[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2324]


[[Page Unknown]]

[Federal Register: February 2, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 231

Regulation EE; Docket No. R-0801]

 

Netting Eligibility for Financial Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board has adopted a rule to include certain entities under 
the definition of ``financial institution'' in section 402 of the 
Federal Deposit Insurance Corporation Improvement Act of 1991 so that 
they will be covered by the Act's netting provisions. The Act 
authorizes the Board to expand the definition of ``financial 
institution'' to the extent consistent with the purposes of enhancing 
efficiency and reducing systemic risk in the financial markets.

EFFECTIVE DATE: March 7, 1994.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division. For the hearing impaired only: 
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).

SUPPLEMENTARY INFORMATION:

Background

    The Federal Deposit Insurance Corporation Improvement Act of 1991 
(Act) (Pub. L. 102-242, sections 401-407; 105 Stat. 2236, 2372-3; 12 
U.S.C. 4401-4407) validates netting contracts among financial 
institutions. Parties to a netting contract agree that they will pay or 
receive the net, rather than the gross, payment due under the netting 
contract. The Act provides certainty that netting contracts will be 
enforced, even in the event of the insolvency of one of the parties. 
The Act's netting provisions, effective December 19, 1991, are designed 
to promote efficiency and reduce systemic risk within the banking 
system and financial markets.
    The netting provisions apply to bilateral netting contracts between 
two financial institutions and multilateral netting contracts among 
members of a clearing organization. Section 402(9) of the Act defines 
``financial institution'' to include a depository institution, a 
securities broker or dealer, a futures commission merchant, and any 
other institution as determined by the Board. In addition, the Act's 
definition of ``broker or dealer'' (section 402(1)(B)) includes any 
affiliate of a registered broker or dealer, to the extent consistent 
with the Act, as determined by the Board.

Proposed Rule

    In May 1993, the Board requested comment on a proposed regulation 
that would expand the application of the Act's netting provisions to a 
broader range of financial market participants (58 FR 29149, May 19, 
1993). The Board proposed that persons meeting certain tests based on 
market activity would qualify as ``financial institutions'' under the 
Act. The proposed tests were designed to capture institutions that are 
significant market participants whose coverage could enhance market 
liquidity and whose failure without coverage could have systemic risk 
implications. The Board chose the activity-based tests instead of tests 
based on an institution's status as a regulated entity, its affiliation 
with a defined financial institution, or its class of charter. As these 
three latter tests likely would be both over- and under-inclusive, the 
Board believed they were not as appropriate as an activity-based test.
    The test proposed by the Board had both a qualitative and a 
quantitative aspect. First, to qualify as a financial institution under 
the proposed rule, a person1 would have to participate actively in 
a financial market for its own account and hold itself out as a 
counterparty that will engage in transactions both as a buyer and a 
seller in the financial market. Second, the person would have to meet 
one of two quantitative thresholds: It must have either (1) had one or 
more financial contracts of a total gross dollar value of $1 billion in 
notional principal amount outstanding on any day during the previous 
15-month period with counterparties that are not its affiliates, or (2) 
incurred total gross mark-to-market positions of $100 million 
(aggregated across counterparties) in one or more financial contracts 
on any day during the previous 15-month period with counterparties that 
are not its affiliates.
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    \1\``Person'' is defined broadly to include any legal entity, 
such as a corporation, partnership, or individual.
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Final Rule

    The final rule adopted by the Board retains the qualitative test, 
in a modified form, as well as the quantitative test. Under the final 
rule, a person would qualify as a financial institution if it 
represents that it will engage in financial contracts as a counterparty 
on both sides of one or more financial markets and meets one of the 
quantitative thresholds, which are largely unchanged from the proposal.
    The operation of the rule is prospective, i.e., the Act's netting 
provisions will apply only to those netting contracts entered into 
after a person qualifies as a financial institution. The final rule 
clarifies that a person will continue to be considered a financial 
institution for the purposes of any contract entered into during the 
period in which it qualifies, even if the person subsequently fails to 
qualify during the life of the contract. In addition, the Board has 
grandfathered those netting contracts in existence on the effective 
date of the final rule. If a person qualifies as a financial 
institution on the effective date, that person will be considered a 
financial institution for the purposes of any outstanding contract 
entered into prior to that date.
    The Board also made various revisions to the proposed definitions. 
Those revisions are discussed in the comment summary below.

Summary of Comments

    The Board received 32 comment letters (from 30 commenters) on 
proposed Regulation EE. The commenters were distributed as follows:

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                     Type of institution                        Number  
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Trade association............................................          7
Federal Reserve Bank.........................................          4
Commercial bank..............................................          4
Government-sponsored entity..................................          3
Clearing house...............................................          2
Financial institution holding company........................          2
Swaps dealer.................................................          3
Federal agency...............................................          2
Law firm.....................................................          1
Financial corporation........................................          1
International agency.........................................         1 
                                                              ----------
    Total....................................................        30 
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General Comments

    Virtually all of the commenters supported the objectives of the 
Act's netting provisions and the Board's proposed regulation. The 
commenters generally agreed that broadening the Act's definition of 
``financial institution'' would enhance efficiency and reduce risk in 
the financial markets. Only two commenters expressed doubts as to 
whether broader netting protection would decrease systemic risk.
    One commenter specifically supported expansion of the definition by 
rule rather than by case-by-case determinations. Two commenters 
suggested that the Board should indicate in advance how it intends to 
use its discretion in case-by-case determinations. The Board, however, 
has set forth in the regulation the standards it believes should apply 
for a person to qualify as a financial institution in most 
circumstances. In case of unanticipated circumstances, the Board has 
the flexibility to make case-by-case determinations based on standards 
different from those in the regulation.

Qualitative Test

    Fifteen commenters raised concerns about the qualitative prong of 
the proposed rule's test. Eleven of these commenters argued that the 
rule should cover major market participants that are end users, in 
addition to covering market intermediaries. (Four commenters suggested 
that the Board eliminate the test altogether, and one commenter 
suggested that coverage be extended to any entity that enters into a 
netting contract as defined by the Act.) The commenters stated that the 
insolvency of a major end user would raise substantial settlement, 
liquidity, and systemic risks and that such risks arise from the size 
and nature of an entity's positions, not from the character of its 
business. The commenters noted that although end users may not be 
market-makers, their arbitrage strategies may cause them to take 
positions on both sides of the market. The commenters observed that 
including end users would provide certainty of enforceability for a 
broader range of netting contracts. They stated that this broader range 
of coverage would enhance market liquidity, as dealers could do a 
larger volume of business with end users without raising credit limits, 
and would eliminate a competitive disadvantage for end users.
    The Board has determined to retain the qualitative test, in a 
modified form. Although the Board recognizes that end users (as well as 
their counterparties) might benefit by the netting provisions and the 
failure of certain end users could create systemic risk, the Board 
believes it would be difficult to justify inclusion of many end users 
as ``financial institutions.'' The Act defines ``financial 
institution'' to include traditional financial market intermediaries 
such as banks, broker-dealers, and futures commission merchants. 
Expanding the definition to cover end users would include many non-
financial corporations and, potentially, even individuals. The Board 
believes it would be a stretch of the statutory definition of 
``financial institution'' to include institutions or individuals that 
are not market intermediaries and are not in the financial services 
business.
    Eleven commenters offered suggestions on how to achieve certainty 
that a given entity qualifies as a financial institution. The 
commenters argued that market participants would have no choice but to 
rely on the representations of their counterparties in many cases. Many 
commenters suggested that market participants be allowed to rely in 
good faith on the written representation of a counterparty, signed by 
an appropriate officer, stating that the tests were met. The commenters 
argued that this ``safe harbor'' would provide certainty in instances 
where a participant might otherwise refuse to deal with an institution 
solely because it cannot verify the institution's qualifications.
    With regard to the qualitative test, five commenters noted that, as 
a practical matter, it would be difficult for counterparties to verify 
that an institution participates ``actively'' in the financial markets 
and holds itself out as a market intermediary. In addition, one 
commenter suggested that the rule should cover certain entities that do 
not enter into transactions for their own account, such as collective 
investment funds and master trust arrangements that act in a fiduciary 
capacity. One commenter noted that a statement from an entity that it 
meets the test could be considered the equivalent of ``holding itself 
out'' as a market intermediary. Other commenters suggested eliminating 
the ``participates actively'' clause.
    The Board agrees that an institution that represents that it is 
willing to engage in transactions on both sides of the market is, in 
effect, holding itself out as a market intermediary. Accordingly, the 
Board has revised the language of the qualitative test to provide that 
such a representation would suffice to meet the test. The Board has 
eliminated that part of the proposed rule that would have required a 
financial institution to participate actively in a financial market for 
its own account. The Board believes that the revised final rule 
provides counterparties with greater certainty that an institution 
meets the qualitative test because counterparties can rely on the 
institution's representation.
    Three commenters made drafting suggestions, such as (1) replacing 
the reference to ``buyer and seller,'' which is appropriate in a 
securities market, with the more generic ``participates on both sides'' 
of the market, and (2) clarifying that an institution may be active in 
one or more financial markets simultaneously. The Board has revised the 
rule to incorporate both of these suggestions. Under Sec. 231.3(a) of 
the final rule, a person meets the qualitative test if it ``represents 
that it will engage in financial contracts as a counterparty on both 
sides of one or more financial markets.''

Quantitative Test

    Fourteen commenters cited problems with the proposed quantitative 
test. Seven commenters noted that financial market participants will 
have difficulty verifying whether their counterparties meet the volume 
thresholds because publicly available financial statements typically do 
not present information in a format that would allow verification. Five 
commenters stated that small-volume dealers would be placed at a 
competitive disadvantage, resulting in concentration of trading at 
large dealers and barriers to entry. In addition, two commenters noted 
that the test would penalize business wind-downs, as financial 
institutions would cease to be covered as their contracts expired. Two 
commenters argued that counterparties could circumvent the test by 
engaging in reciprocal transactions to raise their outstanding 
principal amounts artificially.
    As a solution to the problems cited above, eight commenters 
suggested that the Board eliminate the quantitative test. These 
commenters stated that the qualitative test would be sufficient to 
guarantee coverage of parties with a material presence in the financial 
markets, so a quantitative test is unnecessary.
    The purpose of the rule, however, is to further the Act's 
objectives of increasing efficiency and decreasing systemic risk in the 
financial markets. The qualitative test targets institutions that are 
market intermediaries in order to restrict coverage to those entities 
that can reasonably be included in the Act's definition of ``financial 
institution.'' The qualitative test alone does not necessarily focus on 
those institutions whose coverage would help achieve the Act's 
objectives. The purpose of the quantitative test is to ensure that a 
covered institution engages in a level of business such that its 
failure to meet its obligations could create systemic risk.
    The Board believes that most institutions that meet the qualitative 
test engage in a volume of transactions substantially above the 
quantitative test thresholds. Although institutions entering the market 
may not be able to meet the quantitative test right away, the test 
would aid in reducing systemic risk by helping to ensure the 
creditworthiness of new market participants because they would have to 
achieve a certain level of market participation without the benefit of 
certainty of the validity of netting provided by the rule. In addition, 
the quantitative test tends to encourage active market participation by 
financial institutions by requiring them to meet certain volume 
thresholds within a set period of time. The netting contracts of 
institutions that are winding down their businesses would continue to 
be covered as long as the institution entered into the contracts while 
it qualified as a financial institution. (See discussion of timing 
issues below and Sec. 231.3(b) of the final rule.) For these reasons, 
the Board has retained the proposed quantitative test in Sec. 231.3(a) 
(1) and (2) of the final rule.
    The commenters also suggested changes in the event the quantitative 
test is not eliminated. Five commenters asked that the volume 
thresholds be reduced from $1 billion in notional principle to $500 
million and from $100 million in gross mark-to-market positions to $50 
million. As the Board does not believe these thresholds would be overly 
limiting, it has not decreased the threshold levels. The Board may 
reexamine the thresholds if it finds that these levels prove to be 
overly limiting.
    One commenter suggested that the Board establish one set of 
quantitative thresholds for dealers, but allow non-dealers to be 
covered at higher thresholds. As discussed above, the Board believes 
that inclusion of end users, even at higher volume thresholds, would be 
a stretch of the term ``financial institution.''
    Another commenter suggested that the quantitative test measure 
average activity levels over a 24-month period to discourage short-run 
attempts to increase activity. Although using average volumes could 
help discourage artificial short-run increases in activity, it would 
also add more complexity to the determination of whether an institution 
meets the quantitative test. Rather than focusing on one day in a 15-
month period, averaging would require surveillance of activity on a 
much more frequent basis. The final rule retains the proposed ``one-
day'' test.
    Several commenters suggested that the Board allow counterparties to 
rely on an external auditor's certificate or that the Board redesign 
the test so that a party could verify its counterparty's qualifications 
by examining publicly available information. The Board believes that 
institutions desiring to qualify as financial institutions under the 
rule will have a strong incentive to present information in publicly 
available documents, such as financial reports, showing that the 
institution meets the quantitative test. These reports could be 
verified by an outside auditor, if the participants so desire.
    One commenter suggested that, for the purposes of the quantitative 
test, the Board should treat the aggregate risk of an affiliated group 
as one entity, i.e. an institution would qualify as a financial 
institution if it meets the qualitative test and it and/or its 
affiliates meet the quantitative test. If an institution fails to meet 
its obligations, however, those obligations are not automatically 
assumed by its affiliates, even though in some cases a holding company, 
for example, may make contributions to a troubled subsidiary. The Board 
believes that treating each institution separately under the rule 
reflects more closely the risk that institution poses for its 
counterparties.
    Two commenters requested that the Board allow the quantitative test 
to be satisfied by financial contracts from several financial markets, 
even though the institution may not satisfy the qualitative test for 
each one of those financial markets. The rule would allow aggregation 
of financial contracts across markets for purposes of the quantitative 
test, but would not require an institution to meet the qualitative test 
for each type of its financial contracts. For example, an institution 
might meet the qualitative test by representing that it will engage in 
foreign exchange contracts on both sides of the market and meet the 
quantitative test with both its foreign exchange and interest rate 
contracts. The institution would nevertheless qualify as a financial 
institution, and all of its netting contracts would be subject to the 
Act's protection.
    Finally, in Sec. 231.3(a)(2), the Board has changed the word 
``incurred'' to ``had'' to clarify that the contracts that yield mark-
to-market positions of $100 million need not be entered into on a 
single day. Rather, the $100 million refers to positions in outstanding 
contracts on a single day.

Charter Test

    Six commenters suggested that the Board supplement the market 
activity tests with charter tests. The commenters argued that charter 
tests are consistent with the approach taken in the Act and are 
competitively neutral for each charter type. The commenters did not 
agree with the Board's statement that charter tests would foster 
inaccurate presumptions about the riskiness of covered institutions. 
Rather, they believed that charter tests would promote certainty 
without harmful results. The commenters requested coverage for a 
variety of charter types, including bank holding companies and their 
subsidiaries, insurance companies, foreign banks (rather than solely 
their U.S. branches and agencies), affiliates of registered broker-
dealers, trust companies, Federal Reserve Banks, Federal Home Loan 
Banks, and certain government-sponsored entities.
    The Board has determined not to expand the rule's coverage through 
charter tests. Charter tests would include many end user institutions 
that are not market intermediaries, which the Board believes would 
stretch beyond the meaning of ``financial institution.'' A charter test 
would also cover many institutions whose business volumes do not give 
rise to systemic risk considerations. Although Congress used charter 
tests in the Act, the Board does not believe that charter tests are 
necessarily the most appropriate means to expand Congress' definition.
    There may be certain end user institutions that reasonably can be 
described as financial institutions even though they are not market 
intermediaries. The Board has the ability to make case-by-case 
determinations in these instances and has done so. For example, in 
1992, the Board made individual determinations in the cases of three 
CHIPS members. Similarly, there may be certain government-sponsored 
entities or international organizations that do not meet the 
requirements of the rule yet could reasonably be considered financial 
institutions due to their roles in the financial markets. The Board 
would consider making individual determinations in such cases.

Definitions

    The commenters also made various technical suggestions concerning 
the definitions. One commenter suggested that, in the definition of 
``affiliate,'' the Board replace the word ``dealer'' with ``person.'' 
The Board has revised the definition in Sec. 231.2(b) accordingly.
    Two commenters requested that the Board revise the definition of 
``gross mark-to-market positions'' to replace the word ``price'' with 
``value'' to clarify that market participants may use their normal 
market valuation methods rather than the method used to price each 
transaction at its inception. Section 231.2(e) of the final rule 
reflects this revision.
    Six commenters requested that the definition of ``person'' 
explicitly include an entity organized outside the U.S., thereby 
assuring that foreign banks and other foreign market participants could 
qualify as financial institutions. Another commenter asked that the 
definition explicitly include trusts and that ``similar entity'' be 
changed to the more general ``other entity.'' The Board intends that 
``person'' be defined broadly to include all entities, foreign and 
domestic, and has revised the definition in Sec. 231.2(f) to 
incorporate both of these comments.
    One commenter suggested that the Board include a comprehensive 
description of the financial institutions defined by the Act as well as 
those defined by the regulation. However, to keep the rule as simple as 
possible, the Board has not included the Act's definitions. Section 
231.1(b) of the rule specifically states that the rule does not affect 
the status of those financial institutions defined by the Act.
    One commenter suggested that the Act's definition of netting 
contract also be used in the regulation, rather than the proposed 
``financial contract'' definition, which is based on the Federal 
Deposit Insurance Act's (FDIA's) definition of qualified financial 
contract. The commenter believed that using a common definition would 
reduce confusion and avoid litigation. The final rule retains the 
concept of a financial contract based on the FDIA. The concept of a 
financial contract narrows the focus of the rule to participants in the 
financial markets and is relevant only to the determination of whether 
a particular institution qualifies as a financial institution under the 
rule. Once an institution qualifies, the Act's netting provisions would 
apply to all of that institution's netting contracts, as defined by the 
Act.
    The Board has expanded upon the FDIA to include spot forward 
contracts (contracts with maturities of two days or less) as financial 
contracts for purposes of the qualitative and quantitative tests. 
Arguably, the FDIA definition of swap agreement already includes spot 
forward contracts, however, for purposes of clarity, the Board has 
included spot contracts expressly in the forward contract definition.

Timing Issues

    Many commenters raised timing-related issues regarding the rule's 
coverage. Eight commenters requested that the Board clarify that the 
Act's netting provisions will apply for the life of a contract as long 
as the parties qualify as financial institutions at the time they enter 
into the contract. The Board has revised the rule to clarify that a 
person will continue to be considered a financial institution for the 
purposes of any contract entered into during the period it qualifies, 
even if the person subsequently fails to qualify. (See Sec. 231.3(b).)
    Four commenters suggested that the Board clarify that an 
institution's status as a financial institution will be determined at 
the time it enters into a netting contract because that is when the 
counterparty will evaluate the institution's creditworthiness. On the 
other hand, two commenters suggested that the netting provisions should 
be applied retroactively to an institution's existing contracts once it 
qualifies as a financial institution. One commenter requested 
clarification as to whether existing contracts will be grandfathered 
when the rule takes effect. Under the final rule, the Act's netting 
provisions will apply only to those netting contracts entered into 
after a person qualifies as a financial institution. However, the Board 
has revised the rule to grandfather those contracts in existence on the 
effective date of the final rule for entities qualifying under the rule 
at that time. (See Sec. 231.3(c).)
    One commenter requested that the Board define the 15-month rolling 
period in the quantitative test with reference to the time parties 
enter into a master agreement, not the time of the first transaction 
under that agreement. In the absence of a master agreement, the 
commenter suggested that the period be measured with reference to a 
particular netting transaction. In practice, to determine whether a 
party meets the quantitative test, the 15-month period will date back 
from the day a party enters into a netting contract, whether or not 
that netting contract is a master agreement. Thus, on a particular day 
(``Day X''), a party meets the quantitative test if its financial 
contracts, as defined in the rule, met one of the rule's threshold 
levels on any day during the previous 15 months. Assuming the party 
qualifies as a financial institution and enters into a netting 
contract, as defined in the Act, on Day X, Sec. 231.3(b) of the rule 
provides that the netting contract will be covered by the Act's 
provisions regardless of whether the party ceases to qualify as a 
financial institution on a subsequent day. If the netting contract that 
the party enters into on Day X is a master agreement, e.g., an 
agreement to net specified types of underlying transactions that the 
counterparties may enter into in the future, Sec. 231.3(b) would 
provide that netting under that master agreement would continue to be 
protected under the Act even though the party enters into individual 
underlying transactions after it ceases to qualify as a financial 
institution. The Act's provisions would not extend to netting under any 
new master agreement entered into after the party ceases to qualify as 
a financial institution.

Board List.

    Two commenters requested that the Board keep a list of entities 
that have declared themselves to be financial institutions. The Board 
believes that the commenters' concerns about lack of certainty are 
largely addressed by allowing counterparties to rely on an 
institution's representation that it will act as a market intermediary 
and creating an incentive for institutions to publish volume threshold 
information to establish that they meet the quantitative test. Thus, 
the Board does not believe an ``official'' list is necessary.

Automatic Stays.

    Section 405 of the Act provides that no injunction or similar order 
issued by a court or agency will interfere with the application of 
netting. One commenter believed that section 405 could be interpreted 
so as not to override provisions for automatic stays in bankruptcy 
under federal or state law. The commenter asked that the Board indicate 
its view on this matter. Although the Board cannot authoritatively 
interpret the provisions of the Act, the Board believes the intent of 
the Act is to override the automatic statutory bankruptcy stays for 
valid netting contracts. Sections 403 and 404 of the Act explicitly 
provide that netting is effective ``notwithstanding any other provision 
of law.'' The Board believes that section 405 was included to clarify 
that the netting provisions override court or agency actions in 
addition to overriding statutory law.

CFTC Comment.

    The Commodity Futures Trading Commission (CFTC) noted that it can 
exempt certain contracts between ``appropriate persons'' from the 
Commodity Exchange Act's (CEA's) exchange-trading requirement and has 
done so for certain swaps, hybrid instruments, and energy contracts. 
The CFTC may also exempt appropriate multilateral netting arrangements, 
in which case the arrangement may not meet the Act's definition of 
clearing organization, which refers to an organization that ``performs 
clearing functions for a contract market designated pursuant to the 
CEA.'' The CFTC stated that it would like to work with the Board to 
ensure that a clearing organization exempted by the CFTC would be 
covered by the Act's netting provisions. The Board is willing to work 
with the CFTC in this area.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected.
    The rule, however, should not have an economic impact on small 
entities. The rule will apply only to entities with financial contracts 
of $1 billion in gross notional principal amount or gross mark-to-
market positions of $100 million over a period of 15 months. Entities 
with a smaller level of market activity would not be covered by the 
Board's expanded definition of ``financial institution.'' Many small 
market participants are included in the Act's definition of ``financial 
institution'' and thus are already covered by the netting provisions. 
The Board limited its expansion of the Act's definition to entities 
with a relatively large volume of activity because the lack of netting 
coverage for small entities is unlikely to affect overall market 
efficiency or systemic risk.

List of Subjects in 12 CFR Part 231

    Banks, banking, Financial institutions, Netting.

    For the reasons set out in the preamble, the Board adds a new part 
231 to Title 12, Chapter II of the Code of Federal Regulations to read 
as follows:

PART 231--NETTING ELIGIBILITY FOR FINANCIAL INSTITUTIONS REGULATION 
EE

Sec.
231.1  Authority, purpose, and scope.
231.2  Definitions.
231.3  Qualification as a financial institution.

    Authority: 12 U.S.C. 4402(1)(B) and 4402(9).


Sec. 231.1  Authority, purpose, and scope.

    (a) Authority. This part (Regulation EE; 12 CFR part 231) is issued 
by the Board of Governors of the Federal Reserve System under the 
authority of sections 402(1)(B) and 402(9) of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and 
4402(9)).
    (b) Purpose and scope. The purpose of the Act and this part is to 
enhance efficiency and reduce systemic risk in the financial markets. 
This part expands the Act's definition of ``financial institution'' to 
allow more financial market participants to avail themselves of the 
netting provisions set forth in sections 401-407 of the Act (12 U.S.C. 
4401-4407). This part does not affect the status of those financial 
institutions specifically defined in the Act.


Sec. 231.2  Definitions.

    As used in this part, unless the context requires otherwise:
    (a) Act means the Federal Deposit Insurance Corporation Improvement 
Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.
    (b) Affiliate, with respect to a person, means any other person 
that controls, is controlled by, or is under common control with the 
person.
    (c) Financial contract means a qualified financial contract as 
defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract 
includes a contract with a maturity date two days or less after the 
date the contract is entered into (i.e., a ``spot'' contract).
    (d) Financial market means a market for a financial contract.
    (e) Gross mark-to-market positions in one or more financial 
contracts means the sum of the absolute values of positions in those 
contracts, adjusted to reflect the market values of those positions in 
accordance with the methods used by the parties to each contract to 
value the contract.
    (f) Person means any legal entity, foreign or domestic, including a 
corporation, unincorporated company, partnership, government unit or 
instrumentality, trust, natural person, or any other entity or 
organization.


Sec. 231.3  Qualification as a financial institution.

    (a) A person qualifies as a financial institution for purposes of 
sections 401-407 of the Act if it represents that it will engage in 
financial contracts as a counterparty on both sides of one or more 
financial markets and either--
    (1) Had one or more financial contracts of a total gross dollar 
value of at least $1 billion in notional principal amount outstanding 
on any day during the previous 15-month period with counterparties that 
are not its affiliates; or
    (2) Had total gross mark-to-market positions of at least $100 
million (aggregated across counterparties) in one or more financial 
contracts on any day during the previous 15-month period with 
counterparties that are not its affiliates.
    (b) If a person qualifies as a financial institution under 
paragraph (a) of this section, that person will be considered a 
financial institution for the purposes of any contract entered into 
during the period it qualifies, even if the person subsequently fails 
to qualify.
    (c) If a person qualifies as a financial institution under 
paragraph (a) of this section on March 7, 1994, that person will be 
considered a financial institution for the purposes of any outstanding 
contract entered into prior to March 7, 1994.

    By order of the Board of Governors of the Federal Reserve 
System, January 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-2324 Filed 2-1-94; 8:45 am]
BILLING CODE 6210-01-P