulting counterparty; 

(B) Where the agreement is subject by 

its terms to, or incorporates, any of the 

laws referenced in paragraph (2)(i)(A) of 

this definition; and 

(ii) The agreement may limit 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 of the counterparty to the extent 

necessary for the counterparty to 

comply with the requirements of 

subpart I of the Board’s Regulation YY 

(part 252 of this chapter), part 47 of this 

title, or part 382 of this title, as 

applicable; 

* * * * * 

PART 252—ENHANCED PRUDENTIAL 

STANDARDS (REGULATION YY) 

■ 5. The authority citation for part 252 

continues to read as follows: 

Authority: 12 U.S.C. 321–338a, 481–486, 

1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 

1831w, 1835, 1844(b), 1844(c), 3101 et seq., 

3101 note, 3904, 3906–3909, 4808, 5361, 

5362, 5365, 5366, 5367, 5368, 5371. 

■ 6. Add subpart I to read as follows: 

Subpart I—Requirements for Qualified 

Financial Contracts of Global 

Systemically Important Banking 

Organizations 

Sec. 

252.81 Definitions. 

252.82 Applicability. 

252.83 U.S. Special Resolution Regimes. 

252.84 Insolvency proceedings. 

252.85 Approval of enhanced creditor 

protection conditions. 

252.86 Foreign bank multi-branch master 

agreements. 

252.87 Identification of global systemically 

important foreign banking organizations. 

252.88 Exclusion of certain QFCs. 

Subpart I—Requirements for Qualified 

Financial Contracts of Global 

Systemically Important Banking 

Organizations 

§ 252.81 Definitions. 

For purposes of this subpart: 

Central counterparty (CCP) has the 

same meaning as in § 217.2 of the 

Board’s Regulation Q (12 CFR 217.2). 

Chapter 11 proceeding means a 

proceeding under Chapter 11 of Title 11, 

United States Code (11 U.S.C. 1101– 

74.). 

Consolidated affiliate means an 

affiliate of another company that 

(1) Either consolidates the other 

company, or is consolidated by the 

other company, on financial statements 

prepared in accordance with U.S. 

Generally Accepted Accounting 

Principles, the International Financial 

Reporting Standards, or other similar 

standards; 

(2) Is, along with the other company, 

consolidated with a third company on a 

financial statement prepared in 

accordance with principles or standards 

referenced in paragraph (1) of this 

definition; or 

(3) For a company that is not subject 

to principles or standards referenced in 

paragraph (1), if consolidation as 

described in paragraph (1) or (2) of this 

definition would have occurred if such 

principles or standards had applied. 

Default right (1) Means, with respect 

to a QFC, any: 

(i) Right of a party, whether 

contractual or otherwise (including, 

without limitation, rights incorporated 

by reference to any other contract, 

agreement, or document, and rights 

afforded by statute, civil code, 

regulation, and common law), to 

liquidate, terminate, cancel, rescind, or 

accelerate such agreement or 

transactions thereunder, set off or net 

amounts owing in respect thereto 

(except rights related to same-day 

payment netting), exercise remedies in 

respect of collateral or other credit 

support or property related thereto 

(including the purchase and sale of 

property), demand payment or delivery 

thereunder or in respect thereof (other 

than a right or operation of a contractual 

provision arising solely from a change 

in the value of collateral or margin or a 

change in the amount of an economic 

exposure), suspend, delay, or defer 

payment or performance thereunder, or 

modify the obligations of a party 

thereunder, or any similar rights; and 

(ii) Right or contractual provision that 

alters the amount of collateral or margin 

that must be provided with respect to an 

exposure thereunder, including by 

altering any initial amount, threshold 

amount, variation margin, minimum 

transfer amount, the margin value of 

collateral, or any similar amount, that 

entitles a party to demand the return of 

any collateral or margin transferred by 

it to the other party or a custodian or 

that modifies a transferee’s right to reuse 

collateral or margin (if such right 

previously existed), or any similar 

rights, in each case, other than a right 

or operation of a contractual provision 

arising solely from a change in the value 

of collateral or margin or a change in the 

amount of an economic exposure; 

(2) With respect to § 252.84, does not 

include any right under a contract that 

allows a party to terminate the contract 

on demand or at its option at a specified 

time, or from time to time, without the 

need to show cause. 

Excluded bank: 

(1) Means a national bank, a Federal 

savings association, a Federal branch, a 

Federal agency, or an FSI that is 

exempted from the scope of this subpart 

pursuant to paragraph (b)(2) or (b)(3) of 

§ 252.82; 

(2) Does not include any entity 

described in paragraph (1) of this 

definition that is owned pursuant to 

section 3(a)(A)(ii) of the Bank Holding 

Company Act (12 U.S.C. 1842(a)(A)(ii)); 

is owned by a depository institution in 

satisfaction of debt previously 

contracted in good faith; is a portfolio 

concern, as defined under 13 CFR 

107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662); is owned pursuant to 

paragraph (11) of section 5136 of the 

Revised Statutes of the United States (12 

U.S.C. 24); or is a DPC branch 

subsidiary. 

FDI Act proceeding means a 

proceeding in which the Federal 

Deposit Insurance Corporation is 

appointed as conservator or receiver 

under section 11 of the Federal Deposit 

Insurance Act (12 U.S.C. 1821). 

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FDI Act stay period means, in 

connection with an FDI Act proceeding, 

the period of time during which a party 

to a QFC with a party that is subject to 

an FDI Act proceeding may not exercise 

any right that the party that is not 

subject to an FDI Act proceeding has to 

terminate, liquidate, or net such QFC, in 

accordance with section 11(e) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1821(e)) and any implementing 

regulations. 

Financial counterparty means a 

person that is: 

(1)(i) A bank holding company or an 

affiliate thereof; a savings and loan 

holding company as defined in section 

10(n) of the Home Owners’ Loan Act (12 

U.S.C. 1467a(n)); a U.S. intermediate 

holding company that is established or 

designated for purposes of compliance 

with this part; or a nonbank financial 

company supervised by the Board; 

(ii) A depository institution as defined 

in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)); an 

organization that is organized under the 

laws of a foreign country and that 

engages directly in the business of 

banking outside the United States; a 

Federal credit union or State credit 

union as defined in section 2 of the 

Federal Credit Union Act (12 U.S.C. 

1752(1) & (6)); an institution that 

functions solely in a trust or fiduciary 

capacity as described in section 

2(c)(2)(D) of the Bank Holding Company 

Act (12 U.S.C. 1841(c)(2)(D)); an 

industrial loan company, an industrial 

bank, or other similar institution 

described in section 2(c)(2)(H) of the 

Bank Holding Company Act (12 U.S.C. 

1841(c)(2)(H)); 

(iii) An entity that is state-licensed or 

registered as: 

(A) A credit or lending entity, 

including a finance company; money 

lender; installment lender; consumer 

lender or lending company; mortgage 

lender, broker, or bank; motor vehicle 

title pledge lender; payday or deferred 

deposit lender; premium finance 

company; commercial finance or 

lending company; or commercial 

mortgage company; except entities 

registered or licensed solely on account 

of financing the entity’s direct sales of 

goods or services to customers; 

(B) A money services business, 

including a check casher; money 

transmitter; currency dealer or 

exchange; or money order or traveler’s 

check issuer; 

(iv) A regulated entity as defined in 

section 1303(20) of the Federal Housing 

Enterprises Financial Safety and 

Soundness Act of 1992, as amended (12 

U.S.C. 4502(20)) or any entity for which 

the Federal Housing Finance Agency or 

its successor is the primary federal 

regulator; 

(v) Any institution chartered in 

accordance with the Farm Credit Act of 

1971, as amended, 12 U.S.C. 2002 et 

seq., that is regulated by the Farm Credit 

Administration; 

(vi) Any entity registered with the 

Commodity Futures Trading 

Commission as a swap dealer or major 

swap participant pursuant to the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1 et seq.), or an entity that is 

registered with the U.S. Securities and 

Exchange Commission as a securitybased swap dealer or a major securitybased swap participant pursuant to the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.); 

(vii) A securities holding company, 

with the meaning specified in section 

618 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(12 U.S.C. 1850a); a broker or dealer as 

defined in sections 3(a)(4) and 3(a)(5) of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(4)–(5)); an investment 

adviser as defined in section 202(a) of 

the Investment Advisers Act of 1940 (15 

U.S.C. 80b–2(a)); an investment 

company registered with the U.S. 

Securities and Exchange Commission 

under the Investment Company Act of 

1940 (15 U.S.C. 80a–1 et seq.); or a 

company that has elected to be 

regulated as a business development 

company pursuant to section 54(a) of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–53(a)); 

(viii) A private fund as defined in 

section 202(a) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b– 

2(a)); an entity that would be an 

investment company under section 3 of 

the Investment Company Act of 1940 

(15 U.S.C. 80a–3) but for section 

3(c)(5)(C); or an entity that is deemed 

not to be an investment company under 

section 3 of the Investment Company 

Act of 1940 pursuant to Investment 

Company Act Rule 3a–7 (17 CFR 

270.3a–7) of the U.S. Securities and 

Exchange Commission; 

(ix) A commodity pool, a commodity 

pool operator, or a commodity trading 

advisor as defined, respectively, in 

sections 1a(10), 1a(11), and 1a(12) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(10), 1a(11), and 1a(12)); a floor 

broker, a floor trader, or introducing 

broker as defined, respectively, in 

sections 1a(22), 1a(23) and 1a(31) of the 

Commodity Exchange Act of 1936 (7 

U.S.C. 1a(22), 1a(23), and 1a(31)); or a 

futures commission merchant as defined 

in section 1a(28) of the Commodity 

Exchange Act of 1936 (7 U.S.C. 1a(28)); 

(x) An employee benefit plan as 

defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income and Security Act of 1974 (29 

U.S.C. 1002); 

(xi) An entity that is organized as an 

insurance company, primarily engaged 

in writing insurance or reinsuring risks 

underwritten by insurance companies, 

or is subject to supervision as such by 

a State insurance regulator or foreign 

insurance regulator; or 

(xii) An entity that would be a 

financial counterparty described in 

paragraphs (1)(i)–(xi) of this definition, 

if the entity were organized under the 

laws of the United States or any state 

thereof. 

(2) The term ‘‘financial counterparty’’ 

does not include any counterparty that 

is: 

(i) A sovereign entity; 

(ii) A multilateral development bank; 

or 

(iii) The Bank for International 

Settlements. 

Financial market utility (FMU) means 

any person, regardless of the 

jurisdiction in which the person is 

located or organized, that manages or 

operates a multilateral system for the 

purpose of transferring, clearing, or 

settling payments, securities, or other 

financial transactions among financial 

institutions or between financial 

institutions and the person, but does not 

include: 

(1) Designated contract markets, 

registered futures associations, swap 

data repositories, and swap execution 

facilities registered under the 

Commodity Exchange Act (7 U.S.C. 1 et 

seq.), or national securities exchanges, 

national securities associations, 

alternative trading systems, securitybased swap data repositories, and swap 

execution facilities registered under the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), solely by reason of 

their providing facilities for comparison 

of data respecting the terms of 

settlement of securities or futures 

transactions effected on such exchange 

or by means of any electronic system 

operated or controlled by such entities, 

provided that the exclusions in this 

clause apply only with respect to the 

activities that require the entity to be so 

registered; or 

(2) Any broker, dealer, transfer agent, 

or investment company, or any futures 

commission merchant, introducing 

broker, commodity trading advisor, or 

commodity pool operator, solely by 

reason of functions performed by such 

institution as part of brokerage, dealing, 

transfer agency, or investment company 

activities, or solely by reason of acting 

on behalf of a FMU or a participant 

therein in connection with the 

furnishing by the FMU of services to its 

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participants or the use of services of the 

FMU by its participants, provided that 

services performed by such institution 

do not constitute critical risk 

management or processing functions of 

the FMU. 

FSI means a state savings association 

or state nonmember bank (as the terms 

are defined in section 3 of the Federal 

Deposit Insurance Act, 12 U.S.C. 1813). 

Investment advisory contract means 

any contract or agreement whereby a 

person agrees to act as investment 

adviser to or to manage any investment 

or trading account of another person. 

Master agreement means a QFC of the 

type set forth in sections 

210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), 

(v)(V), or (vi)(V) of Title II of the DoddFrank Wall Street Reform and Consumer 

Protection Act (12 U.S.C. 

5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), 

(v)(V), or (vi)(V)) or a master agreement 

that the Federal Deposit Insurance 

Corporation determines by regulation is 

a QFC pursuant to section 210(c)(8)(D)(i) 

of Title II of the act (12 U.S.C. 

5390(c)(8)(D)(i)). 

Person has the same meaning as in 12 

CFR 225.2. 

Qualified financial contract (QFC) has 

the same meaning as in section 

210(c)(8)(D) of Title II of the Dodd-Frank 

Wall Street Reform and Consumer 

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

Retail customer or counterparty has 

the same meaning as in § 249.3 of the 

Board’s Regulation WW (12 CFR 249.3). 

Small financial institution means a 

company that: 

(1) Is organized as a bank, as defined 

in section 3(a) of the Federal Deposit 

Insurance Act, the deposits of which are 

insured by the Federal Deposit 

Insurance Corporation; a savings 

association, as defined in section 3(b) of 

the Federal Deposit Insurance Act, the 

deposits of which are insured by the 

Federal Deposit Insurance Corporation; 

a farm credit system institution 

chartered under the Farm Credit Act of 

1971; or an insured Federal credit union 

or State-chartered credit union under 

the Federal Credit Union Act; and 

(2) Has total assets of $10,000,000,000 

or less on the last day of the company’s 

most recent fiscal year. 

U.S. special resolution regimes means 

the Federal Deposit Insurance Act (12 

U.S.C. 1811–1835a) and regulations 

promulgated thereunder and Title II of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (12 U.S.C. 

5381–5394) and regulations 

promulgated thereunder. 

§ 252.82 Applicability. 

(a) General requirement. A covered 

entity must ensure that each covered 

QFC conforms to the requirements of 

§§ 252.83 and 252.84. 

(b) Covered entities. For purposes of 

this subpart, a covered entity is: 

(1) A bank holding company that is 

identified as a global systemically 

important BHC pursuant to 12 CFR 

217.402; 

(2) A subsidiary of a company 

identified in paragraph (b)(1) of this 

section other than a subsidiary that is: 

(i) A national bank, a Federal savings 

association, a Federal branch, a Federal 

agency, an FSI; 

(ii) A company owned pursuant to 

section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 

4(k)(4)(I) of the Bank Holding Company 

Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 

1843(k)(4)(H), 1843(k)(4)(I)); 

(iii) A company owned by a 

depository institution in satisfaction of 

debt previously contracted in good faith; 

(iv) A portfolio concern, as defined 

under 13 CFR 107.50, that is controlled 

by a small business investment 

company, as defined in section 103(3) of 

the Small Business Investment Act of 

1958 (15 U.S.C. 662); or 

(v) A company the business of which 

is to make investments that are designed 

primarily to promote the public welfare, 

of the type permitted under paragraph 

(11) of section 5136 of the Revised 

Statutes of the United States (12 U.S.C. 

24), including the welfare of low- and 

moderate-income communities or 

families (such as providing housing, 

services, or jobs)); or 

(3) A U.S. subsidiary, U.S. branch, or 

U.S. agency of a global systemically 

important foreign banking organization 

other than a U.S. subsidiary, U.S. 

branch, or U.S. agency that is: 

(i) A national bank, a Federal savings 

association, a Federal branch, a Federal 

agency, an FSI; 

(ii) A company owned pursuant to 

section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 

4(k)(4)(I) of the Bank Holding Company 

Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 

1843(k)(4)(H), 1843(k)(4)(I)); 

(iii) A company owned by a 

depository institution in satisfaction of 

debt previously contracted in good faith; 

(iv) A portfolio concern, as defined 

under 13 CFR 107.50, that is controlled 

by a small business investment 

company, as defined in section 103(3) of 

the Small Business Investment Act of 

1958 (15 U.S.C. 662); 

(v) A company the business of which 

is to make investments that are designed 

primarily to promote the public welfare, 

of the type permitted under paragraph 

(11) of section 5136 of the Revised 

Statutes of the United States (12 U.S.C. 

24), including the welfare of low- and 

moderate-income communities or 

families (such as providing housing, 

services, or jobs); 

(vi) A section 2(h)(2) company; or 

(vii) A DPC branch subsidiary. 

(c) Covered QFCs. For purposes of this 

subpart, a covered QFC is: 

(1) With respect to a covered entity 

that is a covered entity on November 13, 

2017, an in-scope QFC that the covered 

entity: 

(i) Enters, executes, or otherwise 

becomes a party to on or after January 

1, 2019; or 

(ii) Entered, executed, or otherwise 

became a party to before January 1, 

2019, if the covered entity or any 

affiliate that is a covered entity or 

excluded bank also enters, executes, or 

otherwise becomes a party to a QFC 

with the same person or a consolidated 

affiliate of the same person on or after 

January 1, 2019. 

(2) With respect to a covered entity 

that becomes a covered entity after 

November 13, 2017, an in-scope QFC 

that the covered entity: 

(i) Enters, executes or otherwise 

becomes a party to on or after the later 

of the date the covered entity first 

becomes a covered entity and January 1, 

2019; or 

(ii) Entered, executed, or otherwise 

became a party to before the date 

identified in paragraph (c)(2)(i) of this 

section with respect to the covered 

entity, if the covered entity or any 

affiliate that is a covered entity or 

excluded bank also enters, executes, or 

otherwise becomes a party to a QFC 

with the same person or consolidated 

affiliate of the same person on or after 

the date identified in paragraph (c)(2)(i) 

with respect to the covered entity. 

(d) In-scope QFCs. An in-scope QFC 

is a QFC that explicitly: 

(1) Restricts the transfer of a QFC (or 

any interest or obligation in or under, or 

any property securing, the QFC) from a 

covered entity; or 

(2) Provides one or more default rights 

with respect to a QFC that may be 

exercised against a covered entity. 

(e) Rules of construction. For 

purposes of this subpart: 

(1) A covered entity does not become 

a party to a QFC solely by acting as 

agent with respect to the QFC; and 

(2) The exercise of a default right with 

respect to a covered QFC includes the 

automatic or deemed exercise of the 

default right pursuant to the terms of the 

QFC or other arrangement. 

(f) Initial applicability of requirements 

for covered QFCs. (1) With respect to 

each of its covered QFCs, a covered 

entity that is a covered entity on 

November 13, 2017 must conform the 

covered QFC to the requirements of this 

subpart by: 

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(i) January 1, 2019, if each party to the 

covered QFC is a covered entity or an 

excluded bank; 

(ii) July 1, 2019, if each party to the 

covered QFC (other than the covered 

entity) is a financial counterparty that is 

not a covered entity or excluded bank; 

or 

(iii) January 1, 2020, if a party to the 

covered QFC (other than the covered 

entity) is not described in paragraph 

(f)(1)(i) or (f)(1)(ii) of this section or if, 

notwithstanding paragraph (f)(1)(ii), a 

party to the covered QFC (other than the 

covered entity) is a small financial 

institution. 

(2) With respect to each of its covered 

QFCs, a covered entity that is not a 

covered entity on November 13, 2017 

must conform the covered QFC to the 

requirements of this subpart by: 

(i) The first day of the calendar 

quarter immediately following 1 year 

after the date the covered entity first 

becomes a covered entity, if each party 

to the covered QFC is a covered entity 

or an excluded bank; 

(ii) The first day of the calendar 

quarter immediately following 18 

months from the date the covered entity 

first becomes a covered entity if each 

party to the covered QFC (other than the 

covered entity) is a financial 

counterparty that is not a covered entity 

or excluded bank; or 

(iii) The first day of the calendar 

quarter immediately following 2 years 

from the date the covered entity first 

becomes a covered entity if a party to 

the covered QFC (other than the covered 

entity) is not described in paragraph 

(f)(2)(i) or (f)(2)(ii) of this section or if, 

notwithstanding paragraph (f)(2)(ii), a 

party to the covered QFC (other than the 

covered entity) is a small financial 

institution. 

§ 252.83 U.S. Special Resolution Regimes. 

(a) Covered QFCs not required to be 

conformed. (1) Notwithstanding 

§ 252.82, a covered entity is not required 

to conform a covered QFC to the 

requirements of this section if: 

(i) The covered QFC designates, in the 

manner described in paragraph (a)(2) of 

this section, the U.S. special resolution 

regimes as part of the law governing the 

QFC; and 

(ii) Each party to the covered QFC, 

other than the covered entity, is: 

(A) An individual that is domiciled in 

the United States, including any State; 

(B) A company that is incorporated in 

or organized under the laws of the 

United States or any State; 

(C) A company the principal place of 

business of which is located in the 

United States, including any State; or 

(D) A U.S. branch or U.S. agency. 

(2) A covered QFC designates the U.S. 

special resolution regimes as part of the 

law governing the QFC if the covered 

QFC: 

(i) Explicitly provides that the 

covered QFC is governed by the laws of 

the United States or a state of the United 

States; and 

(ii) Does not explicitly provide that 

one or both of the U.S. special 

resolution regimes, or a broader set of 

laws that includes a U.S. special 

resolution regime, is excluded from the 

laws governing the covered QFC. 

(b) Provisions required. A covered 

QFC must explicitly provide that: 

(1) In the event the covered entity 

becomes subject to a proceeding under 

a U.S. special resolution regime, the 

transfer of the covered QFC (and any 

interest and obligation in or under, and 

any property securing, the covered QFC) 

from the covered entity will be effective 

to the same extent as the transfer would 

be effective under the U.S. special 

resolution regime if the covered QFC 

(and any interest and obligation in or 

under, and any property securing, the 

covered QFC) were governed by the 

laws of the United States or a state of 

the United States; and 

(2) In the event the covered entity or 

an affiliate of the covered entity 

becomes subject to a proceeding under 

a U.S. special resolution regime, default 

rights with respect to the covered QFC 

that may be exercised against the 

covered entity are permitted to be 

exercised to no greater extent than the 

default rights could be exercised under 

the U.S. special resolution regime if the 

covered QFC were governed by the laws 

of the United States or a state of the 

United States. 

(c) Relevance of creditor protection 

provisions. The requirements of this 

section apply notwithstanding 

paragraphs (d), (f), and (h) of § 252.84. 

§ 252.84 Insolvency proceedings. 

(a) Covered QFCs not required to be 

conformed. Notwithstanding § 252.82, a 

covered entity is not required to 

conform a covered QFC to the 

requirements of this section if the 

covered QFC: 

(1) Does not explicitly provide any 

default right with respect to the covered 

QFC that is related, directly or 

indirectly, to an affiliate of the direct 

party becoming subject to a 

receivership, insolvency, liquidation, 

resolution, or similar proceeding; and 

(2) Does not explicitly prohibit the 

transfer of a covered affiliate credit 

enhancement, any interest or obligation 

in or under the covered affiliate credit 

enhancement, or any property securing 

the covered affiliate credit enhancement 

to a transferee upon or following an 

affiliate of the direct party becoming 

subject to a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding or would prohibit such a 

transfer only if the transfer would result 

in the supported party being the 

beneficiary of the credit enhancement in 

violation of any law applicable to the 

supported party. 

(b) General prohibitions. (1) A 

covered QFC may not permit the 

exercise of any default right with 

respect to the covered QFC that is 

related, directly or indirectly, to an 

affiliate of the direct party becoming 

subject to a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding. 

(2) A covered QFC may not prohibit 

the transfer of a covered affiliate credit 

enhancement, any interest or obligation 

in or under the covered affiliate credit 

enhancement, or any property securing 

the covered affiliate credit enhancement 

to a transferee upon or following an 

affiliate of the direct party becoming 

subject to a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding unless the transfer would 

result in the supported party being the 

beneficiary of the credit enhancement in 

violation of any law applicable to the 

supported party. 

(c) Definitions relevant to the general 

prohibitions—(1) Direct party. Direct 

party means a covered entity or 

excluded bank that is a party to the 

direct QFC. 

(2) Direct QFC. Direct QFC means a 

QFC that is not a credit enhancement, 

provided that, for a QFC that is a master 

agreement that includes an affiliate 

credit enhancement as a supplement to 

the master agreement, the direct QFC 

does not include the affiliate credit 

enhancement. 

(3) Affiliate credit enhancement. 

Affiliate credit enhancement means a 

credit enhancement that is provided by 

an affiliate of a party to the direct QFC 

that the credit enhancement supports. 

(d) General creditor protections. 

Notwithstanding paragraph (b) of this 

section, a covered direct QFC and 

covered affiliate credit enhancement 

that supports the covered direct QFC 

may permit the exercise of a default 

right with respect to the covered QFC 

that arises as a result of: 

(1) The direct party becoming subject 

to a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding; 

(2) The direct party not satisfying a 

payment or delivery obligation pursuant 

to the covered QFC or another contract 

between the same parties that gives rise 

to a default right in the covered QFC; or 

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(3) The covered affiliate support 

provider or transferee not satisfying a 

payment or delivery obligation pursuant 

to a covered affiliate credit 

enhancement that supports the covered 

direct QFC. 

(e) Definitions relevant to the general 

creditor protections—(1) Covered direct 

QFC. Covered direct QFC means a direct 

QFC to which a covered entity or 

excluded bank is a party. 

(2) Covered affiliate credit 

enhancement. Covered affiliate credit 

enhancement means an affiliate credit 

enhancement in which a covered entity 

or excluded bank is the obligor of the 

credit enhancement. 

(3) Covered affiliate support provider. 

Covered affiliate support provider 

means, with respect to a covered 

affiliate credit enhancement, the affiliate 

of the direct party that is obligated 

under the covered affiliate credit 

enhancement and is not a transferee. 

(4) Supported party. Supported party 

means, with respect to a covered 

affiliate credit enhancement and the 

direct QFC that the covered affiliate 

credit enhancement supports, a party 

that is a beneficiary of the covered 

affiliate support provider’s obligation(s) 

under the covered affiliate credit 

enhancement. 

(f) Additional creditor protections for 

supported QFCs. Notwithstanding 

paragraph (b) of this section, with 

respect to a covered direct QFC that is 

supported by a covered affiliate credit 

enhancement, the covered direct QFC 

and the covered affiliate credit 

enhancement may permit the exercise of 

a default right after the stay period that 

is related, directly or indirectly, to the 

covered affiliate support provider 

becoming subject to a receivership, 

insolvency, liquidation, resolution, or 

similar proceeding if: 

(1) The covered affiliate support 

provider that remains obligated under 

the covered affiliate credit enhancement 

becomes subject to a receivership, 

insolvency, liquidation, resolution, or 

similar proceeding, other than a Chapter 

11 proceeding; 

(2) Subject to paragraph (h) of this 

section, the transferee, if any, becomes 

subject to a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding; 

(3) The covered affiliate support 

provider does not remain, and a 

transferee does not become, obligated to 

the same, or substantially similar, extent 

as the covered affiliate support provider 

was obligated immediately prior to 

entering the receivership, insolvency, 

liquidation, resolution, or similar 

proceeding with respect to: 

(i) The covered affiliate credit 

enhancement; 

(ii) All other covered affiliate credit 

enhancements provided by the covered 

affiliate support provider in support of 

other covered direct QFCs between the 

direct party and the supported party 

under the covered affiliate credit 

enhancement referenced in paragraph 

(f)(3)(i) of this section; and 

(iii) All covered affiliate credit 

enhancements provided by the covered 

affiliate support provider in support of 

covered direct QFCs between the direct 

party and affiliates of the supported 

party referenced in paragraph (f)(3)(ii) of 

this section; or 

(4) In the case of a transfer of the 

covered affiliate credit enhancement to 

a transferee, 

(i) All of the ownership interests of 

the direct party directly or indirectly 

held by the covered affiliate support 

provider are not transferred to the 

transferee; or 

(ii) Reasonable assurance has not been 

provided that all or substantially all of 

the assets of the covered affiliate 

support provider (or net proceeds 

therefrom), excluding any assets 

reserved for the payment of costs and 

expenses of administration in the 

receivership, insolvency, liquidation, 

resolution, or similar proceeding, will 

be transferred or sold to the transferee 

in a timely manner. 

(g) Definitions relevant to the 

additional creditor protections for 

supported QFCs—(1) Stay period. Stay 

period means, with respect to a 

receivership, insolvency, liquidation, 

resolution, or similar proceeding, the 

period of time beginning on the 

commencement of the proceeding and 

ending at the later of 5:00 p.m. (eastern 

time) on the business day following the 

date of the commencement of the 

proceeding and 48 hours after the 

commencement of the proceeding. 

(2) Business day. Business day means 

a day on which commercial banks in the 

jurisdiction the proceeding is 

commenced are open for general 

business (including dealings in foreign 

exchange and foreign currency 

deposits). 

(3) Transferee. Transferee means a 

person to whom a covered affiliate 

credit enhancement is transferred upon 

the covered affiliate support provider 

entering a receivership, insolvency, 

liquidation, resolution, or similar 

proceeding or thereafter as part of the 

resolution, restructuring, or 

reorganization involving the covered 

affiliate support provider. 

(h) Creditor protections related to FDI 

Act proceedings. Notwithstanding 

paragraphs (b), (d), and (f) of this 

section, with respect to a covered direct 

QFC that is supported by a covered 

affiliate credit enhancement, the 

covered direct QFC and the covered 

affiliate credit enhancement may permit 

the exercise of a default right that is 

related, directly or indirectly, to the 

covered affiliate support provider 

becoming subject to FDI Act 

proceedings: 

(1) After the FDI Act stay period, if 

the covered affiliate credit enhancement 

is not transferred pursuant to 12 U.S.C. 

1821(e)(9)–(e)(10) and any regulations 

promulgated thereunder; or 

(2) During the FDI Act stay period, if 

the default right may only be exercised 

so as to permit the supported party 

under the covered affiliate credit 

enhancement to suspend performance 

with respect to the supported party’s 

obligations under the covered direct 

QFC to the same extent as the supported 

party would be entitled to do if the 

covered direct QFC were with the 

covered affiliate support provider and 

were treated in the same manner as the 

covered affiliate credit enhancement. 

(i) Prohibited terminations. A covered 

QFC must require, after an affiliate of 

the direct party has become subject to a 

receivership, insolvency, liquidation, 

resolution, or similar proceeding: 

(1) The party seeking to exercise a 

default right to bear the burden of proof 

that the exercise is permitted under the 

covered QFC; and 

(2) Clear and convincing evidence or 

a similar or higher burden of proof to 

exercise a default right. 

§ 252.85 Approval of enhanced creditor 

protection conditions. 

(a) Protocol compliance. (1) Unless 

the Board determines otherwise based 

on the specific facts and circumstances, 

a covered QFC is deemed to comply 

with this subpart if it is amended by the 

universal protocol or the U.S. protocol. 

(2) A covered QFC will be deemed to 

be amended by the universal protocol 

for purposes of paragraph (a)(1) of this 

section notwithstanding the covered 

QFC being amended by one or more 

Country Annexes, as the term is defined 

in the universal protocol. 

(3) For purposes of paragraphs (a)(1) 

and (2) of this section: 

(i) The universal protocol means the 

ISDA 2015 Universal Resolution Stay 

Protocol, including the Securities 

Financing Transaction Annex and Other 

Agreements Annex, published by the 

International Swaps and Derivatives 

Association, Inc., as of May 3, 2016, and 

minor or technical amendments thereto; 

(ii) The U.S. protocol means a 

protocol that is the same as the 

universal protocol other than as 

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provided in paragraphs (a)(3)(ii)(A)–(F) 

of this section. 

(A) The provisions of Section 1 of the 

attachment to the universal protocol 

may be limited in their application to 

covered entities and excluded banks 

and may be limited with respect to 

resolutions under the Identified 

Regimes, as those regimes are identified 

by the universal protocol; 

(B) The provisions of Section 2 of the 

attachment to the universal protocol 

may be limited in their application to 

covered entities and excluded banks; 

(C) The provisions of Section 

4(b)(i)(A) of the attachment to the 

universal protocol must not apply with 

respect to U.S. special resolution 

regimes; 

(D) The provisions of Section 4(b) of 

the attachment to the universal protocol 

may only be effective to the extent that 

the covered QFCs affected by an 

adherent’s election thereunder would 

continue to meet the requirements of 

this subpart; 

(E) The provisions of Section 2(k) of 

the attachment to the universal protocol 

must not apply; and 

(F) The U.S. protocol may include 

minor and technical differences from 

the universal protocol and differences 

necessary to conform the U.S. protocol 

to the differences described in 

paragraphs (a)(3)(ii)(A)–(E) of this 

section; 

(iii) Amended by the universal 

protocol or the U.S. protocol, with 

respect to covered QFCs between 

adherents to the protocol, includes 

amendments through incorporation of 

the terms of the protocol (by reference 

or otherwise) into the covered QFC; and 

(iv) The attachment to the universal 

protocol means the attachment that the 

universal protocol identifies as 

‘‘ATTACHMENT to the ISDA 2015 

UNIVERSAL RESOLUTION STAY 

PROTOCOL.’’ 

(b) Proposal of enhanced creditor 

protection conditions. (1) A covered 

entity may request that the Board 

approve as compliant with the 

requirements of §§ 252.83 and 252.84 

proposed provisions of one or more 

forms of covered QFCs, or proposed 

amendments to one or more forms of 

covered QFCs, with enhanced creditor 

protection conditions. 

(2) Enhanced creditor protection 

conditions means a set of limited 

exemptions to the requirements of 

§ 252.84(b) that is different than that of 

paragraphs (d), (f), and (h) of § 252.84. 

(3) A covered entity making a request 

under paragraph (b)(1) of this section 

must provide: 

(i) An analysis of the proposal that 

addresses each consideration in 

paragraph (d) of this section; 

(ii) A written legal opinion verifying 

that proposed provisions or 

amendments would be valid and 

enforceable under applicable law of the 

relevant jurisdictions, including, in the 

case of proposed amendments, the 

validity and enforceability of the 

proposal to amend the covered QFCs; 

and 

(iii) Any other relevant information 

that the Board requests. 

(c) Board approval. The Board may 

approve, subject to any conditions or 

commitments the Board may set, a 

proposal by a covered entity under 

paragraph (b) of this section if the 

proposal, as compared to a covered QFC 

that contains only the limited 

exemptions in paragraphs of (d), (f), and 

(h) of § 252.84 or that is amended as 

provided under paragraph (a) of this 

section, would prevent or mitigate risks 

to the financial stability of the United 

States that could arise from the failure 

of a global systemically important BHC, 

a global systemically important foreign 

banking organization, or the subsidiaries 

of either and would protect the safety 

and soundness of bank holding 

companies and state member banks to at 

least the same extent. 

(d) Considerations. In reviewing a 

proposal under this section, the Board 

may consider all facts and 

circumstances related to the proposal, 

including: 

(1) Whether, and the extent to which, 

the proposal would reduce the 

resiliency of such covered entities 

during distress or increase the impact 

on U.S. financial stability were one or 

more of the covered entities to fail; 

(2) Whether, and the extent to which, 

the proposal would materially decrease 

the ability of a covered entity, or an 

affiliate of a covered entity, to be 

resolved in a rapid and orderly manner 

in the event of the financial distress or 

failure of the entity that is required to 

submit a resolution plan; 

(3) Whether, and the extent to which, 

the set of conditions or the mechanism 

in which they are applied facilitates, on 

an industry-wide basis, contractual 

modifications to remove impediments to 

resolution and increase market 

certainty, transparency, and equitable 

treatment with respect to the default 

rights of non-defaulting parties to a 

covered QFC; 

(4) Whether, and the extent to which, 

the proposal applies to existing and 

future transactions; 

(5) Whether, and the extent to which, 

the proposal would apply to multiple 

forms of QFCs or multiple covered 

entities; 

(6) Whether the proposal would 

permit a party to a covered QFC that is 

within the scope of the proposal to 

adhere to the proposal with respect to 

only one or a subset of covered entities; 

(7) With respect to a supported party, 

the degree of assurance the proposal 

provides to the supported party that the 

material payment and delivery 

obligations of the covered affiliate credit 

enhancement and the covered direct 

QFC it supports will continue to be 

performed after the covered affiliate 

support provider enters a receivership, 

insolvency, liquidation, resolution, or 

similar proceeding; 

(8) The presence, nature, and extent of 

any provisions that require a covered 

affiliate support provider or transferee 

to meet conditions other than material 

payment or delivery obligations to its 

creditors; 

(9) The extent to which the supported 

party’s overall credit risk to the direct 

party may increase if the enhanced 

creditor protection conditions are not 

met and the likelihood that the 

supported party’s credit risk to the 

direct party would decrease or remain 

the same if the enhanced creditor 

protection conditions are met; and 

(10) Whether the proposal provides 

the counterparty with additional default 

rights or other rights. 

§ 252.86 Foreign bank multi-branch master 

agreements. 

(a) Treatment of foreign bank multibranch master agreements. With respect 

to a U.S. branch or U.S. agency of a 

global systemically important foreign 

banking organization, a foreign bank 

multi-branch master agreement that is a 

covered QFC solely because the master 

agreement permits agreements or 

transactions that are QFCs to be entered 

into at one or more U.S. branches or 

U.S. agencies of the global systemically 

important foreign banking organization 

will be considered a covered QFC for 

purposes of this subpart only with 

respect to such agreements or 

transactions booked at such U.S. 

branches and U.S. agencies. 

(b) Definition of foreign bank multibranch master agreements. A foreign 

bank multi-branch master agreement 

means a master agreement that permits 

a U.S. branch or U.S. agency and 

another place of business of a foreign 

bank that is outside the United States to 

enter transactions under the agreement. 

§ 252.87 Identification of global 

systemically important foreign banking 

organizations. 

(a) For purposes of this subpart, a toptier foreign banking organization that is 

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42926 Federal Register / Vol. 82, No. 175 / Tuesday, September 12, 2017 / Rules and Regulations 

or controls a covered company (as 

defined at 12 CFR 243.2(f)) is a global 

systemically important foreign banking 

organization if any of the following 

conditions is met: 

(1) The top-tier foreign banking 

organization determines, pursuant to 

paragraph (c) of this section, that the 

top-tier foreign banking organization has 

the characteristics of a global 

systemically important banking 

organization under the global 

methodology; or 

(2) The Board, using information 

available to the Board, determines: 

(i) That the top-tier foreign banking 

organization would be a global 

systemically important banking 

organization under the global 

methodology; 

(ii) That the top-tier foreign banking 

organization, if it were subject to the 

Board’s Regulation Q (part 217 of this 

chapter), would be identified as a global 

systemically important BHC under 

§ 217.402 of the Board’s Regulation Q; 

or 

(iii) That any U.S. intermediate 

holding company controlled by the toptier foreign banking organization, if the 

U.S. intermediate holding company is or 

were subject to § 217.402 of the Board’s 

Regulation Q, is or would be identified 

as a global systemically important BHC. 

(b) Each top-tier foreign banking 

organization that determines pursuant 

to paragraph (c) of this section that it 

has the characteristics of a global 

systemically important banking 

organization under the global 

methodology must notify the Board of 

the determination by January 1 of each 

calendar year. 

(c) A top-tier foreign banking 

organization that is or controls a 

covered company (as defined at 12 CFR 

243.2(f)) and prepares or reports for any 

purpose the indicator amounts 

necessary to determine whether the toptier foreign banking organization is a 

global systemically important banking 

organization under the global 

methodology must use the data to 

determine whether the top-tier foreign 

banking organization has the 

characteristics of a global systemically 

important banking organization under 

the global methodology. 

(d) Each top-tier foreign banking 

organization that controls a U.S. 

intermediate holding company and that 

meets the requirements of 

§ 252.153(b)(5) and (6) also meets the 

requirements of paragraphs (b) and (c) of 

this section. 

§ 252.88 Exclusion of certain QFCs. 

(a) Exclusion of QFCs with FMUs. 

Notwithstanding § 252.82, a covered 

entity is not required to conform to the 

requirements of this subpart a covered 

QFC to which: 

(1) A CCP is party; or 

(2) Each party (other than the covered 

entity) is an FMU. 

(b) Exclusion of certain excluded 

bank QFCs. If a covered QFC is also a 

covered QFC under parts 47 or 382 of 

this title that an affiliate of the covered 

entity is also required to conform 

pursuant to parts 47 or 382 of this title 

and the covered entity is: 

(1) The affiliate credit enhancement 

provider with respect to the covered 

QFC, then the covered entity is required 

to conform the credit enhancement to 

the requirements of this subpart but is 

not required to conform the direct QFC 

to the requirements of this subpart; or 

(2) The direct party to which the 

excluded bank is the affiliate credit 

enhancement provider, then the covered 

entity is required to conform the direct 

QFC to the requirements of this subpart 

but is not required to conform the credit 

enhancement to the requirements of this 

subpart. 

(c) Exclusion of certain contracts. 

Notwithstanding § 252.82, a covered 

entity is not required to conform the 

following types of contracts or 

agreements to the requirements of this 

subpart: 

(1) An investment advisory contract 

that: 

(i) Is with a retail customer or 

counterparty; 

(ii) Does not explicitly restrict the 

transfer of the contract (or any QFC 

entered pursuant thereto or governed 

thereby, or any interest or obligation in 

or under, or any property securing, any 

such QFC or the contract) from the 

covered entity except as necessary to 

comply with section 205(a)(2) of the 

Investment Advisers Act of 1940 (15 

U.S.C. 80b–5(a)(2)); and 

(iii) Does not explicitly provide a 

default right with respect to the contract 

or any QFC entered pursuant thereto or 

governed thereby. 

(2) A warrant that: 

(i) Evidences a right to subscribe to or 

otherwise acquire a security of the 

covered entity or an affiliate of the 

covered entity; and 

(ii) Was issued prior to November 13, 

2017. 

(d) Exemption by order. The Board 

may exempt by order one or more 

covered entities from conforming one or 

more contracts or types of contracts to 

one or more of the requirements of this 

subpart after considering: 

(1) The potential impact of the 

exemption on the ability of the covered 

entity(ies), or affiliates of the covered 

entity(ies), to be resolved in a rapid and 

orderly manner in the event of the 

financial distress or failure of the entity 

that is required to submit a resolution 

plan; 

(2) The burden the exemption would 

relieve; and 

(3) Any other factor the Board deems 

relevant. 

By order of the Board of Governors of the 

Federal Reserve System, September 1, 2017. 

Ann E. Misback, 

Secretary of the Board. 

[FR Doc. 2017–19053 Filed 9–11–17; 8:45 am] 

BILLING CODE P 

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