Prohibition Against Federal Assistance to Swaps Entities (Regulation KK)

FOOTNOTE 6 See Guidance on the Effective Date of Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 77 FR 27465 (May 10, 2012). END FOOTNOTE

I. Description of Final Rule

A. Treatment of Uninsured U.S. Branches and Agencies of Foreign Banks

As discussed in the interim final rule, the structure, language, and purpose of section 716 create an ambiguity as to whether the term "insured depository institution" includes uninsured U.S. branches and agencies of foreign banks for purposes of the various provisions of section 716. The term "insured depository institution" is not defined for purposes of these provisions. Section 2 of the Dodd-Frank Act provides that "except as the context otherwise requires. . .," /7/ the definition of "insured depository institution" has the same meaning as in the Federal Deposit Insurance Act. "Insured depository institution" is defined by section 3(c)(2) of the Federal Deposit Insurance Act to mean a bank or savings association the deposits of which are insured by the FDIC, and, for some purposes under section 3(c)(3), an uninsured U.S. branch or agency of a foreign bank. /8/

FOOTNOTE 7 See section 2 (chapeau) and (18)(A) of the Dodd-Frank Act; 12 U.S.C. 5301 (chapeau) and (18)(A). END FOOTNOTE

FOOTNOTE 8 See 12 U.S.C. 1813(c)(2), (c)(3). END FOOTNOTE

The interim final rule resolved this ambiguity by providing that the term "insured depository institution" included uninsured U.S. branches and agencies of foreign banks for purposes of section 716. /9/ Accordingly, uninsured branches and agencies of foreign banks are provided the same exceptions and transition period relief as provided to insured depository institutions.

FOOTNOTE 9 The interim final rule defined the terms branch, agency, and foreign bank by cross-reference to section 1 of the International Banking Act of 1978. 12 U.S.C. 3101. Insured branches of foreign banks are separately included in the definition of "insured depository institution" under section 3(c)(2) of the Federal Deposit Insurance Act. END FOOTNOTE

The Board received four comments in response to its invitation for public comment on the interim final rule. Two of these comment letters were from industry groups, one letter was from a public interest group, and one letter was from an individual. Three of the four commenters expressed strong support for the approach taken in the interim final rule. These commenters agreed that section 716 is predicated on the treatment of uninsured U.S. branches and agencies of foreign banks as insured depository institutions for purposes of qualifying for Federal assistance and that similar treatment for purposes of section 716 is consistent with Congressional intent. One of these commenters expressed the view that the treatment in the interim final rule was necessary to secure equal treatment between U.S. banks and uninsured U.S. branches and agencies of foreign banks under the provisions of section 716.

One commenter disagreed with the Board's analysis and argued that U.S. branches and agencies of foreign banks should not be treated as "insured depository institutions" for purposes of section 716. The commenter expressed the view that the purpose of section 716 is to reduce systemic risk. The commenter argued that treating U.S. branches and agencies of foreign banks as insured depository institutions does not achieve that purpose because U.S. branches and agencies are subject to a safety and soundness regime that the commenter asserted is less rigorous than the regime applicable to insured depository institutions. The commenter also argued that U.S. branches and agencies of foreign banks have volatile liability structures and relatively weak capital requirements. For these reasons, the commenter concluded that U.S. branches and agencies of foreign banks should not be treated in the same manner as insured depository institutions and should not be allowed to continue swaps activities pursuant to the same exceptions.

As discussed in the preamble to the interim final rule, the interim final rule's definition of "insured depository institution" is premised on the fact that, by statute, both uninsured and insured U.S. branches and agencies of foreign banks may receive Federal Reserve advances on the same terms and conditions that apply to domestic insured member banks. /10/ Federal Reserve advances are the only type of Federal assistance that causes uninsured U.S. branches and agencies of foreign banks to be affected by section 716.

FOOTNOTE 10 Section 13(14) of the Federal Reserve Act; 12 U.S.C. 347d. END FOOTNOTE

Congress generally requires the Board to regulate foreign banking organizations in accordance with the principle of national treatment, which means that foreign banking organizations operating in the United States are generally treated no less favorably than similarly-situated U.S. banking organizations, and are generally subject to the same restrictions and obligations in the United States that apply to the domestic operations of U.S. banking organizations. /11/ Congress provided U.S. uninsured branches and agencies of foreign banks with access to Federal Reserve advances on the same terms as insured depository institutions, and has permitted uninsured U.S. branches and agencies to engage in the same activities as insured depository institutions, in furtherance of this principle. /12/ Congress did not express an indication to deviate from this principle in the Dodd-Frank Act. Instead, the interim final rule is consistent with Congress's intent to treat U.S. branches and agencies of foreign banks like insured depository institutions for purposes of section 716. /13/

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Part 237"

Citation: "79 FR 340"

Document Number: "Docket No. R-1458; RIN 7100 AD 96"

Federal Register Page Number: "340"

"Rules and Regulations"