81 FR 71348 - Regulatory Capital Rules, Liquidity Coverage Ratio: Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions

FEDERAL DEPOSIT INSURANCE CORPORATION

Federal Register Volume 81, Issue 200 (October 17, 2016)

Page Range		71348-71356
FR Document		2016-25021
The FDIC is adopting a final rule that amends the definition of ``qualifying master netting agreement'' under the regulatory capital rules and the liquidity coverage ratio rule. In this final rule, the FDIC also is amending the definitions of ``collateral agreement,'' ``eligible margin loan,'' and ``repo-style transaction'' under the regulatory capital rules. These amendments are designed to ensure that the regulatory capital and liquidity treatment of certain financial contracts generally would not be affected by implementation of special resolution regimes in non-U.S. jurisdictions that are substantially similar to the U.S. resolution framework or by changes to the International Swaps and Derivative Association (ISDA) Master Agreement that provide for contractual submission to such regimes. The Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) issued in December 2014, a joint interim final rule that is substantially identical to this final rule.
Federal Register, Volume 81 Issue 200 (Monday, October 17, 2016)
[Federal Register Volume 81, Number 200 (Monday, October 17, 2016)]
[Rules and Regulations]
[Pages 71348-71356]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-25021]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324 and 329

RIN 3064-AE30


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

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is adopting a final rule that amends the definition 
of ``qualifying master netting agreement'' under the regulatory capital 
rules and the liquidity coverage ratio rule. In this final rule, the 
FDIC also is amending the definitions of ``collateral agreement,'' 
``eligible margin loan,'' and ``repo-style transaction'' under the 
regulatory capital rules. These amendments are designed to ensure that 
the regulatory capital and liquidity treatment of certain financial 
contracts generally would not be affected by implementation of special 
resolution regimes in non-U.S. jurisdictions that are substantially 
similar to the U.S. resolution framework or by changes to the 
International Swaps and Derivative Association (ISDA) Master Agreement 
that provide for contractual submission to such regimes. The Office of 
the Comptroller of the Currency (OCC) and the Board of

[[Page 71349]]

Governors of the Federal Reserve System (Federal Reserve) issued in 
December 2014, a joint interim final rule that is substantially 
identical to this final rule.

DATES: The final rule is effective October 17, 2016.

FOR FURTHER INFORMATION CONTACT:  Ryan Billingsley, Acting Associate 
Director, [email protected]; Benedetto Bosco, Chief, Capital Policy 
Section, [email protected]; Eric Schatten, Capital Markets Policy 
Analyst, Capital Markets Strategies, [email protected], Capital 
Markets Branch, Division of Risk Management Supervision, (202) 898-
6888; or David Wall, Assistant General Counsel, [email protected]; 
Cristina Regojo, Counsel; [email protected]; Michael Phillips, Counsel, 
[email protected], Legal Division, Federal Deposit Insurance 
Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Summary

    The regulatory capital rules of the Federal Reserve, the OCC, and 
the FDIC (collectively, the agencies) permit a banking organization to 
measure exposure from certain types of financial contracts on a net 
basis, provided that the contracts are subject to a ``qualifying master 
netting agreement'' that provides for certain rights upon a 
counterparty default.\1\ The agencies, by rule, have defined a 
qualifying master netting agreement \2\ as a netting agreement that, 
among other things, permits a banking organization to terminate, apply 
close-out netting, and promptly liquidate or set-off collateral upon an 
event of default of the counterparty (default rights), thereby reducing 
its counterparty exposure and market risks. On the whole, measuring the 
amount of exposure of these contracts on a net basis, rather than a 
gross basis, results in a lower measure of exposure, and thus, a lower 
capital requirement, under the regulatory capital rules. Similarly, the 
Liquidity Coverage Ratio (LCR) Rule \3\ allows a banking organization 
to net the inflows and outflows associated with derivative transactions 
subject to a qualifying master netting agreement, which generally 
results in a more accurate measure of cash outflows than if a banking 
organization were to calculate its derivatives inflows and outflows on 
a gross basis.
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    \1\ See 12 CFR part 3 (OCC); 12 CFR part 217 (Federal Reserve); 
12 CFR part 324 (FDIC). The term ``banking organization'' includes 
national banks, state member banks, state nonmember banks, savings 
associations, and top-tier bank holding companies domiciled in the 
United States not subject to the Federal Reserve's Small Bank 
Holding Company Policy Statement (12 CFR part 225, appendix C), as 
well as top-tier savings and loan holding companies domiciled in the 
United States, except for certain savings and loan holding companies 
that are substantially engaged in insurance underwriting or 
commercial activities.
    \2\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal Reserve); 12 CFR 
324.2 (FDIC).
    \3\ See 12 CFR part 50 (OCC); 12 CFR part 249 (Federal Reserve); 
12 CFR part 329 (FDIC).
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    The agencies' current definition of ``qualifying master netting 
agreement'' recognizes that default rights may be stayed if the 
financial company is in receivership, conservatorship, or resolution 
under Title II of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act),\4\ or under the Federal Deposit 
Insurance Act (FDI Act).\5\ Accordingly, transactions conducted under 
netting agreements where default rights may be stayed under Title II of 
the Dodd-Frank Act or the FDI Act may qualify for the favorable capital 
treatment described above. However, the FDIC's current definition of 
``qualifying master netting agreement'' does not recognize that default 
rights may be stayed where a master netting agreement is subject to 
limited stays under non-U.S. special resolution regimes or where 
counterparties agree through contract that a special resolution regime 
would apply. When the FDIC adopted the current definition of 
``qualifying master netting agreement,'' no other jurisdiction had 
adopted a special resolution regime, and no banking organizations had 
communicated to the FDIC an intent to enter into contractual amendments 
to clarify that bilateral over-the-counter (OTC) derivatives 
transactions are subject to certain provisions of certain U.S. and 
foreign special resolution regimes.
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    \4\ See 12 U.S.C. 5390(c)(8)-(16).
    \5\ See 12 U.S.C. 1821(e)(8)-(13). The definition would also 
recognize that default rights may be stayed under any similar 
insolvency law applicable to government sponsored enterprises 
(GSEs). Generally under the agencies' regulatory capital rules, 
government-sponsored enterprise means an entity established or 
chartered by the U.S. government to serve public purposes specified 
by the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government. See 
12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal Reserve); 12 CFR 324.2 
(FDIC).
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    Regarding non-U.S. special resolution regimes that provide a 
limited stay of termination rights and other remedies in financial 
contracts, in 2014, the European Union (EU) finalized the Bank Recovery 
and Resolution Directive (BRRD), which prescribes aspects of a special 
resolution regime that EU member nations should implement. For the BRRD 
to be fully implemented, each member nation of the EU must transpose 
the BRRD requirements into local law. The implementation of the BRRD by 
EU member nations was permitted as early as January 1, 2015, and the 
transposition process is largely complete.
    Regarding contractual amendments between counterparties to OTC 
derivatives, various U.S. banking organizations have adhered to the 
2015 Universal ISDA Resolution Stay Protocol (ISDA Protocol),\6\ which 
is a multilateral amendment mechanism that provides for cross-border 
application of temporary stays under special resolution regimes 
(including Title II of the Dodd-Frank Act and the FDI Act). The ISDA 
Protocol would apply the provisions of Title II of the Dodd-Frank Act 
or the FDI Act, as appropriate, concerning stays of termination rights 
and other remedies in qualified financial contracts entered into by 
U.S. financial companies, including insured banks, if counterparties to 
such transactions are not subject to U.S. law. It would also apply 
similar provisions of the laws and regulations of certain EU member 
countries that have implemented the BRRD to counterparties of financial 
companies in those countries. Thus, the ISDA Protocol would limit the 
rights of counterparties to exercise termination rights and other 
remedies in financial contracts to the same extent that those rights 
would be limited under the sovereign resolution regime applicable to 
their counterparties or, in certain circumstances, their 
counterparties' affiliates.
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    \6\ See ISDA Protocol at http://assets.isda.org/media/f253b540-25/958e4aed.pdf/.
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    In addition, the ISDA Protocol provides for limited stays of 
termination rights and other remedies for cross-defaults resulting from 
affiliate insolvency proceedings under a limited number of U.S. 
insolvency regimes. ISDA Master Agreements \7\ and securities financing 
transactions (documented under industry standard documentation for such 
transactions) \8\

[[Page 71350]]

between counterparties that adhere to the ISDA Protocol are 
automatically amended to stay certain default rights and other remedies 
provided under the agreement. The effective date of certain provisions 
of the ISDA Protocol was January 1, 2016.
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    \7\ The ISDA Master Agreement is a form of agreement that 
governs OTC derivatives transactions and is used by a significant 
portion of the parties to bilateral OTC derivatives transactions, 
including large, internationally active banking organizations. 
Furthermore, the ISDA Master Agreement generally creates a single 
legal obligation that provides for the netting of all individual 
transactions covered by the agreement.
    \8\ The ISDA Protocol is an expansion of the ISDA 2014 
Resolution Stay Protocol and covers securities financing 
transactions in addition to over-the-counter derivatives documented 
under ISDA Master Agreements. As between adhering parties, the ISDA 
Protocol replaces the ISDA 2014 Resolution Stay Protocol (which does 
not cover securities financing transactions). Securities financing 
transactions (which generally include repurchase agreements and 
securities lending transactions) are documented under non-ISDA 
master agreements. The ISDA Protocol addresses financial contracts 
under these master agreements in the ``Securities Financing 
Transaction Annex.''
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    A master netting agreement under which default rights may be stayed 
under the BRRD or that incorporates the ISDA Protocol would no longer 
qualify as a qualifying master netting agreement under the FDIC's 
current regulatory capital and liquidity rules. This would result in 
considerably higher capital and liquidity requirements.
    The FDIC issued in the Federal Register of January 30, 2015, 
proposed amendments to the definition of qualifying master netting 
agreement in the regulatory capital and liquidity rules and certain 
related definitions in the regulatory capital rules (January 2015 
NPR).\9\ This final rule adopts those revised definitions in the 
proposed rule issued in the January 2015 NPR, as amended to better 
conform with the interim final rule jointly issued by the Federal 
Reserve and the OCC in December 2014.\10\
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    \9\ 80 FR 5063 (January 30, 2015).
    \10\ 79 FR 78287 (December 30, 2014).
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    Under this final rule, the FDIC permits an otherwise qualifying 
master netting agreement to qualify for favored netting treatment under 
the FDIC's regulatory capital and liquidity rules if (i) default rights 
under the agreement may be stayed under a qualifying non-U.S. special 
resolution regime or (ii) the agreement incorporates a qualifying 
special resolution regime by contract. Through these revisions, the 
final rule maintains the existing treatment for these contracts for 
purposes of the regulatory capital and liquidity rules, while 
recognizing the recent changes instituted by the BRRD and the ISDA 
Protocol.
    The final rule also revises certain other definitions of the 
regulatory capital rules to make various conforming changes designed to 
ensure that a banking organization may continue to recognize the risk 
mitigating effects of financial collateral \11\ received in a secured 
lending transaction, repo-style transaction, or eligible margin loan 
for purposes of the regulatory capital and liquidity rules. 
Specifically, the final rule revises the definition of ``collateral 
agreement,'' ``eligible margin loan,'' \12\ and repo-style 
transaction'' \13\ to provide that a counterparty's default rights may 
be stayed under a non-U.S. special resolution regime or, if applicable, 
that are made subject to a special resolution regime by contract.\14\
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    \11\ Generally, under the agencies' regulatory capital rules, 
financial collateral means collateral in the form of: (i) Cash on 
deposit with the banking organization (including cash held for the 
banking organization by a third-party custodian or trustee); (ii) 
gold bullion; (iii) long-term debt securities that are not 
resecuritization exposures and that are investment grade; (iv) 
short-term debt instruments that are not resecuritization exposures 
and that are investment grade; (v) equity securities that are 
publicly traded; (vi) convertible bonds that are publicly traded; or 
(vii) money market fund shares and other mutual fund shares if a 
price for the shares is publicly quoted daily. In addition, the 
regulatory capital rules also require that the banking organization 
have a perfected, first-priority security interest or, outside of 
the United States, the legal equivalent thereof (with the exception 
of cash on deposit and notwithstanding the prior security interest 
of any custodial agent). See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Federal 
Reserve); 12 CFR 324.2 (FDIC).
    \12\ Generally under the agencies' regulatory capital rules, 
eligible margin loan means an extension of credit where: (i) The 
extension of credit is collateralized exclusively by liquid and 
readily marketable debt or equity securities, or gold; (ii) the 
collateral is marked-to-fair value daily, and the transaction is 
subject to daily margin maintenance requirements; and (iii) the 
extension of credit is conducted under an agreement that provides 
the banking organization with default rights, provided that any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs. In addition, in order to 
recognize an exposure as an eligible margin loan a banking 
organization must comply with the requirements of section 3(b) of 
the regulatory capital rules with respect to that exposure.
    \13\ Generally, under the agencies' regulatory capital rules, 
repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the banking 
organization acts as agent for a customer and indemnifies the 
customer against loss, provided that: (1) The transaction is based 
solely on liquid and readily marketable securities, cash, or gold; 
(2) the transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements; (3) the transaction provides 
certain default rights. In addition, in order to recognize an 
exposure as a repo-style transaction for purposes of this subpart, a 
banking organization must comply with the requirements of section 
3(b) of the regulatory capital rules. See 12 CFR 3.2 (OCC); 12 CFR 
217.2 (Federal Reserve); 12 CFR 324.2 (FDIC).
    \14\ See 12 CFR part 32.
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II. Background

A. U.S. Resolution Regime

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

B. Foreign Special Resolution Procedures and the ISDA Protocol

    In recognition of the issues faced in the financial crisis 
concerning resolution of globally-active financial companies, the EU 
issued the BRRD on April 15, 2014, which requires EU member states to 
implement a resolution mechanism by December 31, 2014, in order to 
increase the likelihood for successful national or cross-border 
resolutions of a financial company organized in the EU.\15\ The BRRD 
contains special resolution powers, including a limited stay on certain 
financial contracts that is similar to the stays provided under Title 
II of the Dodd-Frank Act and the FDI Act. Therefore, the operations of 
U.S. banking organizations located in jurisdictions that have 
implemented the BRRD could become subject to an orderly resolution 
under the BRRD, including the application of a limited statutory stay 
of a counterparty's right to exercise early termination rights and 
other remedies with respect to certain financial contracts. The BRRD is 
generally designed to be consistent with the Key Attributes of 
Effective Resolution Regimes for Financial Institutions (Key 
Attributes),\16\ which were published by the Financial

[[Page 71351]]

Stability Board (FSB) \17\ of the G-20 \18\ member nations in October 
2011, and is designed to increase the likelihood for successful 
national or cross-border resolutions of a financial company organized 
in the EU.
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    \15\ On January 1, 2015, most of the provisions of the BRRD were 
in effect in a number of the EU member states.
    \16\ The Key Attributes area available at 
www.financialstabilityboard.org/publications/r_111104cc.pdf. See 
specifically Key Attributes 4.1-4.4 regarding set-off, netting, 
collateralization and segregation of client assets and Appendix I 
Annex 5 regarding temporary stays on early termination rights.
    \17\ The FSB is an international body that monitors and makes 
recommendations about the global financial system. The FSB 
coordinates the regulatory, supervisory, and other financial sector 
policies of national financial authorities and international 
standard-setting bodies.
    \18\ The G-20 membership comprises a mix of the world's largest 
advanced and emerging economies. The G-20 members are Argentina, 
Australia, Brazil, Canada, China, France, Germany, India, Indonesia, 
Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South 
Africa, Turkey, the United Kingdom, the United States, and the 
European Union. Following the most recent financial crisis, leaders 
of the G-20 member nations recognized that the orderly cross-border 
resolution of a globally active financial company requires all 
countries to have effective national resolution regimes to resolve 
failing financial companies in an orderly manner and that national 
resolution regimes should be consistent with one another. Subjecting 
the same financial company to conflicting legal rules, procedures, 
and mechanisms across jurisdictions can create uncertainty, 
instability, possible systemic contagion, and higher costs of 
resolution. The Key Attributes were adopted by the G-20 leaders and 
are now international-agreed-upon standards that set forth the 
responsibilities and powers that national resolution regimes should 
have to resolve a failing systemically important financial 
institution.
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    ISDA launched the ISDA Protocol on November 12, 2015, which 
provides a mechanism for parties to transactions under ISDA Master 
Agreements (and securities financing transactions documented under 
industry standard documentation for such transactions) to amend those 
agreements to stay certain early termination rights and other remedies 
provided under the agreement. As of July 14, 2016, 217 parties, 
including several of the largest U.S. banking organizations,\19\ have 
adhered to the ISDA Protocol and have thereby modified their ISDA 
Master Agreements. Like other qualified financial contracts, OTC 
derivatives transactions executed under standard ISDA Master Agreements 
allow a party to terminate the agreement immediately upon an event of 
default of its counterparty, including if its counterparty (or a 
related entity) \20\ enters insolvency or similar proceedings.
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    \19\ The U.S. banking organizations that have adhered to the 
ISDA Protocol include Bank of America Corporation, The Bank of New 
York Mellon, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan 
Chase & Co., Wells Fargo & Co., Morgan Stanley, and certain 
subsidiaries thereof. See current list of adhering parties to the 
ISDA Protocol at http://www2.isda.org/functional-areas/protocol-management/protocol-data-csv/22.
    \20\ Under the ISDA Protocol, a related entity is defined to 
include (i) each parent or (ii) an affiliate that is (a) a creditor 
support provider or (b) a specified entity.
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    The contractual amendments effectuated pursuant to the ISDA 
Protocol would apply the provisions of Title II of the Dodd-Frank Act 
and the FDI Act concerning limited stays of termination rights and 
other remedies in qualified financial contracts to ISDA Master 
Agreements between adhering counterparties, including adhering 
counterparties that are not otherwise subject to U.S. law. The 
amendments also would apply substantially similar provisions of certain 
non-U.S. laws, to ISDA Master Agreements between adhering 
counterparties that are not otherwise subject to such laws.\21\ Thus, 
the contractual amendments effectuated pursuant to the ISDA Protocol 
would permit a party that has agreed to adhere to the ISDA Protocol to 
exercise early termination rights and other remedies only to the extent 
that it would be entitled to do so under the special resolution regime 
applicable to its adhering counterparties (or related entities, as 
applicable).\22\
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    \21\ The provisions of the ISDA Protocol relating to the special 
resolution regimes in these jurisdictions became effective on 
January 1, 2016, for ISDA Master Agreements between the adherents. 
The ISDA Protocol also provides a mechanism for adhering parties to 
opt-in to special resolution regimes in other FSB member 
jurisdictions so long as the regimes meet conditions specified in 
the ISDA Protocol relating to creditor safeguards, which are 
consistent with the Key Attributes.
    \22\ Parties adhering to the ISDA Protocol initially were 
contractually subject to the statutory special resolution regimes of 
France, Germany, Japan, Switzerland, the United Kingdom and the 
United States.
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C. Description of Relevant Provisions of the Regulatory Capital and the 
Liquidity Coverage Ratio Rules

    As noted above, the agencies' regulatory capital rules permit a 
banking organization to measure exposure from certain types of 
financial contracts on a net basis, provided that the contracts are 
subject to a qualifying master netting agreement or other agreement 
that contains specific provisions. Specifically, under the current 
regulatory capital rules, a banking organization with multiple OTC 
derivatives that are subject to a qualifying master netting agreement 
would be able to calculate a net exposure amount by netting the sum of 
all positive and negative fair values of the individual OTC derivative 
contracts subject to the qualifying master netting agreement and 
calculating a risk-weighted asset amount based on the net exposure 
amount. For purposes of the current supplementary leverage ratio (as 
applied only to advanced approaches banking organizations), a banking 
organization that has one or more OTC derivatives with the same 
counterparty that are subject to a qualifying master netting agreement 
would be permitted to not include in total leverage exposure cash 
variation margin received from such counterparty that has offset the 
mark-to-fair value of the derivative asset, or cash collateral that is 
posted to such counterparty that has reduced the banking organization's 
on-balance sheet assets.\23\
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    \23\ Under the agencies' regulatory capital rules, the general 
framework consists of two approaches: (1) The standardized approach, 
which, beginning on January 1, 2015, applies to all banking 
organizations regardless of total asset size, and (2) the advanced 
approaches, which currently apply to large internationally active 
banking organizations (defined as those banking organizations with 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance sheet foreign exposure, depository 
institution subsidiaries of those banking organizations that use the 
advanced approaches rule, and banking organizations that elect to 
use the advanced approaches). As a general matter, the standardized 
approach sets forth standardized risk weights for different asset 
types for regulatory capital calculations, whereas, for certain 
assets, the advanced approaches make use of risk assessments 
provided by banking organizations' internal systems as inputs for 
regulatory capital calculations. Consistent with section 171 of the 
Dodd-Frank Act (codified at 12 U.S.C. 5371), a banking organization 
that is required to calculate its risk-based capital requirements 
under the advanced approaches (i.e., an advanced approaches banking 
organization) also must determine its risk-based capital 
requirements under the generally applicable risk-based capital 
rules, which is the standardized approach as of January 1, 2015). 
The lower--or more binding--ratio for each risk-based capital 
requirement is the ratio that the advanced approaches banking 
organization must use to determine its compliance with minimum 
regulatory capital requirements.
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    In addition, for risk-based capital purposes, a banking 
organization with a securities financing transaction that meets the 
definition of a repo-style transaction with financial collateral, a 
margin loan that meets the definition of an eligible margin loan with 
financial collateral, or an OTC derivative contract collateralized with 
financial collateral may determine a net exposure amount to its 
counterparty according to section 37 or section 132 of the regulatory 
capital rules. A banking organization with multiple repo-style 
transactions or eligible margin loans with a counterparty that are 
subject to a qualifying master netting agreement may net the exposure 
amounts of the individual transactions under that agreement. In 
addition, for purposes of the supplementary leverage ratio, an advanced 
approaches banking organization with multiple repo-style transactions 
with the same counterparty that are subject to a qualifying master 
netting agreement would be permitted to net for purposes of calculating 
the counterparty credit risk component of its total leverage exposure. 
In general, recognition of netting results in a lower

[[Page 71352]]

measure of risk-weighted assets and total leverage exposure than if a 
banking organization were to calculate its OTC derivatives, repo-style 
transactions, and eligible margin loans on a gross basis.
    The agencies also use the concept of a qualifying master netting 
agreement in the LCR rule.\24\ The LCR rule requires a banking 
organization to maintain an amount of high-quality liquid assets (the 
numerator) to match at least 100 percent of its total net cash outflows 
over a prospective 30 calendar-day period (the denominator). For 
derivative transactions subject to a qualifying master netting 
agreement, a banking organization would be able to calculate the net 
derivative outflow or inflow amount by netting the contractual payments 
and collateral that it would provide to, or receive from, the 
counterparty over a prospective 30 calendar-day period.\25\ If the 
derivative transactions are not subject to a qualifying master netting 
agreement, then the derivative cash outflows for that counterparty 
would be included in the net derivative cash outflow amount and the 
derivative cash inflows for that counterparty would be included in the 
net derivative cash inflow amount, without any netting and subject to 
the LCR rule's cap on total inflows. Recognition of netting generally 
results in a more accurate measure of outflows than if a banking 
organization were to calculate its inflows and outflows on its 
derivatives transactions on a gross basis.
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    \24\ The agencies' LCR rule may be found at 12 CFR part 50 
(OCC); 12 CFR part 249 (Federal Reserve); and 12 CFR part 329 
(FDIC).
    \25\ The LCR rule provides that foreign currency transactions 
that meet certain criteria can be netted regardless of whether those 
transactions are covered by a qualified master netting agreement. 
See 12 CFR 50.32(c)(2) (OCC); 12 CFR 249.32(c)(2) (Federal Reserve); 
12 CFR 329.32(c)(2) (FDIC).
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III. The Final Rule

    The final rule amends the definitions of ``collateral agreement, 
``eligible margin loan,'' ``qualifying master netting agreement,'' and 
``repo-style transaction'' in the FDIC's regulatory capital rules and 
``qualifying master netting agreement'' in the FDIC's LCR rules to 
ensure that the regulatory capital and liquidity treatment of OTC 
derivatives, repo-style transactions, eligible margin loans, and other 
collateralized transactions would be unaffected by the adoption of 
various foreign special resolution regimes and the ISDA Protocol. In 
particular, the final rule amends these definitions to provide that a 
relevant netting agreement or collateral agreement may provide for a 
limited stay or avoidance of rights where the agreement is subject by 
its terms to, or incorporates, certain resolution regimes applicable to 
financial companies, including Title II of the Dodd-Frank Act, the FDI 
Act, or any similar foreign resolution regime that are jointly 
determined by the agencies to be substantially similar to Title II of 
the Dodd-Frank Act or the FDI Act.
    In determining whether the laws of foreign jurisdictions are 
``similar'' to the FDI Act and Title II of the Dodd-Frank Act, the 
FDIC, jointly with the OCC and FRB, intends to consider all aspects of 
U.S. law, including all aspects of stays provided thereunder.\26\ 
Relevant factors include, for instance, creditor safeguards or 
protections provided under a foreign resolution regime as well as the 
length of stay.\27\
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    \26\ See 12 U.S.C. 1821(e)(8)-(13) and 5390(c)(8)-(16). As noted 
above, the ISDA Protocol covers only resolution regimes that are 
considered to be consistent with the principles of the Key 
Attributes. Therefore, it is also expected that any limited 
statutory stay under foreign law determined for purposes of this 
final rule to be similar to the FDI Act and Title II of the Dodd-
Frank Act would also be consistent with the relevant principles of 
the Key Attributes.
    \27\ Under Title II of the Dodd-Frank Act, counterparties are 
stayed until 5:00 p.m. on the business day following the date of 
appointment of a receiver from exercising termination, liquidation, 
or netting rights under the qualified financial contract. 12 U.S.C. 
5390(c)(10)(B)(i)(I). If the qualified financial contracts are 
transferred to a solvent third party before the stay expires, the 
counterparty is permanently enjoined from exercising such rights 
based upon the appointment of the receiver, but is not stayed from 
exercising such rights based upon other events of default. See 12 
U.S.C. 5390(c)(10)(B)(i)(II).
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    This final rule allows for the continuation of the existing netting 
treatment for these contracts for purposes of the regulatory capital 
and liquidity rules. Implementation of consistent, national resolution 
regimes on a global basis furthers the orderly resolution of 
internationally active financial companies, and enhances financial 
stability. In addition, the development of the ISDA Protocol furthers 
the principles of Title II of the Dodd-Frank Act and the FDI Act (in 
instances where a counterparty is a U.S. entity or its subsidiary) to 
counterparties who are not otherwise subject to U.S. law.
    In addition to giving contractual effect to limited stays of 
termination rights under special resolution regimes on a cross-border 
basis, the ISDA Protocol also provides for limited stay of termination 
rights for cross-defaults resulting from affiliate insolvency 
proceedings under a limited number of U.S. general insolvency regimes, 
including the U.S. bankruptcy code. This provision takes effect upon 
the effective date of implementing regulations in the United States. To 
the extent the agencies implement regulations to give effect to these 
provisions of the ISDA Protocol, the FDIC will consider further 
amending the definition of ``qualifying master netting agreement'' in 
the regulatory capital and liquidity rules and the definition of 
``collateral agreement'', ``repo-style transaction'' and ``eligible 
margin loan'' in the regulatory capital rules.
    The qualified master netting agreement definition in the FDIC's 
capital and liquidity rules also relates to the eligible master netting 
agreement definition in the swap margin rules issued by the adopting 
agencies in November 2015.\28\ The swap margin rule establishes margin 
requirements for non-cleared swaps entered into by an entity supervised 
by one of the adopting agencies that is also registered with the 
Commodity Futures Trading Commission or the Securities and Exchange 
Commission as a dealer or major participants in non-cleared swaps (such 
entities are referred to in the swap margin rule as ``covered swap 
entities.'') The swap margin rule allows a covered swap entity to net 
variation margin and initial margin requirements for non-cleared swaps 
subject to the rule when such swaps are subject to an ``eligible master 
netting agreement'' between the covered swap entity and its 
counterparty.
---------------------------------------------------------------------------

    \28\ See 80 FR 74840 (November 30, 2015).
---------------------------------------------------------------------------

    The swap margin rule's definition of ``eligible master netting 
agreement'' is substantively the same as the definition of ``qualified 
master netting agreement'' as amended by this final rule.

IV. Summary of Comments on the January 2015 NPR

    The FDIC received three comments on the January 2015 NPR. One 
comment was generally supportive of the proposed rule in the January 
2015 NPR as a necessary technical amendment that would promote the 
objective of establishing effective resolution regimes for globally 
active financial companies. That commenter also recommended that the 
FDIC revisit in the near term the broader policy questions surrounding 
the impact of close-out netting on systemic risk mitigation, and 
evaluate how well the regulatory capital and liquidity coverage ratio 
rules reflect the risks associated with netted financial contracts.\29\
---------------------------------------------------------------------------

    \29\ Systemic Risk Council.
---------------------------------------------------------------------------

    Two of the commenters \30\ noted the absence of reference to any 
stays authorized by state insurance law in the

[[Page 71353]]

proposed definition of ``qualifying master netting agreement.'' Some 
States may be considering amending laws applicable to the conservation, 
rehabilitation, liquidation and insolvency of insurance companies to 
provide authority for close-outs of derivative and similar financial 
contracts to be stayed for twenty-four hours, similar to stays under 
the FDI Act and the Dodd-Frank Act. The commenters maintained that 
failure to include stays under state insurance resolution proceedings 
within the definition of ``qualifying master netting agreement'' might 
adversely affect derivative and similar financial transactions between 
state-regulated insurance companies and their counterparties, including 
FDIC-supervised institutions. As such stays may be analogous to similar 
stays under the other resolution authorities referenced in the rule's 
definition, the commenters recommend that state law should also be 
referenced.
---------------------------------------------------------------------------

    \30\ American Council of Life Insurers; Northwestern Mutual.
---------------------------------------------------------------------------

    The narrow purpose of amending the definition of ``qualifying 
master netting agreement'' in the proposed rule and this final rule is 
to maintain the regulatory capital and liquidity treatment of certain 
financial contracts as unaffected by the ISDA Master Agreement and 
stays by non-U.S. resolution authorities. The FDIC has considered the 
comments for purposes of the final rule, and has determined that the 
commenters raise an issue that is beyond that limited purpose.\31\
---------------------------------------------------------------------------

    \31\ Although the issue is currently outside the scope of this 
rulemaking, staff may consider the treatment of derivatives and 
other similar financial contracts subject to stays in state 
insurance resolution proceedings in the context of further 
rulemaking, in consultation with the other agencies and with State 
insurance regulatory authorities.
---------------------------------------------------------------------------

V. Effective Date

    This final rule is effective upon publication in the Federal 
Register. The final rule imposes no new requirements, and will benefit 
FDIC-supervised institutions that adhere to the ISDA Protocol by 
allowing for the continuation of the existing netting treatment for 
certain financial contracts for purposes of the regulatory capital and 
liquidity rules.
    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act \32\ (RCDRIA) generally requires that each Federal 
banking agency, in determining the effective date and administrative 
compliance requirements for new regulations that impose additional 
reporting, disclosure, or other requirements on insured depository 
institutions, consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, new regulations 
that impose additional reporting, disclosures, or other new 
requirements on an insured depository institution 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. The FDIC 
has determined that this final rule does not impose any additional 
reporting, disclosure, or other new requirements on insured depository 
institutions and thus section 302 of RCDRIA does not apply.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The Administrative Procedure Act (``APA'') requires that a final 
rule be published in the Federal Register no less than 30 days before 
its effective date unless good cause is found and published with the 
final rule.\33\ The FDIC finds good cause for the final rule to take 
effect on the date it is published in the Federal Register. Having the 
final rule take effect on the date of publication in the Federal 
Register will allow affected FDIC-supervised institutions to use the 
definition of qualified master netting agreement as amended by the 
final rule when they file their respective Call Report for the third 
quarter period ending on September 30, 2016.
---------------------------------------------------------------------------

    \33\ See 5 U.S.C. 553(d).
---------------------------------------------------------------------------

VI. Expected Effects

    The final rule is intended to prevent any change in the treatment 
of QFCs under capital and liquidity rules that may result from the 
establishment of non-U.S. special resolution regimes or by contract. As 
stated above, the final rule maintains the existing treatment for these 
contracts for purposes of the regulatory capital and liquidity rules, 
while recognizing the recent changes instituted by the BRRD and the 
ISDA Protocol. Implementation of consistent, national resolution 
regimes on a global basis furthers the orderly resolution of 
internationally active financial companies, and enhances financial 
stability. In addition, the development of the ISDA Protocol furthers 
the principles of Title II of the Dodd-Frank Act and the FDI Act (in 
instances where a counterparty is a U.S. entity or its subsidiary) to 
counterparties who are not otherwise subject to U.S. law.
    This final rule will benefit FDIC-supervised institutions that 
adhere to the ISDA Protocol by allowing for the continuation of the 
existing netting treatment for these contracts for purposes of the 
regulatory capital and liquidity rules. Absent the final rule, such 
FDIC-supervised institutions would be unable to include a master 
netting agreement under which default rights may be stayed under the 
BRRD or that incorporates the ISDA Protocol as a qualifying master 
netting agreement under the FDIC's current regulatory capital and 
liquidity regulations, and would be required to hold more capital and 
liquid assets as a result.
    The final rule may result in administrative costs associated with 
changing the legal language that govern QFCs for a small number of 
entities. These costs are likely to be very small relative to the 
increase in capital and liquidity requirements likely to result if 
capital and liquidity requirements for QFCs had to be calculated on a 
gross basis. Any administrative costs associated with the proposed rule 
are likely to be very low given that similar legal structures already 
exist in the ISDA Protocol. The FDIC estimates that six FDIC-supervised 
institutions will be directly affected by this rule. Therefore, any 
administrative costs for FDIC-supervised institutions is likely to be 
low and the volume of costs for all FDIC-supervised institutions is 
likely to have no significant impact on financial institutions or the 
economy.

VII. Regulatory Analysis

A. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that the final 
rule is not a ``major rule'' within the meaning of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (Title II, Pub. L. 104-
121).

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency, in connection with a final rule, to prepare an 
Initial Regulatory Flexibility Act analysis describing the impact of 
the final rule on small entities (defined by the Small Business 
Administration for purposes of the RFA to include banking entities with 
total assets of $550 million or less) or to certify that the final rule 
would not have a significant economic impact on a substantial number of 
small entities. The FDIC believes that the final rule would not have a 
significant economic impact on a substantial number of small entities.
    Under regulations issued by the Small Business Administration, a 
small entity includes a depository institution, bank

[[Page 71354]]

holding company, or savings and loan holding company with total assets 
of $550 million or less (a small banking organization).\34\ As of March 
31, 2016, there were approximately 2,942 small state nonmember banks 
and 275 small state savings associations under the FDIC's supervisory 
jurisdiction.
---------------------------------------------------------------------------

    \34\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

    The final rule is expected only to apply to banking organizations 
that adhere to the ISDA Protocol or engage in a substantial amount of 
cross-border derivatives transactions. Small entities generally would 
not fall into this category. Accordingly, the FDIC believes that this 
final rule would not have a significant economic impact on small 
banking organizations supervised by the FDIC and therefore believes 
that there are no significant alternatives to the issuance of this 
final rule that would reduce the economic impact on small banking 
organizations supervised by the FDIC. Pursuant to section 605(b) of the 
RFA, the FDIC certifies that the Final Rule will not have a significant 
economic impact on a substantial number of small entities.

C. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501-3521) (PRA), the FDIC may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (``OMB'') control number. The FDIC has reviewed this final 
rule and determined that it does not create any new, or revise any 
existing, collection of information pursuant to the PRA. Consequently, 
no information has been submitted to the Office on Management and 
Budget for review.

D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

E. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113 
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The FDIC invited comments on how to make this rule 
easier to understand. No comments addressing this issue were received.

List of Subjects

12 CFR Part 324

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

12 CFR Part 329

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

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

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

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

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


Sec.  324.210   [Amended]

0
2. In Sec.  324.210, redesignate footnote 29 as footnote 33.


Sec.  324.202   [Amended]

0
3. In Sec.  324.202, redesignate footnotes 27 and 28 as footnotes 31 
and 32.


Sec.  324.134   [Amended]

0
4. In Sec.  324.134, redesignate footnote 26 as footnote 30.


Sec.  324.101  [Amended]

0
5. In Sec.  324.101, redesignate footnote 25 as footnote 29.


Sec.  324.22   [Amended]

0
6. In Sec.  324.22, redesignate footnotes 18 through 24 as footnotes 22 
through 28.


Sec.  324.20   [Amended]

0
7. In Sec.  324.20, redesignate footnotes 8 through 17 as footnotes 12 
through 21.


Sec.  324.11   [Amended]

0
8. In Sec.  324.11, redesignate footnote 7 as footnote 11.


Sec.  324.4   [Amended]

0
9. In Sec.  324.4, redesignate footnote 6 as footnote 10.

0
10. Section 324.2 is amended by redesignating footnote 5 as footnote 9, 
and by revising the definitions of ``Collateral agreement, '' 
``Eligible margin loan'', ``Qualifying master netting agreement'', and 
``Repo-style transaction'' to read as follows:


Sec.  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 FDIC-supervised institution a perfected, first-
priority security interest (notwithstanding the prior security interest 
of any custodial agent), or the legal equivalent thereof, in the 
collateral posted by the counterparty under the agreement. This 
security interest must provide the FDIC-supervised institution with a 
right to close out the financial positions and liquidate the collateral 
upon an event of default of, or failure to perform by, the counterparty 
under the collateral agreement. A contract would not satisfy this 
requirement if the FDIC-supervised institution's exercise of rights 
under the agreement may be stayed or avoided under applicable law in 
the relevant jurisdictions, other than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \4\ to the U.S. laws 
referenced in this paragraph (1) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \4\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.

---------------------------------------------------------------------------

[[Page 71355]]

    (2) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1) of this definition.
* * * * *
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked to fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the FDIC-supervised institution the right to accelerate and 
terminate the extension of credit and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, conservatorship, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, or resolution under the Federal Deposit 
Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs,\5\ or laws of foreign jurisdictions 
that are substantially similar \6\ to the U.S. laws referenced in this 
paragraph in order to facilitate the orderly resolution of the 
defaulting counterparty.
---------------------------------------------------------------------------

    \5\ This 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).
    \6\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
---------------------------------------------------------------------------

    (2) In order to recognize an exposure as an eligible margin loan 
for purposes of this subpart, an FDIC-supervised institution must 
comply with the requirements of Sec.  324.3(b) with respect to that 
exposure.
* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, insolvency, 
conservatorship, liquidation, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the FDIC-supervised institution the 
right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \7\ to the U.S. laws 
referenced in this paragraph (2)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \7\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
---------------------------------------------------------------------------

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, an FDIC-supervised 
institution must comply with the requirements of Sec.  324.3(d) of this 
chapter 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 FDIC-supervised 
institution acts as agent for a customer and indemnifies the customer 
against loss, provided that:
    (1) The transaction is based solely on liquid and readily 
marketable securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting 
contract between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides 
the FDIC-supervised institution the right to accelerate, terminate, and 
close-out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, or resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs, or laws of foreign jurisdictions that are 
substantially similar \8\ to the U.S. laws referenced in this paragraph 
(3)(ii)(A) in order to facilitate the orderly resolution of the 
defaulting counterparty; or
---------------------------------------------------------------------------

    \8\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
---------------------------------------------------------------------------

    (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 Sec.  324.3(e) with respect to that 
exposure.
* * * * *

PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS

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


[[Page 71356]]


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


0
12. Amend Sec.  329.3 as follows:
0
a. Redesignate footnote 1 as footnote 2.; and
0
b. Revise the definition of ``Qualifying master netting agreement'' to 
read as follows:


Sec.  329.3   Definitions.

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

    \1\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
---------------------------------------------------------------------------

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

    By order of the Board of directors of the Federal Deposit 
Insurance Corporation.

    Dated: September 20, 2016.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2016-25021 Filed 10-14-16; 8:45 am]
 BILLING CODE P
Document Created: 2016-10-15 01:51:47
Document Modified: 2016-10-15 01:51:47
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Final rule.
Dates		The final rule is effective October 17, 2016.
Contact		Ryan Billingsley, Acting Associate Director, [email protected]; Benedetto Bosco, Chief, Capital Policy Section, [email protected]; Eric Schatten, Capital Markets Policy Analyst, Capital Markets Strategies, [email protected], Capital Markets Branch, Division of Risk Management Supervision, (202) 898- 6888; or David Wall, Assistant General Counsel, [email protected]; Cristina Regojo, Counsel; [email protected]; Michael Phillips, Counsel, [email protected], Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
FR Citation		81 FR 71348
RIN Number		3064-AE30
CFR Citation		12 CFR 324 12 CFR 329
CFR Associated		Administrative Practice and Procedure; Banks; Banking; Capital Adequacy; Reporting and Recordkeeping Requirements; Savings Associations; State Non-Member Banks; Banking; Federal Deposit Insurance Corporation and Fdic; Liquidity; Reporting and Recordkeeping Requirements