[Federal Register Volume 61, Number 13 (Friday, January 19, 1996)]
[Rules and Regulations]
[Pages 1273-1274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-506]



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FEDERAL RESERVE SYSTEM

12 CFR Part 231

[Regulation EE; Docket No. R-0912]


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 amended Regulation EE to clarify that, for 
purposes of qualifying as a financial institution under Regulation EE, 
a person may represent that it is a financial market intermediary 
either orally or in writing. This amendment is intended to remove 
uncertainty in the financial markets as to the form of such 
representations.

EFFECTIVE DATE: February 20, 1996.

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

SUPPLEMENTARY INFORMATION:

Background

    The Federal Deposit Insurance Corporation Improvement Act of 1991 
(Act) (Pub. L. 102-242, Secs. 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 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.
    In 1994, the Board adopted Regulation EE (12 CFR part 231) to 
expand the application of the Act's netting provisions to a broader 
range of financial market participants (59 FR 4780, February 2, 1994). 
Under Regulation EE, persons meeting certain tests based on market 
activity will qualify as ``financial institutions'' under the Act. The 
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 Regulation EE tests have both a qualitative and a quantitative 
aspect. First, to qualify as a financial institution under the rule, a 
person 1 must represent that it will engage in financial contracts 
as a counterparty on both sides of one or more financial markets. 
Second, the person must meet one of two quantitative thresholds: It 
must have 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 

[[Page 1274]]
with counterparties that are not its affiliates.

    \1\ ``Person'' is defined broadly to include any legal entity, 
such as a corporation, partnership, or individual.
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Form of Representation

    Regulation EE does not require a person to make the ``market 
intermediary'' representation in any particular form. Some market 
participants, however, have requested that the Board clarify that the 
representation can be made orally or in writing. The Board has amended 
Sec. 231.3(a) of Regulation EE accordingly. The regulation does not 
require written representations (either as part of a financial contract 
or outside of the contract). Representations can be made orally and 
need not be made to a particular counterparty. This amendment should 
remove any lingering uncertainty in the financial markets as to the 
form of the representation as well as reduce the burden on any 
institutions that assumed the representation had to be in writing.

Regulatory Flexibility Act Certification

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 
605(b)), the Board certifies that this rule will not have a significant 
economic impact on a substantial number of small entities. The rule 
applies only to entities with a large volume of financial contracts 
and, in any case, does not impose any additional requirements on 
entities affected by the regulation.

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed 
the rule under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the rule.

Administrative Procedure Act

    The Administrative Procedure Act generally requires agencies to 
publish a notice of proposed rule making before adopting a final rule 
(5 U.S.C. 553(b)). In certain circumstances, however, the Act allows an 
agency to forego to the notice-and-comment process. These circumstances 
include when the agency for good cause finds that notice and comment 
are unnecessary or contrary to the public interest (5 U.S.C. 
553(b)(B)). The amendment to Regulation EE does not make a substantive 
change to the rule but rather clarifies that by not specifying a form 
of representation in the original rule, the Board intended that the 
representations could be made orally or in writing. The amendment 
clarifies a market uncertainty and may reduce burden for any 
institutions that assumed the representation had to be in writing. For 
these reasons, the Board finds that public comment is unnecessary and 
contrary to the public interest. Therefore, the Board finds that this 
amendment fits within the Act's exceptions from the notice-and-comment 
procedure.

List of Subjects in 12 CFR Part 231

    Banks, banking, Federal Reserve System.
    For the reasons set out in the preamble, 12 CFR Part 231 is amended 
as set forth below:

PART 231--NETTING ELIGIBILITY FOR FINANCIAL INSTITUTIONS 
(REGULATION EE)

    1. The authority citation for Part 231 continues to read as 
follows:

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

    2. In Sec. 231.3, the introductory text of paragraph (a) is revised 
to read as follows:


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, orally or in writing, 
that it will engage in financial contracts as a counterparty on both 
sides of one or more financial markets and either--
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, January 11, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-506 Filed 1-18-96; 8:45 am]
BILLING CODE 6210-01-P