50228 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

1The 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.’’ 

2The 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 under bankruptcy if 

they were to fail and by creating a new back-up 

resolution regime, the Orderly Liquidation 

Authority, applicable to systemically important 

financial companies. 12 U.S.C. 5365(d), 5381–5394. 

3 81 FR 29169 (May 11, 2016). 

4Under 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. See FRB NPRM, 81 FR 29169, 29175 

(May 11, 2016). 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. 

5See FRB NPRM at § 252.82(a) (defining ‘‘covered 

entity’’ to include: (1) A bank holding company that 

is identified as a global systemically important 

[bank holding company] pursuant to 12 CFR 

217.402; (2) A subsidiary of a company identified 

in paragraph (a)(1) of § 252.82 (other than a 

subsidiary that is a covered bank); 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 a covered bank, section 2(h)(2) 

company or a DPC branch subsidiary)). In its final 

rule, the FRB also excluded entities supervised by 

the FDIC from the definition of a ‘‘covered entity.’’ 

82 FR 42882 (September 12, 2017). 

6 81 FR 55,381 (Aug. 19, 2016). 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Parts 324, 329, and 382 

RIN 3064–AE46 

Restrictions on Qualified Financial 

Contracts of Certain FDIC-Supervised 

Institutions; Revisions to the Definition 

of Qualifying Master Netting 

Agreement and Related Definitions 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final rule. 

SUMMARY: The FDIC is adding 

regulations to improve the resolvability 

of systemically important U.S. banking 

organizations and systemically 

important foreign banking organizations 

and enhance the resilience and the 

safety and soundness of certain State 

savings associations and State-chartered 

banks that are not members of the 

Federal Reserve System (‘‘State nonmember banks’’ or ‘‘SNMBs’’) for which 

the FDIC is the primary Federal 

regulator (together, ‘‘FSIs’’ or ‘‘FDICsupervised institutions’’). This final rule 

requires that FSIs and their subsidiaries 

(‘‘covered FSIs’’) ensure that covered 

qualified financial contracts (QFCs) to 

which they are a 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 Wall Street Reform and 

Consumer Protection Act (Dodd-Frank 

Act) and the Federal Deposit Insurance 

Act (FDI Act). In addition, covered FSIs 

are generally prohibited from being 

party to QFCs that would allow a QFC 

counterparty to exercise default rights 

against the covered FSI based on the 

entry into a resolution proceeding under 

the FDI Act, or any other resolution 

proceeding of an affiliate of the covered 

FSI. The final rule also amends the 

definition of ‘‘qualifying master netting 

agreement’’ in the FDIC’s capital and 

liquidity rules, and certain related terms 

in the FDIC’s capital rules. These 

amendments are intended to ensure that 

the regulatory capital and liquidity 

treatment of QFCs to which a covered 

FSI is party would not be affected by the 

restrictions on such QFCs. 

DATES: The final rule is effective on 

January 1, 2018, except for amendatory 

instruction #6 which is delayed 

indefinitely. Once OCC adopts its 

related final rule, FDIC will publish a 

document announcing the effective date 

of the amendatory instruction. 

FOR FURTHER INFORMATION CONTACT: 

Ryan Billingsley, Acting Associate 

Director, rbillingsley@fdic.gov, Capital 

Markets Branch, Division of Risk 

Management and Supervision; 

Alexandra Steinberg Barrage, Senior 

Resolution Policy Specialist, Office of 

Complex Financial Institutions, 

abarrage@fdic.gov; David N. Wall, 

Assistant General Counsel, dwall@

fdic.gov, Cristina Regojo, Counsel, 

cregojo@fdic.gov, Phillip Sloan, 

Counsel, psloan@fdic.gov, Michael 

Phillips, Counsel, mphillips@fdic.gov, 

Greg Feder, Counsel, gfeder@fdic.gov, or 

Francis Kuo, Counsel, fkuo@fdic.gov, 

Legal Division, Federal Deposit 

Insurance Corporation, 550 17th Street 

NW., Washington, DC 20429. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Background 

B. Notice of Proposed Rulemaking and 

General Summary of Comments 

C. Overview of the Final Rule 

D. Consultation With U.S. Financial 

Regulators 

E. Overview of Statutory Authority and 

Purpose 

II. Restrictions on QFCs of Covered FSIs 

A. Covered FSIs 

B. Covered QFCs 

C. Definition of ‘‘Default Right’’ 

D. Required Contractual Provisions Related 

to the U.S. Special Resolution Regimes 

E. Prohibited Cross-Default Rights 

F. Process for Approval of Enhanced 

Creditor Protections 

III. Transition Periods 

IV. Expected Effects 

V. Revisions to Certain Definitions in the 

FDIC’s Capital and Liquidity Rules 

VI. Regulatory Analysis 

A. Paperwork Reduction Act 

B. Regulatory Flexibility Act: Initial 

Regulatory Flexibility Analysis 

C. Riegle Community Development and 

Regulatory Improvement Act of 1994 

D. Solicitation of Comments on the Use of 

Plain Language 

E. Small Business Regulatory Enforcement 

Fairness Act 

I. Introduction 

A. Background 

This final rule addresses one of the 

ways the failure of a major financial 

firm could destabilize the financial 

system. The disorderly 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, as illustrated by 

the failure of Lehman Brothers in 

September 2008. Protecting the financial 

stability of the United States is a core 

objective of the Dodd-Frank Act,1 which 

Congress passed in response to the 

2007–2009 financial crisis and the 

ensuing recession. One way the DoddFrank Act helps to protect the financial 

stability of the United States is by 

reducing the damage that such a 

company’s failure would cause to the 

financial system if it were to occur. This 

strategy centers on measures designed to 

help ensure that a failed company’s 

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.2

The 2016 Notices of Proposed 

Rulemaking 

On May 3, 2016, the FRB issued a 

Notice of Proposed Rulemaking, (the 

FRB NPRM), pursuant to section 165 of 

the Dodd-Frank Act.3 The FRB’s 

proposed rule stated that it is intended 

as a further step to increase the 

resolvability of U.S. global systemically 

important banking organizations 

(GSIBs) 4 and global systemically 

important foreign banking organizations 

(foreign GSIBs) that operate in the 

United States (collectively, ‘‘covered 

entities’’).5 Subsequent to the FRB 

NPRM, the OCC issued the OCC Notice 

of Proposed Rulemaking (OCC NPRM),6

which applies the same QFC 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50229 

7 81 FR 74,326 (Oct. 26, 2016). 

8Although the FDIC is the insurer for all insured 

depository institutions in the United States, it is the 

primary Federal supervisor only for State-chartered 

banks that are not members of the Federal Reserve 

System, State-chartered savings associations, and 

insured State-licensed branches of foreign banks. As 

of June 30, 2017, the FDIC had primary supervisory 

responsibility for 3,711 SNMBs and State-chartered 

savings associations. 

9See https://www.fdic.gov/about/strategic/

strategic/supervision.html. 

10For additional background regarding the 

interconnectivity of the largest financial firms, see 

FRB NPRM, 81 FR 29175–29176 (May 11, 2016). 

11The 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 § 382.1. 

12The definition of ‘‘qualified financial contract’’ 

is broader than this list of examples, and the default 

rights discussed are not common to all types of 

QFCs. See final rule § 382.1. 

13 12 U.S.C. 5365(d). 

14FRB and FDIC, ‘‘Agencies Provide Feedback on 

Second Round Resolution Plans of ‘First-Wave’ 

Filers’’ (Aug. 5, 2014), available at https://

www.fdic.gov/news/news/press/2014/pr14067.html. 

See also FRB and FDIC, ‘‘Agencies Provide 

Feedback on Resolution Plans of Three Foreign 

Banking Organizations’’ (Mar. 23, 2015), available at 

https://www.fdic.gov/news/news/press/2015/

pr15027.html; FRB and FDIC, ‘‘Guidance for 2013 

165(d) Annual Resolution Plan Submissions by 

Domestic Covered Companies that Submitted Initial 

Resolution Plans in 2012’’ 5–6 (Apr. 15, 2013), 

available at https://www.fdic.gov/news/news/press/ 

2013/pr13027.html. 

15See https://www.fdic.gov/news/news/press/

2016/pr16031a.pdf, at 13. 

16 International Swaps and Derivatives 

Association, Inc., ‘‘ISDA 2015 Universal Resolution 

Stay Protocol’’ (November 4, 2015), available at 

http://assets.isda.org/media/ac6b533f-3/5a7c32f8- 

pdf. 

requirements to ‘‘covered banks’’ within 

the OCC’s jurisdiction. The FDIC issued 

a parallel proposal (FDIC NPRM, also 

referred to as ‘‘the proposal’’ or ‘‘the 

proposed rule’’) applicable to FSIs that 

are subsidiaries of a ‘‘covered entity’’ as 

defined in the FRB NPRM and to 

subsidiaries of such FSIs (collectively, 

‘‘covered FSIs’’).7 After considering the 

comments received on the FDIC NPRM, 

the FDIC is now finalizing its rule 

(‘‘FDIC FR’’). The final rule is intended 

to work in tandem with the FRB’s final 

rule adopted on September 1, 2017 

(‘‘FRB FR’’) and the OCC’s expected 

final rule (‘‘OCC FR’’). 

The policy objective of this final rule 

is to improve the orderly resolution of 

a GSIB by limiting disruptions to a 

failed GSIB through its FSI subsidiaries’ 

financial contracts with other 

companies. The FRB FR, the OCC FR, 

and FDIC FR complement the ongoing 

work of the FRB and the FDIC on 

resolution planning requirements for 

GSIBs. 

The FDIC has a strong interest in 

preventing a disorderly termination of 

covered FSIs’ QFCs upon a GSIB’s entry 

into resolution proceedings. In fulfilling 

the FDIC’s responsibilities as (i) the 

primary Federal supervisor for SNMBs 

and State savings associations; 8 (ii) the 

insurer of deposits and manager of the 

Deposit Insurance Fund (DIF); and (iii) 

the resolution authority for all FDICinsured institutions under the FDI Act 

and, if appointed by the Secretary of the 

Treasury, for large complex financial 

institutions under Title II of the DoddFrank Act, the FDIC’s interests include 

ensuring that large complex financial 

institutions are resolvable in an orderly 

manner, and that FDIC-insured 

institutions operate safely and soundly.9

The final rule specifically addresses 

QFCs, which are typically entered into 

by various operating entities in a GSIB 

group, including covered FSIs. These 

covered FSIs are affiliates of U.S. GSIBs 

or foreign GSIBs that have OTC 

derivatives exposure. The exercise of 

default rights against an otherwise 

healthy covered FSI resulting from the 

failure of its affiliate—e.g., its top-tier 

U.S. holding company—may cause it to 

weaken or fail. Accordingly, FDICsupervised affiliates of U.S. or foreign 

GSIBs are exposed, through the 

interconnectedness of their QFCs and 

their affiliates’ QFCs, to destabilizing 

effects if their counterparties or the 

counterparties of their affiliates exercise 

default rights upon the entry into 

resolution of the covered FSI itself or its 

GSIB affiliate.10

These potentially destabilizing effects 

are best addressed by requiring all GSIB 

entities to amend their QFCs to include 

contractual provisions aimed at 

avoiding such destabilization. It is 

imperative that all entities within the 

GSIB group amend their QFCs in a 

similar way, thereby eliminating an 

incentive for counterparties to 

concentrate QFCs in entities subject to 

fewer restrictions. Therefore, the 

application of this final rule to the QFCs 

of covered FSIs is not only necessary for 

the safety and soundness of covered 

FSIs individually and collectively, but 

also to avoid potential destabilization of 

the overall banking system. 

The FDIC received a total of 14 

comment letters in response to the FDIC 

NPRM from trade groups representing 

GSIBs or GSIB groups, buy-side and 

end-users of derivatives, individuals 

and community advocates. There was 

substantial overlap in the comments 

received by the FRB, OCC and FDIC 

regarding the NPRMs. Notably, a copy of 

comments the commenter had already 

sent to the FRB or the OCC generally 

accompanied the comments received by 

the FDIC and were incorporate therein 

by reference. Commenters requested 

that the agencies coordinate in 

developing final rules and consider 

comments submitted to the other 

agencies regarding their NPRMs. 

All comments were considered in 

developing the final rule. Comments are 

discussed in the relevant sections that 

follow. The FDIC consulted with the 

FRB and the OCC in developing the 

final rule. 

Qualified financial contracts, default 

rights, and financial stability. Like the 

FDIC NPRM, this final rule pertains to 

several important classes of financial 

transactions that are collectively known 

as QFCs.11 QFCs include swaps, other 

derivatives contracts, repurchase 

agreements (also known as ‘‘repos’’) and 

reverse repos, and securities lending 

and borrowing agreements.12 Financial 

institutions 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 failure of a GSIB 

that is an affiliate of a covered FSI that 

is party to large volumes of QFCs, which 

are likely to include QFCs with 

counterparties that are themselves 

systemically important. 

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. Together, the 

FRB and 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,13 and have instructed 

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.’’ 14 More 

recently, in April 2016,15 the FRB and 

FDIC noted the important changes that 

have been made to the structure and 

operations of the largest financial firms, 

including the adherence by all U.S. 

GSIBs and their affiliates to the ISDA 

2015 Universal Resolution Stay 

Protocol.16


sradovich on DSK3GMQ082PROD with RULES2
50230 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

17 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. 

18This 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 proceedings 

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. 19See 11 U.S.C. 362. 

Direct defaults and cross-defaults. 

This rule focuses on two distinct 

scenarios in which a party to a QFC is 

commonly able to exercise default 

rights. These two scenarios involve a 

default that occurs when either the GSIB 

entity that is a direct party 17 to the QFC 

or an affiliate of that entity enters a 

resolution proceeding.18 The first 

scenario occurs when a GSIB entity that 

is itself a direct party to the QFC enters 

a resolution proceeding and such event 

gives rise to default rights under the 

QFC it is a party to; 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 and such 

event gives rise to default rights under 

the QFC it is a party to; this preamble 

refers to such a scenario as a ‘‘crossdefault’’ and refers to default rights that 

arise from a cross-default as ‘‘crossdefault rights.’’ A GSIB parent entity 

will often 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. 

Importantly, the final rule does not 

affect all types of default rights, and, 

where it affects a default right, the rule 

does so only temporarily for the purpose 

of allowing the relevant resolution 

authority to take action to continue to 

provide for continued performance on 

the QFC or to transfer the QFC. 

Moreover, the final rule is concerned 

only with default rights that run against 

a GSIB entity—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. 

Resolution Strategies 

Single-point-of-entry resolution. 

Cross-default rights are especially 

significant in the context of a GSIB 

failure because GSIBs and their affiliates 

often enter into large volumes of QFCs. 

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, or similar entities organized in 

other countries. 

Many complex GSIBs have developed 

resolution strategies that rely on the 

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 effect of losses that led to the 

GSIB’s failure would pass 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. This strategy is designed to 

help ensure that the GSIB subsidiaries 

remain adequately capitalized, and that 

operating subsidiaries of the GSIB are 

able to stabilize and continue meeting 

their financial obligations without 

immediately 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 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. An SPOE resolution can also 

avoid the need for insured bank 

subsidiaries, including covered FSIs, to 

be placed into receivership or similar 

proceedings as the likelihood of their 

continuing to operate as going concerns 

will be significantly enhanced if the 

parent’s entry into resolution 

proceedings does not trigger the exercise 

of cross-default rights. Accordingly, this 

final rule, by limiting such cross-default 

rights in covered QFCs based on an 

affiliate’s entry into resolution 

proceedings, assists in stabilizing both 

the covered FSIs and the larger banking 

system. 

Multiple-Point-of-Entry Resolution. 

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. While insured 

depository institutions are not subject to 

resolution under the U.S. Bankruptcy 

Code, if a bank holding company were 

to fail, it would likely be resolved under 

the U.S. Bankruptcy Code. When an 

entity goes into resolution under the 

U.S. Bankruptcy Code, attempts by the 

debtor’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.19 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, 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50231 

20See, e.g., Aiello v. Providian Financial Corp., 

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

21The 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. 

22 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. 

23See 11 U.S.C. 362(a). 

24Section 204(a) of the Dodd-Frank Act, codified 

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

25See section 203 of the Dodd-Frank Act, codified 

at 12 U.S.C. 5383. 

26See 12 U.S.C. 5390(c)(9). 

27 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary 

stay generally lasts until 5 p.m. eastern time on the 

business day following the appointment of the FDIC 

as receiver. 

28 12 U.S.C. 5390(c)(10)(B)(i)(II). 

29 12 U.S.C. 5390(c)(16); 12 CFR 380.12. 

30See id. 

31 12 U.S.C. 1821(c). 

32See 12 U.S.C. 1821(e)(8)–(10). 

collectively cause a value-destroying 

disorderly liquidation of the debtor.20

However, the U.S. Bankruptcy Code 

largely exempts QFC.21 counterparties 

of the debtor from the automatic stay 

through special ‘‘safe harbor’’ 

provisions.22 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,23 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 (Title II) imposes 

stay requirements on QFCs of financial 

companies that enter resolution under 

that back-up resolution authority. In 

general, 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. With 

Title II of the Dodd-Frank Act, 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, an alternative resolution 

framework intended to be used rarely 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.24 Title II of the 

Dodd-Frank Act 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.25

Title II of the Dodd-Frank Act 

empowers the FDIC to transfer 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.26 To give the FDIC time 

to effect this transfer, Title II of the 

Dodd-Frank Act 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 Title II resolution, its 

insolvency, or its financial condition.27

Once the QFCs are transferred in 

accordance with the statute, Title II of 

the Dodd-Frank Act permanently stays 

the exercise of default rights for those 

reasons.28

Title II of the Dodd-Frank Act 

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 Title II 

resolution.29

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 

company. The provisions stay 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 

temporary, 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, in the case of crossdefault rights relating to guaranteed or 

supported QFCs, the FDIC takes the 

action required in order to continue to 

enforce those contracts.30

The Federal Deposit Insurance Act. 

Under the FDI Act, a failing insured 

depository institution would generally 

enter a receivership administered by the 

FDIC.31 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.32 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 QFCs with such affiliates 

based on the depository institution’s 

entry into resolution. Moreover, as with 

Title II, 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 

disruptions that may occur if a 

counterparty to a QFC with an affiliate 

of a GSIB entity that goes into resolution 

under the Bankruptcy Code or the FDI 

Act is provided cross-default rights. 

Scope of application. The proposal’s 

requirements would have applied to all 

‘‘covered FSIs.’’ ‘‘Covered FSIs’’ 

include: Any State savings associations 

(as defined in 12 U.S.C. 1813(b)(3)) or 

State non-member bank (as defined in 

12 U.S.C. 1813(e)(2)) that is a direct or 

indirect subsidiary of (i) a global 

systemically important bank holding 

company that has been designated 

pursuant to § 252.82(a)(1) of the FRB’s 


sradovich on DSK3GMQ082PROD with RULES2
50232 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

33The definition of covered FSI does not include 

insured State-licensed branches of FBOs. Any 

insured State-licensed branches of global 

systemically important FBOs would be covered by 

the FRB FR. Therefore, unlike the FRB FR, the FDIC 

is not including in the rule any special provisions 

relating to multi-branch netting arrangements. 

34 12 U.S.C. 5390(c)(8)(D). See proposed rule 

§ 382.1. 

35 In addition, the proposed rule states at 

§ 382.2(d) that it does not modify or limit, in any 

manner, the rights and powers of the FDIC as 

receiver under the FDI Act or Title II of the DoddFrank Act, including, without limitation, the rights 

of the receiver to enforce provisions of the FDI Act 

or Title II of the Dodd-Frank Act that limit the 

enforceability of certain contractual provisions. For 

example, the suspension of payment and delivery 

obligations to QFC counterparties during the stay 

period as provided under the FDI Act and Title II 

when an entity is in receivership under the FDI Act 

or Title II remains valid and unchanged irrespective 

of any contrary contractual provision and may 

continue to be enforced by the FDIC as receiver. 

Similarly, the use by a counterparty to a QFC of a 

contractual provision that allows the party to 

terminate a QFC on demand, or at its option at a 

specified time, or from time to time, for any reason, 

as a basis for termination of a QFC on account of 

the appointment of the FDIC as receiver (or the 

insolvency or financial condition of the company) 

remains unenforceable. This provision is retained 

in the final rule. 

36See proposed rule § 382.3. 

37See, e.g., Bank of England Prudential 

Regulation Authority, Policy Statement, 

‘‘Contractual stays in financial contracts governed 

by third-country law’’ (Nov. 2015), available at 

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

publications/ps/2015/ps2515.pdf. 

38Financial Stability Board, ‘‘Principles for Crossborder Effectiveness of Resolution Actions’’ (Nov. 3, 

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

uploads/Principles-for-Cross-border-Effectivenessof-Resolution-Actions.pdf. 

39See proposed rule § 382.4(b). 

40However, those default rights would 

nonetheless have been subject to Title II and FDI 

Act. 

41 ISDA, ‘‘Attachment to the ISDA 2015 Universal 

Resolution Stay Protocol,’’ (Nov. 4, 2015), available 

at http://assets.isda.org/media/ac6b533f-3/

5a7c32f8-pdf/. See proposed rule § 382.5(a). 

42See proposed rule § 382.5(c). 

43See proposed rule § 382.5(c). 

44This provision is retained in the final rule and 

the FDIC expects to consult with the FRB and OCC 

during its consideration of a request under this 

section. 

45See proposed rule §§ 324.2 and 329.3. 

Regulation YY (12 CFR 252.82); or (ii) 

a global systemically important foreign 

banking organization 33 that has been 

designated pursuant to § 252.87 of the 

FRB’s Regulation YY (12 CFR 252.87). 

This final rule also makes clear that the 

mandatory contractual stay 

requirements apply to the subsidiaries 

of any covered FSI. Under the final rule, 

the term ‘‘covered FSI’’ also includes 

‘‘any subsidiary of a covered FSI.’’ For 

the reasons noted above, all subsidiaries 

of covered FSIs should also be subject 

to mandatory contractual stay 

requirements—e.g., to avoid 

concentrating QFCs in entities subject to 

fewer restrictions. 

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,34

and included, among other 

arrangements, 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 FSI is party 

(covered QFC).35 Under the proposal, a 

covered FSI would have been required 

to conform pre-existing QFCs if a 

covered FSI entered 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 

FSIs 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 U.S. Special Resolution 

Regimes—that is, Title II and the FDI 

Act.36 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 

section of the proposal was also 

consistent with analogous legal 

requirements that have been imposed in 

other national jurisdictions 37 and with 

the Financial Stability Board’s 

‘‘Principles for Cross-border 

Effectiveness of Resolution Actions.’’ 38

Prohibited cross-default rights. Under 

the proposal, a covered FSI would 

generally 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.39 Covered FSIs would 

generally 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 FSI’s affiliate to 

a transferee upon or following the entry 

into resolution of the affiliate. 

The FDIC did not propose to prohibit 

covered FSIs from entering into QFCs 

that allow its counterparties to exercise 

direct default rights against the covered 

FSI.40 Under the proposal, a covered FSI 

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 

FSI fails to perform its obligations under 

the QFC. 

As an alternative to bringing their 

covered QFCs into compliance with the 

requirements set out in the proposed 

rule, covered FSIs would have been 

permitted to comply 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’’).41

The preamble to the proposal explained 

that the FDIC viewed the Universal 

Protocol as achieving an outcome 

consistent with the outcome intended 

by the requirements of the proposed 

rule by similarly limiting direct default 

rights and cross-default rights. 

Process for approval of enhanced 

creditor protection conditions. As noted 

above, in the context of addressing 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 Bankruptcy Code or the FDI 

Act is allowed to exercise cross-default 

rights, the proposed rule would have 

generally restricted the exercise of crossdefault rights by counterparties against 

a covered FSI. The proposal also would 

have allowed the FDIC, at the request of 

a covered FSI, to approve as compliant 

with the requirements of § 382.5 

proposed creditor protection provisions 

for covered QFCs.42

The FDIC would have been permitted 

to approve such a request if, in light of 

several enumerated considerations,43

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.44

Amendments to certain definitions in 

the FDIC ’s capital and liquidity rules. 

The proposal would have amended 

certain definitions in the FDIC’s capital 

and liquidity rules to help ensure that 

the regulatory capital and liquidity 

treatment of QFCs to which a covered 

FSI 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 FDIC’s 

regulatory capital and liquidity rules 

and would have similarly amended the 

definitions of the terms ‘‘collateral 

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

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

regulatory capital rules.45

Comments on the Proposal. The FDIC 

received 14 comments on the proposed 

rule from banking organizations, trade 

associations, public interest advocacy 

groups, and private individuals. FDIC 

staff also met with some commenters at 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50233 

their request to discuss their comments 

on the proposal, and summaries of these 

meetings may be found on the FDIC’s 

public Web site. 

A number of commenters including 

GSIBs that would be subject to the 

proposed requirements included in the 

proposal expressed strong support for 

the proposed rule as a well-considered 

effort to reduce systemic risk with 

minimal burden and as an important 

step to ensure a more efficient and 

orderly resolution process for GSIB 

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 would have 

shifted the costs of resolving the 

covered FSIs, covered entities, and 

covered banks 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 through a regulation. 

As described above, the proposal 

applied to ‘‘covered FSIs.’’ A covered 

FSI included any subsidiary of a 

covered FSI. The proposal defined 

‘‘subsidiary of a covered FSI’’ as an 

entity owned or controlled directly or 

indirectly by a covered FSI. ‘‘Control’’ 

was defined by reference to the Bank 

Holding Company Act of 1956, as 

amended (‘‘BHC Act’’). The other 

NPRMs similarly used the definition of 

control from the BHC Act for purposes 

of determining the entities that would 

have been subject to the requirements of 

the NPRMs. Commenters urged the 

agencies to move to a financial 

consolidation standard to define the 

subsidiaries of covered FSIs, arguing 

that the concept of control under the 

BHC Act includes entities (1) that are 

not under the operational control of the 

GSIB entity and (2) over whom the GSIB 

may not have the practical ability to 

require remediation. Furthermore, 

commenters urged that non-financial 

consolidated subsidiaries 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 FSI 

conform existing QFCs if a covered FSI 

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 generally prohibited a covered FSI 

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 FDIC 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 

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 cross-default 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 FSI 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 that the final 

rule apply 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 

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 FSIs, entities, 

and banks to conform covered QFCs 

with certain types of counterparties to 

the requirements of the final rule. 

Commenters also requested that the 

FDIC coordinate with other regulatory 

agencies, consider comments submitted 

to the OCC and the FRB regarding their 

proposals and from entities not 

regulated by the FDIC, and finalize a 

rule with conformance periods 

consistent with the OCC’s and FRB’s 

final rules. 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 

FDIC has considered the comments 

received on the proposal, including 

those of entities not regulated by the 


sradovich on DSK3GMQ082PROD with RULES2
50234 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

46 12 U.S.C. 5390(c)(8)(D). See proposed rule 

§ 382.1. 

47See final rule § 382.1. 

48See final rule § 382.2. 

49See final rule § 382.7. 

50See final rule § 382.2(c). 

51See final rule § 382.1. 

52See final rule § 382.3. 

FDIC, as well as the comments 

submitted to the OCC and FRB 

regarding their respective proposals, 

and these comments and any 

corresponding changes in the final rule 

are described in more detail throughout 

the remainder of this SUPPLEMENTARY

INFORMATION. 

C. Overview of Final Rule 

The FDIC is adopting this final rule to 

improve the resolvability of GSIBs and 

thereby furthering financial stability and 

enhancing the resilience, and the safety 

and soundness of covered FSIs. The 

FDIC 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 protect 

covered FSIs and to facilitate the orderly 

resolution of the most systemically 

important banking firms—GSIBs—by 

limiting the ability of the counterparties 

of the firms’ FSI subsidiaries to 

terminate qualified financial contracts 

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 FSIs to contain 

contractual provisions that opt into the 

stay-and-transfer provisions of the FDI 

Act and the Dodd-Frank Act to reduce 

the risk that the stay-and-transfer related 

actions by the receiver would be 

successfully challenged by a QFC 

counterparty or a court in a foreign 

jurisdiction. The final rule also 

prohibits covered FSIs 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 furthers the 

implementation of the Universal 

Protocol, which extends, through 

contractual agreement, the application 

of the resolution frameworks of the FDI 

Act and the Dodd-Frank Act to all QFCs 

entered into by an adhering GSIB and its 

adhering subsidiaries, including QFCs 

entered into 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 FSIs 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-by-counterparty basis. In 

addition, the final rule provides that 

covered QFCs amended pursuant to 

adherence of a covered FSI 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 (and is required to differ) from the 

Universal Protocol in certain respects 

discussed below, but otherwise must be 

substantively identical to the Universal 

Protocol. 

The final rule requires covered FSIs to 

conform certain covered QFCs to the 

requirements of the final rule beginning 

one year after the effective date 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 FSI generally is required to 

conform pre-existing QFCs only if the 

covered FSI or an affiliate of the covered 

FSI enters into a new QFC with the 

same counterparty or a consolidated 

affiliate of the counterparty on or after 

the first compliance date. 

Covered FSIs 

The final rule, like the proposal, 

applies to ‘‘covered FSIs,’’ which 

generally are State savings associations 

and State non-member banks and their 

subsidiaries. ‘‘Subsidiary’’ continues to 

be defined in the final rule by reference 

to BHC Act control. As discussed below, 

certain other types of subsidiaries, 

including a subsidiary that is owned in 

satisfaction of debt previously 

contracted in good faith, a portfolio 

concern controlled by a small business 

investment company, or a subsidiary 

that promotes the public welfare, are 

excluded from the definition of covered 

FSI and therefore not required to 

conform any QFCs. 

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 46 and would include, among other 

things, derivatives, repos, and securities 

lending agreements.47 Subject to the 

exceptions discussed below, the final 

rule’s requirements apply to any QFC to 

which a covered FSI is party (covered 

QFC). The final rule makes clear that 

covered FSIs 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.48

The final rule also excludes certain 

retail investment advisory agreements, 

and certain existing warrants. It also 

provides the FDIC with authority to 

exempt one or more covered FSIs from 

conforming certain contracts or types of 

contracts to the one or more of the 

requirements of the final rule after 

considering, in addition to any other 

factor the FDIC deems relevant, the 

burden the exemption would relieve 

and the potential impact of the 

exemption on the resolvability of the 

covered FSI or its affiliates.49

The final rule also makes clear that a 

covered FSI must conform existing 

QFCs with a counterparty if the GSIB 

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

affiliates that are covered FSIs or 

covered banks or covered entities) 

enters into a new QFC with that 

counterparty or its consolidated 

affiliate, defined by reference to 

financial consolidation principles. In 

particular, the final rule provides that a 

covered QFC includes a QFC that the 

covered FSI entered, executed, or 

otherwise became a party to before the 

first compliance date of this final rule if 

the covered FSI or any affiliate that is 

a covered FSI, covered entity or covered 

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.50 ‘‘Consolidated affiliate’’ is a 

defined term in the final rule that is 

defined by reference to financial 

consolidation principles.51

Required Contractual Provisions Related 

to the U.S. Special Resolution Regimes 

Under the final rule, covered FSIs 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.52 However, any 

covered QFC that is governed under 

U.S. law and involves only parties 

(other than the covered FSI) that are 

domiciled (in the case of individuals), 

incorporated in, organized under, the 

laws of the United States or any State, 

or whose principal place of business is 

located in the United States, including 

any State, or that is a U.S. branch or 

U.S. agency (U.S. counterparties) is also 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50235 

53See final rule § 382.3. 

54See final rule § 382.4(b). 

55See id. 

56These rights may nonetheless be subject to 

limitations governing their exercise in a resolution 

under Title II or the FDI Act. 

57See final rule § 382.5(a). 

58See final rule § 382.5(c). 

59See final rule § 382.5(c) and (d). 

60Several commenters requested that the FDIC 

consult with the FRB and the OCC in developing 

its final rule and coordinate its final rule with that 

of the FRB and OCC. Certain commenters also 

requested that the FDIC consult with foreign 

regulatory authorities in developing its final rule. 

61See 12 U.S.C. 1819. 62The FDIC is (i) the primary Federal supervisor 

for SNMBs and State savings associations; (ii) 

insurer of deposits and manager of the DIF; and (iii) 

the resolution authority for all FDIC-insured 

institutions under the Federal Deposit Insurance 

Act and for large complex financial institutions 

under Title II of the Dodd-Frank Act. See 12 U.S.C. 

1811, 1816, 1818, 1819, 1820(g), 1828, 1828m, 

1831p–1, 1831u, 5301 et seq. 

excluded from the requirements of the 

final rule relating to Title II of the DoddFrank Act and the FDI Act because it is 

clear that in these circumstances the 

stay-and-transfer provisions of those 

acts would be enforceable in a U.S. 

forum.53

Prohibited Cross-Default Rights 

Under the final rule, a covered FSI 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.54 Covered 

FSIs are similarly prohibited from 

entering into covered QFCs that would 

restrict the transfer of a credit 

enhancement supporting the QFC from 

the covered FSI’s affiliate to a transferee 

upon the entry into resolution of the 

affiliate.55

The final rule does not prohibit 

covered FSIs from entering into QFCs 

that provide their counterparties with 

direct default rights against the covered 

FSI. Under the final rule, a covered FSI 

may be a party to a QFC that provides 

the counterparty with the right to 

terminate the QFC if the covered FSI 

fails to perform its obligations under the 

QFC.56

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 FSIs to comply with 

the rule by adhering to the Universal 

Protocol.57 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 

FSIs, covered entities, and covered 

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. 

Process for Approval of Enhanced 

Creditor Protection Conditions 

The final rule also allows the FDIC, at 

the request of a covered FSI, to approve 

as compliant with the final rule covered 

QFCs with creditor protections other 

than those that would otherwise be 

permitted under § 382.4 of the final 

rule.58 The FDIC 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 

covered FSIs to at least the same extent 

as the final rule’s requirements.59

Amendments to Certain Definitions in 

the FDIC’s Capital and Liquidity Rules 

The final rule also amends certain 

definitions in the FDIC’s capital and 

liquidity rules to help ensure that the 

regulatory capital and liquidity 

treatment of QFCs to which a covered 

FSI 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 FDIC’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 FDIC’s regulatory capital rules. 

D. Consultation With U.S. Financial 

Regulators 

In developing this final rule, the FDIC 

consulted with the FRB and the OCC as 

a means of promoting alignment across 

regulations and avoiding redundancy. 

Furthermore, the FDIC has consulted 

with and expects to continue to consult 

with foreign financial regulatory 

authorities regarding the 

implementation of 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.60

The FRB has finalized a rulemaking 

that would subject entities to 

requirements substantially identical to 

those finalized here for covered FSIs. 

Similarly, the OCC is expected to 

finalize a rulemaking that would subject 

covered banks, including the national 

banks of GSIBs, to requirements 

substantially identical to those proposed 

here for covered FSIs. The FDIC has 

consulted with the OCC and the FRB 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. 

E. Overview of Statutory Authority and 

Purpose 

The FDIC is issuing this final rule 

under its authorities under the FDI Act 

(12 U.S.C. 1811 et seq.), including its 

general rulemaking authorities.61 The 

FDIC views the final rule as consistent 

with its overall statutory mandate.62 An 

overarching purpose of the final rule is 

to limit disruptions to an orderly 

resolution of a GSIB and its subsidiaries, 

thereby furthering financial stability 

generally. Another purpose is to 

enhance the safety and soundness of 

covered FSIs by addressing the two 

main issues raised by covered QFCs 

(noted above): Cross-border recognition 

and cross-default rights. 

As discussed above, the exercise of 

default rights by counterparties of a 

failed GSIB can have significant impacts 

on financial stability. These financial 

stability concerns are necessarily 

intertwined with the safety and 

soundness of covered FSIs and the 

banking system—the disorderly exercise 

of default rights can produce a sudden, 

contemporaneous threat to the safety 

and soundness of individual 

institutions, including insured 

depository institutions, throughout the 

system, which in turn threatens the 

system as a whole.F Furthermore, the 

failure of multiple insured depository 

institutions in the same time period 

could stress the DIF, which is managed 

by the FDIC. 

While a covered FSI may not itself be 

considered systemically important, as 

part of a GSIB, the disorderly resolution 

of the covered FSI could result in a 

significant negative impact on the GSIB. 

Additionally, the application of the final 

rule to the QFCs of covered FSIs should 

avoid creating what may otherwise be 


sradovich on DSK3GMQ082PROD with RULES2
50236 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

63See 12 CFR 252.2. 

64 12 U.S.C. 1841(a). 

65Commenters requested further clarification on 

the interaction between the final rules of the 

banking agencies to avoid legal uncertainty. As 

noted above, each banking agency either has 

already or is in the process of finalizing rules that 

are substantially identical to this final rule, and the 

banking agencies are expected to coordinate in the 

interpretation of the rules. Section 382.7(b) of the 

final rule, which addresses potential overlap 

between the agencies’ final rules, has been clarified 

in response to commenters’ requests. Section 

382.7(b) is discussed in more detail below. 

66Commenters generally expressed a similar view 

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

covered FSI as the term is used in §§ 382.3 and 

382.4 of the proposed rule. That term which was 

similarly defined by reference to BHC Act control 

under the proposal. 

67See, e.g., 12 U.S.C. 1842(a)(A)(ii), 1843(c)(2); 12 

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

an incentive for GSIBs and their 

counterparties to concentrate QFCs in 

entities that are subject to fewer 

counterparty restrictions. 

II. Restrictions on QFCs of Covered 

FSIs 

A. Covered FSIs (Section 382.2(a) of the 

Proposed Rule) 

The proposed rule applied to 

‘‘covered FSIs.’’ The term ‘‘covered FSI’’ 

included: Any State savings associations 

(as defined in 12 U.S.C. 1813(b)(3)) or 

State non-member bank (as defined in 

12 U.S.C. 1813(e)(2)) that is a direct or 

indirect subsidiary of (i) a global 

systemically important bank holding 

company that has been designated 

pursuant to § 252.82(a)(1) of the FRB’s 

Regulation YY (12 CFR 252.82); or (ii) 

a global systemically important foreign 

banking organization that has been 

designated pursuant to § 252.87 of the 

FRB’s Regulation YY (12 CFR 252.87). 

Under the proposed rule, the term 

‘‘covered FSI’’ included any ‘‘subsidiary 

of covered FSI.’’ 

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.63 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 of; or exercise of a controlling 

influence over the management or 

policies.64

Commenters noted that covered FSIs 

are not excluded from the definition of 

covered entities in the FRB NPRM. They 

urged the FDIC to coordinate with the 

FRB and the OCC to ensure that only a 

single set of rules applies to a GSIB 

entity. As discussed above, the banking 

agencies have coordinated and the FRB 

final rule excludes covered FSIs from 

the scope of entities covered by that 

rule.65

A number of commenters urged the 

agencies to move to a financial 

consolidation standard to define a 

‘‘subsidiary’’ of a covered entity, 

covered bank or covered FSI instead of 

by reference to BHC Act control.66

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 

asserted that financially consolidated 

subsidiaries are often subject to 

operational control and generally fully 

integrated into the parent’s enterprisewide governance, policies, procedures, 

control frameworks, business strategies, 

information technology systems, and 

management systems. These 

commenters noted 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 

Universal Protocol and, generally, the 

standard forms of ISDA master 

agreements define ‘‘affiliate’’ by 

reference to ownership of a majority of 

the voting power of an entity or person. 

For these reasons, commenters urged 

that the term ‘‘subsidiary’’ of a covered 

FSI should be based on financial 

consolidation under the final rule. 

Commenters urged that regardless of 

whether financial consolidation 

standard is adopted for the purpose of 

defining ‘‘subsidiary,’’ the final rule 

should exclude from the definition of 

‘‘covered FSI, covered bank, or covered 

entity’’ entities over which the GSIB 

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 GSIB 

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).67 Further, 

commenters asked the FDIC to 

coordinate with the FRB and the OCC to 

ensure the scope of entities covered 

under the terms ‘‘subsidiary’’ and 

‘‘affiliate’’ is consistent. Consistent with 

the FRB and the OCC, the FDIC is 

excluding from the definition of 

‘‘covered FSI’’ subsidiaries that are 

portfolio concerns, 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 that is owned pursuant 

to paragraph (11) of section 5136 of the 

Revised Statutes of the United States (12 

U.S.C. 24) and designed to promote the 

public welfare, and companies owned 

in satisfaction of debt previously 

contracted in good faith. 

Certain commenters requested other 

exclusions from the definition of 

‘‘covered entity’’ that are not applicable 

to the FDIC’s final rule. For example, 

certain commenters argued that 

subsidiaries of foreign GSIBs for which 

the foreign GSIB has been given special 

relief by an FRB order not to hold the 

subsidiary under an intermediate 

holding company (IHC) should not be 

included in the definition of covered 

entity, even if such entities would be 

consolidated under financial 

consolidation principles. The FDIC is 

not addressing these comments. 

Under the final rule, a ‘‘covered FSI’’ 

is generally any State savings 

associations (as defined in 12 U.S.C. 

1813(b)(3)) or State non-member bank 

(as defined in 12 U.S.C. 1813(e)(2)) that 

is a direct or indirect subsidiary of (i) a 

global systemically important bank 

holding company that has been 

designated pursuant to § 252.82(a)(1) of 

the FRB’s Regulation YY (12 CFR 

252.82); or (ii) a global systemically 

important foreign banking organization 

that has been designated pursuant to 

§ 252.87 of the FRB’s Regulation YY (12 

CFR 252.87), and any subsidiary of a 

covered FSI, other than 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 owned pursuant to 

paragraph (11) of section 5136 of the 

Revised Statutes of the United States (12 

U.S.C. 24). 

U.S. GSIB subsidiaries. Covered FSI 

would also generally include all 

subsidiaries of a covered FSI other than 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50237 

68See final rule § 382.2(b). 

69See final rule § 382.1. 

70 12 U.S.C. 5390(c)(16). 

71See proposed rule §§ 382.1 and 382.3(a). For 

convenience, this preamble generally refers to ‘‘a 

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

FSI is party’’ as shorthand to encompass the 

definition of ‘‘covered QFC.’’ 

72See proposed rule § 382.1. See also 12 U.S.C. 

5390(c)(8)(D). 

73However, 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. 

74 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. 

the exceptions noted above.68 Therefore, 

in order to increase the resilience and 

resolvability of the FSI and the entire 

GSIB entity of which it is a part by 

addressing the potential obstacles to 

orderly resolution posed by QFCs, it is 

necessary to apply the restrictions to the 

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 as covered FSIs should help 

ensure that such cross-default rights do 

not affect the ability of performing and 

solvent entities—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.’’ 69 The final rule does not 

limit the definition of covered FSIs to 

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.70 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 

FSIs are subsidiaries of GSIBs that are 

already subject to the requirements of 

the BHC Act, they should already know 

all of their BHC Act controlled 

subsidiaries and be familiar with BHC 

Act control principles. 

B. Covered QFCs (Section 382.2 of the 

Final Rule) 

General definition. The proposal 

applied to any ‘‘covered QFC,’’ 

generally defined as any QFC that a 

covered FSI enters into, executes, or 

otherwise becomes party to with the 

person or an affiliate of the same 

person.71 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, securities contracts, and 

forward agreements.72

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 advocated for 

the exclusion of a variety of types of 

QFCs from the requirements of the final 

rule. In particular, a number of 

commenters requested the exclusion of 

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 provided several examples 

of contracts that they asserted 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 indicated that for certain 

types of transactions, 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 requested the 

exclusion of 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; 73 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.74 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 that 

contracts issued in the capital markets 

or related to a capital market issuance 

like warrants or a certificate 

representing a call option, typically on 


sradovich on DSK3GMQ082PROD with RULES2
50238 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

75For 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. 

76One 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 § 382.44 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, 

§ 382.4 of the final rule does not prevent a covered 

FSI from entering into a covered QFC that allows 

the counterparty to exercise default rights once a 

non-bank covered FSI that is a direct party enters 

bankruptcy or fails to pay or perform under the 

QFC. 

77One 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 

§ 382.4 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 § 382.1 (defining ‘‘default 

right’’). Therefore, § 382.4 does not restrict the 

ability of QFCs, including overnight repos, to 

terminate at the end of the term of the contract. 

78See final rule § 382.2(c). 

79See 12 U.S.C. 5390(c)(8)(D); final rule § 382.1. 

80However, those default rights remain subject to 

Title II and FDI Act. 

81See final rule § 382.2(d). The final rule includes 

as an in-scope QFC a QFC that contains a restriction 

on the transfer of a QFC from a covered FSI. This 

would include any QFC that restricts the transfer of 

that QFC or any other QFC. 

a security or a basket of securities be 

excluded. 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 

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.75 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.76 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.77

The final rule applies to any ‘‘covered 

QFC,’’ which generally is defined as any 

‘‘in-scope QFC’’ that a covered FSI 

enters into, executes, or to which the 

covered FSI otherwise becomes a 

party.78 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.79 Parties that enter into 

contracts with covered FSIs have been 

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

Dodd-Frank Act since its enactment. 

Consistent with Title II of the DoddFrank Act, 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.80

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 FSI or 

explicitly provide default rights that 

may be exercised against a covered FSI 

(in-scope QFCs).81 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 rule 

without undermining its purpose by not 

requiring covered FSIs to conform 

contracts that do not contain the types 

of default rights and transfer restrictions 

that the final rule is intended to address. 

The final rule does not, however, 

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 FSI or its affiliate. 

The final rule provides that a covered 

FSI is not required to conform certain 

investment advisory contracts described 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50239 

82See final rule § 382.7(c)(1). The final rule 

defines retail customers or counterparty by 

reference to the FDIC’s rule relating to the liquidity 

coverage ratio, 12 CFR part 329. Covered FSIs 

should be familiar with this definition and its 

application. 

83See final rule § 382.7(c)(2). Warrants issued 

after the effective date of the final rule are not 

excluded from the requirements of the final rule. 

84The exclusions for investment advisory 

agreements and existing warrants set forth in the 

final rule are included to address commenters’ 

concerns as to the scope and potential compliance 

burden of the final rule. These exemptions are not 

interpretations of the definition of QFC and should 

not be construed as indicating that the FDIC has 

determined such contracts are necessarily QFCs. 

85See final rule § 382.7(d). 

86See proposed rule §§ 382. 3(a); 382.4(a). 

87See proposed rule § 382.1 (defining ‘‘affiliate’’). 

88See 12 U.S.C. 1841(k). 

89One 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. 

90See final rule § 382.2(c). 

91See final rule § 382.1. 

92See proposed rule § 382.7(a). 

93Commenters argued that in the European-style 

principal-to-principal clearing model, the clearing 

member faces the CCP on one swap (the ‘‘CCPfacing leg’’), and the clearing member, frequently a 

GSIB, faces the client on an otherwise identical, 

offsetting swap (the ‘‘client-facing leg’’). Under the 

proposed rule, only the CCP-facing leg of the 

transaction was excluded even though the clientfacing leg relates 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 agencies 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 

Continued 

by commenters (i.e., investment 

advisory contracts with retail advisory 

customers 82 of the covered FSI that only 

contain transfer restrictions necessary to 

comply with section 205(a) of the 

Investment Advisers Act). The final rule 

also exempts any existing warrant 

evidencing a right to subscribe or to 

otherwise acquire a security of a 

covered FSI or its affiliate.83 The final 

rule excludes these types of agreements 

because 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.84 The final rule also provides 

the FDIC with authority to exempt one 

or more covered FSIs from conforming 

certain contracts or types of contracts to 

the final rule after considering, in 

addition to any other factor the FDIC 

deems relevant, the burden the 

exemption would relieve and the 

potential impact of the exemption on 

the resolvability of the covered FSI or its 

affiliates.85 Covered FSIs that request 

that the FDIC exempt additional 

contracts from the final rule should be 

prepared to provide information in 

support of their requests. The FDIC 

expects to consult as appropriate with 

the FRB and the OCC during its 

consideration of any such request. 

Definition of covered QFC. As noted 

above, the proposal applied to any 

‘‘covered QFC,’’ generally defined as a 

QFC that a covered FSI enters into, after 

the effective date and a QFC entered 

earlier, but only if the covered FSI or its 

affiliate enters into a new QFC with the 

same person or an affiliate of the same 

person.86 ‘‘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.87 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.88

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.89

These arguments were similar to 

commenters’ arguments regarding the 

definition of ‘‘subsidiary’’ of a covered 

FSI, which were discussed above. 

Commenters asserted 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 to be remediated if the 

covered FSI 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 FSI 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 FSI entered, executed, or 

otherwise became a party to before 

January 1, 2019, if the covered FSI or 

any affiliate that is a covered FSI, 

covered entity, or covered 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, 2019.90 The 

final rule defines ‘‘consolidated 

affiliate’’ by reference to financial 

consolidation principles.91 As 

commenters indicated, 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 FSI). As a 

consequence, modifying the coverage of 

affiliates in this manner addresses 

concerns raised by commenters 

regarding burden. 

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.92

Commenters generally expressed 

support for this exclusion but some 

commenters requested that the agencies 

broaden this exclusion in the final rule. 

In particular, a number of commenters 

urged the agencies to exclude the 

‘‘client-facing 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.93 One commenter 


sradovich on DSK3GMQ082PROD with RULES2
50240 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

member that is a covered entity, covered bank or 

covered FSI to be closed out substantially 

contemporaneously with the CCP-facing 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, covered 

bank, or covered FSI client and its clearing member 

(as opposed to transactions where the covered 

entity, covered bank, or covered FSI 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, covered 

bank, or covered FSI is a clearing member or a 

client. A covered QFC—generally a QFC to which 

a covered entity, covered bank, or covered FSI is 

a party—is exempted from the requirements of the 

final rule if a CCP is also a party. 

94Letter to Robert E. Feldman, Executive 

Secretary, Federal Deposit Insurance Corporation, 

from James M. Cain, Sutherland Asbill & Brennan 

LLP, writing on behalf of the eleven Federal Home 

Loan Banks, at 2 (Dec. 12, 2016). 

95 12 CFR 324.2. 

96Letter to Robert E. Feldman, Executive 

Secretary, Federal Deposit Insurance Corporation, 

from Walt L. Lukken, President and CEO, Futures 

Industry Association, at 8–9 (Nov. 1, 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). 

97 Id. at 9. 

98 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. 

99As 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. 

100Letter to Robert E. Feldman, Executive 

Secretary, Federal Deposit Insurance Corporation, 

from Larry E. Thompson, Vice Chairman and 

General Counsel, The Depository Trust & Clearing 

Corporation, at 6 (Dec. 12, 2016). 

101See final rule § 382.1. See also 12 CFR 324.2. 

102See final rule § 382.7(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 agencies 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.’’ 94

The commenter requested, in the 

alternative, that the final rule expressly 

exclude such agreements. 

A few commenters requested that the 

FDIC 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.95 These commenters argued 

that a CCP does far more than 

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

that a CCP ‘‘interposes itself between 

counterparties to contracts 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.’’ 96 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.’’ 97

Commenters also urged the FDIC 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 98

or that are entered into subject to the 

rules of an FMU.99 For example, 

commenters argued that QFCs with 

FMUs such as the provision of an 

extension of credit by a central 

securities depositary (CSD) to a GSIB 

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 FSI 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.100 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, it is appropriate 

to exclude centrally cleared QFCs, in 

light of differences between cleared and 

non-cleared QFCs with respect to 

contractual arrangements, counterparty 

credit risk, default management, and 

supervision. The FDIC has not extended 

the exclusion for CCPs to the clientfacing 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 FSI 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 and does not 

sweep in entities that market 

participants would not normally 

recognize as clearing organizations.101

The final rule also makes clear that, 

if one or more FMUs are the only 

counterparties to a covered QFC, the 

covered FSI is not required to conform 

the covered QFC to the final rule.102

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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50241 

103These 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 FSIs, resulting in the loss of valuable 

counterparties in a way that will hinder market 

liquidity and covered FSI risk management. 104But see 12 U.S.C. 1821(e)(8)(G); 12 U.S.C. 

5390(c)(8)(F). 

105See proposed rule § 382.1. 

106See proposed rule § 382.1. 

107See id. These rights are nonetheless subject to 

the stay provisions of the FDIA and Title II. 

108See 81 FR 74333. 

109See id. 

110See proposed rule §§ 382.1, 382.4. 

111The definition of ‘‘default right’’ parallels the 

definition contained in the ISDA Protocol. 

Continued 

intended to address default rights of 

non-FMU parties. For example, if two 

covered FSIs engage in a bilateral QFC 

that is facilitated by an FMU and in the 

course of this facilitation each covered 

FSI maintains a QFC solely with the 

FMU then the final rule would not 

apply to each QFC between the FMU 

and each covered FSI but the 

requirements of the final rule would 

apply to the bilateral QFC between the 

two covered FSIs. This approach 

ensures that QFCs that are directly with 

FMUs are treated in a manner similar to 

transactions between covered FSIs and 

CCPs but also ensures that QFCs 

conducted by covered FSIs that are 

related to the direct QFC with the FMU 

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 

clarifications and exemptions that may 

help address the commenter’s concern 

regarding FCM agreements. 

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 

FDIC 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.103

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 FDIC 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 FSIs 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 FSIs sufficient time to develop 

separate conformance mechanisms for 

sovereigns and central banks, if 

necessary. 

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

382.1 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.104 The phrase ‘‘default right’’ in 

the proposed rule was broadly defined 

to include these common rights as well 

as ‘‘any similar rights.’’ 105 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.’’ 106 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.107 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.108

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 FSI 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).109

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.110 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 FSI, while 

leaving other default rights 

unrestricted.111


sradovich on DSK3GMQ082PROD with RULES2
50242 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

However, certain rights not included as such 

‘‘default rights’’ are nonetheless subject to the stay 

and other provisions of the FDI Act and the DoddFrank Act. The final rule does not modify or limit 

the FDIC’s powers in its capacity as receiver under 

the FDI Act or the Dodd-Frank Act with respect to 

a counterparties’ contractual or other rights. 

112See final rule § 382.4(b). 

113However, as noted previously, such rights are 

subject to the provisions of the FDI Act and Title 

II. 

114See proposed rule § 382.3. 

115See final rule § 382.3(b). 

116See final rule § 382.3. The proposal defined 

the term ‘‘U.S. special resolution regimes’’ to mean 

the FDI Act and Title II of the Dodd-Frank Act, 

along with regulations issued under those statutes. 

12 U.S.C. 1811–1835a; 12 U.S.C. 5381–5394. See 

final rule § 382.1. 

117These commenters stated 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. 

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 to the FRB and the OCC’s 

proposal urged that if the FRB’s and 

OCC’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 expressed concern that the 

definition of default right in the 

proposal would permit a defaulting 

covered FSI to demand collateral from 

its QFC counterparty as margin due to 

a market price change, but would not 

allow the non-covered FSI to demand 

collateral from the covered FSI. 

The final rule retains the same 

definition of ‘‘default right’’ as that of 

the proposal. The FDIC 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.112

‘‘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.113 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 are exercised before a covered FSI 

or its affiliate enter resolution and that 

would not be affected by the stay-andtransfer 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 FSIs to address 

default rights in QFCs solely between 

parties that are not covered FSIs (e.g., 

off-setting transactions to third parties 

by the non-GSIB counterparty, to the 

extent none are covered FSIs). 

D. Required Contractual Provisions 

Related to the U.S. Special Resolution 

Regimes (Section 382.3 of the Proposed 

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 

FSI to a transferee will 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 FSI 

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.114 The final rule contains 

these same provisions.115

A number of commenters noted that 

the wording of these requirements in 

proposed § 382.3(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 FSI (or, in 

the case of the requirement regarding 

default rights, its affiliate) becomes 

subject to a proceeding under a U.S. 

Special Resolution Regime.116

A number of commenters argued that 

QFCs should be exempt from the 

requirements of proposed § 382.3 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 

§ 382.3 would be redundant and would 

not provide any material resolution 

benefit, but would significantly increase 

the remediation burden on covered 

FSIs. 

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 § 382.3. 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.117

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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50243 

118See generally Financial Stability Board, 

‘‘Principles for Cross-border Effectiveness of 

Resolution Actions’’ (Nov. 3, 2015), available at 

http://www.fsb.org/wp-content/uploads/Principlesfor-Cross-border-Effectiveness-of-ResolutionActions.pdf. 

119See final rule § 382.3(a). 

120However, 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). 

121Although 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.’’). 

122For 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. 

123See Hertz Corp. v. Friend, 559 U.S. 77(2010) 

(describing the appropriate test for principal place 

of business). 

124See final rule § 382.3(a)(1)(ii). 

125See id. 

126See 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). 

127See PRA Rulebook: CRR Firms and NonAuthorised Persons: Stay in Resolution Instrument 

2015 (Nov. 12, 2015), available at 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), 

available at 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 U.K. 

mixed financial holding companies. 

128See 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 

europaeischen Vorgaben Zur Bankenabgabe, Nov. 2, 

2015, Artikel 1(17). 

129See 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). 

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 (in 

conjunction with those of the FRB FR 

and the expected OCC FR) seek to 

provide certainty that all covered QFCs 

would be treated the same way in the 

context of a resolution of a covered 

entity, covered bank or covered FSI 

under the Dodd-Frank Act or the FDI 

Act. The stay-and-transfer 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.118

Further, the knowledge that a court in 

a foreign jurisdiction would reject the 

purported exercise of default rights in 

violation of the required contractual 

provisions should deter covered FSIs’ 

counterparties from attempting to 

exercise such rights. 

In response to comments, the final 

rule exempts from the requirements of 

§ 382.3 a covered QFC that meets two 

requirements.119 First, the covered QFC 

must state that it is governed by the 

laws of the United States or a State of 

the United States.120 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.121 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 counterparty to the covered 

FSI must be organized under the laws of 

the United States or a State,122 have its 

principal place of business 123 located in 

the United States, or be a U.S. branch 

or U.S. agency.124 Similarly, a 

counterparty that is an individual must 

be domiciled in the United States.125

This requirement helps ensure that the 

FDIC will be able to quickly and easily 

enforce the stay-and-transfer provisions 

of the U.S. Special Resolution 

Regimes.126 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.127 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.128 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.129 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 


sradovich on DSK3GMQ082PROD with RULES2
50244 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

130See section III–11 of Comprehensive 

Guidelines for Supervision of Major Banks, etc., 

available at http://www.fsa.go.jp/common/law/

guide/city.pdf. 

131See proposed rule § 382.4 (noting that section 

does not apply to proceedings under Title II of the 

Dodd-Frank Act). As noted in final rule § 382.4, the 

final rule does not modify or limit, in any manner, 

the rights and powers of the FDIC as receiver under 

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

including, without limitation, the rights of the 

receiver to enforce provisions of the FDI Act or Title 

II of the Dodd-Frank Act that limit the 

enforceability of certain contractual provisions. 

132See final rule § 382.4(c)(2). 

133See final rule § 382.4(c)(1). 

134See final rule § 382.4(c)(3). 

135See final rule §§ 382.4(e)(2) and (3). 

136See final rule § 382.4(e)(4). 

137See final rule § 382.4(b)(1). A few commenters 

requested that the FDIC clarify that covered QFCs 

that do not contain the cross-default rights or 

transfer restrictions on credit enhancement that are 

prohibited by § 382.4 would not be required to be 

remediated. This reading of § 382.4 of the final rule 

is correct. In addition, § 382.4(a) of the final rule 

provides the requested clarity. 

138See final rule § 382.4(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 would be 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 how the contractual provisions relate to transfers 

made during the stay period and potentially unduly 

limit the restrictions on transfer prohibitions. 139This commenter also expressed support for 

parallel Congressional amendment of the U.S. 

Bankruptcy Code. 

Japanese resolution regimes extends to 

contracts governed by foreign laws.130

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 FDIC to do so through this 

final rule. The FDIC believes it is 

appropriate to adopt this final rule in 

order to ensure the safety and 

soundness of covered FSIs and, to that 

end, to improve the resolvability and 

resilience of U.S. GSIBs and foreign 

GSIB parents of covered FSIs. Because 

of the current risk that the stay-andtransfer provisions of U.S. Special 

Resolution Regimes may not be 

recognized by courts of other 

jurisdictions, § 382.3 of the final rule 

requires 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 

FSIs and their affiliates are party to large 

volumes of QFCs with connections to 

foreign jurisdictions. The stay-andtransfer 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 § 382.3 

of the final rule would ensure that the 

stay-and-transfer provisions apply as a 

matter of contract to all non-exempted 

covered QFCs, whatever the transaction. 

E. Prohibited Cross-Default Rights 

(Section 382.4 of the Final Rule) 

Definitions. Section 382.4 of the final 

rule, like the proposal, applies in the 

context of insolvency proceedings 131

and pertains to cross-default rights in 

QFCs between covered FSIs and their 

counterparties, many of which are 

subject to credit enhancements (such as 

a guarantee) provided by an affiliate of 

the covered FSI. Because credit 

enhancements of QFCs are themselves 

‘‘qualified financial contracts’’ under 

the Dodd-Frank 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 additional definitions are the 

same as under the proposal as 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.132 The 

final rule also defines ‘‘direct party’’ to 

mean a covered FSI that is itself a party 

to the direct QFC, as distinct from an 

entity that provides a credit 

enhancement.133 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.134 Moreover, 

the final rule defines ‘‘covered affiliate 

credit enhancement’’ to mean an 

affiliate credit enhancement provided 

by a covered entity, covered bank, or 

covered FSI, and defines ‘‘covered 

affiliate support provider’’ to mean the 

affiliate of the covered entity, covered 

bank, or covered FSI that provides the 

covered affiliate credit enhancement.135

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).136

General prohibitions. The final rule, 

like the proposal, prohibits a covered 

FSI 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 FSI, subject to 

the exceptions discussed below.137 The 

final rule also generally prohibits a 

covered FSI from being party to a 

covered QFC that would prohibit the 

transfer of any covered affiliate credit 

enhancement applicable to the QFC 

(such as another entity’s guarantee of 

the covered FSI’s obligations under the 

QFC), along with associated obligations 

or collateral, upon the entry into 

resolution of an affiliate of the covered 

FSI.138

One commenter expressed strong 

support for these provisions.139 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 FDIC’s final 

rule retains the same scope as the 

proposal. 

A number of commenters representing 

counterparties to covered FSIs objected 

to § 382.4 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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50245 

140One 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 

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. 

141Certain 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 the final rule. As discussed later, 

among the goals of the rule is the facilitation of the 

resolution of a GSIB outside of U.S. Special 

Resolution Regimes, including under the U.S. 

Bankruptcy Code. 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 

§ 382.4(f). 

142 In particular, these commenters requested 

that, when a covered FSI defaults on any physical 

delivery obligation to any counterparty following 

the insolvency of an affiliate of a covered FSI, 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 FSI. 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 FSI not subject to Title 

II or FDI Act proceedings has failed to pay or 

perform its obligations under the covered QFC. See 

final rule § 382.4(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 FSI 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 FSI 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 FSI. 

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 FDIC 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, covered FSIs, or covered banks 

as soon as those entities show signs of 

distress, and perhaps even in normal 

situations, and would disadvantage nonGSIB parties (e.g., end users who rarely 

receive initial margin from GSIB 

counterparties and are less well 

protected against a GSIB default).140

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 

FSI counterparties may challenge the 

legality of contractual stays on the 

exercise of default rights if a GSIB 

becomes distressed. 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 FDIC 

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.141 Certain 

commenters also urged the FDIC to 

provide a limited exception to these 

restrictions, if retained in the final rule, 

to help ensure the continued 

functioning of physical commodities 

markets.142

Some commenters argued that the 

FDIC 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 orderly 

resolution of a GSIB outside of Title II 

of the Dodd-Frank 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 

could 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 could 

occur from exercise of default rights 

against a performing entity based on the 

failure of an affiliate. 

The stay-and-transfer provisions of 

Title II of the Dodd-Frank Act would 

address both direct default rights and 

cross-default rights. But, as explained 

above, no similar statutory provisions 

apply in a resolution under the U.S. 

Bankruptcy Code. This final rule 

attempts to address these obstacles to 

orderly resolution by extending 


sradovich on DSK3GMQ082PROD with RULES2
50246 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

143See final rule § 382.4(b). 

144As discussed above, the FDI Act limits the 

exercise of direct default rights against the 

depository institution, but it does not address the 

threat posed to orderly resolution by cross-default 

rights in the QFCs of the depository institution’s 

subsidiaries. The final rule would facilitate orderly 

resolution under the FDI Act by filling that gap. See 

final rule § 382.4(b). 

145See 12 U.S.C. 5365(d). 

146See final rule § 382.4(d)(1). 

147See final rule § 382.4(d). 148See final rule § 382.4(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 crossdefault 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 FDIC revise this 

provision to clarify that default rights based on a 

covered FSI 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 FDIC 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 § 385.3. 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. 

provisions similar to the stay-andtransfer provisions to any type of 

resolution of an affiliate of a covered FSI 

that is not an insured depository 

institution. 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 FSIs 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.143

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.144

Similarly, the final rule, along with the 

FRB and OCC final rules, 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 rules 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 regions would enter separate 

resolution proceedings. Finally, the 

final rules will help to 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 meet to 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 

insolvency proceedings, including 

proceedings in non-U.S. jurisdictions. 

Therefore, by staying default rights 

arising from affiliates entering into such 

proceedings, the final rule will advance 

the Dodd-Frank Act’s goal of making 

orderly GSIB resolution workable under 

the Bankruptcy Code.145

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 or 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 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’ direct default 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 nonbank covered FSI that has entered 

bankruptcy proceedings.146 Therefore, 

counterparties to a non-bank covered 

FSI in bankruptcy would be able to 

exercise their existing 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 stress or 

disorderly failure of an otherwisesolvent 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 against 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 FSI’s 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 substantive 

exceptions to the restrictions.147 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 

prohibitions would apply only to crossdefault 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.148


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50247 

149See final rule § 382.4(d)(1) through (3). These 

provisions should respond to comments requesting 

that the final rule confirm the ability of a covered 

FSI’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 § 382.3(c). 

150See final rule § 382.4(d)(2). 

151See final rule § 382.4(f). 

152Note that the exception in § 382.4(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, covered FSI, or covered 

bank under the proposal. See final rule § 382.4(e)(2) 

(defining ‘‘covered affiliate credit enhancement’’). 

153See 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). 

154See final rule § 382.4(g)(1). 

155See 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. 

156See final rule § 382.4(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, relative to special resolution 

regimes, is generally well-understood by market 

participants. 

157See final rule § 382.4(f)(2). 

158See final rule § 382.4(f)(3). 

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, direct QFC 

counterparties of a covered FSI’s 

subsidiaries 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, in the 

context of an insolvency proceeding, 

and subject to the statutory 

requirements and restrictions 

thereunder, covered QFCs to permit the 

exercise of default rights based on (i) the 

failure of the direct party; (ii) the direct 

party not satisfying a payment or 

delivery obligation; or (iii) a covered 

affiliate support provider or transferee 

not satisfying its payment or delivery 

obligations under the direct QFC or 

credit enhancement.149 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.150

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 FSI’s QFC 

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 

FSI’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 FSI’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, 

following the applicable stay period, 

under the U.S. Special Resolution 

Regimes. 

These exceptions also help to ensure 

that counterparties of a covered FSI’s 

non-IDI subsidiaries or affiliates 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 FSI that 

is a covered entity, covered bank, or 

covered FSI.151 The final rule allows 

these creditor protections in recognition 

of the supported party’s interest in 

receiving the benefit of its credit 

enhancement. 

Where a covered QFC is supported by 

a covered affiliate credit 

enhancement,152 the covered QFC and 

the credit enhancement are permitted to 

allow the exercise of default rights 

under the circumstances discussed 

below after the expiration of a stay 

period.153 Under the final rule, the 

applicable stay period would begin at 

the commencement of the proceeding 

and would end at the later of 5 p.m. 

(eastern time) on the next business day 

and 48 hours after the entry into 

resolution.154 This portion of the final 

rule is similar to the stay treatment 

provided in a resolution under Title II 

of the Dodd-Frank Act or the FDI Act.155

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 or the FDI Act.156

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 an 

insolvency proceeding, protecting the 

supported party from a transfer of the 

credit enhancement to a transferee that 

is unable to meet its financial 

obligations.157

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.158

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 

also contain provisions to prevent 

cherry picking. 

Finally, if the covered affiliate credit 

enhancement is transferred to a 

transferee, the QFC may permit 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 


sradovich on DSK3GMQ082PROD with RULES2
50248 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

159See final rule § 382.4(f)(4). 

160See 12 U.S.C. 5390(c)(16)(A). 

161See 12 U.S.C. 5390(c)(16)(A). 162See 81 FR 74326 (Oct. 26, 2016). 

163To 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 § 382.84 of the 

final rule and those available under the Universal 

Protocol and U.S. Protocol, discussed below. 

164See generally 81 FR 74326, 74335 (Oct. 26, 

2016) (‘‘Note that the exception in § 382.4(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.’’). See also final rule § 382.4(f). 

transferee in a timely manner.159 These 

conditions will help to assure the 

supported party that the transferee 

would be providing substantively the 

same credit enhancement as the covered 

affiliate support provider.160 Title II of 

the Dodd-Frank Act also requires that 

certain conditions be met with respect 

to affiliate credit enhancements.161

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 FDIC to broaden 

the exclusions to permit, after the 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 

FDIC should include in § 382.4: (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 

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. Certain 

commenters also asked for the right to 

exercise direct default rights and general 

creditor protections even if the exercise 

occurs during the stay period. 

Commenters also asked the FDIC to 

delete the phrases ‘‘or after’’ in 

§ 382.4(b) regarding the restrictions on 

transfers of affiliate credit 

enhancements, as neither the FRB’s nor 

the OCC’s rules have that phrase. These 

commenters asserted that, when 

coupled with the definition of 

‘‘transferee’’ in § 382.4(g)(3), § 382.4(b) 

could be read as overriding transfers 

indefinitely, even with respect to 

subsequent transfers following the 

initial transfer to a bridge financial 

company or a third party transferee. 

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.162 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. 

Additionally, in response to 

commenters, the definition of 

‘‘transferee’’ in § 382.4(g)(3) of the final 

rule has been changed to define a 

‘‘transferee’’ as a person to whom a 

covered affiliate credit enhancement is 

transferred upon the covered affiliate 

credit 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. The provisions of the FRB 

final rule are consistent with this final 

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 382.4 of 

the final rule does not apply in 

situations where the covered affiliate 

support provider is in Title II of the 

Dodd-Frank Act. Furthermore, this 

section is limited in its application to 

the FDI Act as well, limiting the 

exercise of cross-default rights as 

contemplated by § 382.4(h) of the final 

rule. Therefore, the FDIC is not adopting 

the proposed additional creditor 

protection because it would defeat in 

large part the purpose of § 382.4 and 

potentially create confusion regarding 

the requirements and purposes of 

§§ 382.3 and 382.4 of the final rule.163

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, 

covered bank, or covered FSI) and noted 

that foreign GSIBs often will have their 

QFCs supported by a non-U.S. affiliate 

that is not a covered entity, covered 

bank, or covered FSI. Such non-U.S. 

affiliate credit supporter providers 

would not be able to rely on the 

additional creditor protections for 

supported QFCs. Such credit 

enhancements are excluded in order to 

help ensure that the resolution of a nonU.S. entity would not negatively affect 

the financial stability of the United 

States.164

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. The final rule, like the 

proposal, is limited to QFCs to which a 

covered FSI is a party. Section 382.4 of 

the final rule generally prohibits QFCs 

to which a covered FSI 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 § 382.4(g)(3) 

(§ 382.4(f)(3) of the final rule) would 

provide a right without a remedy 

because if the covered affiliate credit 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50249 

165As 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. 

166Under the FDI Act, the relevant stay period 

runs until 5 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 

§ 382.1. 

167 12 U.S.C. 1821(e)(9)–(10). 

168See final rule § 382.4(h). 

169See id. (noting that the general creditor 

protections in § 382.4(d), and the additional 

creditor protections for supported QFCs in 

§ 382.4(f), are inapplicable to FDI Act proceedings). 

170The 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. 

171See final rule § 382.4(i). 

support provider is no longer obligated 

and no transferee has taken on the 

obligation, the non-covered FSI 

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 

§ 382.4, 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 § 382.4(g) (§ 382.4(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 § 382.4 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 

GSIB 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 direct party 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 165 only under the following 

circumstances: (a) After the FDI Act stay 

period,166 if the credit enhancement is 

not transferred under the relevant 

provisions of the FDI Act 167 and 

associated regulations, and (b) during 

the FDI Act stay period, to the extent 

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.168 This provision is 

intended to ensure that a QFC 

counterparty of a subsidiary of a 

covered FSI that goes into FDI Act 

receivership can receive the equivalent 

level of protection that the FDI Act 

provides to QFC counterparties of the 

covered FSI itself.169 No comments were 

received on this aspect of the proposal 

and the final rule contains no 

substantive 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,170 or a 

more demanding standard.171

The purpose of this requirement is to 

deter the QFC counterparty of a covered 

FSI 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 FSIs, 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 

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 FSI demonstrates 

otherwise. One commenter requested 

that the burden of proof not apply to the 

exercise of direct default rights. Another 

commenter suggested that the burden of 

proof provision imposes a higher 

burden of proof on counterparties 

affected by the rule than domestic and 

foreign GSIBs and that the requirements 

for satisfying this burden should be 

clarified and any case law or statutory 

standard that a Federal judge would 

apply in this instance be provided. 

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 or 

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 FSI 

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 


sradovich on DSK3GMQ082PROD with RULES2
50250 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

172The 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 § 382.1. 

173See proposed rule § 382.3(a)(3). 

174See proposed rule § 382.4(a)(3) and (d). 

175Commenters 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. 

176See final rule § 382.2(e)(1). 

177Such a QFC would nonetheless be a covered 

QFC with respect to a principal that also was a 

covered FSI. In response to comments, the FDIC 

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

subsidiaries of a foreign GSIB. 

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 agents 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 subsidiary 

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.172 Similarly, 

a covered FSI may also enter into a QFC 

as agent acting on behalf of a principal. 

The proposal would have applied to 

a covered QFC regardless of whether the 

covered FSI was acting as a principal or 

as an agent. Sections 382.3 and 382.4 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, § 382.3 would have 

limited default rights and transfer 

restrictions that a counterparty may 

have against a covered FSI consistent 

with the U.S. Special Resolution 

Regimes.173 Section 382.4 of the 

proposed rule would have ensured that, 

subject to the enumerated creditor 

protections, counterparties could not 

exercise cross-default rights under the 

covered QFC against the covered FSI, 

acting as agent or principal, based on 

the resolution of an affiliate of the 

covered FSI.174

Commenters argued that the 

provisions of §§ 382.3 and 382.4 that 

relate to transactions entered into by the 

covered FSI as agent should exclude 

QFCs where the covered FSI 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 FSI acts as agent for 

a counterparty whose transactions are 

excluded from the requirements of the 

rule.175 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 

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 

FSIs, covered banks, or covered entities. 

Commenters also requested clarification 

that conformance is not required of 

contracts between a covered FSI as 

agent on behalf of a non-U.S. affiliate of 

a foreign GSIB that would not be a 

covered FSI under the proposal, since 

default rights related to the non-U.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 FSI does not become a 

party to a QFC solely by acting as agent 

to a QFC.176 Therefore, an in-scope QFC 

would not be a covered QFC solely 

because a covered FSI was acting as 

agent for a principal for the QFC.177 For 

example, the final rule would not 

require a covered FSI 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 FSI 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 FSI acting as 

agent with respect to a master securities 

lending agreement, if the covered FSI 

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 FSI 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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50251 

178See 81 FR 74326, 74340 (Oct. 26, 2016). 

179See final rule § 382.5(a). 180See 81 FR 74326. 

181 ‘‘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. 

ISDA requested the FDIC to consider ISDA’s FRB 

comment letter in ISDA’s comment letter to the 

FDIC. See Letter to Robert E. Feldman, Executive 

Secretary, Federal Deposit Insurance Corporation, 

from Katherine T. Darras, ISDA General Counsel, 

The International Swaps and Derivatives 

Association, Inc., at 3 (Dec. 12, 2016). 

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 FSIs such as 

the swap margin requirements issued by 

the FDIC, other prudential regulators 

(the OCC, FRB, 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 FDIC jointly with the other 

prudential regulators as well as a rule 

issued by the CFTC. As commenters 

highlighted, 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 

FDIC 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.178 The FDIC does not 

expect that compliance with this final 

rule will trigger the swap margin 

requirements for non-cleared swaps. 

Compliance with the ISDA 2015 

Resolution Stay Protocol. The final rule, 

like the proposal, allows covered FSIs to 

conform covered QFCs to the 

requirements of the rule through 

adherence to the Universal Protocol.179

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 

§ 382.3 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 § 382.4 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 

number of desirable features that the 

proposal lacked. When an entity 

(whether or not it is a covered FSI) 

adheres to the Universal Protocol, it 

necessarily adheres to the Universal 

Protocol with respect to all covered FSIs 

that have also adhered to the Protocol 

rather than one or a subset of covered 

FSIs (as the proposal would otherwise 

have permitted). 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 non-defaulting parties.180 This feature 

is referred to as ‘‘universal adherence.’’ 

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 

§ 382.4 of the proposal. 

Commenters generally supported the 

proposal’s provisions to allow covered 

FSIs 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 allows covered FSIs 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 § 382.3. 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.181 By clarifying 

§ 382.5(a), the final rule confirms that 

adherence to the Universal Protocol is 

deemed to satisfy the requirements of 

§ 382.3 of the final rule (as well as 

§ 382.4) 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 FSI 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 


sradovich on DSK3GMQ082PROD with RULES2
50252 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

182Commenters argued that approval of the 

approved U.S. JMP should not require satisfaction 

of the administrative requirements of proposed rule 

§ 382.5(b)(3), since the FDIC has already conducted 

that analysis in deciding to provide a safe harbor 

for the Universal Protocol. 

183The 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 § 382.5(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 

§ 382.5(a)(2). 

184The 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. 

185One commenter requested clarification that a 

QFC of a covered FSI with a non-U.S. credit support 

provider for the covered FSI complies with the 

requirements of the final rule to the extent the 

covered FSI 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 countries 

do not satisfy the requirements of the final rule. 

186The final rule also provides that the FDIC may 

determine otherwise based on specific facts and 

circumstances. See final rule § 382.5(a). 

187Commenters 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. 

188The 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, covered FSIs, or covered 

banks would be consistent with the current 

proposal.’’ 81 FR 74326, 74337, n. 91 (Oct. 26, 

2016). 

189The 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 § 382.5(a)(3)(ii)(F). 

‘‘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.182

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. Commenters 

also asked that the FDIC coordinate with 

the FRB and the OCC regarding 

treatment of the JMP and to ensure that 

any determinations made concerning 

the JMP are consistent. 

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.183

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 

force counterparties to give up default 

rights in jurisdictions where that is not 

yet legally required.184 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.185

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 FSIs under 

the final rule (to be identified on a 

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

covered FSIs 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 FSI, covered bank, or covered 

entity 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.186 The U.S. Protocol may 

differ (and is required to differ) from the 

Universal Protocol in certain respects, 

as discussed below, but otherwise must 

be substantively identical to the 

Universal Protocol.187 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 188 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 FSIs, covered banks, and 

covered entities.189 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 substantially identical final 

rules expected to be issued by the OCC 

and already issued by the FRB and not 

also QFCs outside the scope of the 

agencies’ final rules (i.e., QFCs between 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50253 

190See final rule § 382.5(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 

§ 382.5(a)(3)(ii)(F). 

191See final rule § 382.5(a)(3)(ii)(A). 

192The 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 

§ 382.5(a)(2)(ii)(F) (allowing minor and technical 

differences from the Universal Protocol). 

193Section 4(b) of the Universal Protocol. 

194Under the final rule, if an adherent to the 

Universal Protocol or U.S. Protocol exercises an 

available opt-out, covered FSIs with covered QFCs 

affected by the exercise would be required to 

otherwise conform the covered QFCs to the 

requirements of the final rule. 

195See Section 4(b)(i)(A) of the Universal 

Protocol. 

196Section 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 § 382.5(a)(3)(ii)(E). 

197See final rule § 382.5(b). 

198See final rule § 382.5(d)(1) through (10). 

parties that are not covered FSIs, 

covered banks, or covered entities). 

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.190 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. The inclusion of the Identified 

Regimes should help facilitate the 

resolution of a GSIB across a broader 

range of circumstances. 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.191 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 FSIs, which other commenters 

requested.192 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 

FSIs 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.193 The 

Universal Protocol refers to these 

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 FSI and 

counterparty choose to conform the 

QFC.194

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 FSIs 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) 195 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 substantially identical 

rules already issued by the FRB and 

expected to be issued by the OCC, 

should prevent exercise of the Sunset 

Opt-out provision 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 include the 

exemption in Section 2 of the Universal 

Protocol regarding the client-facing leg 

of a cleared transaction. Therefore, the 

final rule provides that the U.S. Protocol 

must not exempt the client-facing leg of 

the transaction.196

F. Process for Approval of Enhanced 

Creditor Protections (Section 382.5 of 

the Proposed Rule) 

As discussed above, the restrictions of 

the final rule would leave many creditor 

protections that are commonly included 

in QFCs unaffected. The final rule 

would also allow any covered FSI to 

submit to the FDIC 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.197 A covered 

FSI 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 FDIC’s 

consideration of whether permitting the 

contractual terms would be consistent 

with the proposed restrictions.198 The 

FDIC also expects to consult with the 

FRB and OCC during its consideration 

of such a request—in particular, when 

the covered QFC is between a covered 

FSI and either a covered bank or a 

covered entity. 

The first two factors concern the 

potential impact of the requested 

creditor protections on GSIB resilience 

and resolvability. The next four concern 


sradovich on DSK3GMQ082PROD with RULES2
50254 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

199See final rule § 382.5(b)(3)(ii) and (iii). 

200See final rule § 382.5(c). 

201One 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. 

202See proposed rule § 382.2(b). Under section 

302(b) of the Riegle Community Development and 

Regulatory Improvement Act of 1994, new FDIC 

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). 

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, 

covered banks, and covered FSIs. 

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, 

covered banks, and covered FSIs 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 FDIC 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 

FSI requesting that the FDIC 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 

FDIC.199

Under the final rule, the FDIC 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 promote the safety and 

soundness of covered FSIs by mitigating 

the potential destabilizing effects of the 

resolution of a GSIB that is an affiliate 

of the covered FSI to at least the same 

extent.200 Once approved by the FDIC, 

enhanced creditor protections could be 

used by other covered FSIs (in addition 

to the covered FSI that submitted the 

request for FDIC approval), as 

appropriate. The request-and-approval 

process would improve flexibility by 

allowing for an industry-proposed 

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 FDIC would approve or deny 

a request. Certain commenters urged 

that counterparties and trade groups, in 

addition to covered entities, covered 

FSIs, and covered banks, 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 FDIC 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 

provisions and amendments would be 

valid and enforceable under applicable 

law of the relevant jurisdictions’’ should 

be eliminated as unnecessary.201

Additionally, commenters also urged 

that the provision should be broadened 

to allow approvals of provisions not 

directly related to enhanced creditor 

protections. 

Finally, commenters also urged the 

FDIC, FRB, and OCC to either 

harmonize their standards for approving 

enhanced creditor protections or 

otherwise be consistent in approving 

enhanced creditor protection 

conditions. Imposing different 

conditions or arriving at different 

outcomes would subject identical QFCs 

to different creditor protections, raise 

fairness issues, increase legal and 

operational complexity, and hence 

impede the goal of orderly resolution of 

a GSIB. 

The FDIC has clarified that the FDIC 

could approve an alternative proposal of 

additional creditor protections as 

compliant with §§ 382.3 and 382.4 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 

FSIs and thus only covered FSIs are 

eligible to submit requests pursuant to 

these provisions. In response to 

commenters’ concerns, the FDIC notes 

that the final rule does not prevent 

multiple covered FSIs from presenting 

one request and does not prevent 

covered FSIs 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. The 

FDIC intends to consult with the FRB 

and OCC with respect to any requests 

for approvals for additional creditor 

protections. Therefore, the FDIC does 

not expect that the agencies would 

arrive at different outcomes with respect 

to an identical application for approval 

for enhanced creditor protections based 

on the differences in standards for 

approval. 

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 

issuance of the final rule, which the 

proposal referred to as the effective 

date.202 A number of commenters urged 

the adoption of 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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50255 

203See final rule § 382.2(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 FSI becomes 

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

quarter immediately following one year from the 

effective date of this part. See final rule § 382.2(c). 

As discussed above, a covered FSI’s in-scope QFC 

that is entered into before this date may also be a 

covered QFC if the covered FSI or any affiliate that 

is a covered entity, covered FSI, or covered 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. 

204See final rule § 382.1 (defining ‘‘financial 

counterparty’’). 

205The final rule defines small financial 

institution as an insured bank, insured savings 

association, farm credit system institution, or credit 

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

final rule § 382.1. 

206See final rule § 382.2(f)(1)(ii). 

207See final rule § 382.2(f)(1)(iii). 

208See final rule § 382.2(e)(1). 

209See final rule § 382.2(c)(1) and (f)(1). 

210See id. 

211See final rule § 382.2(c)(1). 

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 for the agencies to 

approve 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 FDIC confirm that 

entities newly acquired by a GSIB, and 

thereby become new covered FSIs have 

until the first day of the first calendar 

quarter immediately following one year 

after becoming covered FSIs 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 FSIs to engage in corporate 

activities. These commenters also 

requested clarification that, during that 

conformance period, affiliates of 

covered FSIs would not be prohibited 

from entering into new transactions or 

QFCs with counterparties of the newly 

acquired entity if the existing covered 

FSIs otherwise comply with the rule’s 

requirements. Some commenters urged 

the FDIC to exclude existing contracts 

from the final rule’s requirements and 

only apply the rule on a prospective 

basis. Additionally, commenters asked 

for harmonized compliance dates across 

the different agencies’ rules. 

The effective date for the final rule is 

January 1, 2018, more than 60 days 

following publication in the Federal 

Register. However, in order to reduce 

the compliance burden of the final rule, 

the FDIC has adopted a phased-in 

compliance schedule as requested by 

commenters. The final rule provides 

that a covered FSI 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 FSIs, covered entities, and 

covered banks (referred to in this 

discussion as the ‘‘first compliance 

date’’).203 This provision allows the 

counterparties that should be the most 

familiar with the requirements of the 

final rule over one year to comply 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 FSIs, covered 

entities, and covered 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 204

(other than small financial 

institutions) 205 the final rule provides 

18 months from the effective date of the 

final rule for compliance with its 

requirements as requested by 

commenters.206 For smaller banks and 

other non-financial 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.207 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 FDIC is giving this additional 

time for compliance to respond to 

concerns raised by commenters. The 

FDIC encourages covered FSIs to start 

planning and outreach efforts early in 

order to come into compliance with the 

rule on the time frames provided. The 

FDIC 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 FSI does not 

become a party to a QFC solely by acting 

as agent with respect to the QFC.208

Entities that are covered FSIs when 

the final rule is effective would be 

required to comply with the 

requirements of the final rule beginning 

on the first compliance date, but would 

be given more time to conform such 

covered QFCs with entities that are not 

covered FSIs, covered entities, or 

covered banks.209 Thus, a covered FSI 

would be required to ensure that 

covered QFCs entered into on or after 

the effective date comply with the rule’s 

requirements.210 Moreover, a covered 

FSI would be required to bring an inscope 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 FSI or 

an affiliate (that is also a covered entity, 

covered bank, or covered FSI) 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.211 (Thus, a covered 

FSI would not be required to conform a 

pre-existing QFC if that covered FSI and 

its covered FSI, covered entity or 


sradovich on DSK3GMQ082PROD with RULES2
50256 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

212See final rule § 382.2(f)(2). 

213See final rule § 382.2(c)(2). 

214The requirements of the final rule, particularly 

those of § 382.4, may have a different impact on 

netting, including close-out netting, than the UK 

and German requirements cited by commenters. 

215Subject to any compliance date applicable to 

the covered FSI, the FDIC expects a covered FSI to 

conform existing QFCs that become covered QFCs 

within a reasonable period. 

216See final rule § 382.7(c). 217A recent estimate of the unrealized economic 

output that resulted from 2007–09 financial crisis 

in the United States amounted to between $6 and 

$14 trillion. See ‘‘How Bad Was It? The Costs and 

Consequences of the 2007–09 Financial Crisis,’’ 

Staff Paper No. 20, Federal Reserve Bank of Dallas, 

July 2013, available at https://dallasfed.org/assets/ 

documents/research/staff/staff1301.pdf. 218Call Report data, June 2017. 219FFIEC National Information Center. 

covered bank affiliates do not enter into 

any new QFCs with the same 

counterparty or its consolidated 

affiliates on or after the compliance 

date.) 

In addition, an entity that becomes a 

covered FSI after the effective date of 

the final rule (a ‘‘new covered FSI’’ for 

purposes of this preamble) generally has 

the same period of time to comply as an 

entity that is a covered FSI on the 

effective date (i.e., compliance will 

phase in over a two-year period based 

on the type of counterparty).212 The 

final rule also clarifies that a covered 

QFC, with respect to a new covered FSI, 

means an in-scope QFC that the new 

covered FSI becomes a party to (1) on 

the date the covered FSI first becomes 

a covered FSI, and (2) before that date, 

if the covered FSI or one of its affiliates 

that is a covered FSI, covered entity, or 

covered 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.213 Under 

the final rule, a company that is a 

covered FSI on the effective date of the 

final rule (an ‘‘existing covered FSI’’ for 

purposes of this preamble) and becomes 

an affiliate of a new covered FSI, 

covered bank, or covered entity 

generally must conform any existing but 

non-conformed in-scope QFC that the 

existing covered FSI continues to have 

with a counterparty after the applicable 

initial compliance date by the date the 

new covered FSI enters a QFC with the 

same counterparty or any of its 

consolidated affiliates. 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 asserted that this treatment 

would be consistent with the final rules 

in the United Kingdom and the statutory 

requirements adopted by Germany. 

The FDIC 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 FSI. 

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.214 Therefore, the final rule requires 

an existing QFC between a covered FSI 

and a counterparty to be conformed to 

the requirements of the final rule if the 

covered FSI (or an affiliate that is a 

covered FSI, covered entity, or covered 

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.215

By permitting a covered FSI to remain 

a party to noncompliant QFCs entered 

before the effective date unless the 

covered FSI or any affiliate (that is also 

a covered entity, covered bank, or 

covered FSI) enters into new QFCs with 

the same counterparty or its 

consolidated affiliates, the final rule 

strikes a balance between ensuring QFC 

continuity if the GSIB were to fail and 

ensuring that covered FSIs 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 FSI ensure that all existing 

QFCs with a particular counterparty and 

its consolidated affiliates are compliant 

before it or any affiliate of the covered 

FSI (that is also a covered entity, 

covered bank, or covered FSI) enters 

into a new QFC with the same 

counterparty or its consolidated 

affiliates after the effective date will 

provide covered FSIs 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 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.216

The FDIC will monitor covered FSIs’ 

levels of noncompliant QFCs and 

evaluate the risk, if any, that they pose 

to the safety and soundness of the 

covered FSIs. 

IV. Expected Effects 

The final rule is intended to promote 

the financial stability of the United 

States by reducing the potential that 

resolution of a GSIB, particularly 

through bankruptcy, will be disorderly. 

The final rule will help meet this policy 

objective by more effectively and 

efficiently managing the exercise of 

cross default rights and transfer 

restrictions contained in QFCs. It will 

therefore help mitigate the risk of future 

financial crises and imposition of 

substantial costs on the U.S. 

economy.217 The final rule furthers the 

FDIC’s mission and responsibilities, 

which include resolving failed 

institutions in the least costly manner 

and ensuring that FDIC-insured 

institutions operate safely and soundly. 

It also furthers the fulfillment of the 

FDIC’s role as the (i) the primary 

Federal supervisor for State nonmember banks and State savings 

associations; (ii) the insurer of deposits 

and manager of the DIF; and (iii) the 

resolution authority for all FDIC-insured 

institutions under the FDI Act and, if 

appointed by the Secretary of the 

Treasury in accordance with the 

requirements of Title II of the DoddFrank Act, for large complex financial 

institutions. 

The final rule only applies to FDICsupervised institutions that are 

subsidiaries or affiliates of a GSIB. Of 

the 3,717 institutions that the FDIC 

supervises,218 eleven are subsidiaries or 

affiliates of GSIBs.219 Out of those 

eleven institutions, eight had QFC 

contracts at some point over the past 

five years. Those eight institutions had 

an average of $39 billion worth of QFC 

contracts, as measured by notional 

value, over the same time period 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50257 

220Call Report data, June 2012—June 2017. 

221 ‘‘How Bad Was It? The Costs and 

Consequences of the 2007–09 Financial Crisis,’’ 

Staff Paper No. 20, Federal Reserve Bank of Dallas, 

July 2013. 222See Call Report data, June 2012–June 2017. 

223On September 20, 2016, the FDIC adopted a 

separate final rule (the Final QMNA Rule), 

following the earlier notice of proposed rulemaking 

issued in January 2015, see 80 FR 5063 (Jan. 30, 

2015), covering amendments to the definition of 

‘‘qualifying master netting agreement’’ in the FDIC’s 

capital and liquidity rules and related definitions in 

its capital rules. The Final QMNA Rule is designed 

to prevent similar unintended effects from 

implementation of special resolution regimes in 

non-U.S. jurisdictions, or by parties’ adherence to 

the ISDA Protocol. The amendments contained in 

the Final QMNA Rule also are similar to revisions 

that the FRB and the OCC made in their joint 2014 

interim final rule to ensure that the regulatory 

capital and liquidity rules’ treatment of certain 

financial contracts is not affected by the 

implementation of special resolution regimes in 

foreign jurisdictions. See 79 FR 78287 (Dec. 30, 

2014). 

224See 12 CFR 324.34(a)(2). 

compared to an average of over $200 

trillion in notional value for all FDICinsured GSIB affiliates.220 Therefore, the 

final rule applies only to a small 

number of institutions and to a small 

portion of total QFC activity. 

Benefits 

The final rule will likely benefit the 

counterparties of covered FSIs by 

preventing the disorderly failure of the 

GSIB subsidiary and enabling it to 

continue to meet its obligations. The 

mass exercise of default rights against 

an otherwise healthy covered FSI 

resulting from the failure of an affiliate 

may cause it to weaken or fail. 

Therefore, preventing the mass exercise 

of QFC default rights at the time the 

parent or other affiliate enters resolution 

proceedings makes it more likely that 

the subsidiaries will be able to meet 

their obligations to QFC counterparties. 

Moreover, the creditor protections 

permitted under the rule will allow any 

counterparty that does not continue to 

receive payment under the QFC to 

exercise its default rights, after any 

applicable stay period. 

Because financial crises impose 

enormous costs on the economy, even 

small reductions in the probability or 

severity of future financial crises create 

substantial economic benefits.221 QFCs 

play a large role in the financial markets 

and are a major source of financial 

interconnectedness. Therefore, they can 

pose a threat to financial stability in 

times of market stress. The final rule 

will materially reduce risk to the 

financial stability of the United States 

that could arise from the failure of a 

GSIB by enhancing the prospects for the 

orderly resolution of such a firm, and 

would thereby reduce the probability 

and severity of financial crises in the 

future. 

The final rule will also likely benefit 

the DIF. Mass exercise of QFC default 

rights by the counterparties at the time 

the parent or other affiliate of an FDICinsured institution enters resolution 

could lead to severe losses for, or 

possibly the failure of, FDIC-insured 

subsidiaries of failed GSIBs. Those 

losses and/or failures could result in 

considerable losses to the DIF. 

Costs 

The costs of the final rule are likely 

to be relatively small and only affect 

eleven covered FSIs. Only eight of the 

eleven affected institutions had QFC 

contracts over the past 5 years. The QFC 

activity of those eight firms represented 

less than .02 percent of QFC activity 

among all FDIC-insured GSIB 

subsidiaries.222 Covered FSIs and their 

counterparties may incur administrative 

costs associated with drafting and 

negotiating compliant QFCs. However, 

the rule only limits the execution of 

default rights for a brief time period in 

the event that a GSIB or GSIB affiliate 

enters a resolution process. Further, the 

rule only affects QFC contracts that 

contain default rights or transfer 

restrictions, so not all QFC activity will 

be affected by the rule. Affected 

institutions also have the option of 

adhering to the Universal Protocol or 

the U.S. Protocol as an alternative to 

amending QFC contracts, and they have 

a phase-in compliance period of up to 

two years to become fully compliant 

with the rule. The flexibility that the 

final rule allows for affected institutions 

and their counterparties further reduces 

the expected costs associated with this 

rule. Therefore, costs associated with 

drafting compliant QFCs are likely to be 

low. 

In addition, the FDIC anticipates that 

covered FSIs would likely share 

resources with their parent GSIB and/or 

GSIB affiliates—which are subject to 

parallel requirements—to help cover 

compliance costs. 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 for the 25 existing GSIB 

adherents. The partial effectiveness of 

the Universal Protocol (regarding 

Section 1, which addresses recognition 

of stays on the exercise of default rights 

and remedies in financial contracts 

under special resolution regimes, 

including in the United States, the 

United Kingdom, Germany, France, 

Switzerland and Japan) suggests that to 

the extent covered FSIs already adhere 

to the Universal Protocol, some 

implementation costs will likely be 

reduced. 

The final rule could potentially 

impose costs on covered FSIs to the 

extent that they may need to provide 

their QFC counterparties with better 

contractual terms in order to 

compensate those parties for the loss of 

their ability to exercise default rights. 

These costs may be higher than drafting 

and negotiating costs. However, they are 

also expected to be relatively small 

because of the limited reduction in the 

rights of counterparties and the 

availability of other forms of credit 

protection for counterparties. 

The final rule could also create 

economic costs by causing a marginal 

reduction in QFC-related economic 

activity. For example, a covered FSI 

may not enter into a QFC that it would 

have otherwise entered into in the 

absence of the rule. Therefore, economic 

activity that would have been associated 

with that QFC absent the rule (such as 

economic activity that would have 

otherwise been hedged with a 

derivatives contract or funded through a 

repo transaction) might not occur. The 

FDIC does not expect any significant 

reduction in QFC activity to result from 

this rule because the restrictions on 

default rights in covered QFCs that the 

rule requires are relatively narrow and 

would not change a counterparty’s 

rights in response to its direct 

counterparty’s entry into a bankruptcy 

proceeding (that is, the default rights 

covered by the Bankruptcy Code’s ‘‘safe 

harbor’’ provisions). Counterparties are 

also able to prudently manage risk 

through other means, including entering 

into QFCs with entities that are not 

GSIB entities and therefore would not 

be subject to the final rule. 

V. Revisions to Certain Definitions in 

the FDIC’s Capital and Liquidity Rules 

This final rule also amends several 

definitions in the FDIC’s capital and 

liquidity rules to help ensure that the 

final rule does not have unintended 

effects for the treatment of covered FSIs’ 

netting agreements under those rules, 

consistent with the amendments 

contained in the FRB FR and the OCC 

FR.223

The FDIC’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.224 The FDIC 


sradovich on DSK3GMQ082PROD with RULES2
50258 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

225See the definition of ‘‘qualifying master 

netting agreement’’ in 12 CFR 324.2 (capital rules) 

and 329.3 (liquidity rules). 

226 80 FR 74840, 74861–74862 (November 30, 

2015). The FDIC’s definition of ‘‘eligible master 

netting agreement’’ for purposes of the swap margin 

rule is codified at 12 CFR 349.2. 

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.225 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 FSIs. Thus, a master netting 

agreement that is compliant with this 

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 FSIs, which is not an intended 

effect of this final rule. 

Accordingly, the final rule would 

amend 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 limited to 

the extent necessary to comply with the 

requirements of this final rule. This 

revision maintains the existing 

treatment for these contracts under the 

FDIC’s capital and liquidity rules by 

accounting for the restrictions that the 

final rule, or the substantively identical 

rules of issued by the FRB and expected 

from the OCC, would place on default 

rights related to covered FSIs’ QFCs. 

The FDIC does not believe that the 

disqualification of master netting 

agreements that would result in the 

absence of this 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 would similarly revise 

certain other definitions in the 

regulatory capital rules to make 

analogous conforming changes designed 

to account for this 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 

FDIC’s capital rules. Specifically, the 

final rule would revise 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 this 

final rule without unintended adverse 

impacts under the FDIC’s capital rules. 

The interagency 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.’’ 226 Thus, it may also 

be appropriate to amend the definition 

of ‘‘eligible master netting agreement’’ to 

account for the restrictions on covered 

FSIs’ QFCs. Because the FDIC issued the 

swap margin rule jointly with other U.S. 

regulatory agencies, however, the FDIC 

is consulting with the other agencies 

before proposing amendments to 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 § 382.4 

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 § 382.4 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 FDIC 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 FDIC-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 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 FDIC continues to 

believe that the amendments are 

necessary and do not substantially add 

to the complexity of the FDIC’s rules. 

Effective date for the definition of 

‘‘covered bank’’: The FDIC is delaying 

the effective date of the definition of 

‘‘covered bank’’ until the OCC adopts 12 

CFR part 47. 

VI. Regulatory Analysis 

A. Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995, 

44 U.S.C. 3501 through 3521 (PRA), the 

FDIC may not conduct or sponsor, and 

the respondent is not required to 

respond to, an information collection 

unless it displays a currently valid OMB 

control number. Section 382.5 of the 

proposed rule contains ‘‘collection of 

information’’ requirements within the 

meaning of the PRA. OMB has assigned 

the following control numbers to this 

information collection: 3064–AE46. 

This information collection consists 

of amendments to covered QFCs and, in 

some cases, approval requests prepared 

and submitted to the FDIC regarding 

modifications to enhanced creditor 

protection provisions (in lieu of 

adherence to the ISDA Protocol). 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50259 

227See 5 U.S.C. 603, 605. 

228Under regulations issued by the Small 

Business Administration, small entities include 

banking organizations with total assets of $550 

million or less. 229See FRB FR, 82 FR 42882 (Sept. 12, 2017) and 

OCC NPRM, 81 FR 55381 (August 19, 2016). 230 5 U.S.C. 605. 

Section 382.5(b) of the final rule would 

require a covered FSI to request the 

FDIC to approve as compliant with the 

requirements of §§ 382.3 and 382.4, 

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. A covered FSI making a 

request must provide (1) an analysis of 

the proposal under each consideration 

of § 382.5(d); (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 FDIC requests. 

Covered FSIs would also have 

recordkeeping associated with proposed 

amendments to their covered QFCs. 

However, much of the recordkeeping 

associated with amending the covered 

QFCs is already expected from a 

covered FSI. Therefore, the FDIC would 

expect minimal additional burden to 

accompany the initial efforts to bring all 

covered QFCs into compliance. The 

existing burden estimates for the 

information collection associated with 

§ 382.5 are as follows: 

Title Times/year Respondents Hours per 

response 

Total 

burden 

hours 

Paperwork for proposed revisions .................. On occasion ................................................... 6 40 240 

Total Burden ............................................ ......................................................................... ........................ ........................ 240 

The FDIC received no comments on 

the PRA section of the proposal or the 

burden estimates. However, the FDIC 

has an ongoing interest in public 

comments on its burden estimates. Any 

such comments should be sent to the 

Paperwork Reduction Act Officer, FDIC 

Legal Division, 550 17th Street NW., 

Washington, DC 20503. Written 

comments should address the accuracy 

of the burden estimates and ways to 

minimize burden, as well as other 

relevant aspects of the information 

collection request. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA), 

5 U.S.C. 601 et seq., requires that each 

Federal agency either certify that a 

proposed rule will not, if promulgated, 

have a significant economic impact on 

a substantial number of small entities or 

prepare and make available for public 

comment an initial regulatory flexibility 

analysis of the proposal.227 For the 

reasons provided below, the FDIC 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the final rule will not have 

a significant economic impact on a 

substantial number of small entities. 

The final rule would only apply to 

FSIs that form part of GSIB 

organizations, which include the largest, 

most systemically important banking 

organizations and certain of their 

subsidiaries. More specifically, the 

proposed rule would apply to any 

covered FSI that is a subsidiary of a U.S. 

GSIB or foreign GSIB—regardless of 

size—because an exemption for small 

entities would significantly impair the 

effectiveness of the proposed stay-andtransfer provisions and thereby 

undermine a key objective of the 

proposal: To reduce the execution risk 

of an orderly GSIB resolution. 

The FDIC estimates that the final rule 

would apply to approximately eleven 

FSIs. As of June 30, 2017, only eight of 

the eleven covered FSIs have derivatives 

portfolios that could be affected. None 

of these eight banking organizations 

would qualify as a small entity for the 

purposes of the RFA.228 In addition, the 

FDIC anticipates that any small 

subsidiary of a GSIB that could be 

affected by the final rule would not bear 

significant additional costs as it is likely 

to rely on its parent GSIB, or a large 

affiliate, that will be subject to similar 

reporting, recordkeeping, and 

compliance requirements.229 The final 

rule complements the FRB FR and the 

expected OCC FR. It is not designed to 

duplicate, overlap with, or conflict with 

any other Federal regulation. 

This regulatory flexibility analysis 

demonstrates that the proposed rule 

would not, if promulgated, have a 

significant economic impact on a 

substantial number of small entities, 

and the FDIC so certifies.230

C. Riegle Community Development and 

Regulatory Improvement Act of 1994 

The Riegle Community Development 

and Regulatory Improvement Act of 

1994 (RCDRIA), 12 U.S.C. 4701, requires 

that the FDIC, 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. In addition, subject to 

certain exceptions, new regulations that 

impose additional reporting, 

disclosures, or other new requirements 

on insured depository institutions 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. In accordance with these 

provisions and as discussed above, the 

FDIC considered any administrative 

burdens, as well as benefits, that the 

final rule would place on depository 

institutions and their customers in 

determining the effective date and 

administrative compliance requirements 

of the final rule. The final rule will be 

effective no earlier than the first day of 

a calendar quarter that begins on or after 

the date on which the final rule is 

published. 

D. Solicitation of Comments on the Use 

of Plain Language 

Section 722 of the Gramm-LeachBliley Act, 12 U.S.C. 4809, requires the 

FDIC to use plain language in all 

proposed and final rules published after 

January 1, 2000. The FDIC has presented 

the final rule in a simple and 

straightforward manner. 

E. Small Business Regulatory 

Enforcement Fairness Act 

The Office of Management and Budget 

has determined that this final rule is a 

‘‘major rule’’ within the meaning of the 

Small Business Regulatory Enforcement 

Fairness Act of 1996 (5 U.S.C. 801, et 

seq.) (‘‘SBREFA’’). As required by the 


sradovich on DSK3GMQ082PROD with RULES2
50260 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

4The FDIC expects to evaluate jointly with the 

Federal Reserve and the OCC 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 FDIC expects to evaluate jointly with the 

Federal Reserve and the OCC whether foreign 

special resolution regimes meet the requirements of 

this paragraph. 

SBREFA, the FDIC will file the 

appropriate reports with Congress and 

the Government Accountability Office 

so that the Final Rule may be reviewed. 

List of Subjects 

12 CFR Part 324 

Administrative practice and 

procedure, Banks, Banking, Capital 

adequacy, Reporting and recordkeeping 

requirements, Securities, State savings 

associations, State non-member banks. 

12 CFR Part 329 

Administrative practice and 

procedure, Banks, Banking, Federal 

Deposit Insurance Corporation, FDIC, 

Liquidity, Reporting and recordkeeping 

requirements. 

12 CFR Part 382 

Administrative practice and 

procedure, Banks, Banking, Federal 

Deposit Insurance Corporation, FDIC, 

Qualified financial contracts, Reporting 

and recordkeeping requirements, State 

savings associations, State non-member 

banks. 

For the reasons stated in the 

supplementary information, the Federal 

Deposit Insurance Corporation amends 

12 CFR chapter III as follows: 

PART 324—CAPITAL ADEQUACY OF 

FDIC-SUPERVISED INSTITUTIONS 

■ 1. The authority citation for part 324 

continues to read as follows: 

Authority: 12 U.S.C. 1815(a), 1815(b), 

1816, 1818(a), 1818(b), 1818(c), 1818(t), 

1819(Tenth), 1828(c), 1828(d), 1828(i), 

1828(n), 1828(o), 1831o, 1835, 3907, 3909, 

4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 

1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. 

L. 102–242, 105 Stat. 2236, 2355, as amended 

by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 

U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 

2236, 2386, as amended by Pub. L. 102–550, 

106 Stat. 3672, 4089 (12 U.S.C. 1828 note); 

Pub. L. 111–203, 124 Stat. 1376, 1887 (15 

U.S.C. 78o–7 note). 

■ 2. Section 324.2 is amended by 

revising the definitions of ‘‘Collateral 

agreement,’’ ‘‘Eligible margin loan,’’ 

‘‘Qualifying master netting agreement,’’ 

and ‘‘Repo-style transaction’’ to read as 

follows: 

§ 324.2 Definitions. 

* * * * * 

Collateral agreement means a legal 

contract that specifies the time when, 

and circumstances under which, a 

counterparty is required to pledge 

collateral to an FDIC-supervised 

institution for a single financial contract 

or for all financial contracts in a netting 

set and confers upon the FDICsupervised 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 FDIC-supervised institution 

with a right to close-out the financial 

positions and liquidate the collateral 

upon an event of default of, or failure 

to perform by, the counterparty under 

the collateral agreement. A contract 

would not satisfy this requirement if the 

FDIC-supervised institution’s exercise of 

rights under the agreement may be 

stayed or avoided. 

(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 

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 part 382 of this title, 

subpart I of part 252 of this title or part 

47 of this title, as applicable. 

* * * * * 

Eligible margin loan means: 

(1) An extension of credit where: 

(i) The extension of credit is 

collateralized exclusively by liquid and 

readily marketable debt or equity 

securities, or gold; 

(ii) The collateral is marked to fair 

value daily, and the transaction is 

subject to daily margin maintenance 

requirements; and 

(iii) The extension of credit is 

conducted under an agreement that 

provides the FDIC-supervised 

institution the right to accelerate and 

terminate the extension of credit and to 

liquidate or set-off collateral promptly 

upon an event of default, including 

upon an event of receivership, 

insolvency, liquidation, 

conservatorship, or similar proceeding, 

of the counterparty, provided that, in 

any such case, 

(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 part 

382 of this title, subpart I of part 252 of 

this title or part 47 of this title, as 

applicable. 

(2) In order to recognize an exposure 

as an eligible margin loan for purposes 

of this subpart, an FDIC-supervised 

institution must comply with the 

requirements of § 324.3(b) with respect 

to that exposure. 

* * * * * 

Qualifying master netting agreement 

means a written, legally enforceable 

agreement provided that: 

(1) The agreement creates a single 

legal obligation for all individual 

transactions covered by the agreement 

upon an event of default following any 

stay permitted by paragraph (2) of this 

definition, including upon an event of 

receivership, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

(2) The agreement provides the FDICsupervised 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, 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50261 

7The FDIC expects to evaluate jointly with the 

Federal Reserve and the OCC whether foreign 

special resolution regimes meet the requirements of 

this paragraph. 

8The FDIC expects to evaluate jointly with the 

Federal Reserve and the OCC whether foreign 

special resolution regimes meet the requirements of 

this paragraph. 

1The FDIC expects to evaluate jointly with the 

Federal Reserve and the OCC whether foreign 

special resolution regimes meet the requirements of 

this paragraph. 

(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 part 

382 of this title, subpart I of part 252 of 

this title or part 47 of this title, as 

applicable; 

(3) The agreement does not contain a 

walkaway clause (that is, a provision 

that permits a non-defaulting 

counterparty to make a lower payment 

than it otherwise would make under the 

agreement, or no payment at all, to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate of the 

defaulter is a net creditor under the 

agreement); and 

(4) In order to recognize an agreement 

as a qualifying master netting agreement 

for purposes of this subpart, an FDICsupervised institution must comply 

with the requirements of § 324.3(d) with 

respect to that agreement. 

* * * * * 

Repo-style transaction means a 

repurchase or reverse repurchase 

transaction, or a securities borrowing or 

securities lending transaction, including 

a transaction in which the FDICsupervised institution acts as agent for 

a customer and indemnifies the 

customer against loss, provided that: 

(1) The transaction is based solely on 

liquid and readily marketable securities, 

cash, or gold; 

(2) The transaction is marked-to-fair 

value daily and subject to daily margin 

maintenance requirements; 

(3)(i) The transaction is a ‘‘securities 

contract’’ or ‘‘repurchase agreement’’ 

under section 555 or 559, respectively, 

of the Bankruptcy Code (11 U.S.C. 555 

or 559), a qualified financial contract 

under section 11(e)(8) of the Federal 

Deposit Insurance Act, or a netting 

contract between or among financial 

institutions under sections 401–407 of 

the Federal Deposit Insurance 

Corporation Improvement Act or the 

Federal Reserve’s Regulation EE (12 CFR 

part 231); or 

(ii) If the transaction does not meet 

the criteria set forth in paragraph (3)(i) 

of this definition, then either: 

(A) The transaction is executed under 

an agreement that provides the FDICsupervised 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 part 

382 of this title, subpart I of part 252 of 

this title or part 47 of this title, as 

applicable; or 

(B) The transaction is: 

(1) Either overnight or 

unconditionally cancelable at any time 

by the FDIC-supervised institution; and 

(2) Executed under an agreement that 

provides the FDIC-supervised 

institution the 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 

counterparty default; and 

(4) In order to recognize an exposure 

as a repo-style transaction for purposes 

of this subpart, an FDIC-supervised 

institution must comply with the 

requirements of § 324.3(e) of this part 

with respect to that exposure. 

* * * * * 

PART 329—LIQUIDITY RISK 

MEASUREMENT STANDARDS 

■ 3. The authority citation for part 329 

continues to read as follows: 

Authority: 12 U.S.C. 12 U.S.C. 1815, 1816, 

1818, 1819, 1828, 1831p–1, 5412. 

■ 4. Section 329.3 is amended by 

revising the definition of ‘‘Qualifying 

master netting agreement’’ to read as 

follows: 

§ 329.3 Definitions. 

* * * * * 

Qualifying master netting agreement 

means a written, legally enforceable 

agreement provided that: 

(1) The agreement creates a single 

legal obligation for all individual 

transactions covered by the agreement 

upon an event of default following any 

stay permitted by paragraph (2) of this 

definition, including upon an event of 

receivership, conservatorship, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

(2) The agreement provides the FDICsupervised 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 


sradovich on DSK3GMQ082PROD with RULES2
50262 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

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 part 

382 of this title, subpart I of part 252 of 

this title or part 47 of this title, as 

applicable; 

(3) The agreement does not contain a 

walkaway clause (that is, a provision 

that permits a non-defaulting 

counterparty to make a lower payment 

than it otherwise would make under the 

agreement, or no payment at all, to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate of the 

defaulter is a net creditor under the 

agreement); and 

(4) In order to recognize an agreement 

as a qualifying master netting agreement 

for purposes of this subpart, an FDICsupervised institution must comply 

with the requirements of § 329.4(a) with 

respect to that agreement. 

* * * * * 

■ 5. Add part 382 to read as follows: 

PART 382—RESTRICTIONS ON 

QUALIFIED FINANCIAL CONTRACTS 

Sec. 

382.1 Definitions. 

382.2 Applicability. 

382.3 U.S. Special resolution regimes. 

382.4 Insolvency proceedings. 

382.5 Approval of enhanced creditor 

protection conditions. 

382.6 [Reserved] 

382.7 Exclusion of certain QFCs. 

Authority: 12 U.S.C. 1816, 1818, 1819, 

1820(g) 1828, 1828(m), 1831n, 1831o, 

1831p–l, 1831(u), 1831w. 

§ 382.1 Definitions. 

Affiliate has the same meaning as in 

section 12 U.S.C. 1813(w). 

Central counterparty (CCP) has the 

same meaning as in § 324.2 of this 

chapter. 

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. 

Control has the same meaning as in 

section 3(w) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(w)). 

Covered entity means a covered entity 

as defined by the Federal Reserve Board 

in 12 CFR 252.82. 

Covered QFC means a QFC as defined 

in § 382.2 of this part. 

Credit enhancement means a QFC of 

the type set forth in sections 

210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), 

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

Protection Act (12 U.S.C. 

5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), 

(v)(VI), or (vi)(VI)) or a credit 

enhancement that the Federal Deposit 

Insurance Corporation determines 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)). 

Default right means: 

(1) 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 § 382.4, 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. 

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). 

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 12 CFR 252.153; or a nonbank 

financial institution supervised by the 

Board of Governors of the Federal 

Reserve System under Title I of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (12 U.S.C. 

5323); 

(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) and (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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50263 

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. 2001 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 

within 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)(45); 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 

section 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 

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 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) through (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 

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. 

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 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 § 329.3 of this 

chapter. 

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 


sradovich on DSK3GMQ082PROD with RULES2
50264 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

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. 

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. 

Subsidiary of a covered FSI means 

any subsidiary of a covered FSI as 

defined in 12 U.S.C. 1813(w). 

U.S. agency has the same meaning as 

the term ‘‘agency’’ in 12 U.S.C. 3101. 

U.S. branch has the same meaning as 

the term ‘‘branch’’ in 12 U.S.C. 3101. 

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. 

§ 382.2 Applicability. 

(a) General requirement. A covered 

FSI must ensure that each covered QFC 

conforms to the requirements of 

§§ 382.3 and 382.4 of this part. 

(b) Covered FSI. For purposes of this 

part a covered FSI means 

(1) Any State savings association or 

State non-member bank (as defined in 

the Federal Deposit Insurance Act, 12 

U.S.C. 1813(e)(2)) that is a direct or 

indirect subsidiary of: 

(i) A global systemically important 

bank holding company that has been 

designated pursuant to § 252.82(a)(1) of 

the Federal Reserve Board’s Regulation 

YY (12 CFR 252.82); or 

(ii) A global systemically important 

foreign banking organization that has 

been designated pursuant to subpart I of 

12 CFR part 252 (FRB Regulation YY), 

and 

(2) Any subsidiary of a covered FSI 

other than: 

(i) A subsidiary that is owned in 

satisfaction of debt previously 

contracted in good faith; 

(ii) A portfolio concern that is 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 that has received from 

the Small Business Administration 

notice to proceed to qualify for a license 

as a Small Business Investment 

Company, which notice or license has 

not been revoked; or 

(iii) A subsidiary designed 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- to moderate-income communities 

or families (such as providing housing, 

services, or jobs). 

(c) Covered QFCs. For purposes of this 

part, a covered QFC is: 

(1) With respect to a covered FSI that 

is a covered FSI on January 1, 2018, an 

in-scope QFC that the covered FSI: 

(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 19, 

2019, if the covered FSI or any affiliate 

that is a covered entity, covered bank, 

or covered FSI 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 FSI that 

becomes a covered FSI after January 1, 

2018, an in-scope QFC that the covered 

FSI: 

(i) Enters, executes, or otherwise 

becomes a party to on or after the later 

of the date the covered FSI first becomes 

a covered FSI 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 FSI, 

if the covered FSI or any affiliate that is 

a covered entity, covered bank or 

covered FSI 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) 

of this section with respect to the 

covered FSI. 

(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 FSI; or 

(2) Provides one or more default rights 

with respect to a QFC that may be 

exercised against a covered FSI. 

(e) Rules of construction. For 

purposes of this part, 

(1) A covered FSI 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 FSI 

that is a covered FSI on January 1, 2018 

must conform the covered QFC to the 

requirements of this part by: 

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

covered QFC is a covered entity, 

covered bank, or covered FSI. 

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

covered QFC (other than the covered 

FSI) is a financial counterparty that is 

not a covered entity, covered bank or 

covered FSI; or 

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

covered QFC (other than the covered 

FSI) is not described in paragraph 

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

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

party to the covered QFC (other than the 

covered FSI) is a small financial 

institution. 

(2) With respect to each of its covered 

QFCs, a covered FSI that is not a 

covered FSI on January 1, 2018 must 

conform the covered QFC to the 

requirements of this part by: 

(i) The first day of the calendar 

quarter immediately following 1 year 

after the date the covered FSI first 

becomes a covered FSI if each party to 

the covered QFC is a covered entity, 

covered bank, or covered FSI; 

(ii) The first day of the calendar 

quarter immediately following 18 

months from the date the covered FSI 

first becomes a covered FSI if each party 

to the covered QFC (other than the 

covered FSI) is a financial counterparty 

that is not a covered entity, covered 

bank or covered FSI; or 

(iii) The first day of the calendar 

quarter immediately following 2 years 

from the date the covered FSI first 

becomes a covered FSI if a party to the 

covered QFC (other than the covered 

FSI) is not described in paragraph 

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

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

party to the covered QFC (other than the 

covered FSI) is a small financial 

institution. 

(g) Rights of receiver unaffected. 

Nothing in this part shall in any manner 

limit or modify the rights and powers of 

the FDIC as receiver under the Federal 

Deposit Insurance Act or Title II of the 

Dodd-Frank Act, including, without 

limitation, the rights of the receiver to 

enforce provisions of the Federal 

Deposit Insurance Act or Title II of the 

Dodd-Frank Act that limit the 

enforceability of certain contractual 

provisions. 

§ 382.3 U.S. special resolution regimes. 

(a) Covered QFCs not required to be 

conformed. (1) Notwithstanding § 382.2 

of this part, a covered FSI 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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50265 

regimes as part of the law governing the 

QFC; and 

(ii) Each party to the covered QFC, 

other than the covered FSI, 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 FSI 

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 FSI 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 FSI or an 

affiliate of the covered FSI 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 

FSI 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 

§ 382.4(d), (f), and (h) of this part. 

§ 382.4 Insolvency proceedings. 

This section does not apply to 

proceedings under Title II of the DoddFrank Act. 

(a) Covered QFCs not required to be 

conformed. Notwithstanding § 382.2 of 

this part, a covered FSI 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, covered 

bank, or covered FSI 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 

(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, covered 

bank, or covered FSI is a party. 

(2) Covered affiliate credit 

enhancement. Covered affiliate credit 

enhancement means an affiliate credit 

enhancement in which a covered entity, 

covered bank, or covered FSI 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 


sradovich on DSK3GMQ082PROD with RULES2
50266 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

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 p.m. (EST) 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 (d) and (f) of this section, 

which are inapplicable to FDI Act 

proceedings, and 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 that is related, directly or 

indirectly, to the covered affiliate 

support provider becoming subject to 

FDI Act proceedings only in the 

following circumstances: 

(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)–(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. 

§ 382.5 Approval of enhanced creditor 

protection conditions. 

(a) Protocol compliance. (1) Unless 

the FDIC determines otherwise based on 

the specific facts and circumstances, a 

covered QFC is deemed to comply with 

this part 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 

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

through (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, covered banks, and 

covered FSIs 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, covered banks, and 

covered FSIs; 

(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 part; 

(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) through (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 


sradovich on DSK3GMQ082PROD with RULES2
Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 50267 

UNIVERSAL RESOLUTION STAY 

PROTOCOL.’’ 

(b) Proposal of enhanced creditor 

protection conditions. (1) A covered FSI 

may request that the FDIC approve as 

compliant with the requirements of 

§§ 382.3 and 382.4 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 

§ 382.4(b) of this part that is different 

than that of § 382.4(d), (f), and (h). 

(3) A covered FSI 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 FDIC requests. 

(c) FDIC approval. The FDIC may 

approve, subject to any conditions or 

commitments the FDIC may set, a 

proposal by a covered FSI under 

paragraph (b) of this section if the 

proposal, as compared to a covered QFC 

that contains only the limited 

exemptions in § 382.4(d), (f), and (h) or 

that is amended as provided under 

paragraph (a) of this section, would 

promote the safety and soundness of 

covered FSIs by mitigating the potential 

destabilizing effects of the resolution of 

a global significantly important banking 

entity that is an affiliate of the covered 

FSI to at least the same extent. 

(d) Considerations. In reviewing a 

proposal under this section, the FDIC 

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 FSIs during 

distress or increase the impact on U.S. 

financial stability were one or more of 

the covered FSIs to fail; 

(2) Whether, and the extent to which, 

the proposal would materially decrease 

the ability of a covered FSI, or an 

affiliate of a covered FSI, 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 FSIs; 

(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 FSIs; 

(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. 

§ 382.6 [Reserved] 

§ 382.7 Exclusion of certain QFCs. 

(a) Exclusion of QFCs with FMUs. 

Notwithstanding § 382.2 of this part, a 

covered FSI is not required to conform 

to the requirements of this part a 

covered QFC to which: 

(1) A CCP is party; or 

(2) Each party (other than the covered 

FSI) is an FMU. 

(b) Exclusion of certain covered entity 

and covered bank QFCs. If a covered 

QFC is also a covered QFC under part 

252 or part 47 of this title that an 

affiliate of the covered FSI is also 

required to conform pursuant to part 

252 or part 47 and the covered FSI is: 

(1) The affiliate credit enhancement 

provider with respect to the covered 

QFC, then the covered FSI is required to 

conform the credit enhancement to the 

requirements of this part but is not 

required to conform the direct QFC to 

the requirements of this part; or 

(2) The direct party to which the 

covered entity or covered bank is the 

affiliate credit enhancement provider, 

then the covered FSI is required to 

conform the direct QFC to the 

requirements of this part but is not 

required to conform the credit 

enhancement to the requirements of this 

part. 

(c) Exclusion of certain contracts. 

Notwithstanding § 382.2 of this part, a 

covered FSI is not required to conform 

the following types of contracts or 

agreements to the requirements of this 

part: 

(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 into 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 FSI 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 FSI or an affiliate of the covered 

FSI; and 

(ii) Was issued prior to January 1, 

2018. 

(d) Exemption by order. The FDIC 

may exempt by order one or more 

covered FSI(s) from conforming one or 

more contracts or types of contracts to 

one or more of the requirements of this 

part after considering: 

(1) The potential impact of the 

exemption on the ability of the covered 

FSI(s), or affiliates of the covered FSI(s), 

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 FDIC deems 

relevant. 

■ 6. Amend 382.1 by adding the 

definition of ‘‘covered bank’’ to read as 

follows: 

§ 382.1 Definitions. 

* * * * * 


sradovich on DSK3GMQ082PROD with RULES2
50268 Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Rules and Regulations 

Covered bank means a covered bank 

as defined by the Office of the 

Comptroller of the Currency in 12 CFR 

part 47. 

* * * * * 

Dated at Washington, DC, this 27th day of 

September 2017. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Valerie J. Best, 

Assistant Executive Secretary. 

[FR Doc. 2017–21951 Filed 10–27–17; 8:45 am] 

BILLING CODE P 


sradovich on DSK3GMQ082PROD with RULES2