[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Proposed Rules]
[Pages 48935-48937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23479]



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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AB69


Definition of Qualified Financial Contracts

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC or 
Corporation) is publishing for notice and public comment a proposed 
rule defining spot and other short-term foreign exchange agreements and 
repurchase agreements on qualified foreign government securities to be 
``qualified financial contracts'' (QFCs) under the Federal Deposit 
Insurance Act, 12 U.S.C. 1811 et seq. (FDI Act). In the interest of 
providing a measure of protection to the financial markets, the FDI Act 
provides special rules for the treatment of QFCs held by an insured 
depository institution in default for which the FDIC is appointed 
conservator or receiver. The FDIC believes that the market's use of 
these agreements to obtain liquidity in order to manage financial risk 
indicates that they should be included as QFCs. Promulgation of the 
proposed regulation to include spot and other short-term foreign 
exchange contracts and repurchase agreements on qualified foreign 
government securities within the definition of QFC is not intended to 
exclude other agreements that may otherwise qualify to be QFCs.

DATES: Comments must be received by November 20, 1995.

ADDRESSES: Send comments to Jerry L. Langley, Executive Secretary, 
FDIC, 550 17th Street, N.W., Washington, D.C. 20429. Comments may be 
hand-delivered to Room 400, 1776 F Street, N.W., Washington, D.C. 20429 
on business days between 8:30 a.m. and 5 p.m. [FAX number: (202) 898-
3838; Internet: [email protected]]. Comments will be available for 
inspection or photocopying at the FDIC's Reading Room, Room 7118, 550 
17th Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30 
p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Sharon Powers Sivertsen, Assistant 
General Counsel, Legal Division, (202) 736-0112; Keith A. Ligon, Senior 
Counsel, Legal Division, (202) 736-0160; or Christine M. Bradley, 
Attorney, Legal Division, (202) 736-0106, FDIC, 

[[Page 48936]]
550 17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

    No collection of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the 
proposed rule. Consequently, no information was submitted to the Office 
of Management and Budget for review.

II. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), it is certified that the proposed rule will not 
have a significant economic impact on a substantial number of small 
business entities.

III. Discussion

A. The QFC Provisions

    Sections 11(e) (8) through (10) of the FDI Act, 12 U.S.C. 1821(e) 
(8) through (10), provide special rules for the treatment of QFCs in 
the event the FDIC is appointed receiver or conservator for an insured 
depository institution in default. The statute seeks, among other 
things, to protect parties to QFCs by allowing for the liquidation, 
termination, and netting of their agreements. The statute identifies 
securities contracts, commodity contracts, forward contracts, 
repurchase agreements and swap agreements as QFCs.
    Section 11(e)(8)(D) of the FDI Act identifies in some detail the 
types of contracts to be treated as QFCs, but additionally affords the 
FDIC express authority to adopt regulations extending the definition to 
any similar agreements. 12 U.S.C. 1821(e)(8)(D)(i). As discussed below, 
the Corporation is proposing rules that would extend the QFC definition 
to spot and other short-term foreign exchange agreements and to 
repurchase agreements on securities issued or guaranteed by the central 
governments belonging to the Organization for Economic Cooperation and 
Development (OECD). Promulgation of the proposed regulation to include 
spot and other short-term foreign exchange contracts and repurchase 
agreements on qualified foreign government securities within the 
definition of QFC is not intended to be interpreted so as to exclude 
other agreements that may otherwise qualify to be QFCs under the 
language of section 11(e)(8)(D) itself.
    As the Board of Directors of the FDIC has previously recognized, 
QFCs occupy a unique and important position in the financial markets, 
allowing appropriate liquidity, hedging and financial intermediation 
operations in financial institutions, and are generally conducted 
within a highly supervised industry. FDIC Statement of Policy on 
Qualified Financial Contracts (Dec. 12, 1989). See 55 FR 7027 (1990). 
The Corporation believes that these goals would be well served by 
expressly extending QFC treatment to spot and other short-term foreign 
exchange agreements and repurchase agreements on foreign government 
securities issued or guaranteed by the central governments of the OECD-
based group of countries.

B. Foreign Exchange Agreements

    Although section 11(e)(8)(D)(vi) of the FDI Act, defining ``swap 
agreements'' which are to be included within the statutory definition 
of QFCs, refers to forward foreign exchange agreements, the statute 
does not explicitly mention spot or other short-term foreign exchange 
agreements. The statute, in relevant part, covers any agreement, 
including the terms and conditions incorporated by reference in any 
such agreement, which is a forward foreign exchange agreement or any 
other similar agreement. 12 U.S.C. 1821(e)(8)(D)(vi). While the FDIC 
believes that spot and other short-term foreign exchange agreements 
fall within the QFC definition of swap agreement even in the absence of 
FDIC regulatory action, the FDIC also believes that market participants 
would be best served by the certainty of an explicit rule providing 
that spot foreign exchange agreements are QFCs. ``Spot'' foreign 
exchange agreements, like forwards, do not settle immediately; spot 
agreements are typically outstanding for one or two days. As is the 
case with other QFCs, market participants tend to enter into multiple 
spot agreements for both long and short positions in many products with 
the same counterparty. As a result, market participants are also 
creating the same termination and netting agreements as are used with 
other QFCs.
    The Corporation is proposing a rule to recognize the inclusion of 
spot and other short-term foreign exchange agreements as QFCs. The 
language of the proposed rule would extend QFC treatment to short-dated 
transactions such as spots, tomorrow/next day and same day/tomorrow 
transactions, thus eliminating any concern that spot and other short-
term foreign exchange agreements are not included within the definition 
of QFC.

C. Repurchase Agreements on Qualified Foreign Government Securities

    Although section 11(e)(8)(D)(v) of the FDI Act includes repurchase 
agreements within the definition of a QFC, the statute does not cover 
repurchase agreements on foreign government securities. Section 
11(e)(8)(D)(v) incorporates the repurchase agreement definition under 
section 101(47) of the Bankruptcy Code, 11 U.S.C. 101(47), with certain 
additions not relevant here, and restricts the definition of qualified 
financial contract to repurchase agreements on securities that are 
direct obligations of, or that are fully guaranteed as to principal and 
interest by, the United States or any agency of the United States. 
Section 101(47) of the Bankruptcy Code defines a repurchase agreement 
as:

an agreement, including related terms, which provides for the 
transfer of certificates of deposit, eligible bankers' acceptances, 
or securities that are direct obligations of, or that are fully 
guaranteed as to principal and interest by, the United States or any 
agency of the United States against the transfer of funds by the 
transferee of such certificates of deposit, eligible bankers' 
acceptances, or securities with a simultaneous agreement by such 
transferee to transfer to the transferor thereof certificates of 
deposit, eligible bankers' acceptances, or securities as described 
above, at a date certain not later than one year after such 
transfers or on demand, against the transfer of funds;

11 U.S.C. 101(47).
    In the years since the QFC provisions were added to the FDI Act by 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989, Public Law 101-73, 101 Stat. 183 (1989), the market for foreign 
government repurchase agreements appears to have developed to a point 
that such repurchase agreements have become a recognized source of 
liquidity. However, the FDIC also believes that it is appropriate to 
limit the kinds of foreign government securities which may be the 
subject of a repurchase agreement for QFC purposes. The FDIC proposes 
to extend QFC treatment only to repurchase agreements on securities 
issued or guaranteed by the central governments of countries that are 
either full members of the OECD or that have concluded special lending 
arrangements with the International Monetary Fund (IMF) associated with 
the IMF's General Arrangements to Borrow.1

    \1\The OECD is an international organization of countries which 
are committed to market-oriented economic policies, including the 
promotion of private enterprise and free-market prices, liberal 
trade policies, and the absence of exchange controls. 

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    The FDIC believes that repurchase agreements on foreign government 
securities issued or guaranteed by the OECD-based group of countries 
are similar in nature to the repurchase agreements on securities issued 
or guaranteed by the United States, which are presently included within 
the statutory definition of QFC. The risk weightings recommended for 
such securities by the International Convergence of Capital Measurement 
and Capital Standards of July 1988 by the Basle Committee on Banking 
Supervision (Basle Accord)2 reflects that the securities issued or 
guaranteed by the OECD-based group of countries present similar degrees 
of credit risk. Further, the FDIC's risk-based capital rules at 12 CFR 
part 325, appendix A, implementing the Basle Accord, consider the 
credit risk among the securities issued or guaranteed by the central 
governments of the OECD-based group of countries as being equal for 
purposes of determining capital requirements. And, pursuant to 12 CFR 
part 325, appendix A, section II.B.2, securities issued or guaranteed 
by the central governments of the OECD-based group of countries are 
among the limited forms of collateral which are formally recognized by 
the FDIC's risk-based capital framework. Accordingly, repurchase 
agreements on securities issued or guaranteed by the OECD-based group 
of countries are treated consistently under the risk-based capital 
rules. See 12 CFR part 325, appendix A, section II.C.

    \2\The Basle Accord established a risk-based framework for 
measuring the capital adequacy of internationally active banks. The 
Basle Accord was originally proposed by the Basle Committee on 
Banking Supervision (Basle Supervisors' Committee) and endorsed by 
the central bank governors of the Group of Ten (G-10) countries in 
July 1988. See, Int'l Convergence of Capital Measurement & Capital 
Standards, Comm. on Banking Regulations & Supervisory Practices, 
reprinted in 30 I.L.M. 967, 989 (1991).
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    The FDIC is thus proposing a rule to include repurchase agreements 
on securities issued or guaranteed by the OECD-based group of countries 
within the definition of a QFC. In the interests of consistency and 
simplicity, the rule would incorporate by reference the definition of 
``central government'' as set forth in 12 CFR part 325, appendix A, 
section II.C note 173 and ``OECD-based group of countries'' as set 
forth in 12 CFR part 325, appendix A, section II.B.2, note 12 (and 
incorporating any changes to these definitions that should occur by 
future amendment).4

    \3\The definition of central government includes departments and 
ministries of the central government, as well as central banks, but 
does not extend to state, provincial, or local governments or 
commercial enterprises owned by central governments. Nor does it 
extend to securities of local government entities or commercial 
enterprises guaranteed by the central government. 12 CFR part 325, 
section II.C., note 17 (1995).
    \4\The Corporation has recently issued a Notice of Proposed 
Rulemaking proposing to amend the existing definition of ``OECD-
based group of countries.'' 60 FR 8582 (Feb. 15, 1995).
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List of Subjects in 12 CFR Part 360

    Banks, Banking, Savings Associations.

    For the reasons set out in the preamble, the FDIC Board of 
Directors proposes to amend 12 CFR part 360 as follows:

PART 360--RESOLUTION AND RECEIVERSHIP RULES

    1. The authority citation for part 360 is revised to read as 
follows:

    Authority: 12 U.S.C. 1821(d)(11), 1821(e)(8)(D)(i), 1823(c)(4); 
Sec. 401(h), Pub. L. 101-73, 103 Stat. 357.

    2. Section 360.5 is added to Part 360 as follows:


Sec. 360.5  Definition of qualified financial contracts.

    (a) Authority and purpose. Sections 11(e)(8) through (10) of the 
Federal Deposit Insurance Act, 12 U.S.C. 1821(e)(8) through (10), 
provide special rules for the treatment of qualified financial 
contracts of an insured depository institution for which the FDIC is 
appointed conservator or receiver, including rules describing the 
manner in which qualified financial contracts may be transferred or 
closed out. Section 11(e)(8)(D)(i) of the Federal Deposit Insurance 
Act, 12 U.S.C. 1821(e)(8)(D)(i), grants the Corporation authority to 
determine by regulation whether an agreement in addition to those 
identified by section 11(e)(8)(D) itself should be included in the 
definition of qualified financial contract. The purpose of this section 
is to identify additional agreements which the Corporation has 
determined to be qualified financial contracts.
    (b) The following agreements shall be deemed ``qualified financial 
contracts'' under section 11(e)(8)(D)(i) of the Federal Deposit 
Insurance Act, as amended (12 U.S.C. 1821(e)(8)(D)(i)):
    (1) Spot foreign exchange agreements. A spot foreign exchange 
agreement is any agreement or combination of agreements (including 
master agreements) providing for or effecting the purchase or sale of 
one currency in exchange for another currency (or a unit of account 
established by an intergovernmental organization such as the European 
Currency Unit) with a maturity date of two days or less after the 
agreement has been entered into, and includes short-dated transactions 
such as tomorrow/next day and same day/tomorrow transactions.
    (2) Repurchase agreements on qualified foreign government 
securities. (i) A repurchase agreement on qualified foreign government 
securities is an agreement or combination of agreements (including 
master agreements) which provides for the transfer of securities that 
are direct obligations of, or that are fully guaranteed by, the central 
governments (as set forth at 12 CFR part 325, appendix A, section II.C, 
n. 17, as may be amended from time to time) of the OECD-based group of 
countries (as set forth at 12 CFR part 325, appendix A, section 
II.B.2., note 12 as may be amended from time to time) against the 
transfer of funds by the transferee of such securities with a 
simultaneous agreement by such transferee to transfer to the transferor 
thereof securities as described above, at a date certain not later than 
one year after such transfers or on demand, against the transfer of 
funds.
    (c) Nothing in this section shall be construed as limiting or 
changing a party's obligation to comply with all reasonable trading 
practices and requirements, non-insolvency law requirements and any 
other requirements imposed by other provisions of the FDI Act. This 
section in no way limits the authority of the Corporation to take 
supervisory or enforcement actions, or to otherwise manage the affairs 
of a financial institution for which the Corporation has been appointed 
conservator or receiver.

    By Order of the Board of Directors.

    Dated at Washington, D.C., this 6th day of September, 1995.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-23479 Filed 9-20-95; 8:45 am]
BILLING CODE 6714-01-P