Federal Register Vol. 81, No.161,

Table of Contents I. Introduction II. Background A. Qualified Financial Contracts, Default Rights, and Financial Stability B. QFC Default Rights and GSIB Resolution Strategies C. Default Rights and Relevant Resolution Laws III. Description of the Proposal A. Overview, Purpose, and Authority B. Covered Banks C. Covered QFCs D. Definition of “Default Right” E. Required Contractual Provisions Related to U.S. Special Resolution Regimes F. Prohibited Cross-Default Rights G. Process for Approval of Enhanced Creditor Protections H. Transition Periods I. Amendments to Capital Rules IV. Request for Comments V. Regulatory Analysis A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Unfunded Mandates Reform Act of 1995 D. Riegle Community Development and Regulatory Improvement Act of 1994 I. Introduction

In the wake of the financial crisis of 2007-08, U.S. and international financial regulators have placed increased focus on improving the resolvability of large, complex financial institutions that operate in multiple jurisdictions, often called global systemically important banking organizations (GSIBs).

In connection with these ongoing efforts, on May 3, 2016, the Board of Governors of the Federal Reserve System (FRB or Board) issued a notice of proposed rulemaking (NPRM) pursuant to section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as part of its ongoing efforts to improve the resolvability of U.S. GSIBs and foreign GSIBs that operate in the United States (collectively, “covered entities” 1 ).2 The OCC is issuing this parallel proposed rule applicable to OCC-regulated institutions that are part of a covered entity under the FRB NPRM. The OCC intends this proposed rule to complement and work in tandem with the FRB NPRM.

The purpose of the Board's NPRM is to improve the resolvability of covered entities by “limiting disruptions to a failed GSIB through its financial contracts with other companies.” 3 Specifically, the Board's NPRM addresses a threat to financial stability posed by the potential disorderly exercise of default rights contained in several important categories of financial contracts collectively known as “qualified financial contracts” (QFCs).4

As described more fully in the Board's NPRM and in the Background section of this preamble, this threat to financial stability arises because GSIBs are interconnected with other financial firms, including other GSIBs, through large volumes of QFCs. The failure of one entity within a GSIB can trigger disruptive terminations of these contracts if the counterparties of both the failed entity and its affiliates exercise their contractual rights to terminate the contracts and liquidate collateral.5 These terminations, especially if counterparties lose confidence in the GSIB quickly, and in large numbers, can destabilize the financial system and potentially spark a financial crisis through several channels. For example, they can destabilize the failed entity's otherwise solvent affiliates, causing them to weaken or fail with adverse consequences to their counterparties that can result in a chain reaction that ripples through the financial system. They also may result in “fire sales” of large volumes of financial assets, in particular, the collateral that secures the contracts, which can in turn weaken and cause stress for other firms by depressing the value of similar assets that they hold.

As discussed in detail in the Section I.B., the OCC, as the primary regulator for national banks, Federal savings associations (FSAs), and Federal branches and agencies, has a strong safety and soundness interest in preventing such a disorderly termination of QFCs upon a GSIB's entry into resolution proceedings. QFCs are typically entered into by various operating entities in the GSIB group, which will often include a large depository institution that is subject to the OCC's supervision. These OCC-supervised entities are some of the largest entities by asset size in the GSIB group, and often a party to large volumes of QFCs, making these entities highly interconnected with other large financial firms.6 The exercise of default rights against an otherwise healthy national bank, FSA, or Federal branch or agency resulting from the failure of its affiliate, for example its top-tier U.S. holding company, may cause it to weaken or fail, and in turn spread contagion throughout the financial system, including among the system of federally chartered and licensed institutions that the OCC supervises, by causing a chain of failures by other financial institutions—including other national banks, FSAs, or Federal branches or agencies—that are its QFC counterparties. Furthermore, if an OCC-supervised entity itself were to fail, it is imperative that the default rights triggered by such an event are exercised in an orderly manner, both by domestic and foreign counterparties, to ensure that contagion does not spread to other federally chartered and licensed institutions and beyond throughout the Federal banking system.7

Accordingly, OCC-supervised affiliates or branches 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 bank itself or its GSIB affiliate. These potential destabilizing effects are best addressed by requiring all GSIB entities to amend their QFCs to include contractual provisions aimed at avoiding such destabilization. As the primary supervisor of covered banks, the OCC has a significant interest in preventing or mitigating these destabilizing effects; otherwise, the result will be adverse to safety and soundness of covered banks individually and collectively, with the potential for spill-over beyond GSIB-affiliated banks and Federal branches and agencies to the Federal banking system.

As described in the Board's NPRM, measures aimed at improving financial stability and the probability of a successful resolution of GSIBs likely will affect the operations of GSIB subsidiaries. In most cases, the largest GSIB subsidiary by asset size is a national bank supervised by the OCC. While the ultimate aim of the Board's NPRM and this proposed rule is focused on the resolution of a GSIB, the proposed preventative measures would be required to be implemented by GSIBs while they are going concerns. The OCC has an inherent supervisory interest in ensuring that measures aimed at improving resolvability in the event of a GSIB's failure are also consistent with the safe and sound operation of the OCC-supervised subsidiary as a going concern. Accordingly, to ensure that the QFCs entered into by such entities do not threaten the stability or safety and soundness of covered banks individually or collectively, the OCC is issuing this proposed rule, which imposes substantively identical requirements contained in the FRB NPRM on national banks, FSAs, and Federal branches and agencies (covered banks). The OCC worked closely with the FRB to develop this proposed rule.8 In addition, the OCC plans to work with the FRB to coordinate the development of the final rule and may share comments received in response to the proposed rule, as appropriate.

The following background discussion describes in detail the financial contracts that are the subject of this proposed rule, the default rights often contained in such contracts, and impacts on financial stability resulting from the exercise of such default rights. This section also provides background information on the resolution strategies for GSIBs and how they fit within the resolution frameworks in the United States.9

The proposed rule covers QFCs, which include swaps, other derivative contracts, repurchase agreements (repos) and reverse repos, and securities lending and borrowing agreements. GSIB entities enter into QFCs to borrow money to finance their investments, to lend money, to manage risk, to attempt to profit from market movements, and to enable their clients and counterparties to perform these financial activities.

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 may pose a threat to financial stability in times of stress. This proposed rule, along with the FRB NPRM, focuses on one of the most serious threats to both a global systemically important bank holding company (BHC) and its covered banks subsidiaries—the failure of a GSIB that is party to large volumes of QFCs, which are likely to involve QFCs with counterparties that are themselves systemically important.

By contract, a party to a QFC generally has the right to take certain actions if its counterparty defaults on the QFC (that is, if it fails to meet certain contractual obligations). Common default rights include the right to suspend performance of the non-defaulting party's obligations, the right to terminate or accelerate the contract, the right to set off amounts owed between the parties, the right to seize and liquidate the defaulting party's collateral. In general, default rights allow a party to a QFC to reduce the credit risk associated with the QFC by granting it the right to exit the QFC and thereby reduce its exposure to its counterparty upon the occurrence of a specified condition, such as its counterparty's entry into resolution proceedings.

This proposed rule focuses on two distinct scenarios in which a non-defaulting party to a QFC is commonly able to exercise default rights. These two scenarios involve a default that occurs when either the defaulting party to the QFC or an affiliate of that party enters a resolution proceeding.10

The first scenario occurs when a legal entity that is itself a party to the QFC enters a resolution proceeding. This proposed rule refers to such a scenario as a “direct default” and refers to the contractual default rights that arise from a direct default as “direct default rights.” 11

The second scenario occurs when an affiliate of the legal entity that is a direct party to the QFC (such as the direct party's parent holding company) enters a resolution proceeding. This proposed rule refers to such a scenario as a “cross-default” and refers to contractual default rights that arise from a cross-default as “cross-default rights.” For example, a GSIB parent entity might guarantee the derivatives transactions of its subsidiaries and those derivatives contracts could contain cross-default rights against a subsidiary of the GSIB that would be triggered by the bankruptcy filing of the GSIB parent entity even though the subsidiary continues to meet all of its financial obligations.

Direct default rights and cross-default rights are referred to collectively in this proposed rule as “default rights.”

As noted in the FRB NPRM, if a significant number of QFC counterparties exercise their default rights precipitously and in a manner that would impede an orderly resolution of a GSIB, all QFC counterparties and the broader financial system, including institutions supervised by the OCC, may potentially be worse off and less stable.

The destabilization can occur in several ways. First, counterparties' exercise of default rights may drain liquidity from the troubled GSIB, forcing it to sell off assets at depressed prices, both because the sales must be done on a short timeframe and because the elevated supply will push prices down. These asset “fire sales” may cause or deepen balance-sheet insolvency at the GSIB, reducing the amount that its other creditors can recover and thereby imposing losses on those creditors and threatening their solvency (and, indirectly, the solvency of their own creditors, and so on). The GSIB may also respond by withdrawing liquidity that it had offered to other firms, forcing them to engage in asset fire sales. Alternatively, if the GSIB's QFC counterparty itself liquidates the QFC collateral at fire sale prices, the effect will again be to weaken the GSIB's balance sheet, because the debt satisfied by the liquidation would be less than what the value of the collateral would have been outside the fire sale context. The counterparty's setoff rights may allow it to further drain the GSIB's capital and liquidity by withholding payments owed to the GSIB. The GSIB may also have rehypothecated collateral that it received from QFC counterparties, for instance in back-to-back repo or securities lending transactions, in which case demands from those counterparties for the early return of their rehypothecated collateral could be especially disruptive.

The asset fire sales can also spread contagion throughout the financial system by increasing volatility and by lowering the value of similar assets held by other financial institutions, potentially causing them to suffer diminished market confidence in their own solvency, mark-to-market losses, margin calls, and creditor runs (which could lead to further fire sales, worsening the contagion). Finally, the early terminations of derivatives that the defaulting GSIB relied on to hedge its risks could leave major risks unhedged, increasing the GSIB's probable losses going forward.

Where there are significant simultaneous terminations and these effects occur contemporaneously, such as upon the failure of a GSIB that is party to a large volume of QFCs, they may pose a substantial risk to financial stability. In short, QFC continuity is important for the orderly resolution of a GSIB so that the instability caused by asset fire sales can be avoided.12

As will be discussed further, the proposed rule is primarily concerned only with default rights that run against a GSIB—that is, direct default rights and cross-default rights that arise from the entry into resolution of a GSIB. The proposed rule would not affect contractual default rights that a GSIB (or any other entity) may have against a counterparty that is not a GSIB. The OCC believes that this limited scope is appropriate because the risk posed to financial stability by the exercise of QFC default rights is greatest when the defaulting counterparty is a GSIB.

Under the Dodd-Frank Act, many complex GSIBs are required to submit resolution plans to the Board and the Federal Deposit Insurance Corporation (FDIC), detailing how the company can be resolved in a rapid and orderly manner in the event of material financial distress or failure of the company. In response to these requirements, these firms have developed resolution strategies that, broadly speaking, fall into two categories: The single-point-of-entry (SPOE) strategy and the multiple-point-of-entry (MPOE) strategy. As noted in the Board's Proposal, cross-default rights in QFCs pose a potential obstacle to the implementation of either of these strategies.

In an SPOE resolution, only a single legal entity—the GSIB's top-tier BHC—would enter a resolution proceeding. The losses that led to the GSIB's failure would be passed up from the operating subsidiaries that incurred the losses to the holding company and would then be imposed on the equity holders and unsecured creditors of the holding company through the resolution process. This strategy is designed to help ensure that the GSIB's subsidiaries remain adequately capitalized. An SPOE resolution could thereby prevent those operating subsidiaries from failing or entering resolution themselves and allow them to instead continue normal operations. 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 QFC counterparties), reducing their incentive to engage in potentially destabilizing funding runs or margin calls and thus lowering the risk of asset fire sales.

An SPOE proceeding can avoid the need for covered banks to be placed into receivership or similar proceedings, as they would continue to operate as going concerns, only if the parent's entry into resolution proceedings does not trigger the exercise of cross-default rights. Accordingly, this proposed rule, by limiting such cross-default rights based on an affiliate's entry into resolution proceedings, enables the SPOE strategy, and in turn, would assist in stabilizing both the covered bank and the Federal banking system.

This proposed rule would also yield benefits for resolution under the MPOE strategy. Unlike the SPOE strategy, an MPOE strategy involves several entities in the GSIB group entering proceedings. For example, an MPOE strategy might involve a foreign GSIB's U.S. intermediate holding company going into resolution or a GSIB's U.S. insured depository institution entering resolution under the Federal Deposit Insurance Act. Similar to the benefits associated with the SPOE strategy, this proposed rule would help support the continued operation of affiliates of an entity experiencing resolution to the extent the affiliate continues to perform on its QFCs.

In order to understand the connection between direct defaults, cross-defaults, the SPOE and MPOE resolution strategies, and the threats to financial stability discussed previously, it is necessary to understand how QFCs, and the default rights contained therein, are treated when an entity enters resolution. The following sections discuss the treatment of QFCs in greater detail under three U.S. resolution laws: the Bankruptcy Code, the Orderly Liquidation Authority, and the Federal Deposit Insurance Act. As discussed in these sections, each of these resolution laws has special provisions detailing the treatment of QFCs upon an entity's entry into such proceedings.

U.S. Bankruptcy Code. While covered banks themselves are not subject to resolution under the Bankruptcy Code, in general, if a BHC were to fail, it would be resolved under the Bankruptcy Code. When an entity goes into resolution under the Bankruptcy Code, attempts by the creditors of the debtor 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, which generally persists throughout the bankruptcy proceeding.13 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. As a result, the automatic stay addresses the collective action problem, in which the creditors' individual incentives to race to recover as much from the debtor as possible, before other creditors can do so, collectively cause a value-destroying disorderly liquidation of the debtor.14

The Bankruptcy Code, however, largely exempts QFC counterparties from the automatic stay through special “safe harbor” provisions.15 Under these provisions, any contractual rights that a QFC counterparty has to terminate the contract, set off obligations, and liquidate collateral in response to a direct default or cross-default are not subject to the stay and may be exercised at any time.16

Where the failed firm is a GSIB's holding company with covered banks that are going concerns and are party to large volumes of QFCs, the mass exercise of default rights under the QFCs based on the affiliate default represents a significant impediment to the SPOE resolution strategy.17 This is because the failure of a covered bank's affiliate will trigger the mass exercise of cross-default rights against the covered bank, which will not be stayed by the affiliate's entry into bankruptcy proceedings. This will in turn lead to fire sales that will threaten the ongoing viability of the covered bank and the successful resolution of the particular GSIB—and thus will also pose a threat to the federal banking system and broader financial system.

Special Resolution Regimes Under U.S. Law. For purposes of this proposed rule, there are two special resolution regimes under U.S. law: Title II of the Dodd-Frank Act and the Orderly Liquidation Authority (OLA); and the Federal Deposit Insurance Act (FDIA). While these regimes both impose certain limitations on the ability of counterparties to exercise default rights—thus mitigating the potential for disorderly resolution due to the exercise by counterparties of such default rights—these limitations may not be applicable or clearly enforceable in certain contexts.

Title II of the Dodd-Frank Act and the Orderly Resolution Authority. Title II of the Dodd-Frank Act establishes an alternative resolution framework intended “to provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.” 18

As noted, although a failed BHC would generally be resolved under the Bankruptcy Code, Congress recognized that a U.S. 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 therefore authorizes the Secretary of the Treasury, upon the recommendation of other government agencies and a determination that several preconditions are met, to place a U.S. financial company into a receivership conducted by the FDIC as an alternative to bankruptcy.

Title II empowers the FDIC, when it acts as receiver in an OLA resolution, to protect financial stability against the QFC-related threats discussed previously. Title II addresses direct default rights in a number of ways. First, Title II empowers the FDIC to transfer the QFCs to some other financial company that is not in a resolution proceeding.19 To give the FDIC time to effect this transfer, Title II temporarily stays QFC counterparties of the failed entity from exercising termination, netting, and collateral liquidation rights “solely by reason of or incidental to” the failed entity's entry into OLA resolution, its insolvency, or its financial condition.20 Second, once the QFCs are transferred in accord with the statute, Title II permanently stays the exercise of those direct default rights based on the prior event of default and receivership.21

Title II addresses cross-default rights through a similar procedure. It empowers the FDIC “to enforce contracts of subsidiaries or affiliates” of the failed 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 the FDIC takes certain steps to protect the QFC counterparty's interests by the end of the business day following the company's entry into OLA resolution.22

These stay-and-transfer provisions of the Dodd-Frank Act go far to mitigate the threat posed by QFC default rights by preventing mass closeouts against the entity that has entered into OLA proceedings or its going concern affiliates. At the same time, they allow for appropriate protections for QFC counterparties of the failed financial company. They only stay the exercise of default rights based on the failed company's entry into resolution, the fact of its insolvency, or its financial condition. And the stay period is brief, unless the FDIC transfers the QFCs to another financial company that is not in resolution and should therefore be capable of performing under the QFCs.

Federal Deposit Insurance Act. Under the FDIA, a failing insured depository institution would generally enter a receivership administered by the FDIC.23 The FDIA 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 as discussed.24 However, the FDIA 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, and liquidate collateral based on the depository institution's entry into resolution.

As discussed previously, and in the Board's Proposal, the exercise of default rights by counterparties of a failed GSIB can have a significant impact on financial stability. This financial stability concern is necessarily intertwined with the safety and soundness of covered banks and the federal banking system—the disorderly exercise of default rights can produce a sudden, contemporaneous threat to the safety and soundness of individual institutions throughout the system, which in turn threatens the system as a whole. Accordingly, national banks, FSAs, and Federal branches and agencies are affected by financial instability—even if such instability is precipitated outside the Federal banking system—and can themselves also be sources of financial destabilization due to the interconnectedness of these institutions to each other and to other entities within the financial system. Thus, safety and soundness of individual national banks, FSAs, and Federal branches and agencies, the federal banking system, and financial stability of the system as a whole are interconnected.

The purpose of this proposed rule is to enhance the safety and soundness of covered banks and the federal banking system, thereby also bolstering financial stability generally, by addressing the two main issues raised by covered QFCs with the orderly resolution of these covered banks as generally described in the Board's Proposal.

While Title II and the FDIA empower the use of the QFC stay-and-transfer provisions, a court in a foreign jurisdiction may decline to enforce these important provisions. The proposed rule directly improves the safety and soundness of covered banks by clarifying the applicability of U.S. special resolution regimes to all counterparties, whether they are foreign or domestic. Although domestic entities are clearly subject to the temporary stay provisions of OLA and the FDIA, these stays may be difficult to enforce in a cross-border context. As a result, domestic counterparties of a failed U.S. financial institution may be disadvantaged relative to foreign counterparties, as the domestic counterparties would be subject to the stay, and accompanying potential market volatility, while if the stay was not enforced by foreign authorities, foreign counterparties could close out immediately. Furthermore, a mass close out by such foreign counterparties would likely exacerbate market volatility, which in turn would likely magnify harm to the stayed U.S. counterparties' positions, which are likely to include other national banks and FSAs. This proposed rule would eliminate the potential for these adverse consequences by requiring covered banks to condition the exercise of default rights in covered contracts on the stay provisions of OLA and the FDIA.

In spite of the QFC stay-and-transfer provisions in Title II and the FDIA, the affiliates of a global systemically important BHC that goes into resolution under the Bankruptcy Code may face disruptions to their QFCs as their counterparties exercise cross-default rights. Thus, a healthy covered bank whose parent BHC entered resolution proceedings could fail due to its counterparties exercising cross-default rights. This is clearly both a safety and soundness concern for the otherwise healthy covered bank, but it also has the additional negative effect of defeating the orderly resolution of the GSIB, since a key element of SPOE resolution in the United States is ensuring that critical operating subsidiaries—such as covered banks—continue to operate on a going concern basis. This proposed rule would address this issue by generally restricting the exercise of cross-default rights by counterparties against a covered bank.

Moreover, a disorderly resolution like that described previously could jeopardize not just the covered bank and the orderly resolution of its failed parent BHC, but all surviving counterparties, many of which are likely to be other national banks and other FSAs, regardless of size or interconnectedness, by harming the overall condition of the Federal banking system and the financial system as a whole. A disorderly resolution could result in additional defaults, fire sales of collateral, and other consequences likely to amplify the systemic fallout of the resolution of a covered bank.

The proposed rule is designed to minimize such disorder, and therefore enhance the safety and soundness of all individual national banks, FSAs, and Federal branches and agencies, the Federal banking system, and the broader financial system. This is particularly important because financial institutions are more sensitive than other firms to the overall health of the financial system.25

The proposed rule covers the OCC-supervised operations of foreign banking organizations (FBOs) designated as systemically important, including national bank and FSA subsidiaries, as well as Federal branches and agencies, of these FBOs. As with a national bank or FSA subsidiary of a U.S. global systemically important BHC, the OCC believes that this proposed rule should apply to a national bank or FSA subsidiary of a global systematically important FBO for essentially the same reasons. While the national bank or FSA may not be considered systemically important itself, as part of a GSIB, the disorderly resolution of the covered national banks and FSAs could have a significant negative impact on the Federal banking system and on the U.S. financial system, in general.

Specifically, the proposed rule is designed to prevent the failure of a global systemically important FBO from disrupting the ongoing operations or orderly resolution of the covered bank by protecting the healthy national bank or FSA from the mass triggering of default rights by the QFC counterparties. Additionally, the application of this proposed rule to the QFCs of these national bank and FSA subsidiaries should avoid creating what may otherwise be an incentive for counterparties to concentrate QFCs in these firms because they are subject to fewer counterparty restrictions.

Similarly, it is important to cover any Federal branch or agency of a global systemically important FBO in order to ensure the orderly resolution of these entities if the parent FBO were to be placed into resolution in its home jurisdiction. However, to avoid unduly broad application of the proposed rule and imposing unnecessary restrictions on the QFCs of global systemically important FBOs, the proposed rule would exclude certain QFCs that do not have a clear nexus to its U.S. operations. Specifically, the proposed rule would exclude covered QFCs under multi-branch arrangements that either are not booked at the Federal branch or agency or do not provide for payment or delivery at the Federal branch or agency. The OCC believes that this provides a reasonable limitation on the scope of the proposed rule to those QFCs of covered Federal branches and agencies that have a direct effect on the Federal banking system and the general financial stability of the United States.

The OCC is issuing this proposed rule under its authorities under the National Bank Act (12 U.S.C. 1 et seq.), the Home Owners' Loan Act (12 U.S.C. 1461 et seq.), and the International Banking Act of 1978 (12 U.S.C. 3101 et seq.), including its general rulemaking authorities.26 As discussed in detail in Section I. B., the OCC views the proposed rule as consistent with its overall statutory mandate of assuring the safety and soundness of entities subject to its supervision, including national banks, FSAs, and Federal branches and agencies.27

The proposed rule would apply to all “covered banks.” The term “covered bank” would be defined to include (i) any national bank or FSA that is a subsidiary of a global systemically important BHC that has been designated pursuant to subpart I of 12 CFR part 252 of this title (FRB Regulation YY); or (ii) is a national bank or FSA subsidiary, or Federal branch or agency of a global systemically important FBO that has been designated pursuant to FRB Regulation YY.

The proposed rule defines global systemically important BHC and global systemically important FBO by cross-reference to newly added subpart I of 12 CFR part 252 of the Board's Proposal. The list of banking organizations that meet the methodology proposed in the FRB NPRM is currently the same set of banking organizations that meet the Basel Committee on Banking Supervision (BCBS) definition of a GSIB.28

This proposed rule covers national bank and FSA subsidiaries of global systemically important BHCs and FBOs, and Federal branches and agencies of global systemically important FBOs. In the United States, covered QFCs typically are entered into at the subsidiary level, which would include through the national bank, FSA or Federal branch or agency, rather than through the U.S. intermediate holding company.29

The OCC believes if the orderly resolution of a covered entity as defined under the FRB's Proposal is to be successful, then it is necessary that all national banks, FSAs, and Federal branches and agencies of systemically important global systemically important BHCs and FBOs be subject to the mandatory contractual requirements in this proposed rule. Moreover, this proposed rule would make clear that the mandatory contractual stay requirements apply to the subsidiaries of any national bank, FSA, or Federal branch or agency that is a covered bank. Under the proposed rule, the term covered bank also includes any subsidiary of a national bank, FSA, or Federal branch or agency. The definition of “subsidiary of covered bank” in the proposed rule mirrors the definition of subsidiary in the FRB's Regulation YY (12 CFR 252.2), and it is intended to be substantially the same as the FRB's definition with respect to a subsidiary of a covered bank. Essentially, for the same reasons that it is necessary to cover all national banks, FSAs, and Federal branches and agencies of global systemically important BHCs and FBOs under the proposed rule, the OCC believes that it is necessary that all subsidiaries of those covered banks also be subject to the mandatory contractual stay requirements. As mentioned, unless all entities that are part of a GSIB are covered, counterparties might have incentives to migrate their covered QFCs to uncovered entities.

Question 1: While the exercise of mass closeout rights against any individual national bank, FSA or Federal branch or agency would raise concerns, the OCC is especially concerned about the potential spill-over effect such mass closeouts would have, either individually or collectively, on the Federal banking system if the entity itself is systemically important or part of a larger banking group that is systemically important. Are there alternative approaches for determining which national banks, FSAs and Federal branches and agencies should be considered systemically important?

Question 2: While the primary focus of this rule is on, covered banks—i.e., those that are subsidiaries or branches of U.S. or foreign GSIBS—there is some concern that given the interconnected nature of QFCs, a market disruption could significantly impact all national banks, FSAs and Federal branches and agencies. Should this proposed rule be expanded to cover more OCC-regulated entities, for example, those national banks, FSAs or Federal branches and agencies with material levels of QFC activities? How could material levels of QFC activities be defined and measured?

Question 3: Conversely, is the scope of this proposed rule too broad? The proposed rule would apply to all covered QFCs of covered banks as well as all of their subsidiaries, regardless of size or volume of transactions. A key policy concern is that unless all subsidiaries of a covered bank are subject to the direct and cross-default restrictions of the proposed rule, covered banks and their counterparties would have the incentive to transfer their QFCs to unprotected subsidiaries of the covered bank. Could the scope of entities covered by the proposed rule be narrowed while still achieving its policy objectives? If so, what criteria could be used? For example, should a subsidiary of covered banks that only engages in some de minimis level of covered QFCs be safely excluded from the scope of this proposed rule? Are there alternative ways to define what will be considered subsidiaries for purposes of this rule?

Question 4: Some of the subsidiaries of covered banks under the proposed rule could be subject to additional supervision by another U.S. agency, such as the case of a broker-dealer subsidiary of a national bank. Does the issue of potentially conflicting jurisdiction need to be addressed? If so, how? For example, should the rule provide a carve out for a subsidiary of a covered bank that is subject to comparable requirements under the regulations of another agency?

Question 5: The scope of this proposed rule is designed to cover any national bank or FSA that is a subsidiary of a global systemically important BHC or FBO under the FRB NPRM. While this scope of coverage ensures that all national banks or FSAs under a global systemically important BHC or FBO would be subject to the same substantive contractual mandatory stay under the FRB NPRM, the proposed rule does not take into account the potential situation of a standalone national bank or FSA, not under a BHC, that might itself be considered systemically important. Although no such entity exists currently, the OCC is considering whether to amend the definition of covered bank to include any national bank or FSB that meets a certain asset threshold test. In this case, the OCC is considering using the $700 billion in total consolidated assets that is used in the Enhanced Supplementary Leverage Ratio.30 Should the OCC decide to address standalone national banks and FSBs, what methodology and factors should the OCC consider in deciding which institutions to include?

General requirement. The proposed rule would require covered banks to ensure that each “covered QFC” conforms to the requirements of sections 47.4 and 47.5. These sections require that a covered QFC (1) contain contractual stay-and-transfer provisions similar to those imposed under Title II of the Dodd-Frank Act and the FDIA, and (2) limit the exercise of default rights based on the insolvency of an affiliate of the covered bank. A “covered QFC” is generally defined as any QFC that a covered bank enters, executes, or otherwise becomes party to. A party to a QFC includes a party acting as agent under the QFC. “Qualified financial contract” or “QFC” would be defined to have the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Act and would include derivatives, swaps, repurchase, reverse repurchase, and securities lending and borrowing transactions.

Except for certain QFCs under multi-branch master agreements, the definition of QFC would include a single QFC, but also all QFCs under a master agreement. Master agreements are contracts that contain general terms that the parties wish to apply to multiple transactions between them; having executed the master agreement, the parties can then include those terms in future contracts through reference to the master agreement. The proposed rule defines master agreement as defined by Title II of the Dodd-Frank Act or any master agreement designated by regulation by the FDIC. Under the definition, master agreements for QFCs, together with all supplements to the master agreement (including underlying transactions), would be treated as a single QFC.31

The proposed definition of “QFC” is intended to cover those financial transactions whose disorderly unwind has substantial potential to frustrate, directly or indirectly, the orderly resolution of the covered bank or any affiliate of such covered bank. The Dodd-Frank Act uses its definition of “qualified financial contract” to determine the scope of the stay-and-transfer provisions that it applies to direct default and cross-default rights in an OLA resolution. By adopting the Dodd-Frank Act's definition, the proposed rule would track Congress's judgment as to which financial transactions could, if not subject to appropriate restrictions, pose an obstacle to the orderly resolution of a systemically important financial company.

Question 6: With regard to the proposed definitions of “QFC” and “covered QFC” are there other types of financial contracts or transactions that should be included in the definition of a “covered QFC” in the proposed rule because they could pose a similar risk to the safety and soundness of the covered national banks, FSAs, and Federal branches and agencies and to the Federal banking system? Conversely, is the definition of covered QFC too broad? Are there types of financial contracts that fall within the definition of covered QFC that could be excluded without compromising the policy objectives of the proposed rule?

Question 7: Should this proposed rule include a reservation of authority provision that would maintain OCC's supervisory flexibility, on a case-by-case basis, to include or exclude from the proposed rule (1) specific OCC-supervised entities (and their subsidiaries) and (2) financial contracts or transactions, if consistent with the purposes of the proposed rule?

Exclusion of cleared QFCs. The proposed rule would exclude from the definition of “covered QFC” all QFCs that are cleared through a central counterparty (CCP). The OCC continues to consider the appropriate treatment of centrally cleared QFCs, in light of differences between cleared and uncleared QFCs with respect to contractual arrangements, counterparty credit risk, default management, and supervision.

Question 8: Should the QFCs between a CCP (or other financial market utility) and a member covered bank be subject to the requirements of this proposed rule? What additional risks do such cleared QFCs pose to the orderly resolution of covered banks and the Federal banking system? What other factors should be considered?

Exclusion of certain QFCs under foreign bank multi-branch master agreements. Under the proposed rule, the definition of a “QFC” would include a master agreement that covers other QFCs. In addition, under this definition those QFCs covered by the master agreement would be treated as a single QFC. By design, this definition of QFC is intended to ensure that the proposed rule would apply to all of the relevant QFCs entered into by a covered bank. However, as applied to the QFCs of Federal branches and agencies under a multi-branch master agreement, this definition may be too broad in its scope.

Foreign banks have multi-branch master agreements that permit transactions to be entered into both at a U.S. branch or agency of the foreign bank and at a foreign branch (located outside of the United States) of the foreign bank. Under this proposed rule, a QFC of a Federal branch or agency, as well as all of the QFCs entered into by foreign branches under the same multi-branch master agreement would be treated as a single QFC of the Federal branch or agency, and would therefore be subject to the requirements of this proposed rule. Where the QFC of the foreign branch has some U.S. nexus, such as permitting payment or delivery in the United States, the OCC believes that subjecting those QFCs to this proposed rule is reasonable and consistent with protecting the safety and soundness of the Federal banking system. However, where the QFC of the foreign branch does not permit any payment or delivery in the United States, the OCC believes that applying this proposed rule to such QFCs lacks a sufficient connection to the U.S. operations of the Federal branch or agency and may be unduly broad.

Absent the possibility under the QFC of payment or delivery in the United States, the OCC believes that the impact of such QFCs on the Federal branch or agency covered by this proposed rule, or on the Federal banking system and the United States as a whole, is indirect and relatively immaterial. For this reason, the proposed rule would exclude QFCs under such a “multi-branch master agreement” that are not booked at a Federal branch or agency covered by this proposed rule, and for which no payment or delivery may be made at the Federal branch or agency. Conversely, the multi-branch master agreement would be a covered QFC with respect to QFC transactions that are booked and permits payment and delivery at a Federal branch or agency covered by this proposed rule.

Question 9: Should the scope of the proposed rule be limited to only those transactions that are booked, or provide for payment and delivery, at the Federal branch or agency?

As discussed previously, 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 which is 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 non-defaulting party's performance under the contract or to accelerate the obligations of the defaulting party.

Finally, the non-defaulting party typically has the right to terminate the QFC, meaning that the parties would not make payments that would have been required under the QFC in the future. The phrase “default right” in the proposed rule text at § 47.2 is broadly defined to include these common rights as well as “any similar rights.” Additionally, the definition includes all such rights regardless of source, including rights existing under contract, statute, or common law.

However, the proposed definition excludes 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 is excluded from the definition of “default right.” 32 Second, contractual margin requirements that arise solely from the change in the value of the collateral or the amount of an economic exposure are also excluded from the definition.33 The effect of these exclusions is to leave such rights unaffected by the proposed rule. The exclusions are appropriate because the proposed rule is intended to improve resolvability by addressing default rights that could disrupt an orderly resolution, and not to interrupt the parties' business-as-usual dealings under a QFC.

However, certain QFCs are also commonly subject to rights that would increase the amount of collateral or margin that the defaulting party (or a guarantor) must provide upon an event of default. The financial impact of such default rights on a covered bank could be similar to the impact of the liquidation and acceleration rights discussed previously. Therefore, the proposed definition of “default right” includes such rights (with the exception discussed in the previous paragraph for margin requirements that depend solely on the value of collateral or the amount of an economic exposure).34

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, are excluded from the definition of “default right” for purposes the proposed rule's restrictions on cross-default rights (section 47.5 of the proposed rule).35 This is consistent with the proposed rule's objective of restricting only default rights that are related, directly or indirectly, to the entry into resolution of an affiliate of the covered bank, while leaving other default rights unrestricted.

Question 10: The OCC invites comment on all aspects of the proposed definition of “default right” In particular, are the proposed exclusions appropriate in light of the objectives of the proposal? To what extent does the exclusion of rights that allow 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” create an incentive for firms to include these rights in future contracts to evade the proposed restrictions? To what extent should other regulatory requirements (e.g., liquidity coverage ratio or the short-term wholesale funding components of the GSIB surcharge rule) be revised to create a counterincentive? Would additional exclusions be appropriate? To what extent should it be clarified that the “need to show cause” includes the need to negotiate alternative terms with the other party prior to termination or similar requirements (e.g., Master Securities Loan Agreement, Annex III—Term Loans)?

Under the proposed rule, a covered QFC would be required to explicitly provide both (a) that the transfer of the QFC (and any interest or obligation in or under it and any property collateralizing it) from the covered bank to a transferee would be effective to the same extent as it would be under the U.S. special resolution regimes if the covered QFC were governed by the laws of the United States or of a state of the United States and (b) that default rights with respect to the covered QFC that could be exercised against a covered bank 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.36 The proposed rule would define the term “U.S. Special Resolution Regimes” to mean the FDIA 37 and Title II of the Dodd-Frank Act,38 along with regulations issued under those statutes.39

The proposed requirements are not intended to imply that a given covered QFC is not governed by the laws of the United States or of a state of the United States, or that the statutory stay-and-transfer provisions would not in fact apply to a given covered QFC. This section of the proposed rule would not have any substantive impact on those covered QFCs that are already subject to the U.S. special resolution regimes. Rather, the requirements are intended to provide certainty that all covered QFCs would be treated the same way in the context of a receivership of a covered bank under the Dodd-Frank Act or the FDIA. Thus, the purpose of this provision is to ensure that if a national bank or FSA covered by this proposed rule is placed into receivership under any U.S. special resolution regime, the stay-and-transfer provisions would extend to all foreign counterparties as a matter of contract law.

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 cases brought before it (such as a case regarding a covered QFC between a covered bank and a non-U.S. entity that is governed by non-U.S. law and secured by collateral located outside the United States). By requiring that the effect of the statutory stay-and-transfer provisions be incorporated directly into the QFC contractually, the proposed requirement would help 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 themselves.40 For example, the proposed provisions should prevent a U.K. counterparty of a U.S. GSIB from persuading a U.K. court that it should be permitted to seize and liquidate collateral located in the United Kingdom in response to the U.S. GSIB's entry into OLA resolution. And the knowledge that a court in a foreign jurisdiction would reject the purported exercise of default rights in violation of the required provisions would deter covered banks' counterparties from attempting to exercise such rights.

The OCC believes that this proposed rule directly addresses a major QFC-related obstacle to the orderly resolution of covered banks. As discussed previously, 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 banks are party to large volumes of QFCs with connections to foreign jurisdictions. The stay-and-transfer provisions of the U.S. special resolution regimes would not achieve their purpose of facilitating orderly resolution in the context of the failure of a GSIB with large volumes of such QFCs if QFCs could escape the effect of those provisions. As discussed in detail in Section I of this proposed rule, the OCC has a supervisory interest in preventing or mitigating the destabilizing effects of a disorderly GSIB resolution; otherwise, the result will be adverse to safety and soundness of covered banks individually and collectively, as well as the broader Federal banking system. To remove any doubt about the scope of coverage of these provisions, the proposed requirement would ensure that the stay-and-transfer provisions apply as a matter of contract to all covered QFCs, wherever the transaction. This will advance the resolvability goals of the Dodd-Frank Act and the FDIA.41

Question 11: While the direct default requirements are proposed to apply broadly to all covered QFCs of covered banks, the primary focus of this requirements is with QFCs with foreign counterparties not directly subject to the U.S. special resolution regimes. U.S. counterparties are less of a concern because these counterparties would already be subject to the stay-and-transfer requirements under statutory requirements of the U.S. special resolution regimes. With respect to the direct default requirements, the proposed rule does not distinguish between U.S. and foreign counterparties because the OCC believes that the broad application of this proposed rule would be simpler to implement and less burdensome given the standardized nature of QFCs and their associated master netting agreements. Should the direct default requirements of the proposed rule apply only to covered QFCs with foreign counterparties not subject to U.S. special resolution regimes? What would be the costs and regulatory burden associated with identifying and maintaining separate versions of covered QFCs for U.S. and foreign counterparties?

Definitions. Section 47.5 of the proposed rule pertains to cross-default rights in QFCs between covered banks and their counterparties, many of which are subject to credit enhancements (such as guarantees) provided by an affiliate of the covered bank. Because credit enhancements on QFCs are themselves “qualified financial contracts” under the Dodd-Frank Act's definition of that term (which this proposed rule would adopt), the proposed rule includes the following additional definitions in order to precisely describe the relationships to which this section applies.

First, the proposed rule distinguishes between a credit enhancement and a “direct QFC,” which is defined as any QFC that is not a credit enhancement. The proposed rule also defines “direct party” to mean a covered bank that itself is a party to the direct QFC, as distinct from an entity that provide a credit enhancement. In addition, the proposed rule defines “affiliate credit enhancement” to mean “a credit enhancement that is provided by an affiliate of the 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. Moreover, the proposed rule defines “covered affiliate credit enhancement” to mean an affiliate credit enhancement provided by a covered bank, or a covered entity under the Board's proposal, and defines “covered affiliate support provider to mean the covered bank that provides the covered affiliate credit enhancement. Finally, the proposed rule defines the term “supported party” to mean any party that is the beneficiary of 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).

General Prohibition. Subject to the substantial exceptions to be discussed, the proposed rule would prohibit a covered bank from being a 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 bank. The proposed rule also would generally prohibit a covered bank from being party to a covered QFC that would prohibit the transfer of any credit enhancement applicable to the QFC (such as another entity's guarantee of the covered bank's obligations under the QFC), along with associated obligations or collateral, upon the entry into resolution of an affiliate of the covered bank.42

A primary purpose of the proposed restrictions is to facilitate the resolution of a GSIB outside of Title II, including under the Bankruptcy Code. As discussed in the background section, the potential for the mass exercise of QFC default rights is a major reason why the failure of a global systemically important BHC could have a severe negative impact on financial stability and on the Federal banking system. In the context of an SPOE resolution, if the global systemically important BHC's entry into resolution triggers the mass exercise of cross-default rights by the subsidiaries' QFC counterparties of the covered QFCs against the national bank or FSA subsidiary, then the national bank or FSA could themselves experience financial distress or failure. Moreover, the mass exercise of covered QFC default rights would entail asset fire sales, which could affect other U.S. financial companies and undermine financial stability of the U.S. financial system. Similar disruptive results can occur with an MPOE resolution of an affiliate of an otherwise performing entity triggers default rights on QFCs involving the performing covered bank.

In an SPOE resolution, this damage can be avoided if actions of the following two types are prevented: The exercise of direct default rights against the top-tier holding company that has entered resolution, and the exercise of cross-default rights against the national bank and FSA subsidiaries and other operating subsidiaries based on their parent's entry into resolution. Direct default rights against the national bank or FSA subsidiary would not be exercisable, because that subsidiary would continue normal operations and would not enter resolution. In an MPOE resolution, this damage occurs from the exercise of default rights against a performing entity based on the failure of an affiliate.

Under the OLA, the Dodd-Frank Act's stay-and-transfer provisions would address both direct default rights and cross-default rights. But, as explained in the Background section, no similar statutory provisions would apply to a resolution under the Bankruptcy Code. This proposed rule attempts to address these obstacles to orderly resolution under the Bankruptcy Code by extending the stay-and transfer-provisions to any type of resolution. Similarly, the proposed 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 banks 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. Accordingly, the proposed rule would broadly prevent the unanticipated failure of any one GSIB entity from bringing about the disorderly failures of its affiliates by preventing the affiliates' QFC counterparties from using the first entity's failure as a ground for exercising default rights against those affiliates that continue meet to their obligations.43

The proposed rule is intended to enhance the potential for orderly resolution of a GSIB under the Bankruptcy Code, the FDIA, or similar resolution proceedings. In doing so, the proposed rule would advance the Dodd-Frank Act's goal of making orderly resolution of a workable covered bank under the Bankruptcy Code.44

The proposed rule could also prevent the disorderly failure of the national bank or FSA subsidiary and allow it to continue normal operations. In addition, while it may be in the individual interest of any given counterparty to exercise any available contractual rights to run on the national bank or FSA subsidiary, the mass exercise of such rights could harm the collective interest of all the counterparties by causing the subsidiary to fail. Therefore, like the automatic stay in bankruptcy, which also serves to maximize creditors' ultimate recoveries by preventing a disorderly liquidation of the debtor, the proposed rule would mitigate this collective action problem to the benefit of the creditors and counterparties of covered banks by preventing a disorderly resolution. And because many of these counterparties and creditors are themselves covered banks, or other systemically important financial firms, improving outcomes for these creditors and counterparties would further protect the safety and soundness of the Federal banking system and financial stability of the United States.

General creditor protections. While the proposed restrictions would facilitate orderly resolution, they would also have the effect of diminishing the ability of the counterparties of the covered banks to include protections for themselves in covered QFCs. In order to reduce this effect, the proposed rule includes several significant exceptions to the proposed restrictions. These permitted creditor protections are intended to allow creditors to exercise cross-default rights outside of an orderly resolution of a GSIB (as described previously and in the Board's Proposal) and therefore would not be expected to undermine such a resolution.

First, to ensure that the proposed prohibitions would apply only to cross-default rights (and not direct default rights), the proposed rule would provide that a covered QFC may permit the exercise of default rights based on the direct party's entry into a resolution proceeding, other than a proceeding under a U.S. or foreign special resolution regime.45 This provision would help ensure that, if the direct party to a QFC were to enter bankruptcy, its QFC counterparties could exercise any relevant direct default rights. Thus, a covered bank's direct QFC counterparties would not risk the delay and expense associated with becoming involved in a bankruptcy proceeding, and would be able to take advantage of default rights that would fall within the Bankruptcy Code's safe harbor provisions.

The proposed rule would also allow covered QFCs to permit the exercise of default rights based on the failure of (1) the direct party, (2) a covered affiliate support provider, or (3) a transferee that assumes a credit enhancement to satisfy its payment or delivery obligations under the direct QFC or credit enhancement. Moreover, the proposed rule would allow 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. This exception takes appropriate account of the interdependence that exists among the contracts in effect between the same counterparties.

The proposed exceptions for the creditor protections described are intended to help ensure that the proposed rule permits a covered bank'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 bank'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 bank's counterparty would be permitted to exercise its default rights, such as by liquidating collateral). These exceptions are generally consistent with the treatment of payment and delivery obligations under the U.S. special resolution regimes.46

These exceptions also help to ensure that a covered entity's QFC counterparty would not risk the delay and expense associated with becoming involved in a bankruptcy proceeding, since, unlike a typical creditor of an entity that enters bankruptcy, the QFC counterparty would retain its ability under the 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 lead up to resolution promotes orderly resolution because 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 proposed rule would allow additional creditor protections for a non-defaulting counterparty that is the beneficiary of a credit enhancement from an affiliate of the covered bank that is also a covered bank under the proposed rule. The proposed rule would allow these creditor protections in recognition of the supported party's interest in receiving the benefit of its credit enhancement. The Board has concluded that these creditor protections would not undermine an SPOE resolution of a GSIB.47

Where a covered QFC is supported by a covered affiliate credit enhancement,48 the covered QFC and the credit enhancement would be permitted to allow the exercise of default rights under the circumstances after the expiration of a stay period. Under the proposed rule, the applicable stay period would begin when the credit support provider enters resolution and would end at the later of 5:00 p.m. (eastern time) on the next business day and 48 hours after the entry into resolution. This portion of the proposed rule is similar to the stay treatment provided in a resolution under the OLA or the FDIA.49

Under the proposed rule, default rights could be exercised 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 Bankruptcy Code.50 Default rights could also be exercised at the end of the stay period if the transferee (if any) of the credit enhancement enters a resolution proceeding, protecting the supported party from a transfer of the credit enhancement to a transferee that is unable to meet its financial obligations.

Default rights could also be exercised 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 credit enhancement applicable to the covered QFC, (b) all other credit enhancements provided by the credit support provider on any other 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. Such creditor protections would be permitted 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 FDIA contain similar provisions to prevent cherry picking.

Finally, if the covered affiliate credit enhancement is transferred to a transferee, then the non-defaulting counterparty could exercise default rights at the end of the stay period unless either (a) all of the 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 support provider's assets (or the net proceeds from the sale of those assets) will be transferred to the transferee in a timely manner. These conditions would help to assure the supported party that the transferee would be at least roughly as financially capable of providing the credit enhancement as the covered affiliate support provider.

Creditor protections related to FDIA proceedings. Moreover, 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 FDIA 51 under the following circumstances: (a) After the FDIA stay period,52 if the credit enhancement is not transferred under the relevant provisions of the FDIA 53 and associated regulations, and (b) during the FDIA 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. This provision is intended to ensure that a QFC counterparty of a subsidiary of a covered bank that goes into FDIA receivership can receive the same level of protection that the FDIA provides to QFC counterparties of the covered bank itself.

Prohibited terminations. In case of a legal dispute as to a party's right to exercise a default right under a covered QFC, the proposed rule would require 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 shall bear 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,54 a similar standard, or a more demanding standard.

The purpose of this proposed requirement is to prevent QFC counterparties from circumventing the limitations on resolution-related default rights in this proposal by exercising other contractual default rights in instances where such QFC counterparty cannot demonstrate that the exercise of such other contractual default rights is unrelated to the affiliate's entry into resolution.

Agency transactions. In addition to entering into QFCs as principal, GSIBs may engage in QFCs as agent for other principals. For example, a GSIB subsidiary may enter into a master securities lending arrangement with a foreign bank as agent for a U.S.-based pension fund. The GSIB would document its role as agent for the pension fund, often through an annex to the master agreement, and would generally provide to its customer (the principal party) a securities replacement guarantee or indemnification for any shortfall in collateral in the event of the default of the foreign bank.55 A covered bank may also enter into a QFC as principal where there is an agent acting on its behalf or on behalf of its counterparty.

This proposed rule would apply to a covered QFC regardless of whether the covered bank or the covered bank's direct counterparty is acting as a principal or as an agent. This proposed rule does not distinguish between agents and principals with respect to default rights or transfer restrictions applicable to covered QFCs. The proposed rule would limit default rights and transfer restrictions that the principal and its agent may have against a covered bank consistent with the U.S. special resolution regimes. This proposed rule would ensure that, subject to the enumerated creditor protections, neither the agent nor the principal could exercise cross-default rights under the covered QFC against the covered bank based on the resolution of an affiliate of the covered bank.56

Question 12: With respect to the proposed restrictions on cross-default rights in covered banks' QFCs, is the proposed rule sufficiently clear, such that parties to a conforming QFC will understand what default rights are, and are not exercisable, in the context of a GSIB resolution? How could the proposed restrictions be further clarified?

Question 13: Section 47.5(e)(2) of the proposed rule, addressing general creditor protections, would permit the exercise of default rights based on the failure of the direct party to satisfy its payment or delivery obligations under the covered QFC or “another contract between the same parties” that give rise to a default right in the covered QFC. This exception is not limited to covered QFCs but is intended to reflect the interdependence among all contracts between the same counterparties. Does the scope of the terms “contract” and “same parties” need to be clarified? Should the term “same parties” be clarified to include affiliate credit support providers as well as counterparties?

Question 14: Are the proposed restrictions on cross-default rights under-inclusive, such that the proposed terms would permit default rights that would have the same or similar potential to undermine an orderly SPOE resolution and should therefore be subjected to similar restrictions?

Question 15: Would it be appropriate for the prohibition to explicitly cover default rights that are based on or related to the “financial condition” of an affiliate of the direct party (for example, rights based on an affiliate's credit rating, stock price, or regulatory capital levels)?

Question 16: Should the proposed restrictions be expanded to cover contractual rights that a QFC counterparty may have to exit the termination at will or without cause, including rights that arise on a periodic basis? Could such rights be used to circumvent the proposed restrictions on cross-default rights? If so, how, if at all, should the proposed rule regulate such contractual rights?

Question 17: With respect to the proposed provisions permitting specific creditor protections in a covered QFC, does the proposed rule draw an appropriate balance between protecting financial stability from risks associated with QFC unwinds and maintaining important creditor protections? Should the proposed set of permitted creditor protections be expanded to allow for other creditor protections that would fall within the proposed restrictions? Is the proposed set of permitted creditor protections sufficiently clear?

Question 18: With respect to the proposed requirement for burden-of-proof provisions in a covered QFC, is the standard clear? Would the proposed requirement advance the goals of this proposed rule? Would those goals be better advanced by alternative or complementary provisions?

Question 19: Should the proposed rule require periodic legal review of the legal enforceability of the required provisions in relevant jurisdictions? If periodic legal review is not required, should covered banks be required to monitor the applicable law in the relevant jurisdiction for material changes in law?

Question 20: The OCC invites comment on all aspects of the proposed treatment of agency transactions, including whether credit protections should apply to QFCs where the direct party is acting as agent under the QFC.

As discussed previously, the proposed restrictions would leave many creditor protections that are commonly included in QFCs unaffected. The proposed rule would also allow any covered bank to submit to the OCC a request to approve as compliant with the proposed rule one or more QFCs that contain additional creditor protections—that is, creditor protections that would be impermissible under the proposed restrictions set forth previously. A covered bank making such a request would be required to explain how its request is consistent with the purposes of this proposed rule, including an analysis of the contractual terms for which approval is requested in light of a range of factors that are laid out by the proposed rule and intended to facilitate the OCC's consideration of whether permitting the contractual terms would be consistent with the proposed restrictions. The OCC expects to consult with the FDIC and Board during its consideration of a request under this section.

The first two factors concern the potential impact of the requested creditor protections on GSIB resilience and resolvability. The next four concern the potential scope of the covered bank's request: A doption on an industry-wide basis, coverage of existing and future transactions, coverage of one or multiple QFCs, and coverage of some or all covered banks. 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 banks would increase the chance 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, covered bank requests that would expand counterparties' rights beyond those afforded under existing QFCs would conflict with the proposed rule's goal of reducing the risk of mass unwinds of GSIB QFCs. The proposed rule also includes three factors that focus on the creditor protections specific to supported parties. The OCC 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 bank requesting that the OCC 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 OCC.

Under the proposed rule, the OCC could approve a request for an alternative set of creditor protections if the terms of that QFC, as compared to a covered QFC containing only the limited exceptions discussed previously, would promote the orderly resolution of federally chartered or licensed institutions or their affiliates, prevent or mitigate risks to the financial stability of the United States or the Federal banking system that could arise from the failure of a global systemically important BHC or global systemically important FBO, and protect the safety and soundness of covered banks to at least the same extent. The proposed request-and-approval process would improve flexibility by allowing for an industry-proposed alternative to the set of creditor protections permitted by the proposed rule while ensuring that any approved alternative would serve the proposed rule's policy goals to at least the same extent.

Compliance with the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol. In lieu of the process for the approval of enhanced creditor protections that are described previously, a covered bank would be permitted to comply with the proposed rule by amending a covered QFC through adherence to the ISDA 2015 Universal Resolution Stay Protocol (including immaterial amendments to the Protocol).57 The Protocol “enables parties to amend the terms of their financial contracts to contractually recognize the cross-border application of special resolution regimes applicable to certain financial companies and support the resolution of certain financial companies under the U.S. Bankruptcy Code.” 58 The Protocol amends ISDA Master Agreements, which are used for derivatives transactions. Market participants also may amend their master agreements for securities financing transactions by adhering to the Securities Financing Transaction Annex 59 to the Protocol and may amend all other QFCs by adhering to the Other Agreements Annex. Thus, a covered bank would be able to comply with the proposed rule with respect to all of its covered QFCs through adherence to the Protocol and the annexes.

The Protocol has the same general objective as the proposed rule, which is to make GSIB entities more resolvable by amending their contracts to, in effect, contractually recognize the applicability of special resolution regimes (including the OLA and the FDIA) and to restrict cross-default provisions to facilitate orderly resolution under the U.S. Bankruptcy Code. The provisions of the Protocol largely track the requirements of the proposed rule.60 However, the Protocol does have a narrower scope than the proposed rule,61 and it allows for somewhat stronger creditor protections than would otherwise be permitted under the proposed rule.62

The Protocol also includes a feature, not included in the proposed rule, that compensates for the Protocol's narrower scope and allowance for stronger creditor protections: When an entity (whether or not it is a covered bank) adheres to the Protocol, it necessarily adheres to the Protocol with respect to all covered entities that have also adhered to the Protocol.63 Thus, if all covered banks adhere to the Protocol, any other entity that chooses to adhere will simultaneously adhere with respect to all covered entities and covered banks. By allowing for all covered QFCs to be modified by the same contractual terms, this “all-or-none” feature would promote transparency, predictability, and equal treatment with respect to counterparties' default rights during the resolution of a GSIB entity and thereby advance the proposed rule's objective of increasing the likelihood that such a resolution could be carried out in an orderly manner.

Like section 47.5 of the proposed rule, section 2 of the Protocol was developed to increase GSIB resolvability under the Bankruptcy Code and other U.S. insolvency regimes. The Protocol does allow for somewhat broader creditor protections than would otherwise be permitted under the proposed rule, but, consistent with the Protocol's purpose, those additional creditor protections would not materially diminish the prospects for the orderly resolution of a GSIB. And the Protocol carries the desirable all-or-none feature, which would further increase a GSIB entity's resolvability and which the proposed rule otherwise lacks. For these reasons, and consistent with the broad policy objective of enhancing the stability of the U.S. financial system by increasing the resolvability of systemically important financial companies in the United States, the proposed rule would allow a covered bank to bring its covered QFCs into compliance by amending them through adherence to the Protocol (and, as relevant, the annexes to the Protocol).

Question 21: Are the proposed considerations for the approval of enhanced credit protections the appropriate factors for the OCC to take into account in deciding whether to grant a request for approval? What other considerations are potentially relevant to such a decision?

Question 22: Should the OCC provide greater specificity for the process and procedures for the submission and approval of requests for alternative enhanced credit protections? If so, what processes and procedures could be adopted without imposing undue regulatory burden?

Question 23: The OCC invites comment on its proposal to treat as compliant with section 47.6 of the proposal any covered QFC that has been amended by the Protocol. Does adherence to the Protocol suffice to meet the goals of this proposed rule, appropriately protect the Federal banking system and safeguard U.S. financial stability? Should additional guidance be provided that would clarify the consultation process with the FRB or any other relevant supervisory agency?

Under this proposed rule, the final rule would take effect on the first day of the first calendar quarter that begins at least one year after the issuance of the final rule (effective date).64 National banks, FSAs, and Federal branches and agencies that are covered banks when the final rule is issued would be required to comply with the proposed requirements beginning on the effective date. Thus, a covered bank would be required to ensure that covered QFCs entered into on or after the effective date comply with the rule's requirements. Moreover, a covered bank would be required to bring preexisting covered QFCs entered into prior to the effective date into compliance with the rule no later than the first date on or after the effective date on which the covered bank enters into a new covered QFC with the counterparty to the preexisting covered QFC or with an affiliate of that counterparty. Thus, a covered bank would not be required to conform a preexisting QFC if that covered bank does not enter into any new QFCs with the same counterparty or an affiliate of that counterparty on or after the effective date. Finally, a national bank, FSA, or Federal branch or agency that becomes a covered bank after the final rule is issued would be required to comply by the first day of the first calendar quarter that begins at least one year after it becomes a covered bank.

By permitting a covered bank to remain party to nonconforming QFCs entered into before the effective date unless the covered bank enters into new QFCs with the same counterparty or its affiliate, the proposed rule draws a balance between ensuring QFC continuity if a global systemically important BHC or FBO were to fail and ensuring that covered banks and their existing counterparties can avoid any compliance costs associated with conforming existing QFCs by refraining from entering into new QFCs and avoiding unnecessary disruption to existing QFCs. The requirement that a covered bank ensure that all existing QFCs are compliant before entering into a new QFC with the same counterparty or its affiliate will provide covered banks with an incentive to seek the modifications necessary to ensure that their QFCs with the most significant counterparties are compliant.

A covered bank would be required to bring a preexisting covered QFC entered into prior to the effective date into compliance with the rule no later than the first date on or after the effective date on which the covered bank or an affiliate (that is also a covered entity or covered bank) enters into a new covered QFC with the counterparty to the preexisting covered QFC or an affiliate of the counterparty. The OCC believes such an approach is warranted to ensure that adoption of the contractual provisions required by the proposed rule are consistent between a given counterparty, any affiliate of the counterparty, and the covered bank and all of the affiliates of the covered bank (which would essentially be all of the entities under a global systemically important BHC or FBO). The OCC is concerned that to allow counterparties to adopt the required contractual provisions with affiliated covered entities, but not the covered bank, poses a risk to the safety and soundness of the covered bank and would frustrate the goal of facilitating the orderly resolution of the covered bank (and its affiliate covered entities). Furthermore, the OCC expects that, as a practical matter, the decision of how to comply with this proposed rule and the FRB Proposal with respect to a given counterparty, and its affiliates, will be made in close coordination between the covered bank and its affiliated covered entities.

The OCC believes that adoption of the modifications required by the proposed rule should be consistent between a given counterparty and all entities under a global systemically important BHC or FBO, which necessitates allowing a trade by either a covered bank or a covered entity to trigger adoption of the required provisions. Moreover, the volume of nonconforming 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 (which a covered bank would generally be unable to modify without its counterparty's consent), it may be appropriate to permit a limited number of nonconforming QFCs to remain outstanding, in keeping with the terms described previously. The OCC will monitor covered banks' levels of nonconforming QFCs and evaluate the risk, if any, that they pose to the safety and soundness of the covered banks or to the Federal banking system and to U.S. financial stability.

Question 24: With respect to the proposed transaction periods, would there be a reasonable basis for adopting different compliance deadlines with respect to different classes of QFCs? If so, how should those classes be distinguished, and what would be a reasonable time frame for compliance?

Question 25: Is it necessary for a covered bank to bring preexisting covered QFCs entered into prior to the effective date into compliance with the rule based on a covered bank's affiliate's (that is also a covered entity or covered bank) transaction with a counterparty or its affiliates? Is it appropriate to ensure consistent treatment across all affiliated covered banks, covered entities, and affiliated counterparties?

The Basel III Capital Framework, as implemented by the OCC and the other banking agencies, permits a bank 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,” a collateral agreement, eligible margin loan, or repo-style transaction (collectively referred to as netting agreements) that provides for certain rights upon a counterparty default. With limited exception, to qualify for netting treatment, a qualifying netting agreement must permit a bank 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.65 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.

An exception to the immediate close-out requirement is made for the stay of default rights if the financial company is in receivership, conservatorship, or resolution under Title II of the Dodd-Frank Act,66 or the FDIA.67 Accordingly, transactions conducted under netting agreements where default rights may be stayed under Title II of the Dodd-Frank Act or the FDIA would not be disqualified from netting treatment.

On December 30, 2014, the OCC and the FRB issued an interim final rule (effective January 1, 2015) that amended the definitions of “qualifying master netting agreement,” “collateral agreement,” “eligible margin loan,” and “repo-style transaction,” in the OCC and FRB regulatory capital rules, and “qualifying master netting agreement” in the OCC and FRB liquidity coverage ratio (LCR) rules to expand the exception to the immediate close-out requirement to ensure that the current netting treatment under the regulatory capital, liquidity, and lending limits rules for over-the-counter (OTC) derivatives, repo-style transactions, eligible margin loans, and other collateralized transactions would be unaffected by the adoption of various foreign special resolution regimes through the ISDA Protocol.68 In particular, the interim final rule amended 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 FDIA, or any similar foreign resolution regime that provides for limited stays substantially similar to the stay for qualified financial contracts provided in Title II of the Dodd-Frank Act or the FDIA.

Section 47.4 of the proposed rule essentially limits the default rights exercisable against a covered bank to the same stay and transfer restrictions imposed under the U.S. special resolution regime against a direct counterparty. Section 47.4 of the proposed rule mirrors the contractual stay and transfer restrictions reflected in the ISDA Protocol with one notable difference. While adoption of the ISDA Protocol is voluntary, covered banks subject to the proposed rule must conform their covered QFCs to the stay and transfer restrictions in section 47.4.

With respect to limitations on cross-default rights in proposed section 47.5, the OCC is proposing amendments in order to maintain the existing netting treatment for covered QFCs for purposes of the regulatory capital, liquidity, and lending limits rules. Specifically, the OCC is proposing to amend the definition of “qualifying master netting agreement,” as well as to make conforming amendments to “collateral agreement, “eligible margin loan,” and “repo-style transaction,” in the regulatory capital rules in part 3, and “qualifying master netting agreement” in the LCR rules in part 50 to ensure that the regulatory capital, liquidity, and lending limits treatment of OTC derivatives, repo-style transactions, eligible margin loans, and other collateralized transactions would be unaffected by the adoption of proposed section 47.5. Without these proposed amendments, covered banks that amend their covered QFCs to comply with this proposed rule would no longer be permitted to recognize covered QFCs as subject to a qualifying master netting agreement or satisfying the criteria necessary for the current regulatory capital, liquidity, and lending limits treatment, and would be required to measure exposure from these contracts on a gross, rather than net, basis. This result would undermine the proposed requirements in section 47.5. The OCC does not believe that the disqualification of covered QFCs from master netting agreements would accurately reflect the risk posed by these OTC derivative transactions.

Although the proposed rule reformats some of the definitions in parts 3 and 50 to include the text from the interim final rule, the proposed amendments do not alter the substance or effect of the prior amendment adopted by the interim final rule.

The rule establishing margin and capital requirements for covered swap entities (swap margin rule) defines the term “eligible master netting agreement” in a manner similar to the definition of “qualifying master netting agreement.” 69 Thus, it may also be appropriate to amend the definition of “eligible master netting agreement” to account for the proposed restrictions on covered entities' QFCs.

Question 26: As noted, the requirements of this proposed rule are mandatory for all covered banks with respect to their covered QFCs. Under the proposed rule failure by a covered bank to conform its covered QFCs to the mandatory requirements would be a violation of the rule. In light of the important policy objectives of this proposed rule, should the regulatory capital and LCR rules require that nonconforming covered QFCs that violate the requirements of the proposed rule be disqualified from netting treatment?

Question 27. In order to qualify for netting treatment under the regulatory capital rules, eligible margin loans, qualifying master netting agreements, and repo-style transactions require national banks and FSAs to conduct sufficient legal review to ensure that the provisions of these financial contracts would be enforceable in all relevant jurisdictions. Should the scope of the legal review requirement be expanded to explicitly include the enforceability of the direct default and cross-default provisions required by the proposed rule?

In addition to the specifically enumerated questions in the preamble, the OCC requests comment on all aspects of this proposed rule. The OCC requests that, for the specifically enumerated questions, commenters include the number of the question in their response to make review of the comments more efficient.

In accordance with section 3512 of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521) (as amended), the OCC 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.

Certain provisions of the proposed rule contain “collection of information” requirements within the meaning of the PRA. In accordance with the requirements of the PRA, the OCC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently-valid OMB control number. The information collection requirements contained in this proposed rulemaking have been submitted to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing regulations (5 CFR 1320).

Comments are invited on:

(a) Whether the collections of information are necessary for the proper performance of the OCC's functions, including whether the information has practical utility;

(b) The accuracy of the estimates of the burden of the information collections, including the validity of the methodology and assumptions used;

(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to the addresses listed in the ADDRESSES section of this document. A copy of the comments may also be submitted to the OMB desk officer for the agencies: by mail to U.S. Office of Management and Budget, 725 17th Street NW., #10235, Washington, DC 20503; by facsimile to (202) 395-5806; or by email to: [email protected], Attention, Federal Banking Agency Desk Officer.

Title of Information Collection: Mandatory Contractual Stay Requirements for Qualified Financial Contracts.

Affected Public: Businesses or other for-profit.

Respondents: Banks or FSAs (including any subsidiary of a bank or FSA) that are subsidiaries of a global systemically important BHC that has been designated pursuant to 252.82(a)(1) of the Federal Reserve Board's Regulation YY; Banks or FSAs (including any subsidiary of a bank or FSA) that are subsidiaries of a global systemically important FBO designated pursuant to section 252.87 of the Federal Reserve Board's Regulation YY; and Federal branches and agencies (including any U.S. subsidiary of a Federal branch or agency), of a global systemically important FBO that has been designated pursuant to section 252.87 of the Federal Reserve Board's Regulation YY.

Abstract: Section 47.6 provides that a covered bank may request that the OCC approve as compliant with the requirements of section 47.5, regarding insolvency proceedings, provisions of one or more forms of covered QFCs, or amendments to one or more forms of covered QFCs, with enhanced creditor protection conditions. The request must include: (1) an analysis of the proposal under each consideration of the relevance of creditor protection provisions; (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 information relevant to its approval that the OCC requests.

Burden Estimates:

Estimated Number of Respondents: 42.

Estimated Burden per Respondent:

Reporting (§ 47.7): 40 hours.

Total Estimated Burden: 1,680 hours.

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (“RFA”), generally requires that, in connection with a NPRM, an agency prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities.70 The Small Business Administration has defined “small entities” for banking purposes to include a bank or savings association with $175 million or less in assets.71

The OCC currently supervises approximately 1,032 small entities. The scope of the proposal is limited to large banks and their affiliates. Therefore, the proposed rule will not impact any OCC-supervised small entities. Accordingly, the proposal will not have a significant economic impact on a substantial number of small entities.

The OCC has analyzed the proposed rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA).72 Under this analysis, the OCC considered whether the proposed rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation). The UMRA does not apply to regulations that incorporate requirements specifically set forth in law.

The OCC's estimated UMRA cost is less than $2 million. Therefore, the OCC finds that the proposed rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA.

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act of 1994 (RCDRI Act),73 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, the OCC will consider, consistent with the principles of safety and soundness and the public interest: (1) Any administrative burdens that the proposed rule would place on depository institutions, including small depository institutions and customers of depository institutions, and (2) the benefits of the proposed rule. The OCC requests comment on any administrative burdens that the proposed rule would place on depository institutions, including small depository institutions, and their customers, and the benefits of the proposed rule that the OCC should consider in determining the effective date and administrative compliance requirements for a final rule.

For the reasons stated in the Supplementary Information, the Office of the Comptroller of the Currency proposes to amend part 3, add a new part 47, and amend part 50 as follows:

The revisions are set forth below:

The revisions are set forth below:

Throughout this document, “we,” “us” and “our” refer to the EPA.

For the purpose of this document, we are giving meaning to certain words or initials as follows:

(i) The word or initials Act or CAA mean or refer to the Clean Air Act, unless the context indicates otherwise.

(ii) The initials CARB mean or refer to the California Air Resources Board.

(iii) The initials CFR mean or refer to Code of Federal Regulations.

(iv) The initials or words EPA, we, us or our mean or refer to the United States Environmental Protection Agency.

(v) The initials FR mean or refer to Federal Register.

(vi) The word or initials BCAQMD or District mean or refer to the Butte County Air Quality Management District.

(vii) The initials NAAQS mean or refer to National Ambient Air Quality Standards.

(viii) The initials NSR mean or refer to New Source Review.

(ix) The initials PM 10 mean or refer to particulate matter with an aerodynamic diameter of less than or equal to 10 micrometers (coarse particulate matter).

(x) The initials PM 2.5 mean or refer to particulate matter with an aerodynamic diameter of less than or equal to 2.5 micrometers (fine particulate matter).

(xi) The initials SIP mean or refer to State Implementation Plan.

(xii) The initials TSD mean or refer to the technical support document for this action.

Table 1 lists the rules addressed by this proposal, including the dates they were adopted by BCAQMD and submitted by CARB, which is the governor's designee for California SIP submittals.

On December 18, 2014, EPA determined that the submittal of these rules met the completeness criteria in 40 CFR part 51 Appendix V, which must be met before formal EPA review.

There is no previous version of Rule 432 in the SIP; EPA approved previous versions of the rules to be replaced by Rules 400 and 401 into the SIP as indicated in Table 2.

EPA's approval of Rule 401 would have the effect of entirely superseding our prior approval of Rule 4-4 in the SIP. Likewise, approval of Rules 400 and 432 will have the effect of entirely superseding our prior SIP approval of Rules 401, 402, 403, 405, 406, 407, 420, 421 and 424.

Section 110(a) of the CAA requires states to submit regulations that include a pre-construction permit program for certain new or modified stationary sources of pollutants, including a permit program as required by Part D of Title I of the CAA.

The purpose of District Rule 400 (Permit Requirements), Rule 401 (Permit Exemptions) and Rule 432 (Federal New Source Review) is to implement a federal preconstruction permit program for all new and modified minor sources, and new and modified major sources of NAAQS pollutants for which the area is designated nonattainment. BCAQMD is currently designated as a nonattainment area for the 2008 8-hr ozone and 2006 24-hr PM2.5 NAAQS. We present our evaluation under the CAA and EPA's regulations of the amended NSR rules submitted by CARB, as identified in Table 1, and provide our reasoning in general terms below and in more detail in our TSD, which is available in the docket for this proposed rulemaking.

The submitted rules must meet the CAA's general requirements for SIPs and SIP revisions in CAA sections 110(a)(2), 110(l), and 193, as well as the applicable requirements contained in part D of title I of the Act (sections 172, 173, 182(a) and 189(e)) for a nonattainment NSR permit program. In addition, the submitted rules must contain the applicable regulatory provisions required by 40 CFR 51.160-51.165 and 40 CFR 51.307.

Among other things, section 110 of the Act requires that SIP rules be enforceable and provides that EPA may not approve a SIP revision if it would interfere with any applicable requirements concerning attainment and reasonable further progress or any other requirement of the CAA. In addition, section 110(a)(2) and section 110(l) of the Act require that each SIP or revision to a SIP submitted by a State must be adopted after reasonable notice and public hearing.

Section 110(a)(2)(C) of the Act requires each SIP to include a permit program to regulate the modification and construction of any stationary source within the areas covered by the SIP as necessary to assure attainment and maintenance of the NAAQS. EPA's regulations at 40 CFR 51.160-51.164 provide general programmatic requirements to implement this statutory mandate commonly referred to as the “minor NSR” or “general NSR” permit program. These NSR program regulations impose requirements for SIP approval of State and local programs that are more general in nature as compared to the specific statutory and regulatory requirements for nonattainment NSR permitting programs under Part D of title I of the Act.

Part D of title I of the Act contains the general requirements for areas designated nonattainment for a NAAQS (section 172), including preconstruction permit requirements for new major sources and major modifications proposing to construct in nonattainment areas (section 173). Part D of title I of the Act also includes section 182(a), which contains the additional requirements for areas designated as a marginal ozone nonattainment area, and section 189(e), which requires the control of major stationary source of PM10 precursors (and hence PM2.5 precursors) “except where the Administrator determines that such sources do not contribute significantly to PM10 [and PM2.5] levels which exceed the standard in the area.” Additionally, 40 CFR 51.165 sets forth EPA's regulatory requirements for SIP-approval of a nonattainment NSR permit program and 40 CFR 51.165(a)(13) contains specific requirements for regulating sources emitting PM2.5.

The protection of visibility requirements that apply to NSR programs are contained in 40 CFR 51.307. This provision requires that certain actions be taken in consultation with the local Federal Land Manager if a new major source or major modification may have an impact on visibility in any mandatory Class I Federal Area.

Section 110(l) of the Act prohibits EPA from approving any SIP revisions that would interfere with any applicable requirement concerning attainment and reasonable further progress (RFP) or any other applicable requirement of the CAA. Section 193 of the Act, which only applies in nonattainment areas, prohibits the modification of a SIP-approved control requirement in effect before November 15, 1990, in any manner unless the modification insures equivalent or greater emission reductions of such air pollutant.

Our TSD, which can be found in the docket for this rule, contains a more detailed discussion of the approval criteria.

EPA has reviewed the submitted rules in accordance with the rule evaluation criteria described above. With respect to procedures, based on our review of the public process documentation included in the November 6, 2014 submittal, we are proposing to approve the submitted rules in part because we have determined that BCAQMD has provided sufficient evidence of public notice and opportunity for comment and public hearings prior to adoption and submittal of these rules, in accordance with the requirements of CAA sections 110(a)(2) and 110(l).

With respect to substantive requirements, we have reviewed the submitted rules in accordance with the evaluation criteria discussed above. We are proposing to approve Rules 400 and 401 as part of BCAQMD's general NSR permitting program because we have determined that these rules satisfy the substantive statutory and regulatory requirements for a general NSR permit program as contained in CAA section 110(a)(2)(C) and 40 CFR 51.160-51.164.

In addition, we are proposing a limited approval of Rule 432 because we have determined that Rule 432 satisfies all of the statutory and regulatory requirements for a nonattainment NSR permit program as set forth in the applicable provisions of part D of title I of the Act (sections 172, 173 and 182(a)) and in 40 CFR 51.165 and 40 CFR 51.307.

We are also proposing a limited disapproval of Rule 432 because we have determined that the rule does not fully satisfy CAA section 189(e) requirements for regulation of PM2.5 precursors. The rule does not specify ammonia as a PM2.5 precursor and the demonstration provided by Butte County as part of their NSR program submittal is not adequate to allow the Administrator to determine whether potential new major sources and major modifications of ammonia emissions will not contribute significantly to PM2.5 levels that exceed the standard in the area. Our TSD for this action contains additional information regarding our proposed limited disapproval.

EPA is also proposing to find that it is acceptable for BCAQMD to not incorporate the NSR Reform provisions of 40 CFR 51.165 into its NSR permit program because BCAQMD's permitting program will not be any less stringent than the federal permitting program. In addition, EPA is proposing to find that Rules 400, 401 and 432 meet the statutory requirements for SIP revisions as specified in sections 110(l) and 193 of the CAA.

Please see our TSD for more information regarding our evaluation of Rules 400, 401 and 432.

As authorized by CAA section 110(k)(3) and 301(a), we are proposing approval of Rule 400 (Permit Requirements) and Rule 401 (Permit Exemptions), and we are proposing limited approval and limited disapproval of Rule 432 (Federal New Source Review) into the BCAQMD portion of the California SIP. If finalized, this action will incorporate the submitted rules into the SIP, including those provisions identified as deficient.1 The approval of Rule 432 is limited because EPA is simultaneously proposing a limited disapproval of Rule 432 under section 110(k)(3). If this limited disapproval is finalized, it will trigger sanctions under CAA section 179 and 40 CFR 52.31 unless the EPA approves subsequent SIP revisions that correct the rule deficiencies within 18 months of the effective date of the final action.

Note that Rule 432 has been adopted by the BCAQMD, and the EPA's final limited disapproval would not prevent the local agency from enforcing it. The limited disapproval also would not prevent any portion of the rule from being incorporated by reference into the federally enforceable SIP as discussed in a July 9, 1992 EPA memo found at: http://www.epa.gov/nsr/ttnnsr01/gen/pdf/memo-s.pdf.

We will accept comments from the public on the proposed limited approval and limited disapproval for the next 30 days.

In this rule, the EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, the EPA is proposing to finalize the incorporation by reference the BCAQMD rules described in Table 1 of this preamble. The EPA has made, and will continue to make, these materials available electronically through www.regulations.gov and at the EPA Region IX Office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information).

Additional information about these statutes and Executive Orders can be found at http://www2.epa.gov/laws-regulations/laws-and-executive-orders.

This action is not a significant regulatory action and was therefore not submitted to the Office of Management and Budget (OMB) for review.

This action does not impose an information collection burden under the PRA because this action does not impose additional requirements beyond those imposed by state law.

I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA. This action will not impose any requirements on small entities beyond those imposed by state law.

This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. This action does not impose additional requirements beyond those imposed by state law. Accordingly, no additional costs to State, local, or tribal governments, or to the private sector, will result from this action.

This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.

This action does not have tribal implications, as specified in Executive Order 13175, because the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction, and will not impose substantial direct costs on tribal governments or preempt tribal law. Thus, Executive Order 13175 does not apply to this action.

The EPA interprets Executive Order 13045 as applying only to those regulatory actions that concern environmental health or safety risks that the EPA has reason to believe may disproportionately affect children, per the definition of “covered regulatory action” in section 2-202 of the Executive Order. This action is not subject to Executive Order 13045 because it does not impose additional requirements beyond those imposed by state law.

This action is not subject to Executive Order 13211, because it is not a significant regulatory action under Executive Order 12866.

Section 12(d) of the NTTAA directs the EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. The EPA believes that this action is not subject to the requirements of section 12(d) of the NTTAA because application of those requirements would be inconsistent with the CAA.

The EPA lacks the discretionary authority to address environmental justice in this rulemaking.

A. Instructions

All comments must be in writing and submitted through one of the methods specified in the Addresses section above. All submissions must include the title of the action and RIN for this rulemaking. Please include your name, title, organization, postal address, telephone number, and email address in the text of the message.

Please note that USAID recommends sending all comments to the Federal eRulemaking Portal because security screening precautions have slowed the delivery and dependability of surface mail to USAID/Washington.

After receipt of a comment and until finalization of the action, all comments will be made available at http://www.regulations.gov for public review without change, including any personal information provided. We recommend you do not submit information that you consider Confidential Business Information (CBI) or any information that is otherwise protected from disclosure by statute. USAID will only address substantive comments on the rule. Comments that are insubstantial or outside the scope of the rule may not be considered.

USAID is seeking comments on the proposed rule as described below:

In response to numerous inquiries, USAID is proposing a revision of this section of the AIDAR to clarify that employment requirements for TCN and CCN employees of a contractor do not apply to consultants. It is the responsibility of a contractor to determine whether an individual being hired is an employee or a consultant.

In 2011, the U.S. Agency for International Development (USAID) approved a two-year Worldwide CCN Administrative Contracting and Agreement Officer (ACO/AAO) Pilot Warrant Program. The purpose of this program was to address the shortage of USAID contracting officers and build long-term, host country technical capacity to materially assist the Missions with procurement responsibility.

USAID is located in offices in over 80 countries with programs in over 100 nations. USAID operates in a fluid environment responding to a myriad of crises such as war, natural disasters, epidemics, as well as its long term mission of ending extreme poverty, promoting resilient, democratic societies while advancing our security and prosperity. The warranted contracting force to manage this effort consists of 150 US direct hire foreign service contracting officers overseas, 105 direct hire civil service contract officers, 83 warranted foreign service executive officers, 3 warranted US personal service contractors managing mission's acquisition portfolio, and 4 warranted US personal service contractors serving as executive officers. In addition to, and perhaps partially because of having such a relatively small warranted work force to manage a portfolio that is large and varied with a global footprint, the foreign service contracting staff has one of the highest attrition rates in USAID's work force.

USAID made a strategic decision to create a cadre of highly qualified Cooperating Country Nationals, who have demonstrated high potential for assuming responsibilities to serve as administrative contracting officers within designated Missions. The purpose was to alleviate some of the workload of our contracting officer staff. During the two phases of the program, USAID added 6 warranted CCN administrative contracting officers. Currently, by the end of fiscal year 2016, we anticipate that there will be approximately 12 warranted CCN contracting officers. While a seemingly small number, that would represent an 8 percent increase of our overseas US direct hire warranted contracting officer staff.

When designing the CCN Pilot Warrant Program, USAID consulted with the Senior Procurement Executive at the State Department and the unions. The State Department's SPE advised that State conducted a similar pilot several years ago, to great success. They now have a permanent program that extends limited authority to their locally-employed staff in selected countries. The vice president of the American Foreign Service Association concurred with the Pilot, and was pleased by several of its protections.

Based on that two-year pilot program, revisions were made to the program structure to better suit the Agency's needs before the permanent program was launched in September 2014. USAID eliminated the portion of the program that allowed for third country nationals to receive warrants. A comprehensive review of the CCN Pilot Warrant Program underscored a need to broaden participation through among other things, revision of qualifications and inclusion of full obligation warrant authority up to $150,000 per transaction and an annual cumulative amount of $1 million at the CCN Grade 13 Level to assist the Missions' procurement function. A better understanding of CCN grades and the grading process allowed for better clarity of expectations for Missions and warrant applicants. To help mitigate CCN inexperience from leading to mistakes or malfeasance, the revised CCN Warrant Program includes several levels of obligation authority and non-monetary administrative responsibility correlating to CCN grade/experience within the acquisition backstop. Increasing degrees of responsibility and/or obligation authority, as applicable, are granted.

The permanent CCN Warrant Program currently establishes three levels of contracting officer responsibilities that can be designated to a CCN personal services contractor depending on the needs of each mission, complexity and dollar value of the acquisitions, and the individual's experience, training, education, business acumen, judgment, reputation and grade level.

At the first level, a CCN PSC may be delegated authority for select contract administration functions listed in (48 CFR) FAR 42.302(a), including, for example, conducting post-award orientation conferences, approving contractors' requests for payments under the progress payments or performance-based payments clauses.

At the second level, in addition to performing the administrative functions discussed above, a CCN PSC contracting officer may be delegated authority to obligate incremental funding of any amount within the scope and total estimated cost of a contract (to include task orders and purchase orders).

At the third and highest participating grade level, in addition to the incremental funding obligation authority and post-award administration duties described in levels one and two above, a CCN PSC contracting officer may be delegated authority to execute new awards for a total award amount not to exceed one hundred fifty thousand dollars ($150,000). This authority is further subject to a new award cumulative obligation limit of one million dollars ($1 million) per Fiscal Year. No deviation from these limitations is authorized.

(48 CFR) FAR part 1 establishes the authority for Agency heads to select and appoint contracting officers and it does not specify that contracting officers must be U.S. citizen direct-hire employees of the Federal government. (48 CFR) FAR part 7.5 includes contracting officer duties in the list of inherently governmental functions or functions that must be treated as such, but does not exclude personal services contractors hired under a statutory authority from performing such functions.

(48 CFR) AIDAR 701.603-70 currently limits delegations of contracting officer authorities to U.S. citizen direct-hire employees of the U.S. Government as a matter of Agency policy. However, section 4(b)(3) of (48 CFR) AIDAR Appendix D and the corresponding section of Appendix J contain an exception for PSCs to be delegated contracting officer authority with approval from the Assistant Administrator for the Bureau of Management.

In September 2014, USAID issued a two-year class deviation from 48 CFR) AIDAR 701.603-70 to establish the permanent CCN PSC warrant program to allow a limited number of selected and qualified CCN PSCs to be delegated contracting officer authorities. In conjunction with the approval of the class deviation described above, the Assistant Administrator for the Bureau for Management approved a class exception to the limitations in (48 CFR) AIDAR Appendix J 4(b)(3). By this rule USAID is proposing to revise (48 CFR) AIDAR to permanently authorize delegation of contracting officer authorities to a limited number of selected and qualified CCN PSCs.

Prior to establishing the permanent CCN warrant program, the Agency reviewed the risks associated with issuing CO warrants to Non-U.S. citizens who are not direct-hire employees of USAID. In particular, such factors as proper accountability, adequate security considerations, conflicts of interest, and appropriate legal jurisdiction over the employee were considered. Adequate management controls and warrant limitations established under the CCN PSC warrant program, as discussed below, were established to mitigate such risks.

To address the risks associated with adequate accountability and conflict of interest, the warrant program requires candidates for the CCN PSC warrant program to show commitment to the profession by meeting stringent acquisition competencies, education and training requirements. In addition to meeting these requirements, potential candidates must have extensive experience in Direct U.S. Federal Government Contracting and clearly demonstrate professional and ethical behavior. When reviewing applications for a CCN PSC warrant, the agency contacts past performance references (typically, the candidate's last three Supervisory Contracting Officers) and any other sources deemed appropriate for signs of potential risks or cautions that may be detrimental to the responsibilities inherent in this Program. The candidate's supervisor must also attest to the candidate's education, training, experience, business acumen, judgment, character, reputation and ethical behavior.

Additionally, the Program requires the CCN contracting officer's supervisor to closely and frequently monitor the CCN PSC's work and review performance and progress every six months. This review is followed by periodic reviews conducted by the Bureau for Management, Office of Acquisition and Assistance, Evaluation Division, which is responsible for the program implementation.

CCN PSC contracting officers will support the functions of the overseas Mission's Office of Acquisition & Assistance (A&A), which typically include acquisition and assistance awards implementing the Agency's foreign assistance programs and activities. CCN PSC contracting officers are currently not delegated authority to award any personal services contracts. The program also limits delegated authority for select contract administration functions listed in (48 CFR) FAR 42.302(a), specifically, the contracting officer functions in which disputes or possible legal challenges may arise due to decisions of the contracting officer, functions related to novation and contractor name changes, which may be a result of changes in a contractor's business structure as governed under applicable U.S. state law and other functions based on U.S. state laws, functions related to small business contracting matters and those requiring extensive knowledge of specific U.S. laws and government-wide policies not specifically related to contracting. Accordingly, the functions specified in items 5-7, 9-12, 18, 21-26, 29, 32,50, 52-55, 62-63, 66 and 68-71 of (48 CFR) FAR 42.302(a) will not be redelegated to CCN PSC contracting officers.

To address conflict of interest concerns, the program relies on the standard clause entitled “Compliance with Laws and Regulations Applicable Abroad”, included in all personal services contracts with CCNs, that mandates compliance with the Standards of Conduct for Executive Branch Employees. These standards, available at https://www2.oge.gov/web/oge.nsf/All%20Documents/5D633072D0B2DB5085257E96006A90E7?opendocument, contain two provisions addressing financial interests that conflict with an individual's official duties. The first provision, entitled “Disqualifying financial interests,” prohibits an employee from participating in an official government capacity in a matter in which he has a financial interest or in which his spouse, minor child, employer, or any one of several other specified persons has a financial interest. The second provision, entitled “Prohibited financial interests,” contains authority by which agencies may prohibit employee from acquiring or retaining certain financial interests. To address the security concerns, the Program uses the current process, in which the USAID Office of Security and Department of State, Office of Security conduct background checks on potential personal service contractors. Recognizing the fact that some countries may not have adequate legal systems or may be unwilling to provide assistance in prosecuting their citizens for U.S. procurement infractions, the CCN PSC Warrant Program established the following management controls designed to minimize the risk that such legal actions might be necessary:

USAID is seeking public comments on the proposed changes to the AIDAR to implement the agency CCN PSC Warrant Program.

(1) Regulatory Planning and Review. Under E.O. 12866, USAID must determine whether a regulatory action is “significant” and therefore subject to the requirements of the E.O. and subject to review by the Office of Management and Budget (OMB). USAID has determined that this Rule is not an “economically significant regulatory action” under Section 3(f)(1) of E.O. 12866. This proposed rule is not a major rule under 5 U.S.C. 804.

(2) Regulatory Flexibility Act. The rule will not have an impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. Therefore, an Initial Regulatory Flexibility Analysis has not been performed.

(3) Paperwork Reduction Act. The proposed rule does not establish a new collection of information that requires the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

For the reasons discussed in the preamble, USAID amends 48 CFR Chapter 7 as set forth below:

Authority for Action

NMFS manages U.S. groundfish fisheries of the GOA under the GOA FMP. The North Pacific Fishery Management Council (Council) prepared, and the Secretary of Commerce (Secretary) approved, the GOA FMP under the authority of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act), 16 U.S.C. 1801 et seq. Regulations governing U.S. fisheries and implementing the GOA FMP appear at 50 CFR parts 600 and 679. Sablefish (Anoplopoma fimbria) is managed as a groundfish species under the GOA FMP. The Council is authorized to prepare an FMP amendment for conservation and management of a fishery managed under the FMP. NMFS conducts rulemaking to implement FMP and regulatory amendments.

The International Pacific Halibut Commission (IPHC) and NMFS manage fishing for Pacific halibut (Hippoglossus stenolepis) through regulations at 50 CFR part 300, subpart E, established under authority of the Northern Pacific Halibut Act of 1982 (Halibut Act), 16 U.S.C. 773-773k. The IPHC adopts annual management measures governing fishing for halibut under the Convention between the United States and Canada for the Preservation of the Halibut Fishery of the North Pacific Ocean and Bering Sea (Convention), signed at Ottawa, Ontario, on March 2, 1953, as amended by a Protocol Amending the Convention (signed at Washington, DC, on March 29, 1979). The IPHC regulations are subject to acceptance by the Secretary of State with concurrence from the Secretary. After acceptance by the Secretary of State and the Secretary, NMFS publishes the annual management measures in the Federal Register pursuant to 50 CFR 300.62. The final rule implementing the 2016 annual management measures published March 16, 2016 (81 FR 14000). The Halibut Act, at section 773c(c), also authorizes the Council to develop halibut fishery regulations, including limited access regulations, that are in addition to, and not in conflict with, approved IPHC regulations.

Under the authority of the GOA FMP and the Halibut Act, the Council has recommended and NMFS has established regulations that implement the IFQ Program. The IFQ Program allocates sablefish and halibut harvesting privileges among U.S. fishermen. NMFS manages the IFQ Program pursuant to regulations at 50 CFR part 679 and 50 CFR part 300 under the authority of section 773c of the Halibut Act and section 303(b) of the Magnuson-Stevens Act. The Council has recommended Amendment 101 to the GOA FMP (Amendment 101) to amend provisions of the GOA FMP applicable to the sablefish IFQ fishery and implementing regulations applicable to the sablefish IFQ fisheries. FMP amendments and regulations developed by the Council may be implemented by NMFS only after approval by the Secretary. This proposed rule also includes regulations developed by the Council under the Halibut Act to authorize harvest of halibut IFQ caught incidentally in longline pot gear used in the GOA sablefish IFQ fishery. Halibut fishery regulations developed by the Council may by implemented by NMFS only after approval of the Secretary in consultation with the United States Coast Guard.

A notice of availability for Amendment 101 was published in the Federal Register on August 8, 2016 (81 FR 52394). Comment on Amendment 101 is invited through October 7, 2016. Written comments may address Amendment 101, this proposed rule, or both, but must be received by October 7, 2016, to be considered in the decision to approve or disapprove Amendment 101.

NMFS proposes regulations to implement Amendment 101 for the sablefish IFQ fisheries in the GOA and regulations to authorize harvest of halibut IFQ caught incidentally in longline pot gear used in the GOA sablefish IFQ fishery. This proposed rule would make three types of changes to the sablefish and halibut IFQ Program. First, this proposed rule would authorize longline pot gear to harvest sablefish IFQ in the GOA. Under current regulations, only longline gear is authorized for the GOA sablefish IFQ fishery. Longline gear includes hook-and-line, jig, troll, and handline gear. Participants have used longline hook-and-line gear (hook-and-line gear) to harvest sablefish IFQ in the GOA because it is more efficient than jig, troll, or handline gear. However, various species of whales can remove or damage sablefish caught on hook-and-line gear (depredation). Depredation occurs with hook-and-line gear because sablefish are captured on hooks that lie on the ocean floor. Whales can completely remove or damage sablefish captured on these hooks before the gear is retrieved. Longline pot is an efficient gear and prevents depredation because whales cannot remove or damage sablefish enclosed in a pot. This proposed rule would authorize, but not require, vessel operators to use longline pot gear in the GOA sablefish IFQ fishery.

Second, this proposed rule would implement several regulations to minimize potential interactions between hook-and-line gear and longline pot gear. These provisions include a pot limit, requirements for vessel operators to use pot tags issued by NMFS, requirements that longline pot gear be redeployed within a certain amount of time after being deployed, requirements that longline pot gear be removed from the fishing grounds when making a sablefish landing, and requirements to mark longline pot gear deployed on the fishing grounds.

Third, to minimize halibut discards in the GOA sablefish IFQ fishery, this proposed rule would implement a requirement for halibut IFQ harvesters to retain halibut IFQ caught incidentally in longline pots.

This proposed rule would improve efficiency in harvesting sablefish IFQ and reduce adverse economic impacts on harvesters that occur from depredation. This proposed rule would mitigate impacts on sablefish IFQ harvesters using hook-and-line gear by minimizing the potential for interactions between hook-and-line gear and longline pot gear. Finally, this proposed rule would reduce whale and seabird interactions with fishing gear in the GOA sablefish IFQ fishery.

The following sections of this preamble describe 1) the sablefish fishery in the GOA, 2), the need for Amendment 101 and this proposed rule, 3) the impacts of Amendment 101 and this proposed rule, and 4) the specific provisions that would be implemented by this proposed rule.

The commercial sablefish fisheries in the GOA and the Bering Sea and Aleutian Islands management area (BSAI) are managed primarily under the IFQ Program. The Council and NMFS designed the IFQ Program to allocate harvest privileges among participants in the hook-and-line fishery to reduce fishing capacity that had led to an unsafe “race for fish” as vessels raced to harvest their allocation of the annual total allowable catch (TAC) of sablefish as quickly as possible before the TAC was reached. The IFQ Program design and subsequent amendments were intended to support the social and economic character of the fisheries and the coastal fishing communities where many of these fisheries are based. NMFS also allocates a small portion of the annual sablefish TAC to vessels using trawl gear. The trawl sablefish fishery is not managed under the IFQ Program, and this proposed rule does not modify regulations applicable to the trawl sablefish fishery.

The commercial halibut fisheries in the GOA and the BSAI are also managed under the IFQ Program. The halibut fisheries experienced overcapacity and short fishing seasons similar to the sablefish fisheries. In addition, many fishermen participate in both fisheries because the species overlap in some fishing areas and are harvested with the same type of fishing gear.

The IFQ Program was implemented in 1995 (58 FR 59375, November 9, 1993). Under the IFQ Program, access to the non-trawl sablefish and halibut fisheries is limited to those persons holding quota share. NMFS issued separate quota share for sablefish and halibut to qualified applicants based on their historical participation during a set of qualifying years in the sablefish and halibut fisheries. Quota share is an exclusive, revocable privilege that allows the holder to harvest a specific percentage of either the TAC in the sablefish fishery or the annual commercial catch limit in the halibut fishery. In addition to being specific to sablefish or halibut, quota share are designated for specific geographic areas of harvest, a specific vessel operation type (catcher vessel or catcher/processor), and for a specific range of vessel sizes that may be used to harvest the sablefish or halibut (vessel category).

Quota share allocation is given effect on an annual basis through the issuance of an IFQ permit. An annual IFQ permit authorizes the permit holder to harvest a specified amount of the IFQ species in a regulatory area from a specific operation type and vessel category. IFQ is expressed in pounds and is based on the amount of quota share held in relation to the total quota share pool for each regulatory area with an assigned catch limit.

Implementation of the IFQ Program ended the race for fish by providing IFQ permit holders with an exclusive portion of the sablefish TAC or annual commercial catch limit in the halibut fishery. This provided fishermen with flexibility to determine when and where they would fish sablefish and halibut IFQ. The fishing season for sablefish and halibut was expanded from a few days to nine months following implementation of the IFQ Program. Sections 3.1 and 4.5 of the Analysis (see ADDRESSES) provide additional information on the IFQ Program and the GOA sablefish IFQ fishery.

The IFQ fisheries are prosecuted in accordance with catch limits established by regulatory area. The sablefish IFQ regulatory areas defined for sablefish in the GOA are the Southeast Outside District of the GOA (SEO), West Yakutat District of the GOA (WY), Central GOA (CGOA), and Western GOA (WGOA). The sablefish regulatory areas are defined and shown in Figure 14 to part 679. This proposed rule preamble refers to these areas collectively as sablefish areas.

This proposed rule would implement provisions that affect halibut IFQ fisheries in the GOA. The halibut regulatory areas (halibut areas) are defined by the IPHC, described in Section 6 of the annual management measures (81 FR 14000, March 16, 2016), and shown in Figure 15 to part 679. The halibut areas are not separated into GOA or BSAI management areas like sablefish areas. The halibut areas encompass different geographic areas than the sablefish areas, and the boundary lines do not coincide except at the border between the United States and Canada.

The halibut areas in the GOA include Areas 2C, 3A, 3B, and part of Area 4A. All of these areas except Area 4A are completely contained in the GOA. The portion of Area 4A in waters south of the Aleutian Islands, west of Area 3B and east of 170° W. longitude, is included in the WGOA sablefish area. This affected area includes the western part of the WGOA sablefish area and a small strip along the eastern border (east of 170° W. longitude) of the Aleutian Islands sablefish area in the BSAI. Figure 1 and Figure 11 in the Analysis show the boundaries of the sablefish and halibut areas.

Sablefish IFQ fishermen who also hold halibut IFQ are required to retain halibut that are 32 inches or greater in length (legal size) harvested in the sablefish IFQ fishery, provided they have remaining halibut IFQ. This regulation was implemented with the IFQ Program in 1995 and is intended to promote full utilization of halibut by reducing discards of halibut caught incidentally in the sablefish IFQ fishery. Section 4.5 of the Analysis states that many IFQ fishermen hold sablefish and halibut IFQ, and the species can overlap in some fishing areas (58 FR 59375, November 9, 1993).

This proposed rule would revise regulations to add a new authorized gear for catcher vessels and catcher/processors participating in the GOA sablefish IFQ fishery. Under § 679.2, vessels in the GOA sablefish IFQ fishery are authorized to use only longline gear (e.g., hook-and-line gear). Catcher vessels and catcher/processors in the BSAI sablefish IFQ fishery are authorized to use longline gear and pot gear. Pot gear includes pot-and-line gear and longline pot gear. Pot-and-line gear is pot gear with a stationary, buoyed line with a single pot attached. Longline pot gear is pot gear with a stationary, buoyed, and anchored line with two or more pots attached. Longline pot gear is often deployed as a series of many pots attached together in a “string” of gear. For additional information on longline gear, pot-and-line, and longline pot gear see the definition of Authorized Fishing Gear in § 679.2.

Longline pot gear was historically used to harvest sablefish in the GOA. However, under the open access management program that existed prior to the implementation of the IFQ Program, vessel operators sometimes deployed hook-and-line and pot gear in the same fishing areas. This resulted in gear conflicts and the loss of gear on the fishing grounds. The longline pot groundline (i.e., the line attaching the pots together) is heavier and stronger than the groundline used to attach the series of hooks on hook-and-line gear. If longline pot gear is set over previously deployed hook-and-line gear, the weaker hook-and-line gear can be damaged or lost as it is being retrieved. The Council and NMFS have not received reports of gear conflicts between hook-and-line gear.

Deployment of hook-and-line and pot gear in the same fishing areas also resulted in grounds preemption under the race for fish. Fishing grounds preemption occurs when a fisherman sets marked gear in an area and prevents other fishery participants from setting gear in the same area. Pot gear is generally soaked for multiple days so that smaller, less valuable fish are able to swim out of the pots. This optimizes fishing effort by allowing fishermen to use their knowledge of catch rates and fish size in a particular area to choose the amount of soak time that selects for larger fish, but allows them to keep rotating and re-baiting their pot longline gear. Fishing grounds can be preempted for an extended period of time by pot gear, for example, when a vessel hauls, re-baits, and redeploys the gear in the same area while they return to port to make a landing. Fishing grounds preemption has not occurred between hook-and-line gear because the gear is deployed for less than 24 hours before hauling. Section 2.1.1 of the Analysis provides additional information on interactions between hook-and-line and pot gear prior to implementation of the IFQ Program, and a brief summary follows.

In 1986, NMFS implemented a phased-in prohibition of pot gear in the GOA sablefish fishery (50 FR 43193, October 24, 1985) to eliminate gear conflicts between hook-and-line and pot gear. In 1992, the Council recommended, and NMFS approved, a prohibition on the use of longline pot gear in the sablefish fishery in the Bering Sea subarea (57 FR 37906, August 21, 1992). The Council recommended a prohibition against longline pot gear in the Bering Sea subarea to prevent longline pot gear from preempting access to fishing grounds by hook-and-line gear. The Council did not recommend a prohibition on longline pot gear in the Aleutian Islands subarea because the Council did not receive reports of gear conflicts in that sablefish area.

During the same period in the early 1990s, the Council developed and recommended the IFQ Program for a hook-and-line gear fishery for sablefish and halibut in the GOA and BSAI. Fishing under the IFQ Program began in 1995 (58 FR 59375, November 9, 1993). The IFQ Program extended the fishing season and allowed the sablefish and halibut fleets to spread out fishing operations over time. The IFQ Program reduced the possibility of gear conflicts and preemption of common fishing grounds that had previously affected the fisheries (73 FR 28733, May 19, 2008).

During the first IFQ season in 1995, fishing industry representatives reported to the Council that the Bering Sea sablefish TAC had not been fully harvested due, in part, to depredation on hook-and-line gear. Depredation negatively impacts the sablefish IFQ fleet through reduced catch rates and increased operating costs. Depredation also has negative consequences for whales through increased risk of vessel strike, gear entanglement, and altered foraging strategies. Based on this information, the Council determined that authorizing longline pot gear in the Bering Sea sablefish IFQ fishery could reduce depredation. The Council also determined that implementation of the IFQ Program had substantially reduced the possibility of gear conflicts and a complete prohibition on longline pot gear was not necessary. The Council and NMFS recognized that the reintroduction of longline pot gear into the Bering Sea sablefish IFQ fishery posed less of a concern for fishing grounds preemption in 1996 than in 1992, when longline pot gear originally was prohibited. Authorizing the use of longline pot gear in the Bering Sea sablefish IFQ fishery allowed fishermen to use fishing gear that would reduce interactions with whales.

On September 18, 1996, NMFS published a final rule to replace the year-round longline pot gear prohibition with a regulation that allowed the use of longline pot gear except during the month of June (61 FR 49076). The Council and NMFS decided to retain the prohibition on longline pot gear in June because it generally has fair weather, and small vessels using hook-and-line gear that would otherwise be subject to pre-emption tend to operate primarily during June.

In October 2004, a representative for longline pot fishermen in the Bering Sea proposed that gear competition between the sablefish longline pot fleet and the hook-and-line fleet had not occurred in June, and asserted that the regulatory prohibition on the use of longline pot gear during June was unnecessary and burdensome. After review of an analysis and public testimony, the Council recommended, and NMFS implemented, a regulation to remove the prohibition on the use of longline pot gear during June in the Bering Sea sablefish IFQ fishery (73 FR 28733, May 19, 2008). Currently, both longline pot and hook-and-line gear is authorized during the entire year in both the Bering Sea and Aleutian Islands sablefish fisheries.

Beginning in 2009, the Council and NMFS received reports from fishermen in the GOA that there have been numerous sperm whale and killer whale interactions with the sablefish fleet in the GOA. Sperm whale depredation is most common in the CGOA, WY, and SEO sablefish areas and killer whale depredation is most common in the WGOA and BSAI. Section 3.4.1.1 of the Analysis provides the most recent information on depredation in the sablefish IFQ fishery, and Figure 17 in the Analysis shows a map of observed depredation on sablefish longline surveys. While depredation events are difficult to observe because depredation occurs on the ocean floor in deep water, fishery participants have testified to the Council that depredation continues to be a major cost to the sablefish IFQ fishery, and appears to be occurring more frequently.

Depredation can result in lost catch, additional time waiting for whales to leave fishing grounds before hauling gear, and additional time and fuel spent relocating to avoid whales. Depredation can reduce fishing efficiency by increasing operating costs (e.g., fuel, labor) and the opportunity cost of time lost that would have been available for additional fishing effort or dedicated to other fishing and non-fishing activities. Section 3.4.1.1 of the Analysis notes that depredation can reduce harvesting efficiency and impose substantial costs on fishermen using hook-and-line gear, thereby reducing revenue in the sablefish IFQ fishery.

Industry groups have tested a variety of methods to deter whales from preying on fish caught on hook-and-line gear, such as gear modifications and acoustic decoys, but these methods have not substantially reduced the problem of depredation in the GOA sablefish IFQ fishery. A summary of efforts to mitigate whale depredation in Alaska and elsewhere is provided in Section 4.7 of the Analysis.

Participants in the GOA sablefish IFQ fishery indicated to the Council and NMFS that authorizing longline pot gear in the GOA sablefish IFQ fishery would reduce the adverse impacts of depredation for those vessel operators who choose to switch from hook-and-line gear. The Council and NMFS agree that interactions with whales throughout the GOA could affect the ability of sablefish IFQ permit holders to harvest sablefish by reducing catch per unit of effort and decreasing fishing costs. Section 1.2 of the Analysis provides additional information on the Council's development and recommendation of Amendment 101 and this proposed rule.

The following section describes the impacts of Amendment 101 and this proposed rule on affected fishery participants and on the environment.

Section 4.9.2 of the Analysis notes that vessel operators using longline pot gear would benefit from this proposed rule from reduced operating costs and reduced fishing time needed to harvest sablefish IFQ. This proposed rule would provide vessel operators with the option to use longline pot gear if they determine it is appropriate for their fishing operation.

The Analysis states that it is not possible to estimate how many vessel operators would switch to longline pot gear from hook-and-line gear under this proposed rule. The total number of vessels using longline pot gear likely would be limited by the costs of longline pot gear and vessel reconfiguration. The Analysis estimates that the cost to purchase longline pot gear and reconfigure a vessel could be $100,000 or more depending on the configuration of the vessel. For some vessel operators, the costs of reconfiguration likely would be prohibitive. The Analysis suggests that vessel operators who already use pot gear in other fisheries (e.g., Pacific cod) could be the most likely operators to use longline pot gear in the GOA sablefish IFQ fishery because their conversion costs likely would be lower relative to participants who use only hook-and-line gear. Of the 404 catcher vessels harvesting sablefish IFQ in the GOA between 2009 and 2013, 40 vessels deployed pot gear in another fishery.

As described in Section 3.4.1.2 of the Analysis, no temporal or seasonal shift in sablefish IFQ fishing is expected to occur under this proposed rule. Harvest of sablefish IFQ would be authorized only during the sablefish fishing period specified at § 679.23(g)(1) and established by the Council and NMFS through the annual harvest specifications (81 FR 14740, March 18, 2016). Harvest of sablefish IFQ would be limited to the TAC for the GOA sablefish IFQ fishery established by the Council and NMFS through the annual harvest specifications (81 FR 14740, March 18, 2016).

If some portion of the sablefish IFQ fleet switches to longline pot gear, there would likely be decreased interactions between killer whales and sperm whales and the sablefish fishery. Unaccounted sablefish mortality due to depredation would be expected to decline as sablefish IFQ fishermen voluntarily switch from hook-and-line gear to longline pot gear. Because the amount of depredation is not known with certainty, the potential effects of reduced depredation from this proposed rule cannot be quantified. Section 3.1.1 of the Analysis notes that although hook-and-line and longline pot gear may catch slightly different sizes of sablefish, the best available information indicates that the use of pot longline gear would not have a significant impact on the sablefish resource.

During the development of this proposed rule, the Council and NMFS received public testimony from IFQ fishery participants who did not support the use of longline pot gear in the sablefish IFQ fishery. These fishermen indicated that use of longline pot gear could result in conflicts between hook-and-line and longline pot gear similar to those that occurred prior to implementation of the IFQ Program. These fishermen testified that longline pot gear is typically left unattended on the fishing grounds for several days before the pots are retrieved. The testimony expressed concerns that longline pot gear left on the sablefish fishing grounds could preempt the use of these fishing grounds by fishermen using hook-and-line gear as had occurred prior to implementation of the IFQ Program.

In recommending Amendment 101 and this proposed rule, the Council and NMFS recognize that longline pot gear had previously been authorized in the GOA sablefish fishery, but its use was prohibited prior to implementation of the IFQ Program. The Council and NMFS also recognize that the prohibition on pot gear was based on fishery data and scientific information on depredation that is not reflective of the present fishery. The Council determined, and NMFS agrees, that authorizing longline pot gear in the GOA sablefish IFQ fishery under Amendment 101 and this proposed rule is appropriate because the IFQ Program provides fishermen with substantially more flexibility on when and where to harvest sablefish. The IFQ Program makes it much less likely that hook-and-line and longline pot gear conflicts would occur or that fishing grounds would be preempted for extended periods in the same manner previously analyzed by the Council and NMFS.

The Council and NMFS analyzed the extent to which this proposed rule, which would allow hook-and-line gear and pot gear to be used in the same areas, could result in gear conflicts and grounds preemption. Section 4.9.2 of the Analysis explains gear conflict and grounds preemption impose costs on fishermen that are unable to, or choose not to, deploy hook-and-line gear in an area because longline pot gear is used in that area. In the case of the sablefish IFQ fishery, the Council and NMFS received public testimony that vessel operators using hook-and-line gear could incur increased operating costs if their vessels would have to travel farther or to less productive fishing grounds to find an area unoccupied by longline pot gear. The testimony suggested that these costs could potentially be greater for participants in the SEO and WY sablefish areas. In these sablefish areas, fishing grounds are constrained to a narrow area on the edge of the continental shelf and fishing gear is concentrated into a relatively smaller area compared to the CGOA and WGOA sablefish areas. Section 4.9.4 of the Analysis notes that fishery data is not available at a sufficiently fine spatial scale to identify particular areas where competition for fishing grounds may occur in the SEO and WY sablefish areas.

The Analysis explains that it is not possible to determine with certainty the extent to which gear conflicts and grounds preemption might occur under this proposed rule because it is unknown how many vessel operators will use longline pot gear in the GOA sablefish IFQ fishery. After reviewing the Analysis and receiving public testimony, the Council and NMFS determined the likelihood of gear conflicts and grounds preemption was low. However, the likelihood of gear conflicts and grounds preemption is not possible to determine with certainty. The Council received testimony from several stakeholders noting this uncertainty and expressing concern that this proposed rule would negatively impact fishermen who continue to use hook-and-line gear. These stakeholders requested specific measures to further minimize the likelihood of gear conflicts and grounds preemption. Therefore, this proposed rule addresses these stakeholder concerns by recommending a number of management measures that are intended to minimize the potential for gear conflicts and grounds preemption. These measures include (1) authorizing only the use of longline pot gear, (2) limiting the number of pots that may be deployed by a vessel in each sablefish area, (3) requiring all pots to be identified with a tag assigned to the vessel, (4) requiring a vessel operator to redeploy longline pot gear from the fishing grounds within a specified time period, (5) requiring a vessel operator to remove longline pot gear when leaving certain fishing grounds to make a landing, (6) requiring a vessel operator to mark longline pot gear to make it more visible on the fishing grounds, and (7) recordkeeping and reporting requirements to monitor and enforce provisions of this rule. The Council determined, and NMFS agrees, that these management measures would likely further reduce the likelihood of gear conflicts and grounds preemption in the GOA sablefish IFQ fishery under this proposed rule.

Amendment 101 and this proposed rule would authorize the use of longline pot gear in the GOA sablefish IFQ fishery. Vessel operators would be prohibited from using pot-and-line gear (i.e., single pot gear) to harvest sablefish in the GOA. Section 2.4 of the Analysis notes that the Council considered authorizing longline pot gear and pot-and-line gear in the GOA sablefish IFQ fishery for this action. The Council determined, and NMFS agrees, that pot-and-line gear may have a greater potential for conflict with hook-and-line gear because it has a larger number of anchor lines and buoys than longline pot gear. In addition, single pots that are deployed in a pot-and-line format are larger and heavier than pots deployed in a longline pot format because a single pot is more likely to drift than pots deployed in a longline format. Single pots deployed in a pot-and-line format could result in greater gear entanglement and conflicts because they are likely to drift into other areas from the deployed location than pots deployed in a longline pot format. Section 2.4 of the Analysis also states that compared to pot-and-line gear, longline pot gear would be expected to enhance crew safety and may make it feasible for smaller vessels that could not use pot-and-line gear in the sablefish IFQ fishery to use longline pot gear.

This proposed rule would implement different pot limits for different GOA sablefish areas. Section 4.9.3 of the Analysis notes that a pot limit would control vessel fishing effort and limit the total amount of fishing grounds that any single vessel could use at a given time. A vessel operator would be limited to deploying a specific amount of pots in each area in which they hold IFQ: 120 pots in the SEO and WY sablefish areas and 300 pots in the CGOA and WGOA sablefish areas.

The Council considered area-specific pot limits to account for the physical nature of the sablefish fishing grounds and the composition of the IFQ sablefish fleet in each sablefish area. The Council also considered testimony on the number of pots that vessels in the GOA could feasibly deploy in the sablefish IFQ fishery. The Council determined, and NMFS agrees, that smaller pot limits are appropriate in the SEO and WY fisheries because these sablefish areas have more spatially concentrated fishing grounds than the CGOA and WGOA sablefish areas.

This proposed rule would implement a requirement that all pots deployed in GOA sablefish areas have a pot tag that is (1) issued by NMFS and (2) assigned by NMFS to a vessel that is licensed by the State of Alaska. This proposed rule would require a vessel owner to request and receive pot tags by submitting an application to NMFS. NMFS would require a vessel owner to specify on the application for pot tags the vessel name and Alaska Department of Fish and Game (ADF&G) vessel registration number. The State of Alaska requires the owner of a fishing vessel used in waters of the state to register with the State of Alaska and receive an ADF&G vessel registration number (AS 16.05.475). If the ADF&G vessel registration number is current at the time the application for pot tags is submitted, NMFS would consider the vessel eligible to participate in the GOA sablefish IFQ fishery using longline pot gear and assign pot tags to that vessel. NMFS would assign the number of tags requested for each GOA sablefish area, not to exceed the pot limits for each sablefish area, to the vessel and issue the tags to the vessel owner. Vessel owners should allow up to 10 days from receipt of a pot tag application by NMFS for NMFS to issue pot tags. Each pot tag would have a unique number and be a color specific to the GOA sablefish area in which it may be deployed. This proposed rule would require the operator of the vessel to attach a pot tag that is assigned to the vessel to each pot before deploying the gear. Because the proposed pot tag requirements are intended to facilitate monitoring of the proposed pot limits on the fishing grounds, this proposed rule would make the vessel operator responsible for complying with the pot tag requirements and the pot limits in each GOA sablefish area.

Section 4.9.3.2 of the Analysis states that in instances where the vessel is leased by the owner, each vessel operator would need to obtain the pot tags from the vessel owner to ensure the proper use of the pot tags in the GOA sablefish IFQ fishery. In cases where multiple sablefish IFQ permit holders fish from the same vessel, the vessel operator would be responsible for ensuring that no more pots are deployed from a vessel than the pot limit for a specific sablefish area.

The Council and NMFS recognized that pot tags may be lost on the fishing grounds if a tag becomes unattached from the pot or if a pot becomes unattached from the longline and cannot be retrieved. Under this proposed rule, the vessel owner could request replacement pot tags from NMFS if pot tags are lost. The vessel owner would be required to provide NMFS with the pot tag numbers that were lost and provide a description of the circumstances under which the pot tags were lost. NMFS would issue the appropriate number of replacement tags, up to the pot limit specified for the sablefish area. Vessel owners should allow up to 10 days from receipt of a pot tag application by NMFS for NMFS to issue replacement pot tags.

The Council and NMFS anticipated that some vessel operators may want to share longline pot gear during the fishing season to help reduce operating costs. To minimize the potential for grounds preemption by multiple vessels using the same longline pot gear, this proposed rule would allow multiple vessels to use the same longline pot gear during one fishing season but would prohibit use of the same longline pot gear simultaneously. In order for more than one vessel to use the same longline pot gear, this proposed rule would require a vessel operator to remove longline pot gear from the fishing grounds, return the gear to port and remove the pot tags assigned to the vessel before pot tags assigned to another vessel could be attached to the pots and used on another vessel in the GOA sablefish IFQ fishery.

This proposed rule would require vessels using longline pot gear in the GOA sablefish IFQ fishery to redeploy or remove their gear within a specified time period after deployment or when leaving the fishing grounds to make a landing. The Council recommended area-specific requirements because vessel operations and fishing grounds vary by management areas. Section 4.9.4 and Section 4.10 of the Analysis note that this provision is intended to minimize the potential for vessels using longline pot gear to preempt fishing grounds for extended periods. These provisions were supported by sablefish IFQ holders who intend to use longline pot gear and sablefish IFQ holders who intend to continue to use hook-and-line gear under this proposed rule.

The Council based its recommendations on information on the use of pot gear in the BSAI sablefish IFQ fishery and on testimony from sablefish IFQ holders. Section 4.9.2 of the Analysis notes that pot gear typically remains deployed (“soaked”) on the fishing grounds for longer periods of time than hook-and-line gear. As described above in this preamble, pot gear is generally soaked for multiple days. Figure 8 in Section 3.1.1.2 of the Analysis shows that sablefish pot gear deployed by catcher vessels and catcher/processors in the BSAI was typically “soaked” for two to four days from 1995 through 2005, and 90 percent of the observed pot sets were soaked for seven or fewer days. Section 3.1.2.2 of the Analysis notes that hook-and-line fishermen tend to soak their gear for less than 24 hours before hauling, and are less apt to leave their gear on the grounds when returning to port.

In addition to the information on pot soak times in the BSAI sablefish fishery presented in Section 4.9.2 of the Analysis, the Council considered testimony from vessel operators. This testimony suggested it was unlikely that vessels using pot gear would preempt fishing grounds in the GOA by leaving pot gear deployed for extended periods of time because (1) longline pot gear likely would be deployed in the GOA sablefish IFQ fishery from two to four days, similar to operations in the BSAI fisheries, (2) gear conflicts and grounds preemption has not occurred in the BSAI sablefish IFQ fishery, and (3) vessel operators have an incentive to optimize their pot gear fishing effort to maximize their sablefish IFQ harvest in the minimum amount of time.

Nevertheless, these vessel operators acknowledged to the Council that the likelihood of gear conflicts and grounds preemption cannot be determined with certainty. These vessel operators also noted that many GOA sablefish IFQ holders intending to continue to use hook-and-line gear were concerned about the potential for gear conflicts and grounds preemption under this proposed rule. These operators noted that these concerns likely were greater for the GOA sablefish IFQ fishery than the BSAI sablefish IFQ fishery because some GOA sablefish areas have more constrained fishing grounds due to a smaller overall area and a larger number of participating vessels than in the BSAI. To address this concern, several sablefish IFQ holders recommended that the Council establish area-specific requirements for catcher vessels and catcher/processors to redeploy or remove gear from the grounds in order to further reduce the likelihood that longline pot gear would be deployed on the GOA fishing grounds for extended periods of time and result in gear conflicts and grounds preemption.

The Council determined that establishing these gear redeployment or removal limits would provide an additional incentive for operators using longline pot gear to closely monitor the amount of time their gear is left on the grounds and further minimize potential for gear conflicts or grounds preemption. The Council recommended these provisions to balance its objective to provide economic benefits to fishermen using longline pot gear with its objective to minimize potential negative impacts on fishermen continuing to use hook-and-line gear.

In recommending Amendment 101 and this proposed rule, the Council indicated its intent to monitor interactions between longline pot and hook-and-line gear in the GOA sablefish IFQ fishery. The Council recommended that if Amendment 101 and this proposed rule are approved, NMFS would annually report to the Council the amount of longline pot gear effort in the GOA sablefish IFQ fishery in addition to any reported gear conflicts or instances of grounds preemption. The Council also indicated its intent to conduct a review of Amendment 101 and this action three years following implementation of the final rule, if approved. The Council specified its intent to consider the impact of Amendment 101 and this proposed rule on GOA sablefish IFQ holders that continue to use hook-and-line gear in determining whether changes to regulatory provisions are needed in the future.

The Council determined, and NMFS agrees, that the following provisions of this proposed rule would minimize the potential for gear conflicts and grounds preemption. For each area of the GOA, this proposed rule would specify a maximum time limit for which longline pot gear could be left unattended on the fishing grounds. The Council determined, and NMFS agrees, that requiring vessel operators to tend the gear within a specified time period reduces the likelihood that longline pot gear will be left on the grounds unattended for an extended period of time.

In the SEO sablefish area, a catcher vessel operator would be required to remove longline pot gear from the fishing grounds when the vessel leaves the fishing grounds to make a landing. This would prohibit the vessel operator from preempting fishing grounds by retrieving pots and redeploying the gear in the same fishing location while the vessel made a landing. This restriction responds to concerns expressed by fishermen holding sablefish IFQ in the SEO sablefish area. These fishermen testified that a substantial portion of sablefish IFQ fishermen in SEO likely would continue to use hook-and-line gear under this proposed rule because the vessels are too small to feasibly use longline pot gear.

Section 4.9.8.1 in the Analysis notes that vessels ranging from between 55 feet (16.7 m) and 95 feet (28.9 m) length overall (LOA) participate in sablefish pot fisheries in Canada. The Analysis shows that the majority of the vessels that participate in sablefish fisheries in the GOA are greater than 50 feet (15.2 m) LOA, indicating that these vessels may be able to feasibly use longline pot gear. The Analysis also shows that approximately 30 percent of sablefish IFQ fishermen in SEO use vessels 50 feet (15.2 m) or less LOA. This is a higher percentage of smaller vessels compared to the other GOA sablefish areas. Therefore, the Council determined, and NMFS agrees, that requiring a vessel in the SEO sablefish area to remove longline pot gear from the fishing grounds when the vessel leaves the fishing grounds to make a landing would minimize the potential for grounds preemption while providing fishermen using longline pot gear with an opportunity to efficiently harvest sablefish.

The Council did not recommend a specific redeployment or removal provision for catcher/processors in the SEO sablefish area because relatively few catcher/processors operate in the area and the Council did not receive testimony suggesting specific limitations for these vessels. However, NMFS has determined that this proposed rule should require operators of catcher/processors in SEO to haul and reset (redeploy) in the same location or remove longline pot gear from that location within a specified time period. This provision would be consistent with requirements for sablefish IFQ vessels in other GOA areas in order to minimize the potential for catcher/processors using longline pot gear in SEO to preempt fishing grounds for extended periods. The Council and NMFS determined that redeploying or removing longline pot gear from a specific location would meet the requirements to tend gear in this proposed rule (see Section 2.2 of the Analysis). This would provide sablefish IFQ permit holders with flexibility to harvest sablefish IFQ while still requiring vessel operators to tend gear within a maximum time period in order to minimize the potential for gear to be left unattended on the fishing grounds for an extended period of time. NMFS proposes to require a catcher/processor in the SEO sablefish area to redeploy or remove from the fishing grounds all longline pot gear that is assigned to the vessel and deployed to fish sablefish IFQ within five days after deploying the gear. This proposed regulation would mirror the effect of the provision applicable to vessels in the WY and CGOA sablefish areas.

The Council and NMFS determined that five days was an appropriate period of time because the Council heard testimony from operators intending to use longline pot gear that this would accommodate sablefish vessel fishing plans to soak pots for two to four days, while allowing additional time to redeploy or remove gear in the event of poor weather or operational delays. The Council and NMFS determined that this requirement to redeploy or remove gear at least every five days would minimize the likelihood that one vessel would preempt the same fishing grounds for an extended period of time.

In the WY and CGOA sablefish areas, a catcher vessel and a catcher/processor operator would be required to redeploy or remove longline pot gear from the fishing grounds within five days after deploying the gear. The Council and NMFS received testimony that this would be an appropriate time period because it is unlikely that a vessel operator would leave fishing gear unattended for longer than five days in the WY and CGOA sablefish areas. The Council and NMFS determined that five days was an appropriate period of time because the Council heard testimony from operators intending to use longline pot gear that this would accommodate sablefish vessel fishing plans to soak pots for two to four days while allowing additional time to redeploy or remove gear in the event of poor weather or operational delays.

The Council and NMFS considered testimony indicating that, although the fishing grounds in WY are spatially constrained, similar to SEO, the likelihood of grounds preemption in WY is lower because there are fewer IFQ permit holders in that area than in SEO. Therefore, the Council and NMFS determined that it would not be necessary to require a vessel operator to remove longline pot gear from WY area grounds when the vessel made a landing. The Council and NMFS received testimony that fishing grounds are not as limited in the WY and CGOA sablefish areas, and grounds preemption likely would not occur under this proposed rule.

In the WGOA sablefish area, a catcher vessel and a catcher/processor operator would be required to redeploy or remove longline pot gear from the fishing grounds within seven days after deploying the gear. The Council and NMFS received testimony that this would be an appropriate time period because while it was unlikely that a vessel operator would leave fishing gear unattended for longer than seven days in the WGOA, this proposed rule would provide a maximum time limit for which longline pot gear could be left unattended on the fishing grounds. The Council provided a longer time period in the WGOA for operators to redeploy or remove longline pot gear relative to the other sablefish areas because the WGOA is the largest GOA sablefish area and there are substantially fewer sablefish IFQ holders in the WGOA than in SEO and the CGOA. The Council and NMFS received testimony that fishing grounds are not constrained in the WGOA and grounds preemption likely would not occur under this proposed rule.

This proposed rule would implement additional gear marking requirements for vessels using longline pot gear in the GOA. Current regulations at § 679.24(a) require all vessel operators using hook-and-line and pot gear to mark buoys carried on board or used by the vessel to be marked with the vessel's Federal fisheries permit number or ADF&G vessel registration number. This regulation also specifies that the markings must be a specified size, shall be visible above the water line, and shall be maintained so the markings are clearly visible.

Section 4.9.5 and Section 4.10 of the Analysis describe the impacts of the additional gear marking requirements that would be implemented by this proposed rule for a vessel operator using longline pot gear in the GOA sablefish IFQ fishery. In addition to the current requirements at § 679.24(a), each vessel operator would be required to attach a cluster of four or more marker buoys, a flag mounted on a pole, and a radar reflector to each end of a longline pot set. The Council and NMFS received testimony that these marking requirements would enhance the visibility of the ends of a longline pot gear set to other vessels that are on the fishing grounds and would not impose a substantial cost on vessel operators using longline pot gear. The testimony indicated that these marking tools are commonly used by vessel operators that deploy pot gear in fisheries in Alaska.

This proposed rule would require a vessel operator to use four or more buoys to mark each end of a longline pot gear set. The Council and NMFS anticipate that multiple buoys would keep the gear marking above the water line in stronger currents and facilitate visibility from greater distances. Current regulations require any vessel fishing in the sablefish or halibut IFQ fisheries to mark all buoys carried on board or used with the vessel's Federal Fisheries Permit (FFP) number or Alaska Department of Fish & Game (ADF&G) vessel registration number. This provides enforcement agents and other fishermen on the grounds with information that identifies the vessel or the IFQ permit holder associated with that vessel. This proposed rule would require a vessel operator to add the initials “LP” for “Longline Pot” to one hard buoy in the buoy cluster in addition to the FFP number or ADF&G vessel registration number. This would distinguish buoys for hook-and-line gear from buoys for longline pot gear.

This proposed rule would require a vessel operator to use a flag mounted on a pole to mark each end of a longline pot gear set. Section 4.9.5 of the Analysis explains that flags are commonly used by vessel operators to mark pot gear in fisheries in Alaska.

This proposed rule would require a vessel operator to use a radar reflector to mark each end of a longline pot gear set. Fishing vessels use radar reflectors to help make the vessel or other objects identifiable by other vessels that use radar to scan for vessels and other obstructions. A radar reflector reflects a radar signal directly back to the radar antenna so that the object with the radar reflector is identifiable on the radar of the vessel deploying the radar. The Council and NMFS received public testimony that radar reflectors are commonly used by vessel operators to mark pot gear in fisheries in Alaska. This public testimony indicated that the requirement to mark longline pot gear with a radar reflector under this proposed rule would not impose a substantial cost on vessel operators.

This proposed rule would implement three additional recordkeeping and reporting requirements to monitor and enforce provisions that are intended to minimize gear conflicts and grounds preemption. First, NMFS would require all vessel operators using longline pot gear in the GOA sablefish IFQ fishery to report specific information in logbooks about fishing gear used and catch for all sablefish IFQ fishing trips. Most vessel operators in the GOA sablefish IFQ fishery are currently required to complete logbooks for sablefish IFQ fishing trips. Second, NMFS would require all vessel operators using longline pot gear in the GOA sablefish IFQ fishery to have an operating Vessel Monitoring System (VMS) while fishing for sablefish IFQ. Third, NMFS would add additional required fields to the Prior Notice of Landing (PNOL) for vessel operators using longline pot gear in the GOA sablefish IFQ fishery.

Section 4.9 of the Analysis notes that this proposed rule would require all vessel operators using longline pot gear in the GOA sablefish IFQ fishery to complete NMFS logbooks. NMFS uses logbooks to collect detailed information from vessel operators participating in the IFQ fisheries. Under current regulations, the operator of a catcher vessel 60 feet or greater (18.3 m) LOA using hook-and-line gear in the sablefish or halibut IFQ fisheries is required to maintain a Daily Fishing Logbook (DFL). The operator of a catcher/processor using hook-and-line gear in the sablefish or halibut IFQ fisheries must use a combination of a Daily Cumulative Production Logbook (DCPL) and the NMFS electronic reporting system for landings (eLandings). For each day during a fishing trip, vessel operators are required to record in a DFL or DCPL information on deployed, retrieved, and lost gear and catch information per unit of gear deployed.

This proposed rule would add a requirement for all operators of a vessel using longline pot gear in the GOA sablefish IFQ fishery to report in a DFL (for catcher vessels) or DCPL (for catcher/processors) the number of pots and location of longline pot sets deployed on a fishing trip. Under current regulations, the operator of a vessel less than 60 feet (18.3 m) LOA is exempt from logbook reporting requirements. This proposed rule would remove this exemption for the operator of a vessel using longline pot gear in the GOA sablefish IFQ fishery. While this would be a new regulatory requirement for these vessels, Section 4.9.3.2 of the Analysis explains that many operators of vessels less than 60 feet (18.3 m) in the sablefish IFQ fishery voluntarily complete and submit logbooks. Therefore, the Council and NMFS anticipate this additional reporting requirement would not negatively impact operators of vessels less than 60 feet (18.3 m) that choose to use longline pot gear.

Current regulations allow the operator of a vessel required to complete a DFL or a DCPL to use a NMFS-approved electronic logbook (ELB) instead of a DFL or DCPL. While NMFS does not currently have an approved ELB for vessels using longline pot gear in the GOA, NMFS anticipates that an ELB would be available for use by these vessel operators in the future. Under this proposed rule, vessel operators using longline pot gear in the GOA sablefish IFQ fishery would be required to complete a DFL or a DCPL and eLandings to record and report sablefish information until a NMFS-approved ELB is available.

Section 4.10 of the Analysis notes that this proposed rule would require all vessel operators using longline pot gear in the GOA sablefish IFQ fishery to use VMS to track vessel activity in the GOA sablefish areas. VMS is used to monitor the location and movement of commercial fishing vessels in Federal fisheries in Alaska. NMFS would use the VMS to aid in determining compliance with requirements to redeploy or remove fishing gear from the grounds within a specified time period under this proposed rule.

Section 5.7 of the Analysis states that this proposed rule would add a requirement for vessel operators using longline pot gear in the GOA sablefish IFQ fishery to report the number of pots deployed, the number of pots lost, and the number of pots left deployed on the fishing grounds on the PNOL. NMFS requires vessel operators in the IFQ fisheries to submit a PNOL at least three hours before a landing occurs to alert enforcement personnel of the upcoming landing. The PNOL would be a declaration from the vessel operator that enforcement agents could compare with the gear on board while the vessel is making a landing.

Sections 4.9.3.2, 4.9.4.1, 4.9.5.1, and 4.9.6.1 of the Analysis describe enforcement considerations for the provisions of this proposed rule that are intended to minimize gear conflicts and grounds preemption. The Council and NMFS considered the methods that would be used to enforce the proposed restrictions on use of longline pot gear in the GOA sablefish IFQ fishery. The Council and NMFS determined that the requirements in this proposed rule would provide sufficient monitoring and enforcement information to meet the Council's objectives for Amendment 101 and this proposed rule.

Depredation by killer whales and sperm whales is common in the sablefish IFQ fisheries in the GOA and BSAI. Section 3.4.1 of the Analysis provides available information on the interactions of the GOA sablefish IFQ fishery with killer whales and sperm whales. The Analysis examined data from the commercial fisheries and sablefish survey data and concluded that the use of longline pot gear would support the objective of this proposed rule to reduce sablefish IFQ fishery interactions with whales in the GOA. Use of longline pot gear is expected to reduce fishing gear interactions with whales and have a positive effect on killer whales and sperm whales compared to the status quo.

Section 3.4.2 of the Analysis notes that this proposed rule could reduce the risk of whale entanglements in fishing gear. Although the likelihood of whale entanglements in hook-and-line gear is very low in Alaska fisheries, the Analysis states that neither killer whales nor sperm whales are known to depredate on pot fishing gear. Therefore, this proposed rule could reduce the risk of whale entanglements in fishing gear.

Many seabird species are attracted to fishing vessels to forage on bait, offal, discards, and other prey made available by fishing operations. These interactions can result in direct mortality for seabirds if they become entangled in fishing gear or strike the vessel or fishing gear while flying. In addition, seabirds are attracted to sinking baited hooks and can be hooked and drowned. Hook-and-line gear has the greatest impact on seabirds relative to other fishing gear. Since 1998, seabird avoidance measures have been required on vessels greater than or equal to 27 ft (7.9 m) LOA using hook-and-line gear in the groundfish and halibut fisheries in the GOA and BSAI (March 6, 1998, 63 FR 11161). Additional seabird avoidance measures have been adopted for the hook-and-line fishery since 1998 (72 FR 71601, December 18, 2007). These measures were intended to reduce seabird incidental catch and mortality and mitigate interactions with short-tailed albatross.

Section 3.5.1 of the Analysis examines the effect of hook-and-line gear on seabirds. Data from 1993 through 2012 indicate the annual incidental catch of seabirds in all hook-and-line fisheries constitutes about 91 percent of fisheries-related seabird mortality in Alaska. The GOA typically accounts for 10 percent to 20 percent of overall incidental seabird catch.

Section 3.5.1.2 of the Analysis compared the number of seabird mortalities by hook-and-line and pot gear in the GOA Pacific cod fishery and the BSAI sablefish IFQ fishery and determined that a higher level of seabird mortality occurred with hook-and-line gear. The Analysis compared seabird mortality by hook-and-line and pot gear in the GOA Pacific cod fishery because pot gear is not authorized for the GOA sablefish IFQ fishery. The estimated seabird mortality in the GOA Pacific cod fishery from vessels using hook-and-line gear was 1,802 seabirds and the estimated mortality from vessels using pot gear was 458 seabirds. This comprises a very small portion of total estimated seabird mortality from fisheries in Alaska. This proposed rule would likely reduce the already small incidental catch of seabirds in the sablefish IFQ fishery because it would provide vessel operators with the opportunity to use longline pot gear, which has a lower rate of incidental catch of seabirds than hook-and-line gear.

The Council and NMFS also considered the impacts of this proposed rule on the halibut IFQ fishery. Section 3.2.1 of the Analysis notes that the overall impact of this proposed rule on the halibut IFQ fishery is likely to be small. This proposed rule would revise current regulations to authorize retention of halibut IFQ caught when using longline pot gear in the GOA sablefish IFQ fishery, provided a person on the vessel holds sufficient IFQ pounds to cover the retained halibut.

In developing this proposed rule, the Council recognized that the IPHC authorizes fishing gear for halibut in the GOA through its annual management measures. The IPHC meets annually to approve the regulations that apply to persons and vessels fishing for and retaining halibut IFQ. At its January 2016 Annual Meeting, the IPHC approved longline pot gear, as defined by the Council, as legal gear to retain halibut in Alaska if NMFS implements regulations that authorize longline pot gear in the sablefish IFQ fishery (81 FR 14000, March 16, 2016).

Section 19(1) of the 2016 annual management measures allows a person to retain and possess halibut IFQ taken with hook-and-line or longline pot gear in the sablefish IFQ fishery provided retention and possession is authorized by NMFS regulations published at 50 CFR part 679. Current NMFS regulations require vessel operators using hook-and-line gear and holding sufficient halibut IFQ to retain legal size halibut (32 inches or greater) caught incidentally in the GOA sablefish IFQ fishery. If the Secretary approves a final rule to implement Amendment 101, NMFS would implement a requirement in regulations for vessel operators using longline pot gear and holding sufficient halibut IFQ to retain legal size halibut in the GOA sablefish IFQ fishery as recommended by the Council and the IPHC. The Council developed this regulation pursuant to section 773c(c) of the Halibut Act. The Secretary is publishing this regulation for public comment in this notice of proposed rulemaking.

Requiring the retention of incidentally caught halibut IFQ is intended to avoid the discard and associated discard mortality of halibut in the GOA sablefish IFQ fishery. The sablefish and halibut hook-and-line gear fisheries are prosecuted simultaneously. Vessels that fish sablefish IFQ typically also fish halibut IFQ. Section 4.5.6 of the Analysis notes that the majority of sablefish IFQ permit holders also hold a halibut IFQ permit. Section 4.9.6 of the Analysis concludes that replacing some amount of hook-and-line effort with longline pot gear effort could benefit permit holders in the halibut IFQ fishery because many of the sablefish IFQ fishery participants are also halibut IFQ fishery participants. This proposed rule would create efficiencies in the harvest of halibut and sablefish for these participants.

This proposed rule would require vessel operators that catch halibut in longline pot gear to comply with current retention requirements under the IFQ Program and the provisions recommended by the Council. Currently, halibut caught with hook-and-line gear must be retained if the halibut are of legal size and a person on the vessel holds a halibut IFQ permit with sufficient halibut IFQ pounds to cover the retained halibut. The Council recommended, and NMFS agrees, that a sablefish IFQ permit holder on board a vessel that catches halibut with longline pot gear in the GOA would be required to retain the halibut provided they hold a halibut IFQ permit with sufficient halibut IFQ pounds to cover the retained halibut. Regulations at § 679.7(f)(4) prohibit an IFQ holder from retaining legal size halibut if no person on board the vessel holds sufficient IFQ pounds to cover the retained halibut. In these instances, fishermen are required to discard the halibut with a minimum of injury consistent with regulations at § 679.7(a)(13) and Section 14 of the IPHC annual management measures (81 FR 14000, March 16, 2016).

This proposed rule would revise regulations at 50 CFR part 300 and 50 CFR part 679 to: (1) Authorize longline pot gear in the GOA sablefish IFQ fishery, (2) minimize the potential for gear conflicts and fishing grounds preemption, and (3) require retention of halibut IFQ caught in longline pot gear used in the GOA sablefish IFQ fishery. NMFS also proposes additional regulatory revisions to facilitate the administration, monitoring, and enforcement of this proposed rule. This section describes the proposed changes to current regulations.

This proposed rule would revise §§ 300.61, 679.2, and 679.24 to authorize longline pot gear for use in the GOA sablefish IFQ fishery.

This proposed rule would revise regulations at § 300.61 that supplement the annual management measures adopted by the IPHC. These proposed revisions are necessary to implement the Council's recommendation to require halibut IFQ permit holders to retain legal sized halibut IFQ caught incidentally in longline pots deployed in the GOA sablefish IFQ fishery, provided the halibut IFQ holders have sufficient remaining IFQ pounds to cover the retained halibut. To implement this recommendation, this proposed rule would revise the definition of “Fishing” at § 300.61 to specify that the use of longline pot gear in any halibut area in the GOA to harvest halibut IFQ would be subject to halibut regulations at part 300. This proposed rule would revise the definition of “IFQ halibut” at § 300.61 to specify that halibut IFQ may be harvested with longline pot gear while commercial fishing in any halibut area in the GOA.

This proposed rule would revise the definition of “Fixed gear” under the definition of “Authorized fishing gear” at § 679.2(4)(i) to include longline pot gear as an authorized gear in the GOA sablefish IFQ fishery. Fixed gear is a general term that describes the multiple gear types allowed to fish sablefish IFQ and halibut IFQ under the IFQ Program and is referred to throughout 50 CFR part 679.

This proposed rule would add § 679.2(4)(iv) to the definition of “Fixed gear” under the definition of “Authorized fishing gear” to include longline pot gear as an authorized gear for halibut IFQ harvested in halibut areas in the GOA.

This proposed rule would revise the definition of “IFQ halibut” in § 679.2 to specify that halibut IFQ may be harvested with longline pot gear while commercial fishing in any halibut area in the GOA.

This proposed rule would revise § 679.24(b) and (c) to authorize the use of longline pot gear to harvest sablefish in GOA sablefish areas.

This proposed rule would revise § 679.42(b)(1) to specify that authorized fishing gear for sablefish and halibut IFQ is defined in § 679.2. NMFS proposes to add § 679.42(b)(1)(i) to further clarify that trawl gear is not authorized for use in the sablefish and halibut IFQ fisheries in the GOA and the BSAI. NMFS proposes to add § 679.42(b)(1)(ii) to clarify that pot-and-line gear is not authorized for use in the GOA sablefish IFQ fishery.

This proposed rule would add provisions at § 679.42(l) to minimize the potential for gear conflicts and grounds preemption. This proposed rule would add § 679.42(l)(1) and (2) to establish the general requirements for using longline pot gear in the GOA sablefish IFQ fishery.

This proposed rule would add § 679.42(l)(3) to specify the requirements for vessel operators to request pot tags. This proposed rule would describe the process NMFS would use to issue pot tags and to annually register a vessel and assign pot tags for the GOA sablefish IFQ fishery. Section 679.42(l)(3)(i) would require a vessel operator to request pot tags from NMFS by submitting a complete IFQ Sablefish Longline Pot Gear: Vessel Registration and Request for Pot Gear Tags form that would be available on the NMFS Alaska Region Web site. NMFS would issue the number of requested tags up to the pot limit authorized in a sablefish area. The vessel owner requesting pot tags must specify the vessel to which NFMS would assign the pot tags. Under proposed § 679.42(l)(3)(ii), NMFS would assign pot tags to the registered vessel and issue them to the vessel owner upon receipt of a complete request for pot tags. Section 679.42(l)(3)(iii) would specify the process a vessel owner would use to submit a request for pot tag replacement to NMFS if one or more of the originally issued pot tags is lost or damaged such that the unique pot tag number is not legible.

Section 679.42(l)(3)(iv) would specify the process for annual vessel registration and assignment of pot tags. The vessel owner must annually register with NMFS the vessel that will be used to fish IFQ sablefish in the GOA. The vessel owner also must specify whether he or she is requesting assignment of pot tags previously issued to the vessel owner or is requesting new pot tags to be assigned to the vessel. Pot tags must be assigned to only one vessel each year. To assign pot tags, the vessel owner must submit a complete IFQ Sablefish Longline Pot Gear Vessel Registration and Request for Pot Gear Tags form and indicate the vessel to which NMFS will assign the pot tags for the current year. The vessel owner must indicate whether he or she is assigning pot tags that were previously assigned to the vessel or requesting new pot tags.

This proposed rule would add § 679.42(l)(4) to specify the requirements for a vessel operator to use pot tags in the GOA sablefish IFQ fishery. This proposed rule would require a valid pot tag that is assigned to the vessel be attached to each pot on board the vessel before the vessel departs port to fish in the GOA sablefish IFQ fishery.

This proposed rule would add § 679.42(l)(5) to specify restrictions on longline pot gear deployment and retrieval. Section 679.42(l)(5)(i)(A) would require a vessel operator to mark longline pot gear as specified in § 679.24(a). Section 679.24(a) would be revised to require a vessel operator to mark each end of a set of longline pot gear with a cluster of four or more marker buoys including one hard buoy marked with the capital letters “LP,” a flag mounted on a pole, and a radar reflector. These requirements would be in addition to current requirements at § 679.24(a) that require all hook-and-line, longline pot, and pot-and-line marker buoys to be marked with the vessel's FFP number or ADF&G vessel registration number.

This proposed rule would add § 679.42(l)(5)(i)(B) to require a vessel operator to deploy longline pot gear in the GOA sablefish IFQ fishery only during the sablefish fishing period specified in § 679.23(g)(1). NMFS annually establishes the sablefish fishing period to correspond with the halibut fishing period established by the IPHC.

Current regulations at § 679.23(g)(2) authorize an IFQ permit holder to retain sablefish outside of the established fishing period if the permit holder has unused IFQ for the specified sablefish area. This proposed rule would revise § 679.23(g)(2) to specify that IFQ permit holders using longline pot gear in the GOA would not be authorized to retain sablefish outside of the established fishing period even if the IFQ permit holder has unused IFQ.

This proposed rule would add § 679.42(l)(5)(ii) to establish pot limits in each GOA sablefish area. This proposed rule would add § 679.42(l)(5)(iii) to establish gear redeployment and removal requirements for longline pot gear in each GOA sablefish area. As described in the section titled Impacts of Amendment 101 and this Proposed Rule, this proposed rule would require a vessel operator using longline pot gear to redeploy the gear within a certain amount of time after being deployed, or remove the gear from the fishing grounds when making a sablefish landing.

This proposed rule would allow multiple vessels to use the same longline pot gear during one fishing season but would prevent use of the same longline pot gear simultaneously. To prevent use of the same longline pot gear simultaneously, this proposed rule would add § 679.42(l)(5)(iv) to require a vessel operator to (1) remove longline pot gear assigned to the vessel and deployed to fish sablefish IFQ from the fishing grounds, (2) return the gear to port, and (3) remove the pot tags that are assigned to that vessel from each pot before the gear could be used on another vessel. The operator of the second vessel would be required to attach pot tags assigned to his or her vessel to each pot before deploying the gear to fish for GOA sablefish IFQ. This proposed rule would require that only one set of the appropriate vessel-specific pot tags may be attached to the pots.

This proposed rule would add § 679.42(l)(6) to require a vessel operator using longline pot gear in the GOA sablefish IFQ fishery to retain legal sized halibut caught incidentally if any IFQ permit holder on board has sufficient halibut IFQ pounds for the retained halibut for that halibut area.

This proposed rule would add § 679.42(l)(7) to require a vessel operator using longline pot gear in the GOA sablefish IFQ fishery to comply with logbook reporting requirements at § 679.5(c) and VMS requirements at § 679.42(k).

This proposed rule would revise § 679.5 to implement this proposed rule and clarify current logbook reporting requirements.

The following table describes the proposed revisions to § 679.5.

This proposed rule would revise and add provisions to § 679.7 that would be necessary to monitor and enforce this proposed rule.

This proposed rule would revise the prohibition on deployment of gear at § 679.7(a)(6) to include longline pot gear. This revision is necessary to prohibit deployment of longline pot gear in the GOA outside of the sablefish fishing period. This proposed rule would revise § 679.7(a)(6)(i) to clarify that vessels in the halibut IFQ fishery are subject to gear deployment requirements specified by the IPHC in the annual management measures pursuant to § 300.62.

This proposed rule would revise § 679.7(a)(13). Under current regulations, vessel operators in groundfish fisheries are required to discard halibut if the halibut is less than legal size and/or there are no IFQ permit holders on board with sufficient IFQ pounds for the retained halibut for that halibut area. If halibut must be discarded, current regulations at § 679.7(a)(13) specify handling and release requirements for halibut caught with hook-and-line gear in the sablefish fishery. This proposed rule would revise § 679.7(a)(13) to specify the current regulations describing handling and release methods that would apply to vessels using longline pot gear in the GOA sablefish IFQ fishery.

This proposed rule would add § 679.7(f)(17) through (24) to enforce compliance with proposed regulations at §§ 679.23, 679.24, and 679.42 to minimize gear conflicts and grounds preemption.

This proposed rule would add § 679.7(f)(25) to prohibit a vessel operator in the GOA from using longline pot gear to harvest sablefish IFQ or halibut IFQ in the GOA sablefish areas without having an operating VMS on board the vessel. This proposed rule would revise § 679.42(k)(1) and (2) to require a vessel operator using longline pot gear to possess a transmitting VMS transmitter on board the vessel while fishing for sablefish IFQ in the GOA. NMFS does not propose to change the VMS reporting requirements for vessels fishing for sablefish IFQ in the BSAI. This proposed rule would revise § 679.42(k)(2)(ii) to require a vessel operator fishing for sablefish IFQ in the GOA to comply with VMS requirements at § 679.28(f)(3) through (5), which explain the vessel owner's responsibilities to ensure a VMS is operating and transmitting. This proposed rule would revise § 679.42(k)(2)(ii) to require a vessel operator using longline pot gear to fish sablefish IFQ in the GOA to contact NMFS to confirm that VMS transmissions are being received from the vessel. The vessel operator would be required to receive a VMS confirmation number from NMFS before fishing in the sablefish IFQ fishery.

This proposed rule would revise § 679.20(a)(4) to replace the reference to the sablefish TAC allocation to hook-and-line gear with a reference to fixed gear, as defined at § 679.2, which would include hook-and-line and longline pot gear. This proposed rule would not change the percent of the TAC allocated to the sablefish IFQ fishery in the GOA. NMFS would continue to allocate 95 percent of the sablefish TAC in the EGOA sablefish area to vessels using fixed gear and allocate 80 percent of the sablefish TACs in each of the CGOA and WGOA sablefish areas to vessels using fixed gear.

This proposed rule would revise § 679.42(b)(2) to specify that an operator of a vessel using hook-and-line gear to harvest sablefish IFQ, halibut IFQ, or halibut Community Development Quota (CDQ) must comply with seabird avoidance measures set forth in § 679.24(e). Vessel operators using longline pot gear in the GOA sablefish IFQ fishery would not be required to comply with seabird avoidance measures under this proposed rule.

This proposed rule would revise § 679.51(a), which contains requirements for vessels in the partial observer coverage category, to remove specific reference to hook-and-line gear for vessels fishing for halibut. This revision is needed because this proposed rule would authorize the retention of halibut IFQ by vessels using longline pot gear in the GOA. It is not necessary to specify authorized gear for halibut IFQ in § 679.51(a) because § 679.50(a)(3) currently states that, for purposes of subpart E, when the term halibut is used it refers to both halibut IFQ and halibut CDQ, and the authorized gear for halibut is specified in § 679.2.

This proposed rule would revise Table 15 to part 679 to identify longline pot gear as authorized gear in the GOA sablefish IFQ fishery. NMFS would revise the table to specify that authorized gear for sablefish IFQ harvested from any GOA reporting area would include longline pot gear in addition to all longline gear (i.e., hook-and-line, jig, troll, and handline). NMFS would revise the table to specify that authorized gear for halibut harvest in the GOA would be fishing gear comprised of lines with hooks attached and longline pot gear. No change would be made in the table to authorized gear for sablefish or halibut IFQ in the BSAI.

Pursuant to section 304(b)(1)(A) and 305(d) of the Magnuson-Stevens Act, the NMFS Assistant Administrator has determined that this proposed rule is consistent with the GOA FMP, other provisions of the Magnuson-Stevens Act, the Halibut Act, and other applicable law, subject to further consideration of comments received during the public comment period.

This proposed rule has been determined to be not significant for the purposes of Executive Order 12866.

An RIR was prepared to assess all costs and benefits of available regulatory alternatives. The RIR considers all quantitative and qualitative measures. A copy of this analysis is available from NMFS (see ADDRESSES). The Council recommended and NMFS proposes Amendment 101 and these regulations based on those measures that maximized net benefits to the Nation. Specific aspects of the economic analysis are discussed below in the Initial Regulatory Flexibility Analysis section.

An Initial Regulatory Flexibility Analysis (IRFA) was prepared for this action, as required by Section 603 of the Regulatory Flexibility Act (RFA). The IRFA describes the economic impact this proposed rule, if adopted, would have on small entities. The IRFA describes the action; the reasons why this action is proposed; the objectives and legal basis for this proposed rule; the number and description of directly regulated small entities to which this proposed rule would apply; the recordkeeping, reporting, and other compliance requirements of this proposed rule; and the relevant Federal rules that may duplicate, overlap, or conflict with this proposed rule. The IRFA also describes significant alternatives to this proposed rule that would accomplish the stated objectives of the Magnuson-Stevens Act, and any other applicable statutes, and that would minimize any significant economic impact of this proposed rule on small entities. The description of the proposed action, its purpose, and the legal basis are explained in the preamble and are not repeated here. A summary of the IRFA follows. A copy of the IRFA is available from NMFS (see ADDRESSES).

For RFA purposes only, NMFS has established a small business size standard for businesses, including their affiliates, whose primary industry is commercial fishing (see 50 CFR 200.2). A business primarily engaged in commercial fishing (NAICS code 11411) is classified as a small business if it is independently owned and operated, is not dominant in its field of operation (including its affiliates), and has combined annual receipts not in excess of $11 million for all its affiliated operations worldwide.

NMFS estimates that there are a total of 310 small catcher vessels and 1 small catcher/processor that participate in the GOA sablefish IFQ fishery using hook-and-line gear. These entities would be directly regulated by this proposed rule because they would be subject to the proposed requirements for using longline pot gear if they choose to use pot longline gear in the GOA sablefish IFQ fishery. Thus, NMFS estimates that 311 small entities would be directly regulated by this proposed rule.

Several aspects of this rule directly regulate small entities. Small entities would be required to comply with the requirements for using longline pot gear in the GOA sablefish IFQ fishery, which include using only longline pot gear, pot limits, and gear retrieval and gear marking requirements. Authorizing longline pot gear in this proposed rule would provide an opportunity for small entities to choose whether to use longline pot gear to increase harvesting efficiencies and reduce operating costs in the sablefish IFQ fishery.

Based on public testimony to the Council and NMFS, and Section 4.9 of the Analysis, the proposed requirements for using pot gear are not expected to adversely impact small entities because each entity could choose to use longline pot gear or continue to use hook-and-line gear. In addition, the requirements for using longline pot gear would not be expected to unduly restrict sablefish harvesting operations. The Council and NMFS considered requirements that would impose larger costs on directly regulated small entities. These included requiring all vessels to remove gear from the fishing grounds each time the vessel made a landing and requiring more sophisticated and costly satellite-based gear marking systems. The Council and NMFS determined that these additional requirements were not necessary to meet the objectives of the action. This proposed rule would meet the objectives of the action while minimizing adverse impacts on fishery participants.

Small entities would be required to comply with additional recordkeeping and reporting requirements under this proposed rule if they choose to use longline pot gear in the GOA sablefish IFQ fishery. Section 4.9 of the Analysis notes that directly regulated small entities using longline pot gear would be required to request pot tags from NMFS, maintain and submit logbooks to NMFS, have an operating VMS on board the vessel, and report additional information in a PNOL. The Analysis notes that these additional recordkeeping and reporting requirements would not be expected to adversely impact directly regulated small entities because the costs of complying with these requirements is de minimus relative to total gross fishing revenue. In addition, NMFS anticipates that many of the vessels that choose to use longline pot gear under this proposed rule currently comply with the logbook and VMS reporting requirements when participating in the sablefish IFQ fishery and in other fisheries. The Council and NMFS considered alternatives to implement additional requirements to report locations of deployed and lost gear in an electronic database. The Council and NMFS determined that these additional requirements were not necessary to meet the objectives of the action. This proposed rule would meet the objectives of the action while minimizing the reporting burden for fishery participants.

Thus, there are no significant alternatives to this proposed rule that would accomplish the objectives to authorize longline pot gear in the GOA sablefish IFQ fishery and minimize adverse economic impacts on small entities.

NMFS has not identified any duplication, overlap, or conflict between this proposed action and existing Federal rules.

The recordkeeping, reporting, and other compliance requirements would be increased slightly under this proposed rule. This proposed rule contains new requirements for vessels participating in the proposed longline pot fishery for sablefish IFQ in the GOA.

Presently, NMFS requires catcher vessel operators, catcher/processor operators, buying station operators, mothership operators, shoreside processor managers, and stationary floating processor managers to record and report all FMP species in logbooks, forms, eLandings, and eLogbooks. This proposed rule would revise regulations to require all vessels using longline pot gear in the GOA sablefish IFQ fishery to report information on fishery participation in logbooks, forms, and eLandings.

NMFS currently requires vessels in the BSAI to have an operating VMS on board the vessel while participating in the sablefish IFQ fishery. This proposed rule would revise regulations to extend this requirement to vessels using longline pot gear in the GOA sablefish IFQ fishery.

NMFS currently requires all vessels in the sablefish and halibut IFQ fisheries to submit a PNOL to NMFS. This proposed rule would revise regulations to require vessels using longline pot gear in the GOA sablefish IFQ fishery to report the number of pots deployed, the number of pots lost, and the number of pots left deployed on the fishing grounds on the PNOL, in addition to other required information.

This proposed rule contains collection-of-information requirements subject to review and approval by the Office of Management and Budget (OMB) under the Paperwork Reduction Act (PRA). These requirements have been submitted to OMB for approval. The collections are listed below by OMB control number.

Public reporting burden is estimated to average 35 minutes per individual response for Catcher Vessel Longline and Pot Gear Daily Fishing Logbook; and 50 minutes for Catcher/processor Longline and Pot Gear Daily Cumulative Production Logbook.

Public reporting burden is estimated to average 15 minutes per individual response for Prior Notice of Landing.

Public reporting burden is estimated to average 15 minutes per individual response to mark longline pot gear; 15 minutes for IFQ Sablefish Longline Pot Gear: Vessel Registration and Request for Pot Gear Tags; and 15 minutes for IFQ Sablefish Longline Pot Gear: Request for Replacement of Longline Pot Gear Tags.

Public reporting burden is estimated to average 2 hours per individual response for VMS operation; and 12 minutes for VMS check-in report.

The cost recovery program is mentioned in this rule. The cost to implement and manage the sablefish IFQ longline pot gear fishery, including the cost of the pot tags, will be included in the annual calculation of NMFS' recoverable costs. These costs will be part of the total management and enforcement costs used in the calculation of the annual fee percentage. For example, when the pot gear tags are ordered, the payment of those tags is charged 100 percent to the IFQ Program for cost recovery purposes. This rule would not change the process that harvesters use to pay cost recovery fees.

The public reporting burden includes the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information.

Public comment is sought regarding: Whether this proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; the accuracy of the burden statements; ways to enhance the quality, utility, and clarity of the information to be collected; and ways to minimize the burden of the collection of information, including through the use of automated collection techniques or other forms of information technology. Send comments on these or any other aspects of the collection of information to NMFS (see ADDRESSES), and by email to [email protected] or fax to 202-395-5806.

Notwithstanding any other provision of the law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB control number. All currently approved NOAA collections of information may be viewed at: http://www.cio.noaa.gov/services_programs/prasubs.html.

For the reasons set out in the preamble, 50 CFR parts 300 and 679 are proposed to be amended as follows:

The additions and revisions read as follows:

The additions and revisions read as follows:

The additions and revisions read as follows:

The additions and revisions read as follows:

The additions and revisions read as follows: