[Federal Register Volume 81, Number 91 (Wednesday, May 11, 2016)]
[Proposed Rules]
[Pages 29169-29193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11209]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 81, No. 91 / Wednesday, May 11, 2016 / 
Proposed Rules

[[Page 29169]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 217, 249, and 252

[Regulations Q, WW, and YY; Docket No. R-1538]
RIN 7100 AE-52


Restrictions on Qualified Financial Contracts of Systemically 
Important U.S. Banking Organizations and the U.S. Operations of 
Systemically Important Foreign Banking Organizations; Revisions to the 
Definition of Qualifying Master Netting Agreement and Related 
Definitions

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is inviting comment on a proposed rule to promote 
U.S. financial stability by improving the resolvability and resilience 
of systemically important U.S. banking organizations and systemically 
important foreign banking organizations pursuant to section 165 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). Under the proposed rule, any U.S. top-tier bank holding company 
identified by the Board as a global systemically important banking 
organization (GSIB), the subsidiaries of any U.S. GSIB (other than 
national banks and federal savings associations), and the U.S. 
operations of any foreign GSIB (other than national banks and federal 
savings associations) would be subjected to restrictions regarding the 
terms of their non-cleared qualified financial contracts (QFCs). First, 
a covered entity would generally be required to ensure that QFCs to 
which it is party, including QFCs entered into outside the United 
States, provide that any default rights and restrictions on the 
transfer of the QFCs are limited to the same extent as they would be 
under the Dodd-Frank Act and the Federal Deposit Insurance Act. Second, 
a covered entity would generally be prohibited from being party to QFCs 
that would allow a QFC counterparty to exercise default rights against 
the covered entity based on the entry into a resolution proceeding 
under the Dodd-Frank Act, Federal Deposit Insurance Act, or any other 
resolution proceeding of an affiliate of the covered entity. The 
proposal would also amend certain definitions in the Board's capital 
and liquidity rules; these amendments are intended to ensure that the 
regulatory capital and liquidity treatment of QFCs to which a covered 
entity is party is not affected by the proposed restrictions on such 
QFCs. The Office of the Comptroller of the Currency is expected to 
issue a proposed rule that would subject national banks and federal 
savings associations that are GSIB subsidiaries to requirements 
substantively identical to those proposed here.

DATES: Comments should be received by August 5, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1538 and 
RIN No. 7100 AE-52, by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street (between 18th and 19th Streets 
NW.) Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Felton Booker, Senior Supervisory 
Financial Analyst, (202) 912-4651, or Mark Savignac, Supervisory 
Financial Analyst, (202) 475-7606, Division of Banking Supervision and 
Regulation; or Will Giles, Counsel, (202) 452-3351, or Lucy Chang, 
Attorney, (202) 475-6331, Legal Division, Board of Governors of the 
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. 
For the hearing impaired only, Telecommunications Device for the Deaf 
(TDD) users may contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Proposal
    C. Consultation With U.S. Financial Regulators, the Council, and 
Foreign Authorities
    D. Overview of Statutory Authority
II. Proposed Restrictions on QFCs of GSIBs
    A. Covered Entities
    B. Covered QFCs
    C. Definition of ``Default Right''
    D. Required Contractual Provisions Related to the U.S. Special 
Resolution Regimes
    E. Prohibited Cross-Default Rights
    F. Process for Approval of Enhanced Creditor Protections
III. Transition Periods
IV. Costs and Benefits
V. Revisions to Certain Definitions in the Board's Capital and 
Liquidity Rules
VI. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act: Initial Regulatory Flexibility 
Analysis
    C. Riegle Community Development and Regulatory Improvement Act 
of 1994
    D. Solicitation of Comments on the Use of Plain Language

I. Introduction

A. Background

    This proposed rule, which is part of a set of actions by the Board 
to address the ``too-big-to-fail'' problem, addresses one of the ways 
in which the failure of a major financial firm can destabilize the 
financial system. The failure of a large, interconnected financial 
company could cause severe damage to the U.S. financial system and, 
ultimately, to the economy as a whole, as illustrated by the failure of 
Lehman Brothers in September 2008. Protecting the financial stability 
of the United States by helping to address this too-big-to-fail problem 
is a core objective of the Dodd-Frank Wall Street Reform and Consumer 
Protection

[[Page 29170]]

Act (Dodd-Frank Act),\1\ which Congress passed in response to the 2007-
2009 financial crisis and the ensuing recession. The Dodd-Frank Act and 
the actions that U.S. financial regulators have taken to implement it 
and to otherwise protect U.S. financial stability help to address the 
too-big-to-fail problem in two ways: by reducing the probability that a 
systemically important financial company will fail, and by reducing the 
damage that such a company's failure would do if it were to occur. The 
second of these strategies centers on measures designed to help ensure 
that a failed company's passage through a resolution proceeding--such 
as bankruptcy or the special resolution process created by the Dodd-
Frank Act--would be more orderly, thereby helping to mitigate 
destabilizing effects on the rest of the financial system.\2\
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    \1\ The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L. 
111-203). According to its preamble, the Dodd-Frank Act is intended 
``[t]o promote the financial stability of the United States by 
improving accountability and transparency in the financial system, 
to end `too big to fail', [and] to protect the American taxpayer by 
ending bailouts.''
    \2\ The Dodd-Frank Act itself pursues this goal through numerous 
provisions, including by requiring systemically important financial 
companies to develop resolution plans (also known as ``living 
wills'') that lay out how they could be resolved in an orderly 
manner if they were to fail and by creating a new resolution regime, 
the Orderly Liquidation Authority, applicable to systemically 
important financial companies. 12 U.S.C. 5365(d), 5381-5394. 
Moreover, section 165 of the Dodd-Frank Act directs the Board to 
promote financial stability through regulation by subjecting large 
bank holding companies and nonbank financial companies designated 
for Board supervision to enhanced prudential standards ``[i]n order 
to prevent or mitigate risks to the financial stability of the 
United States that could arise from the material financial distress 
or failure, or ongoing activities, of large, interconnected 
financial institutions.'' 12 U.S.C. 5365(a)(1).
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    This proposed rule is intended as a further step to increase the 
resolvability of U.S. global systemically important banking 
organizations (GSIBs) and foreign GSIBs that operate in the United 
States. The proposal complements the Board's recent notice of proposed 
rulemaking on total loss-absorbing capacity, long-term debt, and clean 
holding company requirements for GSIBs (TLAC proposal) \3\ and the 
ongoing work of the Board and the FDIC on resolution planning 
requirements for GSIBs. The current proposal focuses on improving the 
orderly resolution of a GSIB by limiting disruptions to a failed GSIB 
through its financial contracts with other companies.
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    \3\ 80 FR 74926 (Nov. 30, 2015). For further high-level 
background on post-crisis regulatory reforms aimed at addressing the 
too-big-to-fail problem, see the preamble to the TLAC proposal. Id. 
at 74926-74928.
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    The largest financial firms are interconnected with other financial 
firms through large volumes of financial contracts of various types, 
including derivatives transactions. The failure of one entity within a 
large financial firm can trigger disruptive terminations of these 
contracts, as the counterparties of both the failed entity and other 
entities within the same firm exercise their contractual rights to 
terminate the contracts and liquidate collateral. These terminations, 
especially if counterparties lose confidence in the GSIB quickly and in 
large numbers, can destabilize the financial system and potentially 
spark a financial crisis through several channels. They can destabilize 
the failed entity's otherwise solvent affiliates, causing them to fail 
and thereby potentially causing their counterparties to fail in a chain 
reaction that can ripple through the system. They also may result in 
firesales of large volumes of financial assets, such as the collateral 
that secures the contracts, which can in turn weaken and cause stress 
for other firms by lowering the value of similar assets that they hold.
    For example, the triggering of default rights by counterparties of 
Lehman Brothers in 2008 was a key driver of its destabilization that 
resulted from its failure.\4\ At the time of its failure, Lehman was 
party to very large volumes of financial contracts, including over-the-
counter derivatives contracts.\5\ When its holding company declared 
bankruptcy, Lehman's counterparties exercised their default rights.\6\ 
Lehman's default ``caused disruptions in the swaps and derivatives 
markets and a rapid, market-wide unwinding of trading positions.'' \7\ 
Meanwhile, ``out-of-the-money counterparties, which owed Lehman money, 
typically chose not to terminate their contracts'' and instead 
suspended payment, reducing the liquidity available to the bankruptcy 
estate.\8\ The complexity and disruption associated with Lehman's 
portfolios of financial contracts led to a disorderly resolution of 
Lehman.\9\ This proposal is meant to help avoid a repeat of the 
systemic disruptions caused by the Lehman failure by preventing the 
exercise of default rights in financial contracts from leading to such 
disorderly and destabilizing failures in the future.
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    \4\ See ``The Orderly Liquidation of Lehman Brothers Holdings 
Inc. under the Dodd-Frank Act'' 3, FDIC Quarterly (2011) (``The 
Lehman bankruptcy had an immediate and negative effect on U.S. 
financial stability and has proven to be a disorderly, time-
consuming, and expensive process.''), available at https://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf.
    \5\ See Michael J. Fleming and Asani Sarkar, ``The Failure 
Resolution of Lehman Brothers,'' FRBNY Economic Policy Review 185 
(December 2014), available at https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412flem.pdf.
    \6\ See id.
    \7\ ``The Orderly Liquidation of Lehman Brothers Holdings Inc. 
under the Dodd-Frank Act'' 3, FDIC Quarterly (2011), available at 
https://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf.
    \8\ Michael J. Fleming and Asani Sarkar, ``The Failure 
Resolution of Lehman Brothers,'' FRBNY Economic Policy Review 185 
(December 2014), available at https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412flem.pdf.
    \9\ See Mark J. Roe and Stephen D. Adams, ``Restructuring Failed 
Financial Firms in Bankruptcy: Selling Lehman's Derivatives 
Portfolio,'' Yale Journal on Regulation (2015) (``Lehman's failure 
exacerbated the financial crisis, especially after AIG's collapse in 
the days afterwards prompted counterparties to close out positions, 
sell collateral, and thereby depress and freeze markets. Many 
financial players stopped trading for fear that their counterparty 
would be the next Lehman or that their counterparty had large unseen 
exposures to Lehman that would make the counterparty itself fail. 
Such was the case with the Reserve Primary Fund, a money market fund 
that held too many defaulting obligations of Lehman. That reaction 
led to a further panic, a threat of a run on money market funds, and 
a government guarantee of all money market funds to stem the ongoing 
financial degradation throughout the economy.'').
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    This proposal is intended to respond to the threat to financial 
stability posed by such default rights in two ways. First, the proposal 
reduces the risk that courts in foreign jurisdictions would disregard 
statutory provisions that would stay the rights of a failed firm's 
counterparties to terminate their contracts when the firm enters a 
resolution proceeding under one of the special resolution frameworks 
for failed financial firms created by Congress under the Federal 
Deposit Insurance Act (FDI Act) and the Dodd-Frank Act. Second, the 
proposal would facilitate the resolution of a large financial entity 
under the U.S. Bankruptcy Code and other resolution frameworks by 
ensuring that the counterparties of solvent affiliates of the failed 
entity could not unravel their contracts with the solvent affiliate 
based solely on the failed entity's resolution.
    Qualified financial contracts, default rights, and financial 
stability. In particular, this proposal pertains to several important 
classes of financial transactions that are collectively known as 
``qualified financial contracts'' (QFCs).\10\ QFCs include derivatives, 
repurchase agreements (also known as ``repos'') and reverse repos, and 
securities lending and borrowing agreements.\11\ GSIBs enter into QFCs 
for

[[Page 29171]]

a variety of purposes, including to borrow money to finance their 
investments, to lend money, to manage risk, and to enable their clients 
and counterparties to hedge risks, make markets in securities and 
derivatives, and take positions in financial investments.
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    \10\ The proposal would adopt the definition of ``qualified 
financial contract'' set out in section 210(c)(8)(D) of the Dodd-
Frank Act, 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec.  252.81.
    \11\ The definition of ``qualified financial contract'' is 
broader than this list of examples, and the default rights discussed 
are not common to all types of QFC.
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    QFCs play a role in economically valuable financial intermediation 
when markets are functioning normally. But they are also a major source 
of financial interconnectedness, which can pose a threat to financial 
stability in times of market stress. This proposal focuses on a context 
in which that threat is especially great: the failure of a GSIB that is 
party to large volumes of QFCs, likely including QFCs with 
counterparties that are themselves systemically important.
    By contract, a party to a QFC generally has the right to take 
certain actions if its counterparty defaults on the QFC (that is, if it 
fails to meet certain contractual obligations). Common default rights 
include the right to suspend performance of the non-defaulting party's 
obligations, the right to terminate or accelerate the contract, the 
right to set off amounts owed between the parties, and the right to 
seize and liquidate the defaulting party's collateral. In general, 
default rights allow a party to a QFC to reduce the credit risk 
associated with the QFC by granting it the right to exit the QFC and 
thereby reduce its exposure to its counterparty upon the occurrence of 
a specified condition, such as its counterparty's entry into a 
resolution proceeding.
    Where the defaulting party is a GSIB entity, the private benefit of 
allowing counterparties of GSIBs to take certain actions must be 
weighed against the harm that these actions cause by encouraging the 
disorderly failure of a GSIB and increasing the threat to the stability 
of the U.S. financial system as a whole. For example, if a significant 
number of QFC counterparties exercise their default rights 
precipitously and in a manner that would impede an orderly resolution 
of a GSIB, all QFC counterparties and the financial system may 
potentially be worse off and less stable.
    This may occur through several channels. First, the exits may drain 
liquidity from a troubled GSIB, forcing the GSIB to rapidly sell off 
assets at depressed prices, both because the sales must be done within 
a short timeframe and because the elevated supply may push prices down. 
These asset firesales may cause or deepen balance-sheet insolvency at 
the GSIB, causing a GSIB to fail more suddenly and reducing the amount 
that its other creditors can recover, thereby imposing losses on those 
creditors and threatening their solvency. The GSIB may also respond to 
a QFC run by withdrawing liquidity that it had offered to other firms, 
forcing them to engage in firesales. Alternatively, if the GSIB's QFC 
counterparty itself liquidates the QFC collateral at firesale prices, 
the effect will again be to weaken the GSIB's balance sheet.\12\ The 
counterparty's rights to set off amounts owed, terminate the contract, 
and suspend payments may allow it to further drain the GSIB's capital 
and liquidity by withholding payments that it would otherwise owe to 
the GSIB. The GSIB may also have rehypothecated collateral that it 
received from QFC counterparties, for instance in repo or securities 
lending transactions that fund other client arrangements, in which case 
demands from those counterparties for the early return of their 
rehypothecated collateral could be especially disruptive.\13\
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    \12\ See ``The Orderly Liquidation of Lehman Brothers Holdings 
Inc. under the Dodd-Frank Act'' 8, FDIC Quarterly (2011), available 
at https://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf (``A disorderly unwinding of [qualified financial 
contracts] triggered by an event of insolvency, as each counterparty 
races to unwind and cover unhedged positions, can cause a tremendous 
loss of value, especially if lightly traded collateral covering a 
trade is sold into an artificially depressed, unstable market. Such 
disorderly unwinding can have severe negative consequences for the 
financial company, its creditors, its counterparties, and the 
financial stability of the United States.'').
    \13\ See generally Adam Kirk, James McAndrews, Parinitha Sastry, 
and Phillip Weed, ``Matching Collateral Supply and Financing Demands 
in Dealer Banks,'' FRBNY Economic Policy Review 127 (December 2014), 
available at http://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412kirk.pdf.
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    The asset firesales discussed above can also spread contagion 
throughout the financial system by increasing volatility and by 
lowering the value of similar assets held by other firms, potentially 
causing these firms to suffer mark-to-market losses, diminished market 
confidence in their own solvency, margin calls, and creditor runs 
(which could lead to further firesales, worsening the contagion). 
Finally, the early terminations of derivatives that the surviving 
entities of the failed GSIB relied on to hedge their risks could leave 
those entities with major risks unhedged, increasing the entities' 
potential losses going forward.
    Where there are significant simultaneous terminations and these 
effects occur contemporaneously, such as upon the failure of a GSIB 
that is party to a large volume of QFCs, they may pose a substantial 
risk to financial stability. In short, QFC continuity is important for 
the orderly resolution of a GSIB because it helps to ensure that the 
GSIB entities remain viable and to avoid instability caused by asset 
firesales.
    Consequently, the Board and the Federal Deposit Insurance 
Corporation (FDIC) have identified the exercise of certain default 
rights in financial contracts as a potential obstacle to orderly 
resolution in the context of resolution plans filed pursuant to section 
165(d) of the Dodd-Frank Act,\14\ and have instructed the most 
systemically important firms to demonstrate that they are ``amending, 
on an industry-wide and firm-specific basis, financial contracts to 
provide for a stay of certain early termination rights of external 
counterparties triggered by insolvency proceedings.'' \15\
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    \14\ 12 U.S.C. 5365(d).
    \15\ Board and FDIC, ``Agencies Provide Feedback on Second Round 
Resolution Plans of `First-Wave' Filers'' (August 5, 2014), 
available at http://www.federalreserve.gov/newsevents/press/bcreg/20140805a.htm. See also Board and FDIC, ``Agencies Provide Feedback 
on Resolution Plans of Three Foreign Banking Organizations'' (March 
23, 2015), available at http://www.federalreserve.gov/newsevents/press/bcreg/20150323a.htm; Board and FDIC, ``Guidance for 2013 
165(d) Annual Resolution Plan Submissions by Domestic Covered 
Companies that Submitted Initial Resolution Plans in 2012'' 5-6 
(April 15, 2013), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20130415c2.pdf.
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    Direct defaults and cross-defaults. This proposal focuses on two 
distinct scenarios in which a non-defaulting party to a QFC is commonly 
able to exercise the rights described above. These two scenarios 
involve a default that occurs when either the GSIB legal entity that is 
a direct party \16\ to the QFC or an affiliate of that legal entity 
enters a resolution proceeding.\17\ The first

[[Page 29172]]

scenario occurs when a GSIB entity that is itself a direct party to the 
QFC enters a resolution proceeding; this preamble refers to such a 
scenario as a ``direct default'' and refers to the default rights that 
arise from a direct default as ``direct default rights.'' The second 
scenario occurs when an affiliate of the GSIB entity that is a direct 
party to the QFC (such as the direct party's parent holding company) 
enters a resolution proceeding; this preamble refers to such a scenario 
as a ``cross-default'' and refers to default rights that arise from a 
cross-default as ``cross-default rights.'' For example, a GSIB parent 
entity might guarantee the derivatives transactions of its subsidiaries 
and those derivatives contracts could contain cross-default rights 
against a subsidiary of the GSIB that would be triggered by the 
bankruptcy filing of the GSIB parent entity even though the subsidiary 
continues to meet all of its financial obligations.\18\
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    \16\ In general, a ``direct party'' refers to a party to a 
financial contract other than a credit enhancement (such as a 
guarantee). The definition of ``direct party'' and related 
definitions are discussed in more detail below on page 38.
    \17\ This preamble uses phrases such as ``entering a resolution 
proceeding'' and ``going into resolution'' to encompass the concept 
of ``becoming subject to a receivership, insolvency, liquidation, 
resolution, or similar proceeding.'' These phrases refer to 
proceedings established by law to deal with a failed legal entity. 
In the context of the failure of a systemically important banking 
organization, the most relevant types of resolution proceeding 
include the following: for most U.S.-based legal entities, the 
bankruptcy process established by the U.S. Bankruptcy Code (Title 
11, United States Code); for U.S. insured depository institutions, a 
receivership administered by the Federal Deposit Insurance 
Corporation (FDIC) under the Federal Deposit Insurance Act (12 
U.S.C. 1821); for companies whose ``resolution under otherwise 
applicable Federal or State law would have serious adverse effects 
on the financial stability of the United States,'' the Dodd-Frank 
Act's Orderly Liquidation Authority (12 U.S.C. 5383(b)(2)); and, for 
entities based outside the United States, resolution proceedings 
created by foreign law.
    \18\ See Michael J. Fleming and Asani Sarkar, ``The Failure 
Resolution of Lehman Brothers,'' FRBNY Economic Policy Review 185 
(December 2014), available at https://www.newyorkfed.org/medialibrary/media/research/epr/2014/1412flem.pdf.
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    Importantly, this proposal does not affect all types of default 
rights, and, where it affects a default right, the proposal does so 
only temporarily for the purpose of allowing the relevant resolution 
authority to take action to continue to provide for continued 
performance on the QFC. Moreover, the proposal is concerned only with 
default rights that run against a GSIB--that is, direct default rights 
and cross-default rights that arise from the entry into resolution of a 
GSIB entity. The proposal would not affect default rights that a GSIB 
entity (or any other entity) may have against a counterparty that is 
not a GSIB entity. This limited scope is appropriate because, as 
described above, the risk posed to financial stability by the exercise 
of QFC default rights is greatest when the defaulting counterparty is a 
GSIB entity.
    Single-point-of-entry resolution. Cross-default rights are 
especially significant in the context of a GSIB failure because GSIBs 
typically enter into large volumes of QFCs through different entities 
controlled by the GSIB. For example, a U.S. GSIB is made up of a U.S. 
bank holding company and numerous operating subsidiaries that are 
owned, directly or indirectly, by the bank holding company. From the 
standpoint of financial stability, the most important of these 
operating subsidiaries are generally a U.S. insured depository 
institution, a U.S. broker-dealer, and similar entities organized in 
other countries.
    Many complex GSIB have developed resolution strategies that rely on 
the single-point-of-entry (SPOE) resolution strategy. In an SPOE 
resolution of a GSIB, only a single legal entity--the GSIB's top-tier 
bank holding company--would enter a resolution proceeding. The losses 
that led to the GSIB's failure would be passed up from the operating 
subsidiaries that incurred the losses to the holding company and would 
then be imposed on the equity holders and unsecured creditors of the 
holding company through the resolution process.\19\ This strategy is 
designed to help ensure that the GSIB subsidiaries remain adequately 
capitalized, and that operating subsidiaries of the GSIB are able to 
continue to meet their financial obligations without defaulting or 
entering resolution themselves. The expectation that the holding 
company's equity holders and unsecured creditors would absorb the 
GSIB's losses in the event of failure would help to maintain the 
confidence of the operating subsidiaries' creditors and counterparties 
(including their QFC counterparties), reducing their incentive to 
engage in potentially destabilizing funding runs or margin calls and 
thus lowering the risk of asset firesales. A successful SPOE resolution 
would also avoid the need for separate resolution proceedings for 
separate legal entities run by separate authorities across multiple 
jurisdictions, which would be more complex and could therefore 
destabilize the resolution.
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    \19\ The Board's TLAC proposal would address the need for 
adequate external loss-absorbing capacity at the holding company 
level by requiring the top-tier holding companies of the U.S. GSIBs 
and the U.S. intermediate holding companies of foreign GSIBs to 
maintain outstanding required levels of unsecured long-term debt and 
TLAC, which is defined to include both tier 1 capital and eligible 
long-term debt. See 80 FR 74926, 74931-74944. The TLAC proposal also 
discussed, but did not propose, a potential framework for internal 
loss-absorbing capacity that could be used to transfer losses from 
the operating subsidiaries that incur them to the top-tier holding 
company. See 80 FR 74926, 74948-74949.
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    The Board's TLAC proposal is intended to help, though not 
exclusively, to lay the foundation necessary for the SPOE resolution of 
a GSIB by requiring the top-tier holding companies of U.S. GSIBs and 
the U.S. intermediate holding companies of foreign GSIBs to maintain 
loss-absorbing capacity that could be used for resolution and to adopt 
a ``clean holding company'' structure, under which certain financial 
activities that could pose obstacles to orderly resolution would be 
off-limits to the holding company and could only be conducted by its 
operating subsidiaries.\20\
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    \20\ See 80 FR 74926, 74944-74948.
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    Other orderly resolution strategies. This proposal would also yield 
benefits for other approaches to resolution. For example, preventing 
early terminations of QFCs would increase the prospects for an orderly 
resolution under a multiple-point-of-entry (MPOE) strategy involving a 
foreign GSIB's U.S. intermediate holding company going into resolution 
or a resolution plan that calls for a GSIB's U.S. insured depository 
institution to enter resolution under the Federal Deposit Insurance 
Act. As discussed above, this proposal would help support the continued 
operation of affiliates of an entity experiencing resolution to the 
extent the affiliate continues to perform on its QFCs.
    U.S. Bankruptcy Code. When an entity goes into resolution under the 
Bankruptcy Code, attempts by the debtor entity's creditors to enforce 
their debts through any means other than participation in the 
bankruptcy proceeding (for instance, by suing in another court, seeking 
enforcement of a preexisting judgment, or seizing and liquidating 
collateral) are generally blocked by the imposition of an automatic 
stay.\21\ A key purpose of the automatic stay, and of bankruptcy law in 
general, is to maximize the value of the bankruptcy estate and the 
creditors' ultimate recoveries by facilitating an orderly liquidation 
or restructuring of the debtor. The automatic stay thus solves a 
collective action problem in which the creditors' individual incentives 
to become the first to recover as much from the debtor as possible, 
before other creditors can do so, collectively cause a value-destroying 
disorderly liquidation of the debtor.\22\
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    \21\ See 11 U.S.C. 362.
    \22\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d 
876, 879 (7th Cir. 2001).
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    However, the Bankruptcy Code largely exempts QFC \23\ 
counterparties from the automatic stay through special ``safe harbor'' 
provisions.\24\ Under these provisions, any rights that a QFC 
counterparty has to terminate the contract, set off obligations, and 
liquidate collateral in response to a

[[Page 29173]]

direct default are not subject to the stay and may be exercised against 
the debtor immediately upon default. (The Bankruptcy Code does not 
itself confer default rights upon QFC counterparties; it merely permits 
QFC counterparties to exercise certain rights created by other sources, 
such as contractual rights created by the terms of the QFC.)
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    \23\ The Bankruptcy Code does not use the term ``qualified 
financial contract,'' but the set of transactions covered by its 
safe harbor provisions closely tracks the set of transactions that 
fall within the definition of ``qualified financial contract'' used 
in Title II of the Dodd-Frank Act and in this proposal.
    \24\ 11 U.S.C. 362(b)(6), (7), (17), (27), 362(o), 555, 556, 
559, 560, 561. The Bankruptcy Code specifies the types of parties to 
which the safe harbor provisions apply, such as financial 
institutions and financial participants. Id.
---------------------------------------------------------------------------

    The Bankruptcy Code's automatic stay also does not prevent the 
exercise of cross-default rights against an affiliate of the party 
entering resolution. The stay generally applies only to actions taken 
against the party entering resolution or the bankruptcy estate,\25\ 
whereas a QFC counterparty exercising a cross-default right is instead 
acting against a distinct legal entity that is not itself in 
resolution: The debtor's affiliate.
---------------------------------------------------------------------------

    \25\ See 11 U.S.C. 362(a).
---------------------------------------------------------------------------

    Title II of the Dodd-Frank Act and the Orderly Liquidation 
Authority. Title II of the Dodd-Frank Act imposes somewhat broader stay 
requirements on QFCs that enter resolution under that Title. In 
general, no financial firm (regardless of size) is too-big-to-fail and 
a U.S. bank holding company (such as the top-tier holding company of a 
U.S. GSIB) that fails would be resolved under the Bankruptcy Code. 
Congress recognized, however, that a financial company might fail under 
extraordinary circumstances in which an attempt to resolve it through 
the bankruptcy process would have serious adverse effects on financial 
stability in the United States. Title II of the Dodd-Frank Act 
establishes the Orderly Liquidation Authority (OLA), an alternative 
resolution framework intended to be used rarely to manage the failure 
of a firm that poses a significant risk to the financial stability of 
the United States in a manner that mitigates such risk and minimizes 
moral hazard.\26\ Title II authorizes the Secretary of the Treasury, 
upon the recommendation of other government agencies and a 
determination that several preconditions are met, to place a financial 
company into a receivership conducted by the FDIC as an alternative to 
bankruptcy.\27\
---------------------------------------------------------------------------

    \26\ Section 204(a) of the Dodd-Frank Act, 12 U.S.C. 5384(a).
    \27\ See section 203 of the Dodd-Frank Act, 12 U.S.C. 5383.
---------------------------------------------------------------------------

    Title II empowers the FDIC to transfer the QFCs to a bridge 
financial company or some other financial company that is not in a 
resolution proceeding and should therefore be capable of performing 
under the QFCs.\28\ To give the FDIC time to effect this transfer, 
Title II temporarily stays QFC counterparties of the failed entity from 
exercising termination, netting, and collateral liquidation rights 
``solely by reason of or incidental to'' the failed entity's entry into 
OLA resolution, its insolvency, or its financial condition.\29\ Once 
the QFCs are transferred in accordance with the statute, Title II 
permanently stays the exercise of default rights for those reasons.\30\
---------------------------------------------------------------------------

    \28\ See 12 U.S.C. 5390(c)(9).
    \29\ 12 U.S.C. 5390(c)(10)(B)(i)(I). This temporary stay 
generally lasts until 5:00 p.m. eastern time on the business day 
following the appointment of the FDIC as receiver.
    \30\ 12 U.S.C. 5390(c)(10)(B)(i)(II).
---------------------------------------------------------------------------

    Title II addresses cross-default rights through a similar 
procedure. It empowers the FDIC to enforce contracts of subsidiaries or 
affiliates of the failed covered financial company that are 
``guaranteed or otherwise supported by or linked to the covered 
financial company, notwithstanding any contractual right to cause the 
termination, liquidation, or acceleration of such contracts based 
solely on the insolvency, financial condition, or receivership of'' the 
failed company, so long as the FDIC takes certain steps to protect the 
QFC counterparties' interests by the end of the business day following 
the company's entry into OLA resolution.\31\
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 5390(c)(16).
---------------------------------------------------------------------------

    These stay-and-transfer provisions of the Dodd-Frank Act are 
intended to mitigate the threat posed by QFC default rights. At the 
same time, the provisions allow for appropriate protections for QFC 
counterparties of the failed financial company. The provisions stay 
only the exercise of default rights based on the failed company's entry 
into resolution, the fact of its insolvency, or its financial 
condition. And the stay period is brief, unless the FDIC transfers the 
QFCs to another financial company that is not in resolution (and should 
therefore be capable of performing under the QFCs) or, if applicable, 
provides adequate protection that the QFCs will be performed.
    The Federal Deposit Insurance Act. Under the FDI Act, a failing 
insured depository institution would generally enter a receivership 
administered by the FDIC.\32\ The FDI Act addresses direct default 
rights in the failed bank's QFCs with stay-and-transfer provisions that 
are substantially similar to the provisions of Title II of the Dodd-
Frank Act discussed above.\33\ However, the FDI Act does not address 
cross-default rights, leaving the QFC counterparties of the failed 
depository institution's affiliates free to exercise any contractual 
rights they may have to terminate, net, and liquidate collateral based 
on the depository institution's entry into resolution. Moreover, as 
with Title II of the Dodd-Frank Act, there is a possibility that a 
court of a foreign jurisdiction might decline to enforce the FDI Act's 
stay-and-transfer provisions under certain circumstances.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 1821(c).
    \33\ See 12 U.S.C. 1821(e)(8)-(10).
---------------------------------------------------------------------------

B. Overview of the Proposal

    The Board invites comment on all aspects of this proposed 
rulemaking, which is intended to increase GSIB resolvability by 
addressing two QFC-related issues. First, the proposal seeks to address 
the risk that a court in a foreign jurisdiction may decline to enforce 
the QFC stay-and-transfer provisions of Title II and the FDI Act 
discussed above. Second, the proposal seeks to address the potential 
disruption that may occur if a counterparty to a QFC with an affiliate 
of a GSIB entity that goes into resolution under the Bankruptcy Code or 
the FDI Act is provided cross-default rights.
    Scope of application. The proposal's requirements would apply to 
all ``covered entities.'' ``Covered entity'' would include: Any U.S. 
top-tier bank holding company identified as a GSIB under the Board's 
rule establishing risk-based capital surcharges for GSIBs (GSIB 
surcharge rule); \34\ any subsidiary of such a bank holding company; 
and any U.S. subsidiary, U.S. branch, or U.S. agency of a foreign GSIB. 
Covered entity would not include certain entities that are supervised 
by the Office of the Comptroller of the Currency (OCC) (covered bank). 
The OCC is expected to issue a proposed rule that would subject covered 
banks to requirements substantively identical to those proposed here 
for covered entities.
---------------------------------------------------------------------------

    \34\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015). See proposed 
rule Sec.  252.81.
---------------------------------------------------------------------------

    ``Qualified financial contract'' or ``QFC'' would be defined to 
have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank 
Act,\35\ and would include, among other things, derivatives, repos, and 
securities lending agreements. Subject to the exceptions discussed 
below, the proposal's requirements would apply to any QFC to which a 
covered entity is party (covered QFC).
---------------------------------------------------------------------------

    \35\ 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec.  252.81.
---------------------------------------------------------------------------

    Required contractual provisions related to the U.S. special 
resolution regimes. Covered entities would be required to ensure that 
covered QFCs include contractual terms explicitly providing that any 
default rights or restrictions on the transfer of the QFC are limited 
to the same extent as they

[[Page 29174]]

would be pursuant to the U.S. special resolution regimes--that is, the 
OLA and the FDI Act.\36\ The proposed requirements are not intended to 
imply that the statutory stay-and-transfer provisions would not in fact 
apply to a given QFC, but rather to help ensure that all covered QFCs--
including QFCs that are governed by foreign law, entered into with a 
foreign party, or for which collateral is held outside the United 
States--would be treated the same way in the context of an FDIC 
receivership under the Dodd-Frank Act or the FDI Act. This provision 
would address the first issue listed above and would decrease the QFC-
related threat to financial stability posed by the failure and 
resolution of an internationally active GSIB. This section of the 
proposal is also consistent with analogous legal requirements that have 
been imposed in other national jurisdictions \37\ and with the 
Financial Stability Board's ``Principles for Cross-border Effectiveness 
of Resolution Actions.'' \38\
---------------------------------------------------------------------------

    \36\ See proposed rule Sec.  252.83.
    \37\ See, e.g., Bank of England Prudential Regulation Authority, 
Policy Statement, ``Contractual stays in financial contracts 
governed by third-country law'' (November 2015), available at http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf.
    \38\ Financial Stability Board, ``Principles for Cross-border 
Effectiveness of Resolution Actions'' (November 3, 2015), available 
at http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
    The Financial Stability Board (FSB) was established in 2009 to 
coordinate the work of national financial authorities and 
international standard-setting bodies and to develop and promote the 
implementation of effective regulatory, supervisory, and other 
financial sector policies to advance financial stability. The FSB 
brings together national authorities responsible for financial 
stability in 24 countries and jurisdictions, as well as 
international financial institutions, sector-specific international 
groupings of regulators and supervisors, and committees of central 
bank experts. See generally Financial Stability Board, available at 
http://www.fsb.org.
---------------------------------------------------------------------------

    Prohibited cross-default rights. A covered entity would be 
prohibited from entering into covered QFCs that would allow the 
exercise of cross-default rights--that is, default rights related, 
directly or indirectly, to the entry into resolution of an affiliate of 
the direct party--against it.\39\ Covered entities would similarly be 
prohibited from entering into covered QFCs that would provide for a 
restriction on the transfer of a credit enhancement supporting the QFC 
from the covered entity's affiliate to a transferee upon the entry into 
resolution of the affiliate.
---------------------------------------------------------------------------

    \39\ See proposed rule Sec.  252.83(b).
---------------------------------------------------------------------------

    The Board does not propose to prohibit covered entities from 
entering into QFCs that contain direct default rights. Under the 
proposal, a counterparty to a direct QFC with a covered entity also 
could, to the extent not inconsistent with Title II or the FDI Act, be 
granted and could exercise the right to terminate the QFC if the 
covered entity fails to perform its obligations under the QFC.
    As an alternative to bringing their covered QFCs into compliance 
with the requirements set out in this section of the proposed rule, 
covered entities would be permitted to comply by adhering to the ISDA 
2015 Resolution Stay Protocol.\40\ The Board views the ISDA 2015 
Resolution Stay Protocol as consistent with the requirements of the 
proposed rule.
---------------------------------------------------------------------------

    \40\ See proposed rule Sec.  252.85(a).
---------------------------------------------------------------------------

    The purpose of this section of the proposal is to help ensure that, 
when a GSIB entity enters resolution under the Bankruptcy Code or the 
FDI Act,\41\ its affiliates' covered QFCs will be protected from 
disruption to a similar extent as if the failed entity had entered 
resolution under the OLA. In particular, this section would facilitate 
resolution under the Bankruptcy Code by preventing the QFC 
counterparties of a GSIB's operating subsidiary from exercising default 
rights on the basis of the entry into bankruptcy by the GSIB's top-tier 
holding company or any other affiliate of the operating subsidiary. 
This section generally would not prevent covered QFCs from allowing the 
exercise of default rights upon a failure by the direct party to 
satisfy a payment or delivery obligation under the QFC, the direct 
party's entry into resolution, or the occurrence of any other default 
event that is not related to the entry into a resolution proceeding or 
the financial condition of an affiliate of the direct party.
---------------------------------------------------------------------------

    \41\ The FDI Act does not stay cross-default rights against 
affiliates of an insured depository institution based on the entry 
of the insured depository institution into resolution proceedings 
under the FDI Act.
---------------------------------------------------------------------------

    Process for approval of enhanced creditor protection conditions. 
The proposal would allow the Board, at the request of a covered entity, 
to approve as compliant with the proposal covered QFCs with creditor 
protections other than those that would otherwise be permitted under 
section 252.84 of the proposal.\42\ The Board could approve such a 
request if, in light of several enumerated considerations,\43\ the 
alternative approach would mitigate risks to the financial stability of 
the United States presented by a GSIB's failure to at least the same 
extent as the proposed requirements.
---------------------------------------------------------------------------

    \42\ See proposed rule Sec.  252.85.
    \43\ See proposed rule Sec.  252.85(c).
---------------------------------------------------------------------------

    Amendments to certain definitions in the Board's capital and 
liquidity rules. The proposal would also amend certain definitions in 
the Board's capital and liquidity rules to help ensure that the 
regulatory capital and liquidity treatment of QFCs to which a covered 
entity is party is not affected by the proposed restrictions on such 
QFCs. Specifically, the proposal would amend the definition of 
``qualifying master netting agreement'' in the Board's regulatory 
capital and liquidity rules and would similarly amend the definitions 
of the terms ``collateral agreement,'' ``eligible margin loan,'' and 
``repo-style transaction'' in the Board's regulatory capital rules.

C. Consultation With U.S Financial Regulators, the Council, and Foreign 
Authorities

    In developing this proposal, the Board consulted with the FDIC, the 
OCC, the Financial Stability Oversight Council (Council), and other 
U.S. financial regulators. The proposal reflects input that the Board 
received during this consultation process. The Board also intends to 
consult with the Council and other U.S. financial regulators after it 
reviews comments on the proposal. Furthermore, the Board has consulted 
with, and expects to continue to consult with, foreign financial 
regulatory authorities regarding this proposal and the establishment of 
other standards that would maximize the prospects for the cooperative 
and orderly cross-border resolution of a failed GSIB on an 
international basis.
    The OCC is expected to issue for public comment a notice of 
proposed rulemaking that would subject covered banks, including the 
national bank subsidiaries of GSIBs, to requirements substantively 
identical to those proposed here for covered entities. The Board and 
the OCC coordinated the development of their respective proposals in 
order to avoid redundancy.

D. Overview of Statutory Authority

    The Board is issuing this proposal under the authority provided by 
section 165 of the Dodd-Frank Act.\44\ Section 165 instructs the Board 
to impose enhanced prudential standards on bank holding companies with 
total consolidated assets of $50 billion or more ``[i]n order to 
prevent or mitigate risks to the financial stability of the United 
States that could arise from the material financial distress or 
failure, or ongoing activities, of large, interconnected financial 
institutions.'' \45\ These enhanced prudential standards must increase 
in stringency based on the

[[Page 29175]]

systemic footprint and risk characteristics of covered firms.\46\ 
Section 165 requires the Board to impose enhanced prudential standards 
of several specified types and also authorizes the Board to establish 
``such other prudential standards as the Board of Governors, on its own 
or pursuant to a recommendation made by the Council, determines are 
appropriate.'' \47\
---------------------------------------------------------------------------

    \44\ 12 U.S.C. 5365.
    \45\ 12 U.S.C. 5365(a)(1).
    \46\ 12 U.S.C. 5365(a)(1)(B), (b)(3)(A)-(D).
    \47\ 12 U.S.C. 5365(b)(1)(B)(iv).
---------------------------------------------------------------------------

    Enhanced prudential standards in the proposal are intended to 
prevent or mitigate risks to the financial stability of the United 
States that could arise from the material financial distress or failure 
of a GSIB. In particular, the proposed requirements would improve the 
resolvability of U.S. GSIBs under the Bankruptcy Code, Title II of the 
Dodd-Frank Act, or, with reference to insured depository institutions 
that are GSIB subsidiaries, the FDI Act, and reduce the potential that 
resolution of the firm will be disorderly and lead to disruptive asset 
sales and liquidations.
    The proposal would also improve the resilience of the U.S. 
operations of foreign GSIBs, and thereby increase the likelihood that a 
failed foreign GSIB with U.S. operations would be successfully resolved 
by its home jurisdiction authorities without the failure of the foreign 
GSIB's U.S. operating entities and with limited effect on the financial 
stability of the United States.
    The Board has tailored this proposal to apply only to those banking 
organizations whose disorderly failure would likely pose the greatest 
risk to U.S. financial stability: The U.S. GSIBs and the U.S. 
operations of foreign GSIBs.
    Question 1: The Board invites comment on all aspects of this 
section.

II. Proposed Restrictions on QFCs of GSIBs

A. Covered Entities (Section 252.82(a) of the Proposed Rule)

    The proposed rule would apply to ``covered entities,'' which 
include (a) any U.S. GSIB top-tier bank holding company, (b) any 
subsidiary of such a bank holding company that is not a ``covered 
bank,'' and (c) the U.S. operations of any foreign GSIB with the 
exception of any ``covered bank.'' The term ``covered bank'' would be 
defined to include certain entities, such as certain national banks, 
that are supervised by the OCC. While covered banks would be exempt 
from the requirements of this proposal, the OCC is expected to issue a 
proposed rule that would impose substantively identical requirements 
for covered banks in the near future.\48\
---------------------------------------------------------------------------

    \48\ Section 252.88 of the Board's proposal also clarifies that 
covered entities are not required to conform covered QFCs with 
respect to a part of a covered QFC that a covered bank also would be 
required to conform under the proposed rule that the OCC is expected 
to issue. Such overlap could occur, for example, where a bank 
holding company that is a covered entity guarantees a swap between a 
subsidiary that is a covered bank and the covered bank's 
counterparty.
---------------------------------------------------------------------------

    U.S. GSIB bank holding companies. Covered entities would include 
the entities identified as U.S. GSIB top-tier holding companies under 
the Board's GSIB surcharge rule.\49\ Under the GSIB surcharge rule, a 
U.S. top-tier bank holding company subject to the advanced approaches 
rule must determine whether it is a GSIB by applying a multifactor 
methodology established by the Board.\50\ The methodology evaluates a 
banking organization's systemic importance on the basis of its 
attributes in five broad categories: Size, interconnectedness, cross-
jurisdictional activity, substitutability, and complexity.
---------------------------------------------------------------------------

    \49\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015). See proposed 
rule Sec.  252.82(a)(1).
    \50\ Id.; 12 CFR part 217, subpart E.
---------------------------------------------------------------------------

    Accordingly, the methodology provides a tool for identifying those 
banking organizations whose failure or material distress would pose 
especially large risks to the financial stability of the United States. 
Improving the orderly resolution and resolvability of such firms, 
including by reducing risks associated with their QFCs, would be an 
important step toward achieving the goals of the Dodd-Frank Act. The 
proposal's focus on GSIBs is also in keeping with the Dodd-Frank Act's 
mandate that more stringent prudential standards be applied to the most 
systemically important bank holding companies.\51\ Moreover, several of 
the attributes that feed into the determination of whether a given firm 
is a GSIB incorporate aspects of the firm's QFC activity. These 
attributes include the firm's total exposures, its intra-financial 
system assets and liabilities, its notional amount of over-the-counter 
derivatives, and its cross-jurisdictional claims and liabilities.
---------------------------------------------------------------------------

    \51\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Under the GSIB surcharge rule's methodology, there are currently 
eight U.S. GSIBs: Bank of America Corporation, The Bank of New York 
Mellon Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JPMorgan 
Chase & Co., Morgan Stanley Inc., State Street Corporation, and Wells 
Fargo & Company. This list may change in the future in light of changes 
to the relevant attributes of the current U.S. GSIBs and of other large 
U.S. bank holding companies.
    U.S. GSIB subsidiaries. Covered entities would also include all 
subsidiaries of the U.S. GSIBs (other than covered banks).\52\ U.S. 
GSIBs generally enter into QFCs through subsidiary legal entities 
rather than through the top-tier holding company.\53\ Therefore, in 
order to increase GSIB resolvability by addressing the potential 
obstacles to orderly resolution posed by QFCs, it is necessary to apply 
the proposed restrictions to the U.S. GSIBs' subsidiaries.
---------------------------------------------------------------------------

    \52\ See proposed rule Sec.  252.82(a).
    \53\ Under the clean holding company component of the Board's 
recent TLAC proposal, the top-tier holding companies of U.S. GSIBs 
would be prohibited from entering into direct QFCs with third 
parties. See 80 FR 74926, 74945.
---------------------------------------------------------------------------

    In particular, to facilitate the resolution of a GSIB under an SPOE 
strategy, in which only the top-tier holding company would enter a 
resolution proceeding while its subsidiaries would continue to meet 
their financial obligations, or an MPOE strategy where an affiliate of 
an entity that is otherwise performing under a QFC enters resolution, 
it is necessary to ensure that those subsidiaries or affiliates do not 
enter into QFCs that contain cross-default rights that the counterparty 
could exercise based on the holding company's or affiliate's entry into 
resolution (or that any such cross-default rights are stayed when the 
holding company enters resolution). Moreover, including U.S. and non-
U.S. entities of a U.S. GSIB as covered entities should help ensure 
that such cross-default rights do not affect the ability of performing 
and solvent entities of a GSIB--regardless of jurisdiction--to remain 
outside of resolution proceedings.
    U.S. operations of foreign GSIBs. Finally, covered entities would 
include all U.S. operations of foreign GSIBs that are not covered 
banks, including U.S. subsidiaries, U.S. branches, and U.S. agencies. 
Under the proposal, the term ``global systemically important foreign 
banking organization'' (which this preamble will shorten to ``foreign 
GSIB'') would be defined to include any foreign banking organization 
that (a) would be designated as a GSIB under the Board's GSIB surcharge 
rule if it were subject to that rule on a consolidated basis or (b) 
would be designated as a GSIB under the methodology for identifying 
GSIBs adopted by the Basel Committee on

[[Page 29176]]

Banking Supervision (global methodology).\54\
---------------------------------------------------------------------------

    \54\ See proposed rule Sec.  252.87. The Basel Committee on 
Banking Supervision (BCBS) is a committee of bank supervisory 
authorities established by the central bank governors of the Group 
of Ten countries in 1975. The committee's membership consists of 
senior representatives of bank supervisory authorities and central 
banks from Argentina, Australia, Belgium, Brazil, Canada, China, 
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, 
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, 
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the 
United Kingdom, and the United States. In 2011, the BCBS adopted the 
global methodology to identify global systemically important banking 
organizations and assess their systemic importance. See ``Global 
systemically important banks: Assessment methodology and the 
additional loss absorbency requirement,'' available at http://www.bis.org/publ/bcbs207.htm. In 2013, the BCBS published a revised 
document, which provides certain revisions and clarifications to the 
global methodology. See ``Global systemically important banks: 
Updated assessment methodology and the higher loss absorbency 
requirement,'' available at http://www.bis.org/publ/bcbs255.htm.
    In November 2015, the FSB and the BCBS published an updated list 
of banking organizations that are GSIBs under the assessment 
methodology. The list includes the eight U.S. GSIBs and the 
following 22 foreign banking organizations: Agricultural Bank of 
China, Bank of China, Barclays, BNP Paribas, China Construction 
Bank, Credit Suisse, Deutsche Bank, Groupe BPCE, Groupe 
Cr[eacute]dit Agricole, Industrial and Commercial Bank of China 
Limited, HSBC, ING Bank, Mitsubishi UFJ FG, Mizuho FG, Nordea, Royal 
Bank of Scotland, Santander, Soci[eacute]t[eacute] 
G[eacute]n[eacute]rale, Standard Chartered, Sumitomo Mitsui FG, UBS, 
and Unicredit Group. See FSB, ``2015 update of list of global 
systemically important banks'' (November 3, 2015), available at 
http://www.fsb.org/wp-content/uploads/2015-update-of-list-of-global-systemically-important-banks-G-SIBs.pdf.
---------------------------------------------------------------------------

    As discussed above, the Board's GSIB surcharge rule identifies the 
most systemically important banking organizations on the basis of their 
attributes in the categories of size, interconnectedness, cross-
jurisdictional activity, substitutability, and complexity. While the 
GSIB surcharge rule applies only to U.S. bank holding companies, its 
methodology is equally well-suited to evaluating the systemic 
importance of foreign banking organizations. The global methodology 
generally evaluates the same attributes and would identify the same set 
of GSIBs as the Board's methodology.
    As with U.S. GSIBs, the proposal's focus on those foreign banking 
organizations that qualify as GSIBs is in keeping with the Dodd-Frank 
Act's mandate that more stringent prudential standards be applied to 
the most systemically important banking organizations.\55\ Moreover, 
the use of the GSIB surcharge rule to identify foreign GSIBs as well as 
U.S. GSIBs promotes a level playing field between U.S. and foreign 
banking organizations.
---------------------------------------------------------------------------

    \55\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    The proposal would cover only the U.S. operations of foreign GSIBs. 
As with the coverage of subsidiaries of U.S. GSIBs, coverage of the 
U.S. operations of foreign banks will enhance the orderly resolution of 
the foreign bank and its U.S. operations. In particular, covering QFCs 
that involve any U.S. subsidiary, U.S. branch, or U.S. agency of a 
foreign GSIB will reduce the potentially disruptive cancellation of 
those QFCs if the foreign bank or any of its subsidiaries enters 
resolution.\56\
---------------------------------------------------------------------------

    \56\ Under the clean holding company component of the Board's 
recent TLAC proposal, the U.S. intermediate holding companies of 
foreign GSIBs would be prohibited from entering into QFCs with third 
parties. See 80 FR 74926, 74945.
---------------------------------------------------------------------------

    Question 2: The Board invites comment on the proposed definition of 
the term ``covered entity.''
    Question 3: The Board invites comment on alternative approaches for 
determining the scope of application of the proposed restrictions.
    Question 4: The Board invites comment on whether the proposal 
should be expanded to cover banking organizations that are not GSIBs 
but that engage in especially high levels of QFC activity. If so, what 
specific metrics should be used to identify such banking organizations?

B. Covered QFCs

    General definition. The proposal would apply to any ``covered 
QFC,'' generally defined as any QFC that a covered entity enters into, 
executes, or otherwise becomes party to.\57\ ``Qualified financial 
contract'' or ``QFC'' would be defined as in section 210(c)(8)(D) of 
Title II of the Dodd-Frank Act and would include swaps, repo and 
reverse repo transactions, securities lending and borrowing 
transactions, commodity contracts, and forward agreements.\58\
---------------------------------------------------------------------------

    \57\ See proposed rule Sec.  252.83(a). For convenience, this 
preamble generally refers to ``a covered entity's QFCs'' or ``QFCs 
to which a covered entity is party'' as shorthand to encompass this 
definition.
    \58\ See proposed rule Sec.  252.81; 12 U.S.C. 5390(c)(8)(D).
---------------------------------------------------------------------------

    The proposed definition of ``covered QFC'' is intended to limit the 
proposed restrictions to those financial transactions whose disorderly 
unwind has substantial potential to frustrate the orderly resolution of 
a GSIB, as discussed above. By adopting the Dodd-Frank Act's 
definition, the proposed rule would extend the benefits of the stay and 
transfer protections to the same types of transactions in the event the 
covered entity enters bankruptcy. In this way, the proposal enhances 
the prospects for an orderly resolution in bankruptcy (as opposed to 
resolution under Title II of the Dodd-Frank Act) of a covered entity.
    Question 5: The Board invites comment on the proposed definitions 
of ``QFC'' and ``covered QFC.'' Are there financial transactions that 
could pose a similar risk to U.S. financial stability if a GSIB were to 
fail but that would not be included within the proposed definitions of 
QFC and covered QFC? Are there transactions that would be included 
within the proposed definitions but that would not present risks 
justifying the application of this proposal? Please explain.
    Exclusion of cleared QFCs. The proposal would exclude from the 
definition of ``covered QFC'' all QFCs that are cleared through a 
central counterparty.\59\ The issues that the proposal is intended to 
address with respect to non-cleared QFCs may also exist in the context 
of centrally cleared QFCs. However, clearing through a central 
counterparty also provides unique benefits to the financial system as 
well as unique issues related to the cancellation of cleared contracts. 
Accordingly, the Board continues to consider the appropriate treatment 
of centrally cleared QFCs, in light of differences between cleared and 
non-cleared QFCs with respect to contractual arrangements, counterparty 
credit risk, default management, and supervision. The Board is also 
considering whether to propose a regulatory regime that would address 
the continuity of cleared QFCs during the resolution of a GSIB within 
the broader context of safeguarding GSIB access to financial market 
utilities, including central counterparties, during the orderly 
resolution of the GSIB.
---------------------------------------------------------------------------

    \59\ See proposed rule Sec.  252.82(b).
---------------------------------------------------------------------------

    Question 6: The Board invites comment on the proposed exclusion of 
cleared QFCs, including the potential effects on the financial 
stability of the United States of excluding cleared QFCs as well as the 
potential effects on U.S. financial stability of subjecting covered 
entities' relationships with central counterparties to restrictions 
analogous to this proposal's restrictions on covered entities' non-
cleared QFCs.
    Exclusion of certain QFCs under multi-branch master agreements of 
foreign banking organizations. To avoid imposing unnecessary 
restrictions on QFCs that are not closely connected to the United 
States, the proposal would exclude from the definition of ``covered 
QFC'' certain QFCs of foreign GSIBs that lack a close connection to the 
foreign GSIB's U.S. operations.\60\ The proposed definition of ``QFC'' 
includes master agreements that apply to QFCs.\61\ Master

[[Page 29177]]

agreements are contracts that contain general terms that the parties 
wish to apply to multiple transactions between them; having executed 
the master agreement, the parties can then include those terms in 
future contracts through reference to the master agreement. Moreover, 
the Dodd-Frank Act's definition of ``qualified financial contract,'' 
which the proposal would adopt, treats master agreements for QFCs 
together with all supplements to the master agreement (including 
underlying transactions) as a single QFC.\62\
---------------------------------------------------------------------------

    \60\ See proposed rule Sec.  252.86.
    \61\ See proposed rule Sec.  252.81.
    \62\ 12 U.S.C. 5390(c)(8)(D)(viii); see also 12 U.S.C. 
1821(e)(8)(D)(vii); 109 H. Rpt. 31, Prt. 1 (April 8, 2005) 
(explaining that a ``master agreement for one or more securities 
contracts, commodity contracts, forward contracts, repurchase 
agreements or swap agreements will be treated as a single QFC under 
the FDIA or the FCUA (but only with respect to the underlying 
agreements are themselves QFCs)'').
---------------------------------------------------------------------------

    Foreign banks have master agreements that permit transactions to be 
entered into both at a U.S. branch or U.S. agency of the foreign bank 
and at a non-U.S. location of the foreign bank (such as a foreign 
branch). Notwithstanding the proposal's general treatment of a master 
agreement and all QFCs thereunder as a single QFC, the proposal would 
exclude QFCs under such a ``multi-branch master agreement'' that are 
not booked at a covered entity and for which no payment or delivery may 
be made at a covered entity.\63\ The multi-branch master agreement 
would still be a covered QFC with respect to QFC transactions that are 
booked at a covered entity or for which payment or delivery may be made 
at a covered entity.
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    \63\ See proposed rule Sec.  252.86(a). With respect to a U.S. 
branch or U.S. agency of a foreign GSIB, a multi-branch master 
agreement that is a covered QFC solely because the master agreement 
permits agreements or transactions that are QFCs to be entered into 
at one or more U.S. branches or U.S. agencies of the foreign GSIB 
will be considered a covered QFC for purposes of this proposal only 
with respect to such agreements or transactions booked at such U.S. 
branches and U.S. agencies or for which a payment or delivery may be 
made at such U.S. branches or U.S. agencies.
---------------------------------------------------------------------------

    The purpose of this exclusion is to help ensure that, where a 
foreign GSIB has a multi-branch master agreement, the foreign GSIB will 
only have to conform those QFCs entered into under the multi-branch 
master agreement that could directly affect the obligations of the 
covered U.S. branch or U.S. agency of the foreign GSIB and that could 
therefore have the most direct effect on the financial stability of the 
United States.
    Question 7: The Board invites comment on the proposed exclusion, 
including the potential benefits and detriments to U.S. financial 
stability of eliminating the proposed exclusion, the reduction in 
compliance burden that would be produced by the proposed exclusion, and 
the proposed exclusion's effect on netting under multi-branch master 
agreements.

C. Definition of ``Default Right''

    As discussed above, a party to a QFC generally has a number of 
rights that it can exercise if its counterparty defaults on the QFC by 
failing to meet certain contractual obligations. These rights are 
generally, but not always, contractual in nature. One common default 
right is a setoff right: the right to reduce the total amount that the 
non-defaulting party must pay by the amount that its defaulting 
counterparty owes. A second common default right is the right to 
liquidate pledged collateral and use the proceeds to pay the defaulting 
party's net obligation to the non-defaulting party. Other common rights 
include the ability to suspend or delay the non-defaulting party's 
performance under the contract or to accelerate the obligations of the 
defaulting party. Finally, the non-defaulting party typically has the 
right to terminate the QFC, meaning that the parties would not make 
payments that would have been required under the QFC in the future. The 
phrase ``default right'' in the proposed rule is broadly defined to 
include these common rights as well as ``any similar rights.'' \64\ 
Additionally, the definition includes all such rights regardless of 
source, including rights existing under contract, statute, or common 
law.
---------------------------------------------------------------------------

    \64\ See proposed rule Sec.  252.81.
---------------------------------------------------------------------------

    However, the proposed definition excludes two rights that are 
typically associated with the business-as-usual functioning of a QFC. 
First, same-day netting that occurs during the life of the QFC in order 
to reduce the number and amount of payments each party owes the other 
is excluded from the definition of ``default right.'' \65\ Second, 
contractual margin requirements that arise solely from the change in 
the value of the collateral or the amount of an economic exposure are 
also excluded from the definition.\66\ The function of these exclusions 
is to leave such rights unaffected by the proposed rule. The exclusions 
are appropriate because the proposal is intended to improve 
resolvability by addressing default rights that could disrupt an 
orderly resolution, not to interrupt the parties' business-as-usual 
interactions under a QFC.
---------------------------------------------------------------------------

    \65\ See id.
    \66\ See id.
---------------------------------------------------------------------------

    However, certain QFCs are also commonly subject to rights that 
would increase the amount of collateral or margin that the defaulting 
party (or a guarantor) must provide upon an event of default. The 
financial impact of such default rights on a covered entity could be 
similar to the impact of the liquidation and acceleration rights 
discussed above. Therefore, the proposed definition of ``default 
right'' includes such rights (with the exception discussed in the 
previous paragraph for margin requirements that depend solely on the 
value of collateral or the amount of an economic exposure).\67\
---------------------------------------------------------------------------

    \67\ See id.
---------------------------------------------------------------------------

    Finally, contractual rights to terminate without the need to show 
cause, including rights to terminate on demand and rights to terminate 
at contractually specified intervals, are excluded from the definition 
of ``default right'' for purposes the proposed rule's restrictions on 
cross-default rights (section 252.84 of the proposed rule).\68\ This is 
consistent with the proposal's objective of restricting only default 
rights that are related, directly or indirectly, to the entry into 
resolution of an affiliate of the covered entity, while leaving other 
default rights unrestricted.
---------------------------------------------------------------------------

    \68\ See proposed rule Sec. Sec.  252.81, 252.84.
---------------------------------------------------------------------------

    Question 8: The Board invites comment on all aspects of the 
proposed definition of ``default right.'' In particular, are the 
proposed exclusions appropriate in light of the objectives of the 
proposal? To what extent does the exclusion of rights that allow a 
party to terminate the contract ``on demand or at its option at a 
specified time, or from time to time, without the need to show cause'' 
create an incentive for firms to include these rights in future 
contracts to evade the proposed restrictions? To what extent should 
other regulatory requirements (e.g., liquidity coverage ratio or the 
short-term wholesale funding components of the GSIB surcharge rule) be 
revised to create a counterincentive? Would additional exclusions be 
appropriate? To what extent should it be clarified that the ``need to 
show cause'' includes the need to negotiate alternative terms with the 
other party prior to termination or similar requirements (e.g., Master 
Securities Loan Agreement, Annex III--Term Loans)?

D. Required Contractual Provisions Related to the U.S. Special 
Resolution Regimes (Section 252.83 of the Proposed Rule)

    Under the proposal, a covered QFC would be required to explicitly 
provide both (a) that the transfer of the QFC (and any interest or 
obligation in or under it and any property securing it) from the

[[Page 29178]]

covered entity to a transferee would be effective to the same extent as 
it would be under the U.S. special resolution regimes if the covered 
QFC were governed by the laws of the United States or of a state of the 
United States and (b) that default rights with respect to the covered 
QFC that could be exercised against a covered entity could be exercised 
to no greater extent than they could be exercised under the U.S. 
special resolution regimes if the covered QFC were governed by the laws 
of the United States or of a state of the United States.\69\ The 
proposal would define the term ``U.S. special resolution regimes'' to 
mean the FDI Act \70\ and Title II of the Dodd-Frank Act,\71\ along 
with regulations issued under those statutes.\72\
---------------------------------------------------------------------------

    \69\ See proposed rule Sec.  252.83.
    \70\ 12 U.S.C. 1811-1835a.
    \71\ 12 U.S.C. 5381-5394.
    \72\ See proposed rule Sec.  252.81.
---------------------------------------------------------------------------

    The proposed requirements are not intended to imply that a given 
covered QFC is not governed by the laws of the United States or of a 
state of the United States, or that the statutory stay-and-transfer 
provisions would not in fact apply to a given covered QFC. Rather, the 
requirements are intended to provide certainty that all covered QFCs 
would be treated the same way in the context of a receivership of a 
covered entity under the Dodd-Frank Act or the FDI Act. The stay-and-
transfer provisions of the U.S. special resolution regimes should be 
enforced with respect to all contracts of any U.S. GSIB entity that 
enters resolution under a U.S. special resolution regime as well as all 
transactions of the subsidiaries of such an entity. Nonetheless, it is 
possible that a court in a foreign jurisdiction would decline to 
enforce those provisions in cases brought before it (such as a case 
regarding a covered QFC between a covered entity and a non-U.S. entity 
that is governed by non-U.S. law and secured by collateral located 
outside the United States). By requiring that the effect of the 
statutory stay-and-transfer provisions be incorporated directly into 
the QFC contractually, the proposed requirement would help ensure that 
a court in a foreign jurisdiction would enforce the effect of those 
provisions, regardless of whether the court would otherwise have 
decided to enforce the U.S. statutory provisions themselves.\73\ For 
example, the proposed provisions should prevent a U.K. counterparty of 
a U.S. GSIB from persuading a U.K. court that it should be permitted to 
seize and liquidate collateral located in the United Kingdom in 
response to the U.S. GSIB's entry into OLA resolution. And the 
knowledge that a court in a foreign jurisdiction would reject the 
purported exercise of default rights in violation of the required 
provisions would deter covered entities' counterparties from attempting 
to exercise such rights.
---------------------------------------------------------------------------

    \73\ See generally Financial Stability Board, ``Principles for 
Cross-border Effectiveness of Resolution Actions'' (November 3, 
2015), available at http://www.fsb.org/wp-content/uploads/Principles-for-Cross-border-Effectiveness-of-Resolution-Actions.pdf.
---------------------------------------------------------------------------

    This requirement would advance the proposal's goal of removing QFC-
related obstacles to the orderly resolution of a GSIB. As discussed 
above, restrictions on the exercise of QFC default rights are an 
important prerequisite for an orderly GSIB resolution. Congress 
recognized the importance of such restrictions when it enacted the 
stay-and-transfer provisions of the U.S. special resolution regimes. As 
demonstrated by the 2007-2009 financial crisis, the modern financial 
system is global in scope, and covered entities are party to large 
volumes of QFCs with connections to foreign jurisdictions. The stay-
and-transfer provisions of the U.S. special resolution regimes would 
not achieve their purpose of facilitating orderly resolution in the 
context of the failure of a GSIB with large volumes of such QFCs if 
QFCs could escape the effect of those provisions. To remove any doubt 
about the scope of coverage of these provisions, the proposed 
requirement would ensure that the stay-and-transfer provisions apply as 
a matter of contract to all covered QFCs, wherever the transaction. 
This will advance the resolvability goals of the Dodd-Frank Act and the 
FDI Act.
    This section of the proposal is consistent with efforts by 
regulators in other jurisdictions to address similar risks by requiring 
that financial firms within their jurisdictions ensure that the effect 
of the similar provisions under these foreign jurisdictions' respective 
special resolution regimes would be enforced by courts in other 
jurisdictions, including the United States. For example, the United 
Kingdom's Prudential Regulation Authority (PRA) recently required 
certain financial firms to ensure that their counterparties to newly 
created obligations agree to be subject to stays on early termination 
that are similar to those that would apply upon a U.K. firm's entry 
into resolution if the financial arrangements were governed by U.K. 
law.\74\ Similarly, the German parliament passed a law in November 2015 
requiring German financial institutions to have provisions in financial 
contracts that are subject to the law of a country outside of the 
European Union that acknowledge the provisions regarding the temporary 
suspension of termination rights and accept the exercise of the powers 
regarding such temporary suspension under the German special resolution 
regime.\75\ Additionally, the Swiss Federal Council requires that banks 
``ensure at both the individual institution and group level that new 
agreements or amendments to existing agreements which are subject to 
foreign law or envisage a foreign jurisdiction are agreed only if the 
counterparty recognises a postponement of the termination of agreements 
in accordance with'' the Swiss special resolution regime.\76\
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    \74\ See PRA Rulebook: CRR Firms and Non-Authorised Persons: 
Stay in Resolution Instrument 2015, available at http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf; see also Bank of England, Prudential Regulation 
Authority, ``Contractual stays in financial contracts governed by 
third-country law'' (PS25/15) (November 2015), available at http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515.pdf. These PRA rules apply to PRA-authorized banks, building 
societies, PRA-designated investment firms, and their qualifying 
parent undertakings, including U.K. financial holding companies and 
U.K. mixed financial holding companies.
    \75\ See Gesetz zur Sanierung und Abwicklung von Instituten und 
Finanzgruppen, Sanierungs-und Abwicklungsgesetz [SAG] [German Act on 
the Reorganisation and Liquidation of Credit Institutions], Dec. 10, 
2014, Sec.  60a, https://www.gesetze-im-internet.de/bundesrecht/sag/gesamt.pdf.
    \76\ See Verordnung [uuml]ber die Finanzmarktinfrastrukturen und 
das Marktverhalten im Effekten- und Derivatehandel [FinfraV] 
[Ordinance on Financial Market Infrastructures and Market Conduct in 
Securities and Derivatives Trading] Nov. 25, 2015, amending 
Bankenverordnung vom 30. April 2014 [BankV] [Banking Ordinance of 30 
April 2014] Apr. 30, 2014, SR 952.02, art. 12 paragraph 2\bis\, 
translation at http://www.news.admin.ch/NSBSubscriber/message/attachments/42659.pdf; see also Erl[auml]uterungsbericht zur 
Verordnung [uuml]ber die Finanzmarktinfrastrukturen und das 
Marktverhalten im Effekten- und Derivatehandel (Nov. 25, 2015) 
(providing commentary).
---------------------------------------------------------------------------

    Question 9: The Board invites comment on all aspects of this 
section of the proposal.

E. Prohibited Cross-Default Rights (Section 252.84 of the Proposed 
Rule)

    Definitions. Section 252.84 of the proposal pertains to cross-
default rights in QFCs between covered entities and their 
counterparties, many of which are subject to credit enhancements (such 
as a guarantee) provided by an affiliate of the covered entity. Because 
credit enhancements on QFCs are themselves ``qualified financial 
contracts'' under the Dodd-Frank Act's definition of that term (which 
this proposal would adopt), the proposal includes the following 
additional definitions in order to facilitate a precise description of 
the relationships to which it would apply.

[[Page 29179]]

    First, the proposal distinguishes between a credit enhancement and 
a ``direct QFC,'' defined as any QFC that is not a credit 
enhancement.\77\ The proposal also defines ``direct party'' to mean a 
covered entity that is itself a party to the direct QFC, as distinct 
from an entity that provides a credit enhancement.\78\ In addition, the 
proposal defines ``affiliate credit enhancement'' to mean ``a credit 
enhancement that is provided by an affiliate of the party to the direct 
QFC that the credit enhancement supports,'' as distinct from a credit 
enhancement provided by either the direct party itself or by an 
unaffiliated party.\79\ Moreover, the proposal defines ``covered 
affiliate credit enhancement'' to mean an affiliate credit enhancement 
provided by a covered entity and defines ``covered affiliate support 
provider'' to mean the covered entity that provides the covered 
affiliate credit enhancement.\80\ Finally, the proposal defines the 
term ``supported party'' to mean any party that is the beneficiary of a 
covered affiliate credit enhancement (that is, the QFC counterparty of 
a direct party, assuming that the direct QFC is subject to a covered 
affiliate credit enhancement).\81\
---------------------------------------------------------------------------

    \77\ See proposed rule Sec.  252.84(c)(2).
    \78\ See proposed rule Sec.  252.84(c)(1).
    \79\ See proposed rule Sec.  252.84(c)(3).
    \80\ See proposed rule Sec.  252.84(f)(2).
    \81\ See proposed rule Sec.  252.84(f)(4).
---------------------------------------------------------------------------

    General prohibitions. Subject to the substantial exceptions 
discussed below, the proposal would prohibit a covered entity from 
being party to a covered QFC that allows for the exercise of any 
default right that is related, directly or indirectly, to the entry 
into resolution of an affiliate of the covered entity.\82\ The proposal 
also would generally prohibit a covered entity from being party to a 
covered QFC that would prohibit the transfer of any credit enhancement 
applicable to the QFC (such as another entity's guarantee of the 
covered entity's obligations under the QFC), along with associated 
obligations or collateral, upon the entry into resolution of an 
affiliate of the covered entity.\83\
---------------------------------------------------------------------------

    \82\ See proposed rule Sec.  252.84(b)(1).
    \83\ See proposed rule Sec.  252.84(b)(2). This prohibition 
would be subject to an exception that would allow supported parties 
to exercise default rights with respect to a QFC if the supported 
party would be prohibited from being the beneficiary of a credit 
enhancement provided by the transferee under any applicable law, 
including the Employee Retirement Income Security Act of 1974 and 
the Investment Company Act of 1940. This exception is substantially 
similar to an exception to the transfer restrictions in section 2(f) 
of the ISDA 2014 Resolution Stay Protocol (2014 Protocol) and the 
ISDA 2015 Universal Resolution Stay Protocol, which was added to 
address concerns expressed by asset managers during the drafting of 
the 2014 Protocol.
---------------------------------------------------------------------------

    A primary purpose of the proposed restrictions is to facilitate the 
resolution of a GSIB outside of Title II, including under the 
Bankruptcy Code. As discussed above, the potential for mass exercises 
of QFC default rights is one reason why a GSIB's failure could do 
severe damage to financial stability. In the context of an SPOE 
resolution, if the GSIB parent's entry into resolution led to the mass 
exercise of cross-default rights by the subsidiaries' QFC 
counterparties, then the subsidiaries could themselves fail or 
experience financial distress. Moreover, the mass exercise of QFC 
default rights could entail asset firesales, which likely would affect 
other financial companies and undermine financial stability. Similar 
disruptive results can occur with an MPOE resolution of an affiliate of 
an otherwise performing entity triggers default rights on QFCs 
involving the performing entity.
    In an SPOE resolution, this damage can be avoided if actions of the 
following two types are prevented: The exercise of direct default 
rights against the top-tier holding company that has entered 
resolution, and the exercise of cross-default rights against the 
operating subsidiaries based on their parent's entry into resolution. 
(Direct default rights against the subsidiaries would not be 
exercisable, because the subsidiaries would not enter resolution.) In 
an MPOE resolution, this damage occurs from exercise of default rights 
against a performing entity based on the failure of an affiliate.
    Under the OLA, the Dodd-Frank Act's stay-and-transfer provisions 
would address both direct default rights and cross-default rights. But, 
as explained above, no similar statutory provisions would apply to a 
resolution under the Bankruptcy Code. This proposal attempts to address 
these obstacles to orderly resolution under the Bankruptcy Code by 
extending the stay-and-transfer provisions to any type of resolution of 
a covered entity. Similarly, the proposal would facilitate a transfer 
of the GSIB parent's interests in its subsidiaries, along with any 
credit enhancements it provides for those subsidiaries, to a solvent 
financial company by prohibiting covered entities from having QFCs that 
would allow the QFC counterparty to prevent such a transfer or to use 
it as a ground for exercising default rights.\84\
---------------------------------------------------------------------------

    \84\ See proposed rule Sec.  252.84(b).
---------------------------------------------------------------------------

    The proposal also is intended to facilitate other approaches to 
GSIB resolution. For example, it would facilitate a similar resolution 
strategy in which a U.S. depository institution subsidiary of a GSIB 
enters resolution under the FDI Act while its subsidiaries continue to 
meet their financial obligations outside of resolution.\85\ Similarly, 
the proposal would facilitate the orderly resolution of a foreign GSIB 
under its home jurisdiction resolution regime by preventing the 
exercise of cross-default rights against the foreign GSIB's U.S. 
operations. The proposal would also facilitate the resolution of the 
U.S. intermediate holding company of a foreign GSIB, and the 
recapitalization of its U.S. operating subsidiaries, as part of a 
broader MPOE resolution strategy under which the foreign GSIB's 
operations in other regions would enter separate resolution 
proceedings. Finally, the proposal would broadly prevent the 
unanticipated failure of any one GSIB entity from bringing about the 
disorderly failures of its affiliates by preventing the affiliates' QFC 
counterparties from using the first entity's failure as a ground for 
exercising default rights against those affiliates that continue meet 
to their obligations.
---------------------------------------------------------------------------

    \85\ As discussed above, the FDI Act would prevent the exercise 
of direct default rights against the depository institution, but it 
does not address the threat posed to orderly resolution by cross-
default rights in the QFCs of the depository institution's 
subsidiaries. This proposal would facilitate orderly resolution 
under the FDI Act by filling that gap.
---------------------------------------------------------------------------

    The proposal is intended to enhance the potential for orderly 
resolution of a GSIB under the Bankruptcy Code, the FDI Act, or a 
similar resolution regime. By doing so, the proposal would advance the 
Dodd-Frank Act's goal of making orderly GSIB resolution workable under 
the Bankruptcy Code.\86\
---------------------------------------------------------------------------

    \86\ See 12 U.S.C. 5365(d).
---------------------------------------------------------------------------

    The proposal could also benefit the counterparties of a subsidiary 
of a failed GSIB, by preventing the disorderly failure of the 
subsidiary and allowing it to continue to meet its obligations. While 
it may be in the individual interest of any given counterparty to 
exercise any available rights to run on a subsidiary of a failed GSIB, 
the mass exercise of such rights could harm the counterparties' 
collective interest by causing an otherwise-solvent subsidiary to fail. 
Therefore, like the automatic stay in bankruptcy, which serves to 
maximize creditors' ultimate recoveries by preventing a disorderly 
liquidation of the debtor, the proposal would mitigate this collective 
action problem to the benefit of the failed firm's creditors and 
counterparties by preventing a disorderly resolution. And because many 
creditors and counterparties of

[[Page 29180]]

GSIBs are themselves systemically important financial firms, improving 
outcomes for those creditors and counterparties would further protect 
the financial stability of the United States.
    General creditor protections. While the proposed restrictions would 
facilitate orderly resolution, they would also diminish the ability of 
covered entities' QFC counterparties to include certain protections for 
themselves in covered QFCs. In order to reduce this effect, the 
proposal includes several substantial exceptions to the proposed 
restrictions.\87\ These permitted creditor protections are intended to 
allow creditors to exercise cross-default rights outside of an orderly 
resolution of a GSIB (as described above) and therefore would not be 
expected to undermine such a resolution.
---------------------------------------------------------------------------

    \87\ See proposed rule Sec.  252.84(e).
---------------------------------------------------------------------------

    First, in order to ensure that the proposed prohibitions would 
apply only to cross-default rights (and not direct default rights), the 
proposal would provide that a covered QFC may permit the exercise of 
default rights based on the direct party's entry into a resolution 
proceeding, other than a proceeding under a U.S. or foreign special 
resolution regime.\88\ This provision would help ensure that, if the 
direct party to a QFC were to enter bankruptcy, its QFC counterparties 
could exercise any relevant direct default rights. Thus, a covered 
entity's direct QFC counterparties would not risk the delay and expense 
associated with becoming involved in a bankruptcy proceeding, and would 
be able to take advantage of default rights that would fall within the 
Bankruptcy Code's safe harbor provisions.
---------------------------------------------------------------------------

    \88\ See proposed rule Sec.  252.84(e)(1). Special resolution 
regimes typically stay direct default rights, but may not stay 
cross-default rights. For example, as discussed above, the FDI Act 
stays direct default rights, see 12 U.S.C. 1821(e)(10)(B), but does 
not stay cross-default rights, whereas the Dodd-Frank Act's OLA 
stays direct default rights and cross-defaults arising from a 
parent's receivership, see 12 U.S.C. 5390(c)(10)(B), 5390(c)(16).
---------------------------------------------------------------------------

    The proposal would also allow covered QFCs to permit the exercise 
of default rights based on the failure of the direct party, a covered 
affiliate support provider, or a transferee that assumes a credit 
enhancement to satisfy its payment or delivery obligations under the 
direct QFC or credit enhancement.\89\ Moreover, the proposal would 
allow covered QFCs to permit the exercise of a default right in one QFC 
that is triggered by the direct party's failure to satisfy its payment 
or delivery obligations under another contract between the same 
parties. This exception takes appropriate account of the 
interdependence that exists among the contracts in effect between the 
same counterparties.
---------------------------------------------------------------------------

    \89\ See proposed rule Sec.  252.84(e)(2)-(3).
---------------------------------------------------------------------------

    The proposed exceptions for the creditor protections described 
above are intended to help ensure that the proposal permits a covered 
entity's QFC counterparties to protect themselves from imminent 
financial loss and does not create a risk of delivery gridlocks or 
daisy-chain effects, in which a covered entity's failure to make a 
payment or delivery when due leaves its counterparty unable to meet its 
own payment and delivery obligations (the daisy-chain effect would be 
prevented because the covered entity's counterparty would be permitted 
to exercise its default rights, such as by liquidating collateral). 
These exceptions are generally consistent with the treatment of payment 
and delivery obligations under the U.S. special resolution regimes.\90\
---------------------------------------------------------------------------

    \90\ See 12 U.S.C. 1821(e)(8)(G)(ii), 5390(c)(8)(F)(ii) 
(suspending payment and delivery obligations for one business day or 
less).
---------------------------------------------------------------------------

    These exceptions also help to ensure that a covered entity's QFC 
counterparty would not risk the delay and expense associated with 
becoming involved in a bankruptcy proceeding, since, unlike a typical 
creditor of an entity that enters bankruptcy, the QFC counterparty 
would retain its ability under the Bankruptcy Code's safe harbors to 
exercise direct default rights. This should further reduce the 
counterparty's incentive to run. Reducing incentives to run in the lead 
up to resolution promotes orderly resolution, since a QFC creditor run 
(such as a mass withdrawal of repo funding) could lead to a disorderly 
resolution and pose a threat to financial stability.
    Additional creditor protections for supported QFCs. The proposal 
would allow additional creditor protections for a non-defaulting 
counterparty that is the beneficiary of a credit enhancement from an 
affiliate of the covered entity that is also a covered entity under the 
proposal.\91\ The proposal would allow these creditor protections in 
recognition of the supported party's interest in receiving the benefit 
of its credit enhancement. These creditor protections would not 
undermine an SPOE resolution of a GSIB.
---------------------------------------------------------------------------

    \91\ See proposed rule Sec.  252.84(g).
---------------------------------------------------------------------------

    Where a covered QFC is supported by a covered affiliate credit 
enhancement,\92\ the covered QFC and the credit enhancement would be 
permitted to allow the exercise of default rights under the 
circumstances discussed below after the expiration of a stay period. 
Under the proposal, the applicable stay period would begin when the 
credit support provider enters resolution and would end at the later of 
5:00 p.m. (eastern time) on the next business day and 48 hours after 
the entry into resolution.\93\ This portion of the proposal is similar 
to the stay treatment provided in a resolution under the OLA or the FDI 
Act.\94\
---------------------------------------------------------------------------

    \92\ Note that the exception in Sec.  252.84(g) of the proposed 
rule would not apply with respect to credit enhancements that are 
not covered affiliate credit enhancements. In particular, it would 
not apply with respect to a credit enhancement provided by a non-
U.S. entity of a foreign GSIB, which would not be a covered entity 
under the proposal. Such credit enhancements would be excluded in 
order to help ensure that the resolution of a non-U.S. entity would 
not negatively affect the financial stability of the United States 
by allowing for the exercise of default rights against a covered 
entity.
    \93\ See proposed rule Sec.  252.84(h)(1).
    \94\ See 12 U.S.C. 1821(e)(10)(B)(I), 5390(c)(10)(B)(i), 
5390(c)(16)(A). While the proposed stay period is similar to the 
stay periods that would be imposed by the U.S. special resolution 
regimes, it could run longer than those stay periods under some 
circumstances.
---------------------------------------------------------------------------

    Under the proposal, default rights could be exercised at the end of 
the stay period if the covered affiliate credit enhancement has not 
been transferred away from the covered affiliate support provider and 
that support provider becomes subject to a resolution proceeding other 
than a proceeding under Chapter 11 of the Bankruptcy Code.\95\ Default 
rights could also be exercised at the end of the stay period if the 
transferee (if any) of the credit enhancement enters a resolution 
proceeding, protecting the supported party from a transfer of the 
credit enhancement to a transferee that is unable to meet its financial 
obligations.
---------------------------------------------------------------------------

    \95\ See proposed rule Sec.  252.84(g)(1). Chapter 11 (11 U.S.C. 
1101-1174) is the portion of the Bankruptcy Code that provides for 
the reorganization of the failed company, as opposed to its 
liquidation, and, relative to special resolution regimes, is 
generally well-understood by market participants.
---------------------------------------------------------------------------

    Default rights could also be exercised at the end of the stay 
period if the original credit support provider does not remain, and no 
transferee becomes, obligated to the same (or substantially similar) 
extent as the original credit support provider was obligated 
immediately prior to entering a resolution proceeding (including a 
Chapter 11 proceeding) with respect to (a) the credit enhancement 
applicable to the covered QFC, (b) all other credit enhancements 
provided by the credit support provider on any other QFCs between the 
same parties, and (c) all credit enhancements provided by the credit 
support provider between the direct party and affiliates of the direct

[[Page 29181]]

party's QFC counterparty.\96\ Such creditor protections would be 
permitted in order to prevent the support provider or the transferee 
from ``cherry picking'' by assuming only those QFCs of a given 
counterparty that are favorable to the support provider or transferee. 
Title II and the FDI Act contain similar provisions to prevent cherry 
picking.
---------------------------------------------------------------------------

    \96\ See proposed rule Sec.  252.84(g)(3).
---------------------------------------------------------------------------

    Finally, if the covered affiliate credit enhancement is transferred 
to a transferee, then the non-defaulting counterparty could exercise 
default rights at the end of the stay period unless either (a) all of 
the support provider's ownership interests in the direct party are also 
transferred to the transferee or (b) reasonable assurance is provided 
that substantially all of the support provider's assets (or the net 
proceeds from the sale of those assets) will be transferred to the 
transferee in a timely manner. These conditions would help to assure 
the supported party that the transferee would be at least roughly as 
financially capable of providing the credit enhancement as the covered 
affiliate support provider. Title II contains a similar provision 
regarding affiliate credit enhancements.\97\
---------------------------------------------------------------------------

    \97\ 12 U.S.C. 5390(c)(16)(A).
---------------------------------------------------------------------------

    Creditor protections related to FDI Act proceedings. Moreover, in 
the case of a covered QFC that is supported by a covered affiliate 
credit enhancement, both the covered QFC and the credit enhancement 
would be permitted to allow the exercise of default rights related to 
the credit support provider's entry into resolution proceedings under 
the FDI Act \98\ under the following circumstances: (a) After the FDI 
Act stay period,\99\ if the credit enhancement is not transferred under 
the relevant provisions of the FDI Act \100\ and associated 
regulations, and (b) during the FDI Act stay period, to the extent that 
the default right permits the supported party to suspend performance 
under the covered QFC to the same extent as that party would be 
entitled to do if the covered QFC were with the credit support provider 
itself and were treated in the same manner as the credit 
enhancement.\101\ This provision is intended to ensure that a QFC 
counterparty of a subsidiary of a bank that goes into FDI Act 
receivership can receive the same level of protection that the FDI Act 
provides to QFC counterparties of the bank itself.
---------------------------------------------------------------------------

    \98\ As discussed above, the FDI Act stays direct default rights 
against the failed depository institution but does not stay the 
exercise of cross-default rights against its affiliates.
    \99\ Under the FDI Act, the relevant stay period runs until 5:00 
p.m. (eastern time) on the business day following the appointment of 
the FDIC as receiver. 12 U.S.C. 1821(e)(10)(B)(I).
    \100\ 12 U.S.C. 1821(e)(9)-(10).
    \101\ See proposed rule Sec.  252.84(i).
---------------------------------------------------------------------------

    Prohibited terminations. In case of a legal dispute as to a party's 
right to exercise a default right under a covered QFC, the proposal 
would require that a covered QFC must provide that, after an affiliate 
of the direct party has entered a resolution proceeding, (a) the party 
seeking to exercise the default right bears the burden of proof that 
the exercise of that right is indeed permitted by the covered QFC and 
(b) the party seeking to exercise the default right must meet a ``clear 
and convincing evidence'' standard, a similar standard,\102\ or a more 
demanding standard.
---------------------------------------------------------------------------

    \102\ The reference to a ``similar'' burden of proof is intended 
to allow covered QFCs to provide for the application of a standard 
that is analogous to clear and convincing evidence in jurisdictions 
that do not recognize that particular standard. A covered QFC would 
not be permitted to provide for a lower standard.
---------------------------------------------------------------------------

    The purpose of this proposed requirement is to deter the QFC 
counterparty of a covered entity from thwarting the purpose of this 
proposal by exercising a default right because of an affiliate's entry 
into resolution under the guise of other default rights that are 
unrelated to the affiliate's entry into resolution.
    Agency transactions. In addition to entering into QFCs as 
principals, GSIBs may engage in QFCs as agent for other principals. For 
example, a GSIB subsidiary may enter into a master securities lending 
arrangement with a foreign bank as agent for a U.S.-based pension fund. 
The GSIB would document its role as agent for the pension fund, often 
through an annex to the master agreement, and would generally provide 
to its customer (the principal party) a securities replacement 
guarantee or indemnification for any shortfall in collateral in the 
event of the default of the foreign bank.\103\ A covered entity may 
also enter into a QFC as principal where there is an agent acting on 
its behalf or on behalf of its counterparty.
---------------------------------------------------------------------------

    \103\ The definition of QFC under Title II of the Dodd-Frank Act 
includes security agreements and other credit enhancements as well 
as master agreements (including supplements). 12 U.S.C. 
5390(c)(8)(D).
---------------------------------------------------------------------------

    This proposal would apply to a covered QFC regardless of whether 
the covered entity or the covered entity's direct counterparty is 
acting as a principal or as an agent. Section 252.83 and section 252.84 
do not distinguish between agents and principals with respect to 
default rights or transfer restrictions applicable to covered QFCs. 
Section 252.83 would limit default rights and transfer restrictions 
that the principal and its agent may have against a covered entity 
consistent with the U.S. special resolution regimes.\104\ Section 
252.84 would ensure that, subject to the enumerated creditor 
protections, neither the agent nor the principal could exercise cross-
default rights under the covered QFC against the covered entity based 
on the resolution of an affiliate of the covered entity.\105\
---------------------------------------------------------------------------

    \104\ See proposed rule Sec.  252.83(a)(3).
    \105\ See proposed rule Sec.  252.84(d). If a covered entity 
(acting as agent) is a direct party to a covered QFC, then the 
general prohibitions of section 252.84(d) would only affect the 
substantive rights of the agent's principal(s) to the extent that 
the covered QFC provides default rights based directly or indirectly 
on the entry into resolution of an affiliate of the covered entity 
(acting as agent). See also proposed rule Sec.  252.84(a)(3).
---------------------------------------------------------------------------

    Compliance with the ISDA 2015 Resolution Stay Protocol. As an 
alternative to compliance with the requirements of section 252.84 that 
are described above, a covered entity would comply with the proposed 
rule to the extent its QFCs are amended by to the current ISDA 2015 
Universal Resolution Stay Protocol, including the Securities Financing 
Transaction Annex and the Other Agreements Annex, as well as 
subsequent, immaterial amendments to the Protocol.\106\ The Protocol 
``enables parties to amend the terms of their [contracts] to 
contractually recognize the cross-border application of special 
resolution regimes applicable to certain financial companies and 
support the resolution of certain financial companies under the United 
States Bankruptcy Code.'' \107\ The Protocol amends ISDA Master 
Agreements, which are used for derivatives transactions. Market 
participants that adhere to the Protocol would amend their master 
agreements for securities financing transactions pursuant to the

[[Page 29182]]

Securities Financing Transaction Annex to the Protocol and would amend 
all other QFCs pursuant to the Other Agreements Annex. Thus, a covered 
entity would comply with the proposed rule with respect to all of its 
covered QFCs through adherence to the Protocol and the annexes.
---------------------------------------------------------------------------

    \106\ International Swaps and Derivatives Association, Inc., 
``ISDA 2015 Universal Resolution Stay Protocol'' (November 4, 2015), 
available at http://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf/. 
The Protocol was developed by a working group of member institutions 
of the International Swaps and Derivatives Association, Inc. (ISDA), 
in coordination with the Board, the FDIC, the OCC, and foreign 
regulatory agencies. The Securities Financing Transaction Annex was 
developed by the International Capital Markets Association, the 
International Securities Lending Association, and the Securities 
Industry and Financial Markets Association, in coordination with 
ISDA. ISDA is expected to supplement the Protocol with ISDA 
Resolution Stay Jurisdictional Modular Protocols for the United 
States and other jurisdictions. A jurisdictional module for the 
United States that is substantively identical to the Protocol in all 
respects aside from exempting QFCs between adherents that are not 
covered entities or covered banks would be consistent with the 
current proposal.
    \107\ Protocol Press Release at http://www2.isda.org/functional-areas/protocol-management/protocol/22.
---------------------------------------------------------------------------

    The Protocol has the same general objective as the proposed rule: 
To make GSIBs more resolvable by amending their contracts to, in 
effect, contractually recognize the applicability of U.S. special 
resolution regimes \108\ and to restrict cross-default provisions to 
facilitate orderly resolution under the U.S. Bankruptcy Code. Moreover, 
the provisions of the Protocol largely track the requirements of the 
proposed rule.\109\
---------------------------------------------------------------------------

    \108\ The Protocol also includes other special resolution 
regimes. Currently, the Protocol includes special resolution regimes 
in place in France, Germany, Japan, Switzerland, and the United 
Kingdom. Other special resolution regimes that meet the definition 
of ``Protocol-eligible Regime'' may be added to the Protocol.
    \109\ Sections 2(a) and (b) of the Protocol provide the stays 
required under paragraph (b)(1) of proposed rule Sec.  252.84 for 
the most common U.S. insolvency regimes. Section 2(f) of the 
Protocol overrides transfer restrictions as required under paragraph 
(b)(2) of proposed rule Sec.  252.84 for transfers that are 
consistent with the Protocol. The Protocol's exemptions from the 
stay for ``Performance Default Rights'' and the ``Unrelated Default 
Rights'' described in paragraph (a) of the definition are consistent 
with the proposal's general creditor protections permitted under 
paragraph (b) of proposed rule Sec.  252.84. The Protocol's burden 
of proof provisions (see section 2(i) of the Protocol and the 
definition of Unrelated Default Rights) and creditor protections for 
credit enhancement providers in FDI Act proceedings (see Section 
2(d) of the Protocol) are also consistent with the paragraphs (j) 
and (i), respectively, of proposed rule Sec.  252.84. Note also 
that, although exercise of Performance Default Rights under the 
Protocol does not require a showing of clear and convincing evidence 
while these same rights under the proposal (proposed rule Sec.  
225.84(e)) would require such a showing, this difference between the 
Protocol and the proposal does not appear to be meaningful because 
clearly documented evidence for such default rights (i.e., payment 
and performance failures, entry into resolution proceedings) should 
exist.
---------------------------------------------------------------------------

    The scope of the stay and transfer provisions in the Protocol are 
narrower than the stay and transfer provisions required under the 
proposal.\110\ The Protocol also allows any non-defaulting counterparty 
to exercise its related default rights \111\ under the agreement if an 
affiliate of its direct party enters resolution proceedings (other than 
U.S. Federal insolvency proceedings) while the top-tier U.S. parent of 
the counterparty's direct party remains outside of resolution 
proceedings.
---------------------------------------------------------------------------

    \110\ The Protocol only stays default rights arising from 
proceedings under Chapters 7 and 11 of the Bankruptcy Code, the FDI 
Act, and the Securities Investor Protection Act (U.S. Federal 
insolvency proceedings). The stay required under proposed rule Sec.  
252.84 is broader; it requires a stay to apply under any 
receivership, insolvency, liquidation, resolution, or similar 
proceeding, and therefore includes applicable state and foreign 
insolvency proceedings.
    \111\ Related default rights refer to default rights based 
solely on such insolvency or receivership of the affiliate. See 
paragraph (b) of the definition of Unrelated Default Rights in the 
Protocol.
---------------------------------------------------------------------------

    The Protocol also provides a number of protections to supported 
parties that are additional to, or stronger versions of, the creditor 
protections the proposal otherwise permits for supported parties.\112\ 
Specifically, the Protocol's protections require that the covered 
affiliate support provider or transferee to remain obligated to the 
``same extent'' for its stay to remain effective,\113\ and that the 
direct party remain duly registered and licensed by relevant regulatory 
bodies.\114\ In addition, the Protocol is more specific than the 
proposal as to the form and timing of the assurance that the covered 
affiliate support provider's assets (or net proceeds therefrom) would 
be transferred to the transferee.\115\
---------------------------------------------------------------------------

    \112\ The Protocol is consistent with the creditor protections 
of paragraphs (e)(1) and (e)(2) of Sec.  252.84. Section 2(b) of the 
Protocol requires the support provider to have entered only a 
Chapter 11 resolution proceeding. Section 2(b)(ii)(A)(II) requires 
the transferee to remain outside of resolution proceedings.
    \113\ See paragraph (a) of the definition of DIP Stay Conditions 
and paragraphs (b) and (c) of the definition of Transfer Stay 
Conditions in the Protocol. In contrast, the proposal would not 
permit a covered QFC to exempt the non-defaulting party from the 
stay and transfer requirements of proposed rule Sec.  252.84 if the 
covered affiliate support provider or transferee remains obligated 
to the same or substantially similar extent as the covered affiliate 
support provider was immediately prior to entering the resolution 
proceeding. See proposed rule Sec.  252.84(g)(3).
    \114\ See section 2(b)(ii)(C)(I) and 2(b)(iii)(C) of the 
Protocol.
    \115\ The proposal would not otherwise permit a QFC to be 
relieved from Sec.  252.84's general prohibitions as long as the 
non-defaulting counterparty to receives ``reasonable assurance'' 
that the covered affiliate support provider's assets (or net 
proceeds therefrom) would be transferred to the transferee, as 
described above. See proposed rule Sec.  252.84(g)(4). The Protocol 
requires that the bankruptcy court issue order to that effect at the 
end of the stay period. Section 2(b)(ii) of the Protocol.
---------------------------------------------------------------------------

    A number of the additional creditor protections of the Protocol 
depend on whether credit enhancements have been transferred to another 
entity. Additional protections for situations in which the credit 
enhancements are transferred include the transferee satisfying all 
material payment and delivery obligations to each of its creditors 
during the stay period; \116\ the transferee continuing to satisfy all 
financial covenants and other terms applicable to the credit 
enhancement provider under the agreement after the stay period; \117\ 
and the transferee continuing to satisfy all provisions and covenants 
regarding the attachment, enforceability, perfection, or priority of 
property securing the obligations of the credit enhancement after the 
stay period.\118\ Additional protections for situations in which the 
affiliate credit support provider remains obligated after the 
resolution proceeding include the bankruptcy court's issuance of an 
order by the end of the stay period providing supported parties with 
increased creditor priority in bankruptcy.\119\
---------------------------------------------------------------------------

    \116\ Section 2(b)(ii)(A)(II) of the Protocol.
    \117\ Section 2(b)(ii)(C)(II) of the Protocol. This requirement 
only applies with respect to transfers to transferees that are not 
affiliated with the credit support provider. See id.; definition of 
Bankruptcy Bridge Company of the Protocol.
    \118\ Section 2(b)(ii)(C)(III) of the Protocol.
    \119\ Section 2(b)(iii)(B) and the definition of DIP Stay 
Conditions of the Protocol. The Protocol permits such closeout 
pursuant to section 2(c). The order would (1) include the grant of 
administrative expense status to the non-defaulting counterparty's 
claims against the credit enhancements the affiliate support 
provider has provided the counterparty; (2) allow the non-defaulting 
counterparty to exercise its default rights with respect to a direct 
QFCs supported by the affiliate support provider without further 
involvement from the bankruptcy court if the direct party or 
affiliate support provider fail to meet any material obligations to 
the counterparty under the agreement; and (3) allow the counterparty 
to exercise its default rights against the direct party and 
affiliate support provider without further involvement from the 
bankruptcy court if the direct party failed to pay or deliver to 
another party any close-out amount when due and the affiliate 
support provider does not satisfy its obligations under a credit 
enhancement that supports the direct QFC with the other party. 
Paragraphs (a)-(c) of the definition of Creditor Protection Order of 
the Protocol.
---------------------------------------------------------------------------

    As compared to the creditor protections provided in the proposal, 
the Protocol's additional creditor protections appear to meaningfully 
increase a supported party's assurance that material payment and 
delivery obligations under its covered QFCs will continue to be 
performed and should meaningfully decrease the supported party's credit 
risk to its direct parties.\120\
---------------------------------------------------------------------------

    \120\ See proposed rule Sec.  252.85(d)(7), (9).
---------------------------------------------------------------------------

    Moreover, the additional creditor protections do not appear to 
materially diminish the prospects for the orderly resolution of a GSIB 
entity because the Protocol includes a number of desirable features 
that the proposal lacks. First, when an entity (whether or not it is a 
covered entity) adheres to the Protocol, it necessarily adheres to the 
Protocol with respect to all covered entities that have also adhered to 
the Protocol rather than one or a subset of covered entities (as the 
proposal may otherwise permit).\121\ Since many covered entities

[[Page 29183]]

have already adhered to the Protocol, any other entity that chooses to 
adhere will simultaneously adhere with respect to all covered 
entities.\122\ This feature appears to allow the Protocol to address 
impediments to resolution on an industry-wide basis and increase market 
certainty, transparency, and equitable treatment with respect to 
default rights of non-defaulting parties.\123\ Other features of the 
Protocol that the proposal otherwise lacks also reflect positively 
toward other proposed factors relevant to proposals for enhanced 
creditor protections: The Protocol amends all existing transactions of 
adhering parties; \124\ does not provide the counterparty with default 
rights in addition to those provided under the underlying QFC,\125\ 
and, as noted, applies to all QFCs.\126\ These features also increase 
the chances that all or most of the QFC counterparties to a GSIB will 
be stayed to the same extent in the resolution of the GSIB and improve 
the chances that a GSIB could be resolved in an orderly manner. 
Finally, the Protocol is not limited to resolution under the U.S. 
Bankruptcy Code but also includes U.S. special resolution regimes and 
certain non-U.S. special resolution regimes, which should help 
facilitate the resolution of a GSIB across a broader range of 
scenarios.
---------------------------------------------------------------------------

    \121\ Under section 4(a) of the Protocol, the Protocol is 
generally effective as between any two adhering parties, once the 
relevant effective date has arrived. Under section 4(b)(ii), an 
adhering party that is not a covered entity may choose to opt out of 
section 2 of the Protocol with respect to its contracts with any 
other adhering party that is also not a covered entity. However, the 
Protocol will apply to relationships between any covered entity that 
adheres and any other adhering party.
    \122\ See proposed rule Sec.  252.85(d)(3), (6).
    \123\ See proposed rule Sec.  252.85(d)(3).
    \124\ See proposed rule Sec.  252.85(d)(4). If a covered entity 
intends to continue to comply with the requirements of the proposal 
through the Protocol alternative after its initial adherence, the 
covered entity should ensure that future master agreements and 
credit enhancements also become subject to the terms of the 
Protocol.
    \125\ See proposed rule Sec.  252.85(d)(10). Moreover, the 
Protocol overrides unexercised default rights in certain 
circumstances. Section 2(e) of the Protocol.
    \126\ See proposed rule Sec.  252.85(d)(5).
---------------------------------------------------------------------------

    The features, considered together, appear to advance the proposal's 
objective of increasing the likelihood that a resolution of a GSIB 
under a range of scenarios could be carried out in an orderly 
manner.\127\ For these reasons, and consistent with the Board's 
objective of increasing GSIB resolvability, the proposed rule would 
allow a covered entity to bring its covered QFCs into compliance by 
amending them through adherence to the Protocol.
---------------------------------------------------------------------------

    \127\ See proposed rule Sec.  252.85(d)(1)-(2).
---------------------------------------------------------------------------

    Question 10: The Board invites comment on the proposed restrictions 
on cross-default rights in covered entities' QFCs. Is the proposal 
sufficiently clear, such that parties to a conforming QFC will 
understand what default rights are and are not exercisable in the 
context of a GSIB resolution? How could the proposed restrictions be 
made clearer?
    Question 11: Are the proposed restrictions on cross-default rights 
under-inclusive, such that the proposed restrictions would permit 
default rights that would have the same or similar potential to 
undermine an orderly GSIB resolution and should therefore be subjected 
to similar restrictions?
    Question 12: In particular, would it be appropriate for the 
prohibition to explicitly cover default rights that are based on or 
related to the ``financial condition'' of an affiliate of the direct 
party (for example, rights based on an affiliate's credit rating, stock 
price, or regulatory capital level)? \128\
---------------------------------------------------------------------------

    \128\ Cf. 12 U.S.C. 5390(c)(16) (staying ``any contractual right 
to cause the termination, liquidation, or acceleration of such 
contracts based solely on the insolvency, financial condition, or 
receivership of the covered financial company'').
---------------------------------------------------------------------------

    Question 13: The Board invites comment on whether the proposed 
restrictions should be expanded to cover contractual rights that a QFC 
counterparty may have to terminate the QFC at will or without cause, 
including rights that arise on a periodic basis. Could such rights be 
used to circumvent the proposed restrictions on cross-default rights? 
If so, how, if at all, should the proposed rule regulate such 
contractual rights?
    Question 14: The Board invites comment on the proposed provisions 
permitting specific creditor protections in covered entities' QFCs. 
Does the proposal draw an appropriate balance between protecting 
financial stability from risks associated with QFC unwinds and 
maintaining important creditor protections? Should the proposed set of 
permitted creditor protections be expanded to allow for other creditor 
protections that would fall within the proposed restrictions? Is the 
proposed set of permitted creditor protections sufficiently clear?
    Question 15: The Board invites comment on its proposal to treat as 
compliant with section 252.84 of the proposal any covered QFC that has 
been amended by the Protocol. Does adherence to the Protocol suffice to 
meet the goals of this proposal and appropriately safeguard U.S. 
financial stability?
    Question 16: The Board invites comment on the proposed requirement 
for burden-of-proof provisions in covered QFCs. Is the proposed 
requirement drafted appropriately to advance the goals of this 
proposal? Would those goals be better advanced by alternative or 
complementary provisions?
    Question 17: The Board invites comment on all aspects of the 
proposed treatment of agency transactions, including whether creditor 
protections should apply to QFCs where the direct party is acting as 
agent under the QFC.

F. Process for Approval of Enhanced Creditor Protections (Section 
252.85 of the Proposed Rule)

    As discussed above, the proposed restrictions would leave many 
creditor protections that are commonly included in QFCs unaffected. The 
proposal would also allow any covered entity to submit to the Board a 
request to approve as compliant with the rule one or more QFCs that 
contain additional creditor protections--that is, creditor protections 
that would be impermissible under the restrictions set forth above. A 
covered entity making such a request would be required to provide an 
analysis of the contractual terms for which approval is requested in 
light of a range of factors that are set forth in the proposed rule and 
intended to facilitate the Board's consideration of whether permitting 
the contractual terms would be consistent with the proposed 
restrictions.\129\ The Board also expects to consult with the FDIC and 
OCC during its consideration of such a request.
---------------------------------------------------------------------------

    \129\ Proposed rule Sec.  252.85(d)(1)-(10).
---------------------------------------------------------------------------

    The first two factors concern the potential impact of the requested 
creditor protections on GSIB resilience and resolvability. The next 
four concern the potential scope of the proposal: Adoption on an 
industry-wide basis, coverage of existing and future transactions, 
coverage of one or multiple QFCs, and coverage of some or all covered 
entities. Creditor protections that may be applied on an industry-wide 
basis may help to ensure that impediments to resolution are addressed 
on a uniform basis, which could increase market certainty, 
transparency, and equitable treatment. Creditor protections that apply 
broadly to a range of QFCs and covered entities would increase the 
chance that all of a GSIB's QFC counterparties would be treated the 
same way during a resolution of that GSIB and may improve the prospects 
for an orderly resolution of that GSIB. By contrast, proposals that 
would expand counterparties' rights beyond those afforded under 
existing QFCs would conflict with the proposal's goal of reducing the 
risk of mass unwinds of GSIB QFCs. The proposal also includes three 
factors that focus on the creditor protections specific to supported

[[Page 29184]]

parties. The Board may weigh the appropriateness of additional 
protections for supported QFCs against the potential impact of such 
provisions on the orderly resolution of a GSIB.
    In addition to analyzing the request under the enumerated factors, 
a covered entity requesting that the Board approve enhanced creditor 
protections would be required to submit a legal opinion stating that 
the requested terms would be valid and enforceable under the applicable 
law of the relevant jurisdictions, along with any additional relevant 
information requested by the Board.
    Under the proposal, the Board could approve a request for an 
alternative set of creditor protections if the terms of the QFC, as 
compared to a covered QFC containing only the limited exceptions 
permitted by the proposed rule, would prevent or mitigate risks to the 
financial stability of the United States that could arise from the 
failure of a GSIB and would protect the safety and soundness of bank 
holding companies and state member banks to at least the same extent. 
Once approved by the Board, enhanced creditor protections could be used 
by other covered entities (in addition to the covered entity that 
submitted the request for Board approval) as appropriate. The proposed 
request-and-approval process would improve flexibility by allowing for 
an industry-proposed alternative to the set of creditor protections 
permitted by the proposed rule while ensuring that any approved 
alternative would serve the proposal's policy goals to at least the 
same extent as a covered QFC that complies fully with the proposed 
rule.
    Question 18: The Board invites comment on all aspects of the 
proposed process for approval of enhanced creditor protections. Are the 
proposed considerations the appropriate factors for the Board to take 
into account in deciding whether to grant a request for approval? What 
other considerations are potentially relevant to such a decision?

III. Transition Periods

    Under the proposal, the rule would take effect on the first day of 
the first calendar quarter that begins at least one year after the 
issuance of the final rule (effective date).\130\ Entities that are 
covered entities when the final rule is issued would be required to 
comply with the proposed requirements beginning on the effective date. 
Thus, a covered entity would be required to ensure that covered QFCs 
entered into on or after the effective date comply with the rule's 
requirements.\131\ Moreover, a covered entity would be required to 
bring a preexisting covered QFC entered into prior to the effective 
date into compliance with the rule no later than the first date on or 
after the effective date on which the covered entity or an affiliate 
(that is also a covered entity or covered bank) enters into a new 
covered QFC with the counterparty to the preexisting covered QFC or an 
affiliate of the counterparty.\132\ (Thus, a covered entity would not 
be required to conform a preexisting QFC if that covered entity and its 
affiliates do not enter into any new QFCs with the same counterparty or 
its affiliates on or after the effective date.) Finally, an entity that 
becomes a covered entity after the final rule is issued would be 
required to comply by the first day of the first calendar quarter that 
begins at least one year after the entity becomes a covered 
entity.\133\
---------------------------------------------------------------------------

    \130\ Under section 302(b) of the Riegle Community Development 
and Regulatory Improvement Act of 1994, new Board regulations that 
impose requirements on insured depository institutions generally 
must ``take effect on the first day of a calendar quarter which 
begins on or after the date on which the regulations are published 
in final form.'' 12 U.S.C. 4802(b).
    \131\ See proposed rule Sec. Sec.  252.83(a)(2)(i); 
252.84(a)(2)(i).
    \132\ See proposed rule Sec. Sec.  252.83(a)(2)(ii), 
252.84(a)(2)(ii).
    \133\ See proposed rule Sec.  252.82(c)(1).
---------------------------------------------------------------------------

    By permitting a covered entity to remain party to noncompliant QFCs 
entered into before the effective date unless the covered entity or any 
affiliate (that is also a covered entity or covered bank) enters into 
new QFCs with the same counterparty or its affiliates, the proposal 
strikes a balance between ensuring QFC continuity if the GSIB were to 
fail and ensuring that covered entities and their existing 
counterparties can avoid any compliance costs and disruptions 
associated with conforming existing QFCs by refraining from entering 
into new QFCs. The requirement that a covered entity ensure that all 
existing QFCs with a particular counterparty and its affiliates are 
compliant before it or any affiliate of the covered entity (that is 
also a covered entity or covered bank) enters into a new QFC with the 
same counterparty or its affiliates after the effective date will 
provide covered entities with an incentive to seek the modifications 
necessary to ensure that their QFCs with their most important 
counterparties are compliant. Moreover, the volume of preexisting, 
noncompliant covered QFCs outstanding can be expected to decrease over 
time and eventually to reach zero. In light of these considerations, 
and to avoid creating potentially inappropriate compliance costs with 
respect to existing QFCs with counterparties that, together with their 
affiliates, do not enter new covered QFCs with the GSIB on or after the 
effective date, it would be appropriate to permit a limited number of 
noncompliant QFCs to remain outstanding, in keeping with the terms 
described above. That said, the Board will monitor covered entities' 
levels of noncompliant QFCs and evaluate the risk, if any, that they 
pose to the safety and soundness of the GSIBs or to U.S. financial 
stability.
    Question 19: The Board invites comment on the proposed transition 
periods and the proposed treatment of preexisting QFCs.
    Question 20: Would it be appropriate to impose different compliance 
deadlines with respect to different classes of QFCs? If so, how should 
those classes be distinguished, and which should be required to be 
brought into compliance first?

IV. Costs and Benefits

    The proposed rule is intended to yield substantial net benefits for 
the financial stability of the United States by reducing the potential 
that resolution of a GSIB, particularly a resolution in bankruptcy, 
will be disorderly and disruptive to financial stability. These 
benefits are expected to substantially outweigh the costs associated 
with the proposal.
    The primary costs to covered entities associated with the proposed 
requirements for covered entities' QFCs would be costs associated with 
drafting and negotiating compliant contracts with potential QFC 
counterparties. These costs would be small relative to the revenue of 
covered entities and to the costs of doing business in the financial 
sector generally.
    The proposal could also impose costs on covered entities to the 
extent that they may need to provide their QFC counterparties with 
better contractual terms in order to compensate those parties for the 
loss of their ability to exercise default rights that would be 
restricted by the proposal. These costs may be higher than the drafting 
and negotiating costs. However, they are also expected to be relatively 
small because of the limited nature of the rights counterparties are 
required to reduce, the unlikelihood that the counterparty will have to 
exercise these rights and the availability of other forms of protection 
for counterparties.
    The proposal could also create economic costs by causing a marginal 
reduction in QFC-related economic activity. This could mean that a QFC 
that would have been entered into in the

[[Page 29185]]

absence of the proposed rule would not be entered into, and it could 
also mean that economic activity that would have been associated with 
that QFC would not occur (such as economic activity that would have 
otherwise been hedged with a derivatives contract or funded through a 
repo transaction).
    While uncertainty surrounding the future negotiations of economic 
actors makes a reliable quantification of any such costs difficult, 
costs from reduced QFC activity are expected to be very low. The 
proposed restrictions on default rights in covered QFCs are relatively 
narrow and would not affect a counterparty's rights in the event a GSIB 
fails to make payment on a QFC, or in response to its direct 
counterparty's entry into a bankruptcy proceeding (that is, the default 
rights covered by the Bankruptcy Code's ``safe harbor'' provisions). 
Counterparties are also able to prudently manage risk through other 
means, including entering into QFCs with entities that are not GSIB 
entities and therefore would not be subject to the proposed rule.
    Additionally, the stay-and-transfer provisions of the Dodd-Frank 
Act and the FDI Act are already in force, and the ISDA Protocol is 
already partially effective. To staff's knowledge, no material economic 
costs have arisen as a result. This observation provides further 
support for the view that any marginal costs created by the proposal--
which is intended to extend the effects of the stay-and-transfer 
provisions and the ISDA Protocol--are unlikely to be material.
    Thus, the costs of the proposal are likely to be relatively small. 
These relatively small costs appear to be significantly outweighed by 
the substantial benefits that the rule would produce for the U.S. 
economy. Financial crises impose enormous costs on the real economy, so 
even small reductions in the probability or severity future financial 
crises create substantial economic benefits. The proposal would 
materially reduce the risk to the financial stability of the United 
States that could arise from the failure of a GSIB by enhancing the 
prospects for the orderly resolution of such a firm and would thereby 
materially reduce the probability and severity of financial crises in 
the future.
    Moreover, the proposal would likely benefit the counterparties of a 
subsidiary of a failed GSIB by preventing the disorderly failure of the 
subsidiary and allowing it to continue to meet its obligations. 
Preventing the mass exercise of QFC default rights at the time the 
parent or other affiliate enters resolution proceedings makes it more 
likely that the subsidiaries or other affiliates will be able to meet 
their obligations to QFC counterparties. Moreover, the creditor 
protections permitted under the proposal would allow any counterparty 
that does not continue to receive payment under the QFC to exercise its 
default rights.
    As discussed in detail above, this proposed rule would materially 
reduce the risk to the financial stability of the United States that 
could arise from the failure of a GSIB by enhancing the prospects for 
the orderly resolution of such a firm. By further safeguarding U.S. 
financial stability, the proposed rule would materially reduce the 
probability and severity of financial crises in the future. The 
proposed rule would therefore advance a key objective of the Dodd-Frank 
Act and help protect the American economy from the substantial costs 
associated with more frequent and severe financial crises.
    Question 21: The Board invites comment on all aspects of this 
evaluation of costs and benefits.

V. Revisions to Certain Definitions in the Board's Capital and 
Liquidity Rules

    The proposal would also amend several definitions in the Board's 
capital and liquidity rules to help ensure that the proposal would not 
have unintended effects for the treatment of covered entities' netting 
sets under those rules. The proposed amendments are similar to 
revisions that the Board and the OCC made in a 2014 interim final rule 
to prevent similar effects from foreign jurisdictions' special 
resolution regimes and firms' adherence to the 2014 ISDA Protocol.\134\
---------------------------------------------------------------------------

    \134\ See 12 CFR part 217.
---------------------------------------------------------------------------

    The Board's regulatory capital rules 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'' or agreement that provides 
for certain rights upon the default of a counterparty.\135\ The Board 
has defined ``qualifying master netting agreement'' to mean 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, thereby reducing its counterparty 
exposure and market risks.\136\ On the whole, measuring the amount of 
exposure of these contracts on a net basis, rather than on a gross 
basis, results in a lower measure of exposure and thus a lower capital 
requirement.
---------------------------------------------------------------------------

    \135\ See 12 CFR part 217.
    \136\ See section 2 of the regulatory capital rules.
---------------------------------------------------------------------------

    The current definition of ``qualifying master netting agreement'' 
recognizes that default rights may be stayed if the financial company 
is in resolution under the Dodd-Frank Act, the FDI Act, a substantially 
similar law applicable to government-sponsored enterprises, or a 
substantially similar foreign law, or where the agreement is subject by 
its terms to any of those laws. Accordingly, transactions conducted 
under netting agreements where default rights may be stayed in those 
circumstances may qualify for the favorable capital treatment described 
above. However, the current definition of ``qualifying master netting 
agreement'' does not recognize the restrictions that the proposal would 
impose on the QFCs of covered entities. Thus, a master netting 
agreement that is compliant with this proposal would not qualify as a 
qualifying master netting agreement. This would result in considerably 
higher capital and liquidity requirements for QFC counterparties of 
covered entities, which is not an intended effect of this proposal.
    Accordingly, the proposal would amend the definition of 
``qualifying master netting agreement'' so that a master netting 
agreement could qualify where the right to accelerate, terminate, and 
close-out on a net basis all transactions under the agreement and to 
liquidate or set-off collateral promptly upon an event of default of 
the counterparty is consistent with the requirements of this proposal. 
This revision would maintain the existing treatment for these contracts 
under the Board's capital and liquidity rules by accounting for the 
restrictions that the proposal would place on default rights related to 
covered entities' QFCs. The Board does not believe that the 
disqualification of master netting agreements that would result in the 
absence of the proposed amendment would accurately reflect the risk 
posed by the affected QFCs. As discussed above, the implementation of 
consistent restrictions on default rights in GSIB QFCs would increase 
the prospects for the orderly resolution of a failed GSIB and thereby 
protect the financial stability of the United States.
    The proposal would similarly revise certain other definitions in 
the regulatory capital rules to make analogous conforming changes 
designed to account for this proposal's restrictions and ensure that a 
banking organization may continue to recognize the risk-mitigating 
effects of financial collateral received in a secured lending

[[Page 29186]]

transaction, repo-style transaction, or eligible margin loan for 
purposes of the Board's rules. Specifically, the proposal would revise 
the definitions of ``collateral agreement,'' ``eligible margin loan,'' 
and ``repo-style transaction'' to provide that a counterparty's default 
rights may be limited as required by this proposal without unintended 
effects.
    The rule establishing margin and capital requirements for covered 
swap entities (swap margin rule) defines the term ``eligible master 
netting agreement'' in a manner similar to the definition of 
``qualifying master netting agreement.'' \137\ Thus, it may also be 
appropriate to amend the definition of ``eligible master netting 
agreement'' to account for the proposed restrictions on covered 
entities' QFCs. Because the Board issued the swap margin rule jointly 
with other U.S. regulatory agencies, however, the Board would consult 
with the other agencies before amending that rule's definition of 
``eligible master netting agreement.''
---------------------------------------------------------------------------

    \137\ 80 FR 74840, 74861-74862 (November 30, 2015).
---------------------------------------------------------------------------

    Question 22: The Board invites comment on all aspects of the 
proposed amendments to the definitions of ``qualifying master netting 
agreement,'' ``collateral agreement,'' ``eligible margin loan,'' and 
``repo-style transaction.'' Would the proposed amendments have the 
intended effect?
    Question 23: Would it be appropriate to incorporate state law 
resolution regimes into these definitions (for example, state insurance 
law that provides similar stays of QFC default rights)?

VI. Regulatory Analysis

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 through 3521). The Board 
reviewed the proposed rule under the authority delegated to the Board 
by the Office of Management and Budget (OMB). The reporting 
requirements are found in sections 252.85(b) and 252.87(b). These 
information collection requirements would implement section 165 of the 
Dodd Frank Act, as described in the Abstract below. In accordance with 
the requirements of the PRA, the Board may not conduct or sponsor, and 
the respondent is not required to respond to, an information collection 
unless it displays a currently valid OMB control number.
    The proposed rule would revise the Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY) (Reg YY; OMB No. 7100-0350). In addition, as permitted 
by the PRA, the Board proposes to extend for three years, with 
revision, the Reporting, Recordkeeping, and Disclosure Requirements 
Associated with Enhanced Prudential Standards (Regulation YY) (Reg YY; 
OMB No. 7100-0350).
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the Board's functions, including whether the 
information has practical utility;
    (b) The accuracy of the Board's estimates of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer: By mail to U.S. Office of 
Management and Budget, 725 17th Street NW., #10235, Washington, DC 
20503, or by facsimile to 202-395-5806, Attention, Federal Reserve Desk 
Officer.
Proposed Revision, With Extension, of the Following Information 
Collection
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY).
    Agency Form Number: Reg YY.
    OMB Control Number: 7100-0350.
    Frequency of Response: Annual, semiannual, quarterly, one-time, and 
on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, U.S. bank holding companies, 
savings and loan holding companies, nonbank financial companies, 
foreign banking organizations, U.S. intermediate holding companies, 
foreign saving and loan holding companies, and foreign nonbank 
financial companies supervised by the Board.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
implement enhanced prudential standards for bank holding companies with 
total consolidated assets of $50 billion or more, including global 
systemically important foreign banking organizations with $50 billion 
or more in total consolidated assets. Section 165 of the Dodd-Frank Act 
also permits the Board to establish such other prudential standards for 
such banking organizations as the Board determines are appropriate.
Reporting Requirements
    Section 252.85(b) of the proposed rule would require a covered 
banking entity to request the Board to approve as compliant with the 
requirements of section 252.84 of this subpart provisions of one or 
more forms of covered QFCs or amendments to one or more forms of 
covered QFCs, with enhanced creditor protection conditions. Enhanced 
creditor protection conditions means a set of limited exemptions to the 
requirements of section 252.85(b) of this subpart that are different 
than those of paragraphs (e), (g), and (i) of section 252.84 of this 
subpart. A covered banking entity making a request must provide (1) an 
analysis of the proposal under each consideration of paragraph 
252.85(d); (2) a written legal opinion verifying that proposed 
provisions or amendments would be valid and enforceable under 
applicable law of the relevant jurisdictions, including, in the case of 
proposed amendments, the validity and enforceability of the proposal to 
amend the covered QFCs; and (3) any additional information relevant to 
its approval that the Board requests.
    Section 252.87(b) of the proposed rule would require each top-tier 
foreign banking organization that is or controls a covered company, as 
defined in section 243.2 the Board's Regulation QQ, to submit to the 
Board by January 1 of each calendar year (1) notice of whether the home 
country supervisor (or other appropriate home country regulatory 
authority) of the top-tier foreign banking organization has adopted 
standards consistent with the global methodology; and (2) whether the 
top-tier foreign banking organization or its home country supervisor 
has determined that the organization has the characteristics of a 
global systemically important banking organization under the global 
methodology.

[[Page 29187]]

Estimated Paperwork Burden for Proposed Revisions
    Estimated Number of Respondents:
    Section 252.85(b)--1 respondent.
    Section 252.87(b)--22 respondents.
    Estimated Burden per Response:
    Section 252.85(b)--40 hours.
    Section 252.87(b)--1 hour.
    Current estimated annual burden for Reporting, Recordkeeping, and 
Disclosure Requirements Associated With Enhanced Prudential Standards 
(Regulation YY): 118,546 hours.
    Proposed revisions estimated annual burden: 62 hours.
    Total estimated annual burden: 118,608 hours.

B. Regulatory Flexibility Act: Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires an agency to consider whether the rules it proposes will have 
a significant economic impact on a substantial number of small 
entities.\138\ If so, the agency must prepare an initial and final 
regulatory flexibility analysis respecting the significant economic 
impact. Pursuant to section 605(b) of the RFA, the regulatory 
flexibility analysis otherwise required under sections 603 and 604 of 
the RFA is not required if an agency certifies that the rule will not 
have a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \138\ A banking organization is generally considered to be a 
small banking entity for the purposes of the RFA if it has assets 
less than or equal to $175 million. See also 13 CFR 121.1302(a)(6) 
(noting factors that the Small Business Administration considers in 
determining whether an entity qualifies as a small business, 
including receipts, employees, and other measures of its domestic 
and foreign affiliates).
---------------------------------------------------------------------------

    An initial regulatory flexibility analysis must contain (1) a 
description of the reasons why action by the agency is being 
considered; (2) a succinct statement of the objectives of, and legal 
basis for, the proposed rule; (3) a description of and, where feasible, 
an estimate of the number of small entities to which the proposed rule 
will apply; (4) a description of the projected reporting, 
recordkeeping, and other compliance requirements of the proposed rule, 
including an estimate of the classes of small entities that will be 
subject to the requirement and the type of professional skills 
necessary for preparation of the report or record; and (5) an 
identification, to the extent practicable, of all relevant Federal 
rules which may duplicate, overlap with, or conflict with the proposed 
rule.
    The Board has considered the potential impact of the proposed rule 
on small entities in accordance with the RFA. As discussed below, the 
proposed rule would not appear to have a significant impact on a 
substantial number of small entities, including small banking 
organizations. Nevertheless, the Board is publishing and inviting 
comment on this initial regulatory flexibility analysis.
    As discussed in detail above, the Board is issuing this proposed 
rule as part of its program to make GSIBs more resolvable in order to 
reduce the risk that their failure would pose to the financial 
stability of the United States, consistent with section 165 of the 
Dodd-Frank Act. In particular, the primary purpose of the proposal is 
to reduce the risk that the exercise of default rights by a failing 
GSIB's QFC counterparties would lead to a disorderly failure of the 
GSIB and would produce negative contagion and disruption that could 
destabilize the financial system. Section 165(b) of the Dodd-Frank Act 
provides the legal authority for this proposal.
    The proposed rule would only apply to GSIBs, which are the largest, 
most systemically important banking organizations, and certain of their 
subsidiaries. More specifically, the proposed rule would apply to (a) 
any U.S. GSIB top-tier bank holding company, (b) any subsidiary of such 
a bank holding company that is not a covered bank,\139\ and (c) the 
U.S. operations of any foreign GSIB with the exception of any covered 
bank. The Board estimates that the proposed rule would apply to 
approximately 29 banking organizations: Eight U.S. bank holding 
companies (i.e., U.S. GSIBs) and approximately 21 foreign banking 
organizations (i.e. foreign GSIBs with U.S. operations). None of these 
banking organizations would qualify as a small banking entity for the 
purposes of the FRA. However, as discussed above, the proposed rule 
would also apply to each covered GSIB's subsidiary that meets the 
definition of a covered entity (regardless of the subsidiary's size) 
because an exemption for small entities would significantly impair the 
effectiveness of the proposed stay-and-transfer provisions and thereby 
undermine a key objective of the proposal: To reduce the execution risk 
of an orderly GSIB resolution. The Board anticipates that any small 
subsidiary of a GSIB that would be covered by this proposed rule would 
rely on its parent GSIB or a large subsidiary of that GSIB for 
reporting, recordkeeping, or similar compliance requirements and would 
not bear additional costs. Finally, the proposed rule does not appear 
to duplicate, overlap with, or conflict with any other federal 
regulation.
---------------------------------------------------------------------------

    \139\ The term ``covered bank'' would be defined to include 
certain entities, such as certain national banks, that are 
supervised by the OCC.
---------------------------------------------------------------------------

    For the reasons stated above, the proposed rules would not appear 
to have a significant economic impact on a substantial number of small 
entities.
    Question 24: The Board welcomes written comments regarding this 
initial regulatory flexibility analysis, and requests that commenters 
describe the nature of any impact on small entities and provide 
empirical data to illustrate and support the extent of the impact. A 
final regulatory flexibility analysis will be conducted after 
consideration of comment received during the public comment period.

C. Riegle Community Development and Regulatory Improvement Act of 1994

    The Riegle Community Development and Regulatory Improvement Act of 
1994 (RCDRIA) requires that each Federal banking agency, in determining 
the effective date and administrative compliance requirements for new 
regulations that impose additional reporting, disclosure, or other 
requirements on insured depository institutions, consider, consistent 
with principles of safety and soundness and the public interest, any 
administrative burdens that such regulations would place on depository 
institutions, including small depository institutions, and customers of 
depository institutions, as well as the benefits of such regulations. 
In addition, new regulations that impose additional reporting, 
disclosures, or other new requirements on insured depository 
institutions generally must take effect on the first day of a calendar 
quarter that begins on or after the date on which the regulations are 
published in final form.
    The Board has invited comment on these matters in other sections of 
this Supplementary Information section and will continue to consider 
them as part of the overall rulemaking process.
    Question 25: The Board invites comment on this section, including 
any additional comments that will inform the Board's consideration of 
the requirements of RCDRIA.

D. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the U.S. banking 
agencies to use plain language in proposed and final rulemakings.\140\ 
The Board has sought to present the proposed rule in a simple and

[[Page 29188]]

straightforward manner, and invites comment on the use of plain 
language in this proposal.
---------------------------------------------------------------------------

    \140\ 12 U.S.C. 4809(a).
---------------------------------------------------------------------------

    Question 26: Has the Board organized the proposal in a clear way? 
If not, how could the proposal organized more clearly?
    Question 27: Are the requirements of the proposed rule clearly 
stated? If not, how could they be stated more clearly?
    Question 28: Does the proposal contain unclear technical language 
or jargon? If so, which language requires clarification?
    Question 29: Would a different format (such as a different grouping 
and ordering of sections, a different use of section headings, or a 
different organization of paragraphs) make the regulation easier to 
understand? If so, what changes would make the proposal clearer?
    Question 30: What else could the Board do to make the proposal 
clearer and easier to understand?

List of Subjects in 12 CFR Parts 217, 249, and 252

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

12 CFR Chapter II

Authority and Issuance

    For the reasons stated in the Supplementary Information, the Board 
of Governors of the Federal Reserve System proposes to amend 12 CFR 
parts 217, 249, and 252 as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).

0
1. The authority citation for part 217 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.

0
2. Section 217.2 is amended by:
0
a. Revising the definitions of ``collateral agreement'' and 
``qualifying master netting agreement'';
0
b. Revising paragraph (1)(iii) of the definition of ``eligible margin 
loan'';
0
c. Republishing the introductory text of the definition of ``repo-style 
transaction''; and
0
d. Revising paragraph 3(ii)(A) of the definition of ``repo-style 
transaction''.
    The revisions are set forth below:


Sec.  217.2  Definitions.

* * * * *
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to a Board-regulated institution for a single 
financial contract or for all financial contracts in a netting set and 
confers upon the Board-regulated institution a perfected, first-
priority security interest (notwithstanding the prior security interest 
of any custodial agent), or the legal equivalent thereof, in the 
collateral posted by the counterparty under the agreement. This 
security interest must provide the Board-regulated institution with a 
right to close-out the financial positions and liquidate the collateral 
upon an event of default of, or failure to perform by, the counterparty 
under the collateral agreement. A contract would not satisfy this 
requirement if the Board-regulated institution's exercise of rights 
under the agreement may be stayed or avoided under applicable law in 
the relevant jurisdictions, other than:
    (1) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \4\ to the U.S. laws 
referenced in this paragraph (1) in order to facilitate the orderly 
resolution of the defaulting counterparty;
---------------------------------------------------------------------------

    \4\ The Board expects to evaluate jointly with the OCC and 
Federal Deposit Insurance Corporation whether foreign special 
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------

    (2) Where the agreement is subject by its terms to any of the laws 
referenced in paragraph (1) of this definition; or
    (3) Where the right to accelerate, terminate, and close-out on a 
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is 
limited only to the extent necessary to comply with the requirements of 
subpart I of the Board's Regulation YY or any similar requirements of 
another U.S. federal banking agency, as applicable.
* * * * *
    Eligible margin loan means:
    (1) * * *
    (iii) The extension of credit is conducted under an agreement that 
provides the Board-regulated institution the right to accelerate and 
terminate the extension of credit and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, conservatorship, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (A) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs,\5\ or laws of foreign 
jurisdictions that are substantially similar \6\ to the U.S. laws 
referenced in this paragraph in order to facilitate the orderly 
resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

    \5\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code 
(11 U.S.C. 555), qualified financial contracts under section 
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts 
between or among financial institutions under sections 401-407 of 
the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve Board's Regulation EE (12 CFR part 231).
    \6\ The Board expects to evaluate jointly with the OCC and 
Federal Deposit Insurance Corporation whether foreign special 
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------

    (B) Where the right to accelerate, terminate, and close-out on a 
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is 
limited only to the extent necessary to comply with the requirements of 
subpart I of the Board's Regulation YY or any similar requirements of 
another U.S. federal banking agency, as applicable.
* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the Board-regulated institution the 
right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit

[[Page 29189]]

Insurance Act, Title II of the Dodd-Frank Act, or under any similar 
insolvency law applicable to GSEs, or laws of foreign jurisdictions 
that are substantially similar \7\ to the U.S. laws referenced in this 
paragraph (2)(i) in order to facilitate the orderly resolution of the 
defaulting counterparty;
---------------------------------------------------------------------------

    \7\ The Board expects to evaluate jointly with the OCC and 
Federal Deposit Insurance Corporation whether foreign special 
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition; or
    (iii) Where the right to accelerate, terminate, and close-out on a 
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is 
limited only to the extent necessary to comply with the requirements of 
subpart I of the Board's Regulation YY or any similar requirements of 
another U.S. federal banking agency, as applicable;
* * * * *
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the Board-regulated 
institution acts as agent for a customer and indemnifies the customer 
against loss, provided that:
    (3) * * *
    (ii) * * *
    (A) The transaction is executed under an agreement that provides 
the Board-regulated institution the right to accelerate, terminate, and 
close-out the transaction on a net basis and to liquidate or set-off 
collateral promptly upon an event of default, including upon an event 
of receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, or resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Act, or under any similar insolvency law 
applicable to GSEs, or laws of foreign jurisdictions that are 
substantially similar \8\ to the U.S. laws referenced in this paragraph 
(3)(ii)(a) in order to facilitate the orderly resolution of the 
defaulting counterparty; or where the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and 
to liquidate or set-off collateral promptly upon an event of default of 
the counterparty is limited only to the extent necessary to comply with 
the requirements of subpart I of the Board's Regulation YY or any 
similar requirements of another U.S. federal banking agency, as 
applicable;
---------------------------------------------------------------------------

    \8\ The Board expects to evaluate jointly with the OCC and 
Federal Deposit Insurance Corporation whether foreign special 
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------

    or
* * * * *

PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)

0
3. The authority citation for part 249 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1), 
1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.

0
4. Section 249.3 is amended by revising the definition of ``qualifying 
master netting agreement'' to read as follows:


Sec.  249.3  Definitions.

* * * * *
    Qualifying master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, conservatorship, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the Board-regulated institution the 
right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set-off collateral 
promptly upon an event of default, including upon an event of 
receivership, conservatorship, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than:
    (i) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under 
any similar insolvency law applicable to GSEs, or laws of foreign 
jurisdictions that are substantially similar \1\ to the U.S. laws 
referenced in this paragraph (2)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty;
---------------------------------------------------------------------------

    \1\ The Board expects to evaluate jointly with the OCC and 
Federal Deposit Insurance Corporation whether foreign special 
resolution regimes meet the requirements of this paragraph.
---------------------------------------------------------------------------

    (ii) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i) of this 
definition; or
    (iii) Where the right to accelerate, terminate, and close-out on a 
net basis all transactions under the agreement and to liquidate or set-
off collateral promptly upon an event of default of the counterparty is 
limited only to the extent necessary to comply with the requirements of 
subpart I of the Board's Regulation YY or any similar requirements of 
another U.S. federal banking agency, as applicable;
* * * * *

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
5. The authority citation for part 252 is revised to read as follows:

    Authority: 12 U.S.C. 321-338a, 481-486, 1467a(g), 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 3904, 3906-3909, 4808, 
5361, 5365, 5366, 5367, 5368, 5371.

0
6. Add subpart I to read as follows:
Subpart I--Requirements for Qualified Financial Contracts of Global 
Systemically Important Banking Organizations
Sec.
252.81 Definitions.
252.82 Applicability.
252.83 U.S. Special resolution regimes.
252.84 Insolvency proceedings.
252.85 Approval of enhanced creditor protection conditions.
252.86 Foreign bank multi-branch master agreements.
252.87 Identification of global systemically important foreign 
banking organizations.
252.88 Exclusion of certain QFCs.

Subpart I--Requirements for Qualified Financial Contracts of Global 
Systemically Important Banking Organizations


Sec.  252.81  Definitions.

    Central counterparty (CCP) has the same meaning as in Sec.  217.2 
of the Board's Regulation Q (12 CFR 217.2).
    Chapter 11 proceeding means a proceeding under Chapter 11 of Title 
11, United States Code (11 U.S.C. 1101-74.).
    Credit enhancement means a QFC of the type set forth in Sec. Sec.  
210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) 
or a credit enhancement that the Federal Deposit Insurance Corporation 
determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i) 
of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).

[[Page 29190]]

    Covered bank means a national bank, Federal savings association, 
federal branch, or federal agency.
    Default right (1) Means, with respect to a QFC, any
    (i) Right of a party, whether contractual or otherwise (including, 
without limitation, rights incorporated by reference to any other 
contract, agreement, or document, and rights afforded by statute, civil 
code, regulation, and common law), to liquidate, terminate, cancel, 
rescind, or accelerate such agreement or transactions thereunder, set 
off or net amounts owing in respect thereto (except rights related to 
same-day payment netting), exercise remedies in respect of collateral 
or other credit support or property related thereto (including the 
purchase and sale of property), demand payment or delivery thereunder 
or in respect thereof (other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure), suspend, 
delay, or defer payment or performance thereunder, or modify the 
obligations of a party thereunder, or any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral, or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure;
    (2) With respect to section 252.84, does not include any right 
under a contract that allows a party to terminate the contract on 
demand or at its option at a specified time, or from time to time, 
without the need to show cause.
    FDI Act proceeding means a proceeding in which the Federal Deposit 
Insurance Corporation is appointed as conservator or receiver under 
section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821).
    FDI Act stay period means, in connection with an FDI Act 
proceeding, the period of time during which a party to a QFC with a 
party that is subject to an FDI Act proceeding may not exercise any 
right that the party that is not subject to an FDI Act proceeding has 
to terminate, liquidate, or net such QFC, in accordance with section 
11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and any 
implementing regulations.
    Master agreement means a QFC of the type set forth in section 
210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V) of Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V)) 
or a master agreement that the Federal Deposit Insurance Corporation 
determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i) 
of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
    Qualified financial contract (QFC) has the same meaning as in 
section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
    U.S. special resolution regimes means the Federal Deposit Insurance 
Act (12 U.S.C. 1811-1835a) and regulations promulgated thereunder and 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (12 U.S.C. 5381-5394) and regulations promulgated thereunder.


Sec.  252.82  Applicability.

    (a) Scope of firms. This subpart applies to a ``covered entity,'' 
which is
    (1) A bank holding company that is identified as a global 
systemically important BHC pursuant to 12 CFR 217.402;
    (2) A subsidiary of a company identified in paragraph (a)(1) of 
this section (other than a subsidiary that is a covered bank); or
    (3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global 
systemically important foreign banking organization (other than a U.S. 
subsidiary, U.S. branch, or U.S. agency that is a covered bank, section 
2(h)(2) company or a DPC branch subsidiary).
    (b) Initial applicability of requirements for covered QFCs. A 
covered entity must comply with the requirements of Sec. Sec.  252.83 
and 252.84 beginning on the later of
    (1) The first day of the calendar quarter immediately following 365 
days (1 year) after becoming a covered entity; or
    (2) The date this subpart first becomes effective.
    (c) Rule of construction. For purposes of this subpart, the 
exercise of a default right with respect to a covered QFC includes the 
automatic or deemed exercise of the default right pursuant to the terms 
of the QFC or other arrangement.


Sec.  252.83  U.S. Special Resolution Regimes.

    (a) QFCs required to be conformed. (1) A covered entity must ensure 
that each covered QFC conforms to the requirements of this section 
252.83.
    (2) For purposes of this Sec.  252.83, a covered QFC means a QFC 
that the covered entity:
    (i) Enters, executes, or otherwise becomes a party to; or
    (ii) Entered, executed, or otherwise became a party to before the 
date this subpart first becomes effective, if the covered entity or any 
affiliate that is a covered entity or a covered bank also enters, 
executes, or otherwise becomes a party to a QFC with the same person or 
affiliate of the same person on or after the date this subpart first 
becomes effective.
    (3) To the extent that the covered entity is acting as agent with 
respect to a QFC, the requirements of this section apply to the extent 
the transfer of the QFC relates to the covered entity or the default 
rights relate to the covered entity or an affiliate of the covered 
entity.
    (b) Provisions required. A covered QFC must explicitly provide that
    (1) The transfer of the covered QFC (and any interest and 
obligation in or under, and any property securing, the covered QFC) 
from the covered entity will be effective to the same extent as the 
transfer would be effective under the U.S. special resolution regimes 
if the covered QFC (and any interest and obligation in or under, and 
any property securing, the covered QFC) were governed by the laws of 
the United States or a state of the United States and the covered 
entity were under the U.S. special resolution regime; and
    (2) Default rights with respect to the covered QFC that may be 
exercised against the covered entity are permitted to be exercised to 
no greater extent than the default rights could be exercised under the 
U.S. special resolution regimes if the covered QFC was governed by the 
laws of the United States or a state of the United States and the 
covered entity were under the U.S. special resolution regime.
    (c) Relevance of creditor protection provisions. The requirements 
of this section apply notwithstanding paragraphs (e), (g), and (i) of 
Sec.  252.84.


Sec.  252.84  Insolvency Proceedings.

    (a) QFCs required to be conformed. (1) A covered entity must ensure 
that each covered QFC conforms to the requirements of this Sec.  
252.84.
    (2) For purposes of this Sec.  252.84, a covered QFC has the same 
definition as in paragraph (a)(2) of Sec.  252.83.
    (3) To the extent that the covered entity is acting as agent with 
respect to

[[Page 29191]]

a QFC, the requirements of this section apply to the extent the 
transfer of the QFC relates to the covered entity or the default rights 
relate to an affiliate of the covered entity.
    (b) General Prohibitions.
    (1) A covered QFC may not permit the exercise of any default right 
with respect to the covered QFC that is related, directly or 
indirectly, to an affiliate of the direct party becoming subject to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding.
    (2) A covered QFC may not prohibit the transfer of a covered 
affiliate credit enhancement, any interest or obligation in or under 
the covered affiliate credit enhancement, or any property securing the 
covered affiliate credit enhancement to a transferee upon an affiliate 
of the direct party becoming subject to a receivership, insolvency, 
liquidation, resolution, or similar proceeding unless the transfer 
would result in the supported party being the beneficiary of the credit 
enhancement in violation of any law applicable to the supported party.
    (c) Definitions relevant to the general prohibitions--
    (1) Direct party. Direct party means a covered entity, or covered 
bank referenced in paragraph (a) of Sec.  252.82, that is a party to 
the direct QFC.
    (2) Direct QFC. Direct QFC means a QFC that is not a credit 
enhancement, provided that, for a QFC that is a master agreement that 
includes an affiliate credit enhancement as a supplement to the master 
agreement, the direct QFC does not include the affiliate credit 
enhancement.
    (3) Affiliate credit enhancement. Affiliate credit enhancement 
means a credit enhancement that is provided by an affiliate of a party 
to the direct QFC that the credit enhancement supports.
    (d) Treatment of agent transactions. With respect to a QFC that is 
a covered QFC for a covered entity solely because the covered entity is 
acting as agent under the QFC, the covered entity is the direct party.
    (e) General creditor protections. Notwithstanding paragraph (b) of 
this section, a covered direct QFC and covered affiliate credit 
enhancement that supports the covered direct QFC may permit the 
exercise of a default right with respect to the covered QFC that arises 
as a result of
    (1) The direct party becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding other than a 
receivership, conservatorship, or resolution under the FDI Act, Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or 
laws of foreign jurisdictions that are substantially similar to the 
U.S. laws referenced in this paragraph (e)(1) in order to facilitate 
the orderly resolution of the direct party;
    (2) The direct party not satisfying a payment or delivery 
obligation pursuant to the covered QFC or another contract between the 
same parties that gives rise to a default right in the covered QFC; or
    (3) The covered affiliate support provider or transferee not 
satisfying a payment or delivery obligation pursuant to a covered 
affiliate credit enhancement that supports the covered direct QFC.
    (f) Definitions relevant to the general creditor protections--
    (1) Covered direct QFC. Covered direct QFC means a direct QFC to 
which a covered entity, or covered bank referenced in paragraph (a) of 
Sec.  252.82, is a party.
    (2) Covered affiliate credit enhancement. Covered affiliate credit 
enhancement means an affiliate credit enhancement in which a covered 
entity, or covered bank referenced in paragraph (a) of Sec.  252.82, is 
the obligor of the credit enhancement.
    (3) Covered affiliate support provider. Covered affiliate support 
provider means, with respect to a covered affiliate credit enhancement, 
the affiliate of the direct party that is obligated under the covered 
affiliate credit enhancement and is not a transferee.
    (4) Supported party. Supported party means, with respect to a 
covered affiliate credit enhancement and the direct QFC that the 
covered affiliate credit enhancement supports, a party that is a 
beneficiary of the covered affiliate support provider's obligation(s) 
under the covered affiliate credit enhancement.
    (g) Additional creditor protections for supported QFCs. 
Notwithstanding paragraph (b) of this section, with respect to a 
covered direct QFC that is supported by a covered affiliate credit 
enhancement, the covered direct QFC and the covered affiliate credit 
enhancement may permit the exercise of a default right that is related, 
directly or indirectly, to the covered affiliate support provider after 
the stay period if:
    (1) The covered affiliate support provider that remains obligated 
under the covered affiliate credit enhancement becomes subject to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding other than a Chapter 11 proceeding;
    (2) Subject to paragraph (i) of this section, the transferee, if 
any, becomes subject to a receivership, insolvency, liquidation, 
resolution, or similar proceeding;
    (3) The covered affiliate support provider does not remain, and a 
transferee does not become, obligated to the same, or substantially 
similar, extent as the covered affiliate support provider was obligated 
immediately prior to entering the receivership, insolvency, 
liquidation, resolution, or similar proceeding with respect to:
    (i) The covered affiliate credit enhancement;
    (ii) All other covered affiliate credit enhancements provided by 
the covered affiliate support provider in support of other covered 
direct QFCs between the direct party and the supported party under the 
covered affiliate credit enhancement referenced in paragraph (g)(3)(i) 
of this section; and
    (iii) All covered affiliate credit enhancements provided by the 
covered affiliate support provider in support of covered direct QFCs 
between the direct party and affiliates of the supported party 
referenced in paragraph (g)(3)(ii) of this section; or
    (4) In the case of a transfer of the covered affiliate credit 
enhancement to a transferee,
    (i) All of the ownership interests of the direct party directly or 
indirectly held by the covered affiliate support provider are not 
transferred to the transferee; or
    (ii) Reasonable assurance has not been provided that all or 
substantially all of the assets of the covered affiliate support 
provider (or net proceeds therefrom), excluding any assets reserved for 
the payment of costs and expenses of administration in the 
receivership, insolvency, liquidation, resolution, or similar 
proceeding, will be transferred or sold to the transferee in a timely 
manner.
    (h) Definitions relevant to the additional creditor protections for 
supported QFCs--
    (1) Stay period. Stay period means, with respect to a receivership, 
insolvency, liquidation, resolution, or similar proceeding, the period 
of time beginning on the commencement of the proceeding and ending at 
the later of 5:00 p.m. (eastern time) on the business day following the 
date of the commencement of the proceeding and 48 hours after the 
commencement of the proceeding.
    (2) Business day. Business day means a day on which commercial 
banks in the jurisdiction the proceeding is commenced are open for 
general business (including dealings in foreign exchange and foreign 
currency deposits).
    (3) Transferee. Transferee means a person to whom a covered 
affiliate credit enhancement is transferred upon

[[Page 29192]]

the covered affiliate support provider entering a receivership, 
insolvency, liquidation, resolution, or similar proceeding or 
thereafter as part of the restructuring or reorganization involving the 
covered affiliate support provider.
    (i) Creditor protections related to FDI Act proceedings. 
Notwithstanding paragraph (b) of this section, with respect to a 
covered direct QFC that is supported by a covered affiliate credit 
enhancement, the covered direct QFC and the covered affiliate credit 
enhancement may permit the exercise of a default right that is related, 
directly or indirectly, to the covered affiliate support provider 
becoming subject to FDI Act proceedings
    (1) After the FDI Act stay period, if the covered affiliate credit 
enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)-(e)(10) 
and any regulations promulgated thereunder; or
    (2) During the FDI Act stay period, if the default right may only 
be exercised so as to permit the supported party under the covered 
affiliate credit enhancement to suspend performance with respect to the 
supported party's obligations under the covered direct QFC to the same 
extent as the supported party would be entitled to do if the covered 
direct QFC were with the covered affiliate support provider and were 
treated in the same manner as the covered affiliate credit enhancement.
    (j) Prohibited terminations. A covered QFC must require, after an 
affiliate of the direct party has become subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding,
    (1) The party seeking to exercise a default right to bear the 
burden of proof that the exercise is permitted under the covered QFC; 
and
    (2) Clear and convincing evidence or a similar or higher burden of 
proof to exercise a default right.


Sec.  252.85  Approval of Enhanced Creditor Protection Conditions.

    (a) Protocol compliance. Notwithstanding paragraph (b) of section 
252.4, a covered QFC may permit the exercise of a default right with 
respect to the covered QFC if the covered QFC has been amended by the 
ISDA 2015 Universal Resolution Stay Protocol, including the Securities 
Financing Transaction Annex and Other Agreements Annex, published by 
the International Swaps and Derivatives Association, Inc., as of May 3, 
2016, and minor or technical amendments thereto.
    (b) Proposal of enhanced creditor protection conditions. (1) A 
covered entity may request that the Board approve as compliant with the 
requirements of Sec.  252.84 proposed provisions of one or more forms 
of covered QFCs, or proposed amendments to one or more forms of covered 
QFCs, with enhanced creditor protection conditions.
    (2) Enhanced creditor protection conditions means a set of limited 
exemptions to the requirements of Sec.  252.84(b) of this subpart that 
are different than that of paragraphs (e), (g), and (i) of Sec.  
252.84.
    (3) A covered entity making a request under paragraph (b)(1) of 
this section must provide
    (i) An analysis of the proposal that addresses each consideration 
in paragraph (d) of this section;
    (ii) A written legal opinion verifying that proposed provisions or 
amendments would be valid and enforceable under applicable law of the 
relevant jurisdictions, including, in the case of proposed amendments, 
the validity and enforceability of the proposal to amend the covered 
QFCs; and
    (iii) Any other relevant information that the Board requests.
    (c) Board approval. The Board may approve, subject to any 
conditions or commitments the Board may set, a proposal by a covered 
entity under paragraph (b) of this section if the proposal, as compared 
to a covered QFC that contains only the limited exemptions in 
paragraphs of (e), (g), and (i) of Sec.  252.84 or that is amended as 
provided under paragraph (a) of this section, would prevent or mitigate 
risks to the financial stability of the United States that could arise 
from the failure of a global systemically important BHC, a global 
systemically important foreign banking organization, or the 
subsidiaries of either and would protect the safety and soundness of 
bank holding companies and state member banks to at least the same 
extent.
    (d) Considerations. In reviewing a proposal under this section, the 
Board may consider all facts and circumstances related to the proposal, 
including:
    (1) Whether, and the extent to which, the proposal would reduce the 
resiliency of such covered entities during distress or increase the 
impact on U.S. financial stability were one or more of the covered 
entities to fail;
    (2) Whether, and the extent to which, the proposal would materially 
decrease the ability of a covered entity, or an affiliate of a covered 
entity, to be resolved in a rapid and orderly manner in the event of 
the financial distress or failure of the entity that is required to 
submit a resolution plan;
    (3) Whether, and the extent to which, the set of conditions or the 
mechanism in which they are applied facilitates, on an industry-wide 
basis, contractual modifications to remove impediments to resolution 
and increase market certainty, transparency, and equitable treatment 
with respect to the default rights of non-defaulting parties to a 
covered QFC;
    (4) Whether, and the extent to which, the proposal applies to 
existing and future transactions;
    (5) Whether, and the extent to which, the proposal would apply to 
multiple forms of QFCs or multiple covered entities;
    (6) Whether the proposal would permit a party to a covered QFC that 
is within the scope of the proposal to adhere to the proposal with 
respect to only one or a subset of covered entities;
    (7) With respect to a supported party, the degree of assurance the 
proposal provides to the supported party that the material payment and 
delivery obligations of the covered affiliate credit enhancement and 
the covered direct QFC it supports will continue to be performed after 
the covered affiliate support provider enters a receivership, 
insolvency, liquidation, resolution, or similar proceeding;
    (8) The presence, nature, and extent of any provisions that require 
a covered affiliate support provider or transferee to meet conditions 
other than material payment or delivery obligations to its creditors;
    (9) The extent to which the supported party's overall credit risk 
to the direct party may increase if the enhanced creditor protection 
conditions are not met and the likelihood that the supported party's 
credit risk to the direct party would decrease or remain the same if 
the enhanced creditor protection conditions are met; and
    (10) Whether the proposal provides the counterparty with additional 
default rights or other rights.


Sec.  252.86  Foreign Bank Multi-branch Master Agreements.

    (a) Treatment of foreign bank multi-branch master agreements. With 
respect to a U.S. branch or U.S. agency of a global systemically 
important foreign banking organization, a foreign bank multi-branch 
master agreement that is a covered QFC solely because the master 
agreement permits agreements or transactions that are QFCs to be 
entered into at one or more U.S. branches or U.S. agencies of the 
global systemically important foreign banking organization will be 
considered a covered QFC for purposes of this subpart only with respect 
to such agreements or

[[Page 29193]]

transactions booked at such U.S. branches and U.S. agencies or for 
which a payment or delivery may be made at such U.S. branches or U.S. 
agencies.
    (b) Definition of foreign bank multi-branch master agreements. A 
foreign bank multi-branch master agreement means a master agreement 
that permits a U.S. branch or U.S. agency and another place of business 
of a foreign bank that is outside the United States to enter 
transactions under the agreement.


Sec.  252.87  Identification of Global Systemically Important Foreign 
Banking Organizations.

    (a) For purposes of this part, a top-tier foreign banking 
organization that is or controls a covered company (as defined at 12 
CFR 243.2(f)) is a global systemically important foreign banking 
organization if any of the following conditions is met:
    (1) The top-tier foreign banking organization determines, pursuant 
to paragraph (c) of this section, that the top-tier foreign banking 
organization has the characteristics of a global systemically important 
banking organization under the global methodology; or
    (2) The Board, using information available to the Board, 
determines:
    (i) That the top-tier foreign banking organization would be a 
global systemically important banking organization under the global 
methodology;
    (ii) That the top-tier foreign banking organization, if it were 
subject to the Board's Regulation Q, would be identified as a global 
systemically important BHC under Sec.  217.402 of the Board's 
Regulation Q; or
    (iii) That any U.S. intermediate holding company controlled by the 
top-tier foreign banking organization, if the U.S. intermediate holding 
company is or were subject to Sec.  217.402 of the Board's Regulation 
Q, is or would be identified as a global systemically important BHC.
    (b) Each top-tier foreign banking organization that is or controls 
a covered company (as defined at 12 CFR 243.2(f)) shall submit to the 
Board by January 1 of each calendar year:
    (1) Notice of whether the home country supervisor (or other 
appropriate home country regulatory authority) of the top-tier foreign 
banking organization has adopted standards consistent with the global 
methodology; and
    (2) Whether the top-tier foreign banking organization or its home 
country supervisor has determined that the organization has the 
characteristics of a global systemically important banking organization 
under the global methodology.
    (c) A top-tier foreign banking organization that prepares or 
reports for any purpose the indicator amounts necessary to determine 
whether the top-tier foreign banking organization is a global 
systemically important banking organization under the global 
methodology must use the data to determine whether the top-tier foreign 
banking organization has the characteristics of a global systemically 
important banking organization under the global methodology.
    (d) For purposes of this section:
    (1) Global methodology means the assessment methodology and the 
higher loss absorbency requirement for global systemically important 
banks issued by the Basel Committee on Banking Supervision, as updated 
from time to time;
    (2) Global systemically important foreign banking organization 
means a global systemically important bank, as such term is defined in 
the global methodology;
    (3) Home country means, with respect to a foreign banking 
organization, the country in which the foreign banking organization is 
chartered or incorporated; and
    (4) Top-tier foreign banking organization means, with respect to a 
foreign banking organization, the top-tier foreign banking organization 
or, alternatively, a subsidiary of the top-tier foreign banking 
organization designated by the Board.


Sec.  252.88  Exclusion of Certain QFCs.

    (a) Exclusion of CCP-cleared QFCs. A covered entity is not required 
to conform a covered QFC to which a CCP is party to the requirements of 
Sec. Sec.  252.83 or 252.84.
    (b) Exclusion of covered bank QFCs. A covered entity is not 
required to conform a covered QFC to the requirements of Sec. Sec.  
252.83 or 252.84 to the extent that a covered bank is required to 
conform the covered QFC to similar requirements of the Office of the 
Comptroller of the Currency if the QFC is either a direct QFC to which 
a covered bank is a direct party or an affiliate credit enhancement to 
which a covered bank is the obligor.

    By order of the Board of Governors of the Federal Reserve 
System, May 3, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-11209 Filed 5-10-16; 8:45 am]
 BILLING CODE 6210-01-P