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

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

SUMMARY: The FDIC invites comment on a notice of proposed rulemaking (NPR or proposed rule) that would amend the definition of "qualifying master netting agreement" under the regulatory capital rules, and the liquidity coverage ratio rule. The FDIC also is proposing to amend the definitions of "collateral agreement," "eligible margin loan," and "repo-style transaction" under the regulatory capital rules. The amendments are designed to ensure that the regulatory capital and liquidity treatment of certain financial contracts generally would not be affected by implementation of special resolution regimes in foreign jurisdictions if such regimes are substantially similar to Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act in the United States, or by the International Swaps and Derivative Association Resolution Stay Protocol that provide for contractual submission to such regimes. In December 2014, the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Board) adopted a joint interim final rule that is related to this proposed rule.

DATES: Comments must be received March 31, 2015.

ADDRESSES: You may submit comments, identified by RIN 3064-AE30, by any of the following methods:

* Agency Web site: http://www.fdic.gov/regulations/laws/federal/. Follow instructions for submitting comments on the Agency Web site.

* Email: [email protected]. Include the RIN 3064-AE30 on the subject line of the message.

* Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

* Hand Delivery: Comments may be hand delivered to the guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.

Public Inspection: All comments received must include the agency name and RIN 3064-AE30 for this rulemaking. All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided. Paper copies of public comments may be ordered from the FDIC Public Information Center, 3501 North Fairfax Drive, Room E-I002, Arlington, VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Bobby R. Bean, Associate Director, [email protected]; Ryan Billingsley, Chief, Capital Policy Section, [email protected]; Benedetto Bosco, Capital Markets Policy Analyst, [email protected]; Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; or David Wall, Assistant General Counsel, [email protected]; Michael Phillips, Counsel, [email protected]; Ann Battle, Counsel, [email protected]; Rachel Ackmann, Senior Attorney, [email protected]; Grace Pyun, Senior Attorney, [email protected]; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Summary

The regulatory capital rules of the Board, the OCC, and the FDIC (collectively, the agencies) permit a banking organization to measure exposure from certain types of financial contracts on a net basis 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" that provides for certain rights upon a counterparty default. /1/ The agencies, by rule, have defined a qualifying master netting agreement as a netting agreement that permits a banking organization to terminate, apply close-out netting, and promptly liquidate or set-off collateral upon an event of default of the counterparty (default rights), thereby reducing its counterparty exposure and market risks. /2/ On the whole, measuring the amount of exposure of these contracts on a net basis, rather than a gross basis, results in a lower measure of exposure, and thus, a lower capital requirement, under the regulatory capital rules.

FOOTNOTE 1 See 12 CFR part 3 (OCC), 12 CFR part 217 (Board); 12 CFR part 324 (FDIC). The term "banking organization" includes national banks, state member banks, state nonmember banks, savings associations, and top-tier bank holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), as well as top-tier savings and loan holding companies domiciled in the United States, except for certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities. END FOOTNOTE

FOOTNOTE 2 See section 2 of the regulatory capital rules. END FOOTNOTE

The current definition of "qualifying master netting agreement" recognizes that default rights may be stayed if the financial company is in receivership, conservatorship, or resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), /3/ or under the Federal Deposit Insurance Act (FDI Act). /4/ Accordingly, transactions conducted under netting agreements where default rights may be stayed under Title II of the Dodd-Frank Act or the FDI Act may qualify for the favorable capital treatment described above. However, the current definition of "qualifying master netting agreement" does not recognize that default rights may be stayed where a master netting agreement is subject to limited stays under foreign special resolution regimes or where counterparties agree through contract that a special resolution regime would apply. When the agencies adopted the current definition of "qualifying master netting agreement," no other jurisdiction had adopted a special resolution regime relevant to the definition, and no banking organizations had communicated to the agencies an intent to enter into contractual amendments to clarify that bilateral over-the-counter (OTC) derivatives transactions are subject to certain provisions of certain U.S. and foreign special resolution regimes.

FOOTNOTE 3 See 12 U.S.C. 5390(c)(8) through (16). END FOOTNOTE

FOOTNOTE 4 See 12 U.S.C. 1821(e)(8) through (13). The definition also recognizes that default rights may be stayed under any similar insolvency law applicable to government sponsored enterprises (GSEs). Generally under the agencies' regulatory capital rules, government-sponsored enterprise means an entity established or chartered by the U.S. government to serve public purposes specified by the U.S. Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. government. See regulatory capital rules Section 2. END FOOTNOTE

In recent months, the European Union (EU) finalized the Bank Recovery and Resolution Directive (BRRD), which prescribes aspects of a special resolution regime that EU member nations should implement. On January 1, 2015, most of the provisions of the BRRD are expected to take effect in a number of the EU member states. In addition, several U.S. banking organizations have opted to adhere to the International Swaps and Derivatives Association's (ISDA) Resolution Stay Protocol (ISDA Protocol), /5/ which provides for amendments to the terms of ISDA Master Agreements /6/ between counterparties that adhere to the ISDA Protocol to stay certain default rights and other remedies provided under the agreement. The effective date of certain provisions of the ISDA Protocol also is January 1, 2015. This expected implementation would generally mirror steps taken in the United States to implement a special resolution regime under Title II of the Dodd-Frank Act.

FOOTNOTE 5 See ISDA Protocol at http://assets.isda.org/media/f253b540-25/958e4aed.pdf/. END FOOTNOTE

FOOTNOTE 6 The ISDA Master Agreement is a form of agreement that governs OTC derivatives transactions and is used by a significant portion of the parties to bilateral OTC derivatives transactions, including large, internationally active banking organizations. Furthermore, the ISDA Master Agreement generally creates a single legal obligation that provides for the netting of all individual transactions covered by the agreement. END FOOTNOTE

A master netting agreement under which default rights may be stayed under the BRRD or that incorporates the ISDA Protocol would no longer qualify as a qualifying master netting agreement under the agencies' current regulatory capital and liquidity rules. This would result in considerably higher capital and liquidity requirements.

Accordingly, under this NPR, the FDIC proposes to permit an otherwise qualifying master netting agreement to qualify if (i) default rights under the agreement may be stayed under a qualifying foreign special resolution regime or (ii) the agreement incorporates a qualifying special resolution regime by contract. Through these proposed revisions, the proposed rule would maintain the existing treatment for these contracts for purposes of the regulatory capital and liquidity rules, while recognizing the recent changes contemplated by the BRRD and the ISDA Protocol.

The proposed rule also would revise certain other definitions of the regulatory capital rules to make various conforming changes designed to ensure that a banking organization may continue to recognize the risk mitigating effects of financial collateral /7/ received in a secured lending transaction, repo-style transaction, or eligible margin loan for purposes of the regulatory capital and liquidity rules, while recognizing the recent changes contemplated by the BRRD and banking organizations that have adhered to the ISDA Protocol. Specifically, the proposed rule would revise the definition of "collateral agreement," "eligible margin loan," /8/ and "repo-style transaction" /9/ to provide that a counterparty's default rights may be stayed under a foreign special resolution regime or, if applicable, under a special resolution regime incorporated by contract. /10/ The FDIC requests comment on all aspects of these definitions.

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

Notice of proposed rulemaking.

CFR Part: "12 CFR Parts 324 and 329"

RIN Number: "RIN 3064-AE30"

Citation: "80 FR 5063"

Federal Register Page Number: "5063"

"Proposed Rules"