[Federal Register Volume 81, Number 207 (Wednesday, October 26, 2016)]
[Proposed Rules]
[Pages 74326-74347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25605]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 324, 329, and 382

RIN 3064-AE46


Restrictions on Qualified Financial Contracts of Certain FDIC-
Supervised Institutions; Revisions to the Definition of Qualifying 
Master Netting Agreement and Related Definitions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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[[Page 74327]]

SUMMARY: The FDIC is proposing to add a new part to its rules to 
improve the resolvability of systemically important U.S. banking 
organizations and systemically important foreign banking organizations 
and enhance the resilience and the safety and soundness of certain 
state savings associations and state-chartered banks that are not 
members of the Federal Reserve System (``state non-member banks'' or 
``SNMBs'') for which the FDIC is the primary federal regulator 
(together, ``FSIs'' or ``FDIC-supervised institutions''). Under this 
proposed rule, covered FSIs would be required to ensure that covered 
qualified financial contracts (QFCs) to which they are a party 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 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the 
Federal Deposit Insurance Act (FDI Act). In addition, covered FSIs 
would generally be prohibited from being party to QFCs that would allow 
a QFC counterparty to exercise default rights against the covered FSI 
based on the entry into a resolution proceeding under the FDI Act, or 
any other resolution proceeding of an affiliate of the covered FSI.
    The proposal would also amend the definition of ``qualifying master 
netting agreement'' in the FDIC's capital and liquidity rules, and 
certain related terms in the FDIC's capital rules. These proposed 
amendments are intended to ensure that the regulatory capital and 
liquidity treatment of QFCs to which a covered FSI is party would not 
be affected by the proposed restrictions on such QFCs. The requirements 
of this proposed rule are substantively identical to those contained in 
the notice of proposed rulemaking issued by the Board of Governors of 
the Federal Reserve System (FRB) on May 3, 2016 (FRB NPRM) regarding 
``covered entities'', and the notice of proposed rulemaking issued by 
the Office of the Comptroller of the Currency (OCC) on August 19, 2016 
(OCC NPRM), regarding ``covered banks''.

DATES: Comments must be received by December 12, 2016, except that 
comments on the Paperwork Reduction Act analysis in part VI of the 
SUPPLEMENTARY INFORMATION must be received on or before December 27, 
2016.

ADDRESSES: You may submit comments by any of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Agency Web site: http://www.FDIC.gov/regulations/laws/federal/.
    Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, 
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, 
DC 20429.
    Hand Delivered/Courier: The guard station at the rear of the 550 
17th Street Building (located on F Street), on business days between 
7:00 a.m. and 5:00 p.m.
    Email: [email protected].
    Instructions: Comments submitted must include ``FDIC'' and ``RIN 
3064-AE46'' in the subject matter line. Comments received will be 
posted without change to: http://www.FDIC.gov/regulations/laws/federal/
, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Ryan Billingsley, Acting Associate 
Director, [email protected], Capital Markets Branch, Division of 
Risk Management and Supervision; Alexandra Steinberg Barrage, Senior 
Resolution Policy Specialist, Office of Complex Financial Institutions, 
[email protected]; David N. Wall, Assistant General Counsel, 
[email protected], Cristina Regojo, Counsel, [email protected], Phillip 
Sloan, Counsel, [email protected], Greg Feder, Counsel, [email protected], 
or Michael Phillips, Counsel, [email protected], Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Proposal
    C. Consultation with U.S. Financial Regulators
    D. Overview of Statutory Authority and Purpose
II. Proposed Restrictions on QFCs of GSIBs
    A. Covered FSIs
    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. Expected Effects
V. Revisions to Certain Definitions in the FDIC'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 addresses one of the ways the failure of a major 
financial firm could destabilize the financial system. The disorderly 
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 is a core 
objective of the Dodd-Frank Act,\1\ which Congress passed in response 
to the 2007-2009 financial crisis and the ensuing recession. One way 
the Dodd-Frank Act helps to protect the financial stability of the 
United States is by reducing the damage that such a company's failure 
would cause to the financial system if it were to occur. This strategy 
centers on measures designed to help ensure that a failed company's 
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 under bankruptcy if they were to fail and by creating a new 
back-up resolution regime, the Orderly Liquidation Authority, 
applicable to systemically important financial companies. 12 U.S.C. 
5365(d), 5381-5394.
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    On May 3, 2016, the FRB issued a Notice of Proposed Rulemaking, the 
FRB NPRM, pursuant to section 165 of the Dodd-Frank Act.\3\ The FRB's 
proposed rule stated that it is intended as a further step to increase 
the resolvability of U.S. global systemically important banking 
organizations (GSIBs) \4\ and global systemically important foreign 
banking organizations (foreign GSIBs) that operate in the United States 
(collectively, ``covered

[[Page 74328]]

entities'').\5\ Subsequent to the FRB NPRM, the OCC issued the OCC 
NPRM, which applies the same QFC requirements to ``covered banks'' 
within the OCC's jurisdiction.
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    \3\ The FRB received seventeen comment letters on the FRB NPRM 
during the comment period, which ended on August 5, 2016.
    \4\ 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. See FRB NPRM, 81 FR 29169, 
29175 (May 11, 2016). 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.
    \5\ See FRB NPRM at Sec.  252.83(a) (defining ``covered entity'' 
to include: (1) A bank holding company that is identified as a 
global systemically important [bank holding company] pursuant to 12 
CFR 217.402; (2) A subsidiary of a company identified in paragraph 
(a)(1) of [section 252.83(a)] (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)). 
In addition to excluding a ``covered bank'' from the definition of a 
``covered entity,'' the FDIC expects that in its final rule, the FRB 
would also exclude ``covered FSIs'' from the NPRM's definition of a 
``covered entity.'' 81 FR 29169 (May 11, 2016)
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    The FDIC is issuing this parallel proposed rule applicable to FSIs 
that are subsidiaries of a ``covered entity'' as defined in the FRB 
NPRM and to subsidiaries of such FSIs (collectively, ``covered FSIs''). 
The policy objective of this proposal focuses on improving the orderly 
resolution of a GSIB by limiting disruptions to a failed GSIB through 
its FSI subsidiaries' financial contracts with other companies. The FRB 
NPRM, the OCC NPRM, and this proposal complement the ongoing work of 
the FRB and the FDIC on resolution planning requirements for GSIBs, and 
the FDIC intends this proposed rule to work in tandem with the FRB NPRM 
and the OCC NPRM.\6\
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    \6\ For additional background regarding the interconnectivity of 
the largest financial firms, see FRB NPRM, 81 FR 29175-29176 (May 
11, 2016).
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    As discussed in Part I.D. below, the FDIC has a strong interest in 
preventing a disorderly termination of covered FSIs' QFCs upon a GSIB's 
entry into resolution proceedings. In fulfilling the FDIC's 
responsibilities as (i) the primary federal supervisor for SNMBs and 
state savings associations; \7\ (ii) the insurer of deposits and 
manager of the Deposit Insurance Fund (DIF); and (iii) the resolution 
authority for all FDIC-insured institutions under the FDI Act and, if 
appointed by the Secretary of the Treasury, for large complex financial 
institutions under Title II of the Dodd-Frank Act, the FDIC's interests 
include ensuring that large complex financial institutions are 
resolvable in an orderly manner, and that FDIC-insured institutions 
operate safely and soundly.\8\
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    \7\ Although the FDIC is the insurer for all insured depository 
institutions in the United States, it is the primary federal 
supervisor only for state-chartered banks that are not members of 
the Federal Reserve System, state-chartered savings associations, 
and insured state-licensed branches of foreign banks. As of March 
31, 2016, the FDIC had primary supervisory responsibility for 3,911 
SNMBs and state-chartered savings associations.
    \8\ See https://www.fdic.gov/about/strategic/strategic/supervision.html.
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    The proposed rule specifically addresses QFCs, which are typically 
entered into by various operating entities in a GSIB group, including 
covered FSIs. These covered FSIs are affiliates of U.S. GSIBs or 
foreign GSIBs that have OTC derivatives exposure, making these entities 
interconnected with other large financial firms. The exercise of 
default rights against an otherwise healthy covered FSI resulting from 
the failure of its affiliate--e.g., its top-tier U.S. holding company--
may cause it to weaken or fail. Accordingly, FDIC-supervised affiliates 
of U.S. or foreign GSIBs are exposed, through the interconnectedness of 
their QFCs and their affiliates' QFCs, to destabilizing effects if 
their counterparties or the counterparties of their affiliates exercise 
default rights upon the entry into resolution of the covered FSI itself 
or its GSIB affiliate.
    These potentially destabilizing effects are best addressed by 
requiring all GSIB entities to amend their QFCs to include contractual 
provisions aimed at avoiding such destabilization. It is imperative 
that all entities within the GSIB group amend their QFCs in a similar 
way, thereby eliminating an incentive for counterparties to concentrate 
QFCs in entities subject to fewer restrictions. Therefore, the 
application of this proposed rule to the QFCs of covered FSIs is not 
only necessary for the safety and soundness of covered FSIs 
individually and collectively, but also to avoid potential 
destabilization of the overall banking system.
    This proposed rule imposes substantively identical requirements 
contained in the FRB NPRM on covered FSIs. The FDIC consulted with the 
FRB and the OCC in developing this proposed rule, and intends to 
continue coordinating with the FRB and the OCC in developing the final 
rule.
    Qualified financial contracts, default rights, and financial 
stability. Like the FRB NPRM, this proposal pertains to several 
important classes of financial transactions that are collectively known 
as QFCs.\9\ QFCs include swaps, other derivatives contracts, repurchase 
agreements (also known as ``repos'') and reverse repos, and securities 
lending and borrowing agreements.\10\ GSIBs enter into QFCs for 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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    \9\ 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.  382.1.
    \10\ 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 QFCs.
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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--along with the FRB 
NPRM and OCC NPRM--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.
    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 fire sales. Together, the FRB and 
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,\11\ and have instructed 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.'' \12\ More recently, in April 2016,\13\ the 
FRB and FDIC noted the important changes that have been made to the 
structure and operations of the largest financial firms, including the 
adherence by all U.S. GSIBs and their affiliates to the ISDA 2015 
Universal Resolution Stay Protocol.\14\
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    \11\ 12 U.S.C. 5365(d).
    \12\ FRB and FDIC, ``Agencies Provide Feedback on Second Round 
Resolution Plans of `First-Wave' Filers'' (August 5, 2014), 
available at https://www.fdic.gov/news/news/press/2014/pr14067.html. 
See also FRB and FDIC, ``Agencies Provide Feedback on Resolution 
Plans of Three Foreign Banking Organizations'' (March 23, 2015), 
available at https://www.fdic.gov/news/news/press/2015/pr15027.html; 
FRB 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 
https://www.fdic.gov/news/news/press/2013/pr13027.html.
    \13\ See https://www.fdic.gov/news/news/press/2016/pr16031a.pdf, 
at 13.
    \14\ 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.
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    Direct defaults and cross-defaults. Like the FRB NPRM and the OCC 
NPRM, this proposal focuses on two

[[Page 74329]]

distinct scenarios in which a non-defaulting party to a QFC is commonly 
able to exercise default rights. These two scenarios involve a default 
that occurs when either the GSIB entity that is a direct party \15\ to 
the QFC or an affiliate of that entity enters a resolution 
proceeding.\16\ The first 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.'' A GSIB parent entity will often 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.
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    \15\ 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.
    \16\ 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 FDI 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.
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    Importantly, like the FRB NPRM and the OCC NPRM, 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 entity--
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.
Resolution Strategies
    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. As stated 
in the FRB NPRM, 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, or similar entities 
organized in other countries.
    Many complex GSIBs 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 effect 
of losses that led to the GSIB's failure would pass 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. This strategy is 
designed to help ensure that the GSIB subsidiaries remain adequately 
capitalized, and that operating subsidiaries of the GSIB are able to 
stabilize and continue meeting their financial obligations without 
immediately 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 fire sales. 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. An SPOE resolution can 
also avoid the need for insured bank subsidiaries, including covered 
FSIs, to be placed into receivership or similar proceedings as the 
likelihood of their continuing to operate as going concerns will be 
significantly enhanced if the parent's entry into resolution 
proceedings does not trigger the exercise of cross-default rights. 
Accordingly, this proposed rule, by limiting such cross-default rights 
based on an affiliate's entry into resolution proceedings, assists in 
stabilizing both the covered FSIs and the larger banking system.
    Multiple-Point-of-Entry Resolution. 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 FDI 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. While insured depository institutions are not 
subject to resolution under the Bankruptcy Code, if a bank holding 
company were to fail, it would likely be resolved under the Bankruptcy 
Code. When an entity goes into resolution under the Bankruptcy Code, 
attempts by the debtor'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.\17\ 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.\18\
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    \17\ See 11 U.S.C. 362.
    \18\ See, e.g., Aiello v. Providian Financial Corp., 239 F.3d 
876, 879 (7th Cir. 2001).

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[[Page 74330]]

    However, the Bankruptcy Code largely exempts QFC \19\ 
counterparties from the automatic stay through special ``safe harbor'' 
provisions.\20\ Under these provisions, any rights that a QFC 
counterparty has to terminate the contract, set off obligations, and 
liquidate collateral in response to a 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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    \19\ 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.
    \20\ 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.
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    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,\21\ 
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.
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    \21\ See 11 U.S.C. 362(a).
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    Title II of the Dodd-Frank Act and the Orderly Liquidation 
Authority. Title II of the Dodd-Frank Act (Title II) imposes somewhat 
broader stay requirements on QFCs of companies that enter resolution 
under that back-up resolution authority. In general, 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. With Title II, 
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, 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.\22\ 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.\23\
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    \22\ Section 204(a) of the Dodd-Frank Act, 12 U.S.C. 5384(a).
    \23\ See section 203 of the Dodd-Frank Act, 12 U.S.C. 5383.
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    Title II empowers the FDIC to transfer 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.\24\ 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 
Title II resolution, its insolvency, or its financial condition.\25\ 
Once the QFCs are transferred in accordance with the statute, Title II 
permanently stays the exercise of default rights for those reasons.\26\
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    \24\ See 12 U.S.C. 5390(c)(9).
    \25\ 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.
    \26\ 12 U.S.C. 5390(c)(10)(B)(i)(II).
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    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, in the case of guaranteed or supported 
QFCs, the FDIC takes certain steps to protect the QFC counterparties' 
interests by the end of the business day following the company's entry 
into Title II resolution.\27\
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    \27\ 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
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    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 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 temporary, 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, in the case of 
cross-default rights relating to guaranteed or supported QFCs, the FDIC 
takes the action required in order to continue to enforce those 
contracts.\28\
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    \28\ See id.
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    The Federal Deposit Insurance Act. Under the FDI Act, a failing 
insured depository institution would generally enter a receivership 
administered by the FDIC.\29\ 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.\30\ 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, 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.
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    \29\ 12 U.S.C. 1821(c).
    \30\ See 12 U.S.C. 1821(e)(8)-(10).
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B. Overview of the Proposal

    The FDIC invites comment on all aspects of this proposed 
rulemaking, which is intended to increase GSIB resolvability by 
addressing two QFC-related issues and thereby enhance resiliency of 
FSIs and the overall banking system. 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. The proposed rule directly enhances the prospects 
of orderly resolution by establishing the applicability of U.S. special 
resolution regimes to all counterparties, whether they are foreign or 
domestic. Although domestic entities are clearly subject to the 
temporary stay provisions of Title II and the FDI Act, these stays may 
be difficult to enforce in a cross-border context. As a result, 
domestic counterparties of a failed U.S. financial institution may be 
disadvantaged relative to foreign counterparties, as domestic 
counterparties would be subject to the stay, and accompanying potential 
market volatility, while, if the stay was not enforced by foreign 
authorities, foreign counterparties could close out immediately. 
Furthermore, a mass close out by such foreign counterparties would 
likely exacerbate market volatility, which in turn would likely magnify 
harm to the stayed U.S. counterparties' positions. This proposed rule 
would reduce the risk of these adverse consequences by requiring

[[Page 74331]]

covered FSIs to condition the exercise of default rights in covered 
contracts on the stay provisions of Title II and the FDI Act.
    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 
allowed to exercise cross-default rights. Affiliates of a GSIB that 
goes into resolution under the Bankruptcy Code may face disruptions to 
their QFCs as their counterparties exercise cross-default rights. Thus, 
a healthy covered FSI whose parent bank holding company entered 
resolution proceedings could fail due to its counterparties exercising 
cross-default rights. This proposed rule would address this issue by 
generally restricting the exercise of cross-default rights by 
counterparties against a covered FSI.
    Scope of application. The proposal's requirements would apply to 
all ``covered FSIs.'' ``Covered FSIs'' include: Any state savings 
associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member 
bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect 
subsidiary of (i) a global systemically important bank holding company 
that has been designated pursuant to section 252.82(a)(1) of the FRB's 
Regulation YY (12 CFR 252.82); or (ii) a global systemically important 
foreign banking organization \31\ that has been designated pursuant to 
section 252.87 of the FRB's Regulation YY (12 CFR 252.87). This 
proposed rule also makes clear that the mandatory contractual stay 
requirements apply to the subsidiaries of any covered FSI. Under the 
proposed rule, the term ``covered FSI'' also includes ``any subsidiary 
of a covered FSI.'' For the reasons noted above, all subsidiaries of 
covered FSIs should also be subject to mandatory contractual stay 
requirements--e.g., to avoid concentrating QFCs in entities subject to 
fewer restrictions.
---------------------------------------------------------------------------

    \31\ The definition of covered FSI does not include insured 
state-licensed branches of FBOs. Any insured state-licensed branches 
of global systemically important FBOs would be covered by the Board 
NPRM. Therefore, unlike the FRB NPRM, the FDIC is not including in 
this proposal any exclusion for certain QFCs subject to a multi-
branch netting arrangement.
---------------------------------------------------------------------------

    ``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,\32\ 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 FSI is party (covered QFC).\33\
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    \32\ 12 U.S.C. 5390(c)(8)(D). See proposed rule Sec.  382.1.
    \33\ In addition, the proposed rule states at Sec.  382.2(d) 
that it does not modify or limit, in any manner, the rights and 
powers of the FDIC as receiver under the FDI Act or Title II of the 
Dodd-Frank Act, including, without limitation, the rights of the 
receiver to enforce provisions of the FDI Act or Title II of the 
Dodd-Frank Act that limit the enforceability of certain contractual 
provisions. For example, the suspension of payment and delivery 
obligations to QFC counterparties during the stay period as provided 
under the FDI Act and Title II when an entity is in receivership 
under the FDI Act or Title II remains valid and unchanged 
irrespective of any contrary contractual provision and may continue 
to be enforced by the FDIC as receiver. Similarly, the use by a 
counterparty to a QFC of a contractual provision that allows the 
party to terminate a QFC on demand, or at its option at a specified 
time, or from time to time, for any reason, to terminate a QFC on 
account of the appointment of the FDIC as receiver (or the 
insolvency or financial condition of the company) remains 
unenforceable, and the QFC may be enforced by the FDIC as receiver 
notwithstanding any such purported termination.
---------------------------------------------------------------------------

    Required contractual provisions related to the U.S. special 
resolution regimes. Covered FSIs 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 would be pursuant to the U.S. special 
resolution regimes--that is, Title II and the FDI Act.\34\ 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 
\35\ and with the Financial Stability Board's ``Principles for Cross-
border Effectiveness of Resolution Actions.'' \36\
---------------------------------------------------------------------------

    \34\ See proposed rule Sec.  382.3.
    \35\ 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.
    \36\ 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 FSI 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.\37\ Covered FSIs 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 
FSI's affiliate to a transferee upon or following the entry into 
resolution of the affiliate.
---------------------------------------------------------------------------

    \37\ See proposed rule Sec.  382.3(b) and Sec.  382.4(b).
---------------------------------------------------------------------------

    The FDIC does not propose to prohibit covered FSIs from entering 
into QFCs that contain direct default rights. Under the proposal, a 
counterparty to a direct QFC with a covered FSI 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 FSI 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 FSIs would be permitted to comply by adhering to the ISDA 2015 
Resolution Stay Protocol.\38\ The FDIC views the ISDA 2015 Resolution 
Stay Protocol as consistent with the requirements of the proposed rule.
---------------------------------------------------------------------------

    \38\ See proposed rule Sec.  382.5(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,\39\ its affiliates' covered QFCs will be protected from 
disruption to a similar extent as if the failed entity had entered 
resolution under Title II. In particular, this section would facilitate 
resolution under the Bankruptcy Code by preventing the QFC 
counterparties of a GSIB's subsidiary from exercising default rights on 
the basis of the entry into bankruptcy by the GSIB's top-tier

[[Page 74332]]

holding company or any other affiliate of the 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 
bankruptcy, 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.
---------------------------------------------------------------------------

    \39\ 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. As 
noted above, in the context of addressing 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 
allowed to exercise cross-default rights, the proposed rule generally 
restricts the exercise of cross-default rights by counterparties 
against a covered FSI. The proposal would allow the FDIC, at the 
request of a covered FSI, to approve as compliant with the requirements 
of 382.5 proposed creditor protection provisions for covered QFCs.\40\
---------------------------------------------------------------------------

    \40\ See proposed rule Sec.  382.5(c).
---------------------------------------------------------------------------

    The FDIC could approve such a request if, in light of several 
enumerated considerations,\41\ 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. The FDIC expects to consult with the FRB and OCC during 
its consideration of a request under this section.
---------------------------------------------------------------------------

    \41\ See id.
---------------------------------------------------------------------------

    Amendments to certain definitions in the FDIC 's capital and 
liquidity rules. The proposal would also amend certain definitions in 
the FDIC's capital and liquidity rules to help ensure that the 
regulatory capital and liquidity treatment of QFCs to which a covered 
FSI 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 FDIC'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 FDIC's regulatory capital rules.\42\
---------------------------------------------------------------------------

    \42\ See proposed rule Sec. Sec.  324.2 and 329.3.
---------------------------------------------------------------------------

C. Consultation With U.S Financial Regulators

    In developing this proposal, the FDIC consulted with the FRB and 
the OCC as a means of promoting alignment across regulations and 
avoiding redundancy. The proposal reflects input that the FDIC received 
during this consultation process. Furthermore, the FDIC expects 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.

D. Overview of Statutory Authority and Purpose

    The FDIC is issuing this proposed rule under its authorities under 
the FDI Act (12 U.S.C. 1811 et seq.), including its general rulemaking 
authorities.\43\ The FDIC views the proposed rule as consistent with 
its overall statutory mandate.\44\ An overarching purpose of this 
proposed rule is to limit disruptions to an orderly resolution of a 
GSIB and its subsidiaries, thereby furthering financial stability 
generally. Another purpose is to enhance the safety and soundness of 
covered FSIs by addressing the two main issues raised by covered QFCs 
(noted above): Cross-border recognition and cross-default rights.
---------------------------------------------------------------------------

    \43\ See 12 U.S.C. 1819.
    \44\ The FDIC is (i) the primary federal supervisor for SNMBs 
and state savings associations; (ii) insurer of deposits and manager 
of the deposit insurance fund (DIF); and (iii) the resolution 
authority for all FDIC-insured institutions under the Federal 
Deposit Insurance Act and for large complex financial institutions 
under Title II of the Dodd-Frank Act. See 12 U.S.C. 1811, 1816, 
1818, 1819, 1820(g), 1828, 1828m, 1831p-1, 1831-u, 5301 et seq.
---------------------------------------------------------------------------

    As discussed above and in the FRB NPRM, the exercise of default 
rights by counterparties of a failed GSIB can have significant impacts 
on financial stability. These financial stability concerns are 
necessarily intertwined with the safety and soundness of covered FSIs 
and the banking system--the disorderly exercise of default rights can 
produce a sudden, contemporaneous threat to the safety and soundness of 
individual institutions, including insured depository institutions, 
throughout the system, which in turn threatens the system as a 
whole.[hairsp] Furthermore, the failure of multiple insured depository 
institutions in the same time period can stress the DIF, which is 
managed by the FDIC. Covered FSIs could themselves be a contributing 
factor to financial destabilization due to the interconnectedness of 
these institutions to each other and to other entities within the 
financial system.
    While the covered FSI may not itself be considered systemically 
important, as part of a GSIB, the disorderly resolution of the covered 
FSI could result in a significant negative impact on the financial 
system. Additionally, the application of this proposed rule to the QFCs 
of covered FSIs should avoid creating what may otherwise be an 
incentive for GSIBs and their counterparties to concentrate QFCs in 
entities that are subject to fewer counterparty restrictions.
    Question 1: The FDIC invites comment on all aspects of this notice 
of proposed rulemaking.

II. Proposed Restrictions on QFCs of Covered FSIs

A. Covered FSIs (Section 382.2(a) of the Proposed Rule)

    The proposed rule would apply to ``covered FSIs.'' The term 
``covered FSI'' would be defined to include: Any state savings 
associations (as defined in 12 U.S.C. 1813(b)(3)) or state non-member 
bank (as defined in 12 U.S.C. 1813(e)(2)) that is a direct or indirect 
subsidiary of (i) a global systemically important bank holding company 
that has been designated pursuant to section 252.82(a)(1) of the FRB's 
Regulation YY (12 CFR 252.82); or (ii) a global systemically important 
foreign banking organization that has been designated pursuant to 
section 252.87 of the FRB's Regulation YY (12 CFR 252.87). The 
mandatory contractual stay requirements would also apply to the 
subsidiaries of any covered FSI. Under the proposed rule, the term 
``covered FSI'' also includes any ``subsidiary of covered FSI.''
    Question 2: The FDIC invites comment on the proposed definition of 
the term ``covered FSI.''

B. Covered QFCs

    General definition. The proposal would apply to any ``covered 
QFC,'' generally defined as any QFC that a covered FSI enters into, 
executes, or otherwise becomes party to.\45\ ``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, securities contracts, and forward 
agreements.\46\
---------------------------------------------------------------------------

    \45\ See proposed rule Sec.  382.3(a). For convenience, this 
preamble generally refers to ``a covered FSI's QFCs'' or ``QFCs to 
which a covered FSI is party'' as shorthand to encompass this 
definition.
    \46\ See proposed rule Sec.  382.1; 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

[[Page 74333]]

orderly resolution of a GSIB and its affiliates, 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 a GSIB 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 GSIB.
    Question 3: The FDIC invites comment on the proposed definitions of 
``QFC'' and ``covered QFC.''
    Exclusion of cleared QFCs. The proposal would exclude from the 
definition of ``covered QFC'' all QFCs that are cleared through a 
central counterparty.\47\ The FDIC, in consultation with the FRB and 
OCC, will continue 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.
---------------------------------------------------------------------------

    \47\ See proposed rule Sec.  382.7(a).
---------------------------------------------------------------------------

    Question 4: The FDIC 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. In addition, the FDIC invites comment on whether the 
proposed exclusion of covered entity QFCs in Sec.  382.7 is 
sufficiently clear. Where a credit enhancement supports a covered QFC, 
and where a direct party to a covered QFC is a covered FSI, covered 
entity, or covered bank, would an alternative process better facilitate 
compliance with this proposal?

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.'' \48\ 
Additionally, the definition includes all such rights regardless of 
source, including rights existing under contract, statute, or common 
law.
---------------------------------------------------------------------------

    \48\ See proposed rule Sec.  382.1.
---------------------------------------------------------------------------

    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.'' \49\ 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.\50\ The function of these exclusions 
is to leave such rights unaffected by the proposed rule.
---------------------------------------------------------------------------

    \49\ See id.
    \50\ 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).\51\
---------------------------------------------------------------------------

    \51\ 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 of the proposed rule's restrictions 
on cross-default rights (section 382.4 of the proposed rule).\52\ 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.\53\
---------------------------------------------------------------------------

    \52\ See proposed rule Sec. Sec.  382.1, 382.4.
    \53\ The definition of ``default right'' in this proposal 
parallels the definition contained in the ISDA Protocol. The 
proposed rule does not modify or limit the FDIC's powers in its 
capacity as receiver under the FDI Act or the Dodd-Frank Act with 
respect to a counterparties' contractual or other rights.
---------------------------------------------------------------------------

    Question 5: The FDIC invites comment on all aspects of the proposed 
definition of ``default right.''

D. Required Contractual Provisions Related to the U.S. Special 
Resolution Regimes (Section 382.3 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 
covered entity to a transferee will 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.\54\ The 
proposal would define the term ``U.S. special resolution regimes'' to 
mean the FDI Act \55\ and Title II of the Dodd-Frank Act,\56\ along 
with regulations issued under those statutes.\57\
---------------------------------------------------------------------------

    \54\ See proposed rule Sec.  382.3.
    \55\ 12 U.S.C. 1811-1835a.
    \56\ 12 U.S.C. 5381-5394.
    \57\ See proposed rule Sec.  382.1.
---------------------------------------------------------------------------

    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 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

[[Page 74334]]

regarding a covered QFC between a covered FSI 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.\58\ 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 Title II 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 counterparties from attempting to exercise such 
rights.
---------------------------------------------------------------------------

    \58\ 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.\59\
---------------------------------------------------------------------------

    \59\ See FRB NPRM, 81 FR 29178 (May 11, 2016) for additional 
discussion regarding consistency of this proposal with similar 
regulatory efforts in foreign jurisdictions.
---------------------------------------------------------------------------

    Question 6: The FDIC invites comment on all aspects of this section 
of the proposal.

E. Prohibited Cross-Default Rights (Section 382.4 of the Proposed Rule)

    Definitions. Section 382.4 of the proposal applies in the context 
of insolvency proceedings \60\ and pertains to cross-default rights in 
QFCs between covered FSIs and their counterparties, many of which are 
subject to credit enhancements (such as a guarantee) provided by an 
affiliate of the covered FSI. 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.
---------------------------------------------------------------------------

    \60\ See proposed rule Sec.  382.4 (noting that section does not 
apply to proceedings under Title II of the Dodd-Frank Act).
---------------------------------------------------------------------------

    First, the proposal distinguishes between a credit enhancement and 
a ``direct QFC,'' defined as any QFC that is not a credit 
enhancement.\61\ The proposal also defines ``direct party'' to mean a 
covered FSI that is itself a party to the direct QFC, as distinct from 
an entity that provides a credit enhancement.\62\ 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.\63\ Moreover, the proposal defines ``covered 
affiliate credit enhancement'' to mean an affiliate credit enhancement 
provided by a covered entity, covered bank, or covered FSI, and defines 
``covered affiliate support provider'' to mean the covered entity, 
covered bank, or covered FSI that provides the covered affiliate credit 
enhancement.\64\ 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).\65\
---------------------------------------------------------------------------

    \61\ See proposed rule Sec.  382.4(c)(2).
    \62\ See proposed rule Sec.  382.4(c)(1).
    \63\ See proposed rule Sec.  382.4(c)(3).
    \64\ See proposed rule Sec.  382.4(f)(2).
    \65\ See proposed rule Sec.  382.4(f)(4).
---------------------------------------------------------------------------

    General prohibitions. Subject to the substantial exceptions 
discussed below, the proposal would prohibit a covered FSI 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 FSI.\66\ The proposal also 
would generally prohibit a covered FSI 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 FSI's obligations under the QFC), along with associated 
obligations or collateral, upon the entry into resolution of an 
affiliate of the covered FSI.\67\
---------------------------------------------------------------------------

    \66\ See proposed rule Sec.  382.4(b)(1).
    \67\ See proposed rule Sec.  382.4(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 fire sales, 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 could 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 could occur from exercise of default 
rights against a performing entity based on the failure of an 
affiliate.
    Under Title II, the 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 an 
affiliate of a covered FSI that is not an insured depository 
institution. 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 FSIs 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.\68\
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    \68\ See proposed rule Sec.  382.4(b).

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[[Page 74335]]

    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.\69\ 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.
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    \69\ 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 under the 
Bankruptcy Code workable.\70\
---------------------------------------------------------------------------

    \70\ 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 an otherwise-
solvent 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 against 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 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 FSI's 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.\71\ 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.
---------------------------------------------------------------------------

    \71\ See proposed rule Sec.  382.4(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.\72\ 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 
FSI'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.
---------------------------------------------------------------------------

    \72\ See proposed rule Sec.  382.4(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 Title II 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, in the context of an insolvency 
proceeding, and subject to the statutory requirements and restrictions 
thereunder, covered QFCs to permit the exercise of default rights based 
on (i) the failure of the direct party; (ii) the direct party not 
satisfying a payment or delivery obligation; or (iii) a covered 
affiliate support provider or transferee not satisfying its payment or 
delivery obligations under the direct QFC or credit enhancement.\73\ 
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.
---------------------------------------------------------------------------

    \73\ See proposed rule Sec.  382.4(e).
---------------------------------------------------------------------------

    The proposed exceptions for the creditor protections described 
above are intended to help ensure that the proposal permits a covered 
FSI'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, following the applicable stay period, under 
the U.S. special resolution regimes.
    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 FSI that is a covered entity, covered bank, or 
covered FSI under the proposal.\74\ The proposal would allow these 
creditor protections in recognition of the supported party's interest 
in receiving the benefit of its credit enhancement.
---------------------------------------------------------------------------

    \74\ See proposed rule Sec.  382.4(g).
---------------------------------------------------------------------------

    Where a covered QFC is supported by a covered affiliate credit 
enhancement,\75\ the covered QFC and the credit enhancement would be 
permitted to allow the exercise of default rights \76\ under the 
circumstances discussed below after the expiration of a stay period. 
Under the proposal, the applicable stay period would begin when the 
receiver is appointed 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.\77\ This portion of

[[Page 74336]]

the proposal is similar to the stay treatment provided in a resolution 
under Title II or the FDI Act.\78\
---------------------------------------------------------------------------

    \75\ Note that the exception in Sec.  382.4(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.
    \76\ 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).
    \77\ See proposed rule Sec.  382.4(h)(1).
    \78\ 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 or the FDI 
Act.\79\ Default rights could also be exercised at the end of the stay 
period if the transferee (if any) of the credit enhancement enters an 
insolvency proceeding, protecting the supported party from a transfer 
of the credit enhancement to a transferee that is unable to meet its 
financial obligations.
---------------------------------------------------------------------------

    \79\ See proposed rule Sec.  382.4(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 
party's QFC counterparty.\80\ 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.
---------------------------------------------------------------------------

    \80\ See proposed rule Sec.  382.4(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 providing 
substantively the same credit enhancement as the covered affiliate 
support provider.\81\
---------------------------------------------------------------------------

    \81\ 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 \82\ under the following circumstances: (a) After the FDI 
Act stay period,\83\ if the credit enhancement is not transferred under 
the relevant provisions of the FDI Act \84\ 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.\85\ This 
provision is intended to ensure that a QFC counterparty of a subsidiary 
of a covered FSI that goes into FDI Act receivership can receive the 
equivalent level of protection that the FDI Act provides to QFC 
counterparties of the covered FSI itself.\86\
---------------------------------------------------------------------------

    \82\ 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.
    \83\ 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).
    \84\ 12 U.S.C. 1821(e)(9)-(10).
    \85\ See proposed rule Sec.  382.4(i).
    \86\ See id. (noting that the general creditor protections in 
section 382.4(e), and the additional creditor protections for 
supported QFCs in section 382.4(g), are inapplicable to FDI Act 
proceedings).
---------------------------------------------------------------------------

    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,\87\ or a more 
demanding standard.
---------------------------------------------------------------------------

    \87\ 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 agents 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 subsidiary 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.\88\ 
Similarly, a covered FSI may also enter into a QFC as agent acting on 
behalf of a principal.
---------------------------------------------------------------------------

    \88\ 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 FSI is acting as a principal or as an agent. Section 382.3 
and section 382.4 do not distinguish between agents and principals with 
respect to default rights or transfer restrictions applicable to 
covered QFCs. Section 382.3 would limit default rights and transfer 
restrictions that a counterparty may have against a covered FSI 
consistent with the U.S. special resolution regimes.\89\ Section 382.4 
would ensure that, subject to the enumerated creditor protections, 
counterparties could not exercise cross-default rights under the 
covered QFC against the covered FSI, acting as agent or principal, 
based on the resolution of an affiliate of the covered FSI.\90\
---------------------------------------------------------------------------

    \89\ See proposed rule Sec.  382.3(a)(3).
    \90\ See proposed rule Sec.  382.4(d). If a covered FSI (acting 
as agent) is a direct party to a covered QFC, then the general 
prohibitions of section 382.4(b) 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 FSI (acting as 
agent). See also proposed rule Sec.  382.4(a)(3).

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[[Page 74337]]

    Compliance with the ISDA 2015 Resolution Stay Protocol. As an 
alternative to compliance with the requirements of section 382.4 that 
are described above, a covered FSI could comply with the proposed rule 
to the extent its QFCs are amended by adherence 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.\91\
---------------------------------------------------------------------------

    \91\ 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 ISDA 2015 Universal Resolution Stay Protocol (ISDA Protocol) 
expanded the 2014 ISDA Resolution Stay Protocol to cover securities 
financing transactions in addition to over-the-counter derivatives 
documented under ISDA Master Agreements. As between adhering 
parties, the ISDA Protocol replaces the 2014 ISDA Protocol (which 
does not cover securities financing transactions). Securities 
financing transactions (which generally include repurchase 
agreements and securities lending transactions) are documented under 
non-ISDA master agreements.
    The Protocol was developed by a working group of member 
institutions of the International Swaps and Derivatives Association, 
Inc. (ISDA), in coordination with the FRB, 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 continue supplementing 
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, covered FSIs, or 
covered banks) would be consistent with the current proposal. For 
additional detail on the development of the 2014 and 2015 ISDA 
Resolution Stay Protocols, see FRB NPRM, 81 FR at 29181-29182 (May 
11, 2016).
---------------------------------------------------------------------------

    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 \92\ 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.\93\ Consistent with the FDIC'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.
---------------------------------------------------------------------------

    \92\ 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.
    \93\ Sections 2(a) and (b) of the Protocol provide the stays 
required under paragraph (b)(1) of proposed rule Sec.  382.4 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.  382.4 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.  382.4. 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.  382.4. 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.  252.84(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.
---------------------------------------------------------------------------

    Question 7: The FDIC invites comment on the proposed restrictions 
on cross-default rights in covered FSI's 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 8: The FDIC invites comment on its proposal to treat as 
compliant with section 382.4 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?

F. Process for Approval of Enhanced Creditor Protections (Section 382.5 
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 FSI to submit to the FDIC 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 FSI 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 FDIC's consideration of whether permitting 
the contractual terms would be consistent with the proposed 
restrictions.\94\ The FDIC also expects to consult with the FRB and OCC 
during its consideration of such a request--in particular, when the 
covered QFC is between a covered FSI and either a covered bank or a 
covered entity.
---------------------------------------------------------------------------

    \94\ Proposed rule Sec.  382.5(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, covered banks, and covered FSIs. 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, covered banks and covered FSIs 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 parties. The FDIC 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 FSI requesting that the FDIC 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 FDIC.
    Question 9: The FDIC invites comment on all aspects of the proposed 
process for approval of enhanced creditor protections. Should the FDIC 
provide greater specificity on this process? If so, what processes and 
procedures could be adopted without imposing undue regulatory burden?

III. Transition Periods

    Under the proposal, the final 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

[[Page 74338]]

rule (effective date).\95\ Entities that are covered FSIs when the 
final rule is issued would be required to comply with the proposed 
requirements beginning on the effective date. Thus, a covered FSI would 
be required to ensure that covered QFCs entered into on or after the 
effective date comply with the rule's requirements.\96\ Moreover, a 
covered FSI 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 FSI or an affiliate (that is also a covered entity, covered 
bank, or covered FSI) enters into a new covered QFC with the 
counterparty to the preexisting covered QFC or an affiliate of the 
counterparty.\97\ (Thus, a covered FSI would not be required to conform 
a preexisting QFC if that covered FSI 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 
FSI 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 FSI.\98\
---------------------------------------------------------------------------

    \95\ Under section 302(b) of the Riegle Community Development 
and Regulatory Improvement Act of 1994, new FRB 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).
    \96\ See proposed rule Sec. Sec.  382.3(a)(2)(i); 382.4(a)(2).
    \97\ See proposed rule Sec. Sec.  382.3(a)(2)(ii), 382.4(a)(2).
    \98\ See proposed rule Sec.  382.2(b).
---------------------------------------------------------------------------

    By permitting a covered FSI to remain party to noncompliant QFCs 
entered into before the effective date unless the covered FSI or any 
affiliate (that is also a covered entity, covered bank, or covered FSI) 
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 FSIs 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 FSI ensure that all 
existing QFCs with a particular counterparty and its affiliates are 
compliant before it or any affiliate of the covered FSI (that is also a 
covered entity, covered bank, or covered FSI) enters into a new QFC 
with the same counterparty or its affiliates after the effective date 
will provide covered FSIs 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. The FDIC will monitor covered FSIs' levels of 
noncompliant QFCs and evaluate the risk, if any, that they pose to the 
safety and soundness of the covered FSIs, the banking system, or to 
U.S. financial stability.
    Question 10: The FDIC invites comment on the proposed transition 
periods and the proposed treatment of preexisting QFCs.

IV. Expected Effects

    The proposed rule is intended to promote the financial stability of 
the United States by reducing the potential that resolution of a GSIB, 
particularly through bankruptcy, will be disorderly. The proposed rule 
will help meet this policy objective by more effectively and 
efficiently managing the exercise of default rights and restrictions 
contained in QFCs. It would therefore help mitigate the risk of future 
financial crises and imposition of substantial costs on the U.S. 
economy.\99\ The proposed rule furthers the FDIC's mission and 
responsibilities, which include resolving failed institutions in the 
least costly manner and ensuring that FDIC-insured institutions operate 
safely and soundly. It also furthers the fulfillment of the FDIC's role 
as the (i) primary federal supervisor for SNMBs and state savings 
associations; (ii) resolution authority for all FDIC-insured 
institutions under the FDI Act; and (iii) resolution authority for 
large complex financial institutions under Title II of the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    \99\ A recent estimate of the unrealized economic output that 
resulted from 2007-09 financial crisis in the United States amounted 
to between $6 and $14 trillion. See ``How Bad Was It? The Costs and 
Consequences of the 2007-09 Financial Crisis,'' Staff Paper No. 20, 
Federal Reserve Bank of Dallas, July 2013. https://dallasfed.org/assets/documents/research/staff/staff1301.pdf.
---------------------------------------------------------------------------

    The proposal would likely benefit the counterparties of a 
subsidiary of a failed GSIB by preventing the disorderly failure of the 
subsidiary and enabling 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, after any applicable stay period.
    Because financial crises impose enormous costs on the economy, even 
small reductions in the probability or severity future financial crises 
create substantial economic benefits.\100\ 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.
---------------------------------------------------------------------------

    \100\ See id.
---------------------------------------------------------------------------

    The costs of the proposed rule are likely to be relatively small 
and only affect twelve covered FSIs. Covered FSIs and their 
counterparties are likely to incur administrative costs associated with 
drafting and negotiating compliant QFCs, but to the extent such parties 
adhere to the ISDA Protocol, these administrative costs would likely be 
reduced. While potential administrative costs are difficult to 
accurately predict, these costs are likely to be small relative to the 
revenue of the organizations affected by the proposed rule, and to the 
costs of doing business in the financial sector generally.
    In addition, the FDIC anticipates that covered FSIs would likely 
share resources with its parent GSIB and/or GSIB affiliates--which are 
subject to parallel requirements--to help cover compliance costs. 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 
for the 23 existing GSIB adherents. The partial effectiveness of the 
ISDA Protocol (regarding Section 1, which addresses recognition of 
stays on the exercise of default rights and remedies in financial 
contracts under special resolution regimes, including in the United 
States, the United Kingdom, Germany, France, Switzerland and Japan) 
suggests that to the extent covered FSIs already adhere to the ISDA 
Protocol, some implementation costs will likely be reduced.
    The proposal could also impose costs on covered FSIs to the extent 
that they may need to provide their QFC

[[Page 74339]]

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 drafting and negotiating costs. However, they are also expected to 
be relatively small because of the limited reduction in the rights of 
counterparties 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. For example, a covered FSI 
may not enter into a QFC that it would have otherwise entered into in 
the absence of the proposed rule. Therefore, economic activity that 
would have been associated with that QFC absent the proposed rule (such 
as economic activity that would have otherwise been hedged with a 
derivatives contract or funded through a repo transaction) might not 
occur.
    While uncertainty surrounding the future negotiations of economic 
actors makes an accurate quantification of any such costs difficult, 
costs from reduced QFC activity are likely to be very low. The proposed 
restrictions on default rights in covered QFCs are relatively narrow 
and would not change a counterparty's rights 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.
    Question 11: The FDIC invites comment on all aspects of this 
evaluation of costs and benefits; in particular, whether covered FSIs 
expect to be able to share the costs of complying with this rulemaking 
with affiliated entities.

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

    This proposal would also amend several definitions in the FDIC's 
capital and liquidity rules to help ensure that the proposal would not 
have unintended effects for the treatment of covered FSIs' netting 
agreements under those rules, consistent with the proposed amendments 
contained in the FRB NPRM and the OCC NPRM.\101\
---------------------------------------------------------------------------

    \101\ On September 20, 2016, the FDIC adopted a separate final 
rule (the Final QMNA Rule), following the earlier notice of proposed 
rulemaking issued in January 2015, see 80 FR 5063 (Jan. 30, 2015), 
covering amendments to the definition of ``qualifying master netting 
agreement'' in the FDIC's capital and liquidity rules and related 
definitions in its capital rules. The Final QMNA Rule is designed to 
prevent similar unintended effects from implementation of special 
resolution regimes in non-U.S. jurisdictions, or by parties' 
adherence to the ISDA Protocol. The amendments contained in the 
Final QMNA Rule also are similar to revisions that the FRB and the 
OCC made in their joint 2014 interim final rule to ensure that the 
regulatory capital and liquidity rules' treatment of certain 
financial contracts is not affected by the implementation of special 
resolution regimes in foreign jurisdictions. See 79 FR 78287 (Dec. 
30, 2014).
---------------------------------------------------------------------------

    The FDIC'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.\102\ The FDIC 
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.\103\ 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.
---------------------------------------------------------------------------

    \102\ See 12 CFR 324.34(a)(2).
    \103\ See the definition of ``qualifying master netting 
agreement'' in 12 CFR 324.2 (capital rules) and 329.3 (liquidity 
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 FSIs. 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 
FSIs, 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 limited to the extent necessary to comply with the 
requirements of this proposal. This revision would maintain the 
existing treatment for these contracts under the FDIC's capital and 
liquidity rules by accounting for the restrictions that the proposal 
would place on default rights related to covered FSIs' QFCs. The FDIC 
does not believe that the disqualification of master netting agreements 
that would result in this proposed amendment to the definition of 
``qualifying master netting agreement'' in this proposal 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 
transaction, repo-style transaction, or eligible margin loan for 
purposes of the FDIC's capital 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 adverse impacts under the FDIC's capital rules.
    The interagency 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.'' \104\ Thus, it 
may also be appropriate to amend the definition of ``eligible master 
netting agreement'' to account for the proposed restrictions on covered 
FSIs' QFCs. Because the FDIC

[[Page 74340]]

issued the swap margin rule jointly with other U.S. regulatory 
agencies, however, the FDIC would consult with the other agencies 
before proposing amendments to that rule's definition of ``eligible 
master netting agreement.''
---------------------------------------------------------------------------

    \104\ 80 FR 74840, 74861-74862 (November 30, 2015). The FDIC's 
definition of ``eligible master netting agreement'' for purposes of 
the swap margin rule is codified at 12 CFR 349.2.
---------------------------------------------------------------------------

    Question 12: The FDIC invites comment on all aspects of the 
proposed amendments to the definitions of ``qualifying master netting 
agreement'' in the regulatory capital and liquidity rules and 
``collateral agreement,'' ``eligible margin loan,'' and ``repo-style 
transaction'' in the capital rules, including whether the definitions 
recognize the stay of termination rights under the appropriate 
resolution regimes.

VI. Regulatory Analysis

A. Paperwork Reduction Act

    The FDIC is proposing to add a new Part 382 to its rules to require 
certain FDIC-supervised institutions to ensure that covered QFCs to 
which they are a party 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 FDI Act. In addition, covered 
FSIs would generally be prohibited from being party to QFCs that would 
allow a QFC counterparty to exercise default rights against the covered 
FSI based on the entry into a resolution proceeding under the Dodd-
Frank Act, FDI Act, or any other resolution proceeding of an affiliate 
of the covered FSI.
    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, 44 U.S.C. 3501 through 3521, (PRA), the FDIC 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. Section 382.5 of the proposed rule contains ``collection of 
information'' requirements within the meaning of the PRA. Accordingly, 
the FDIC will obtain an OMB control number relating to the information 
collection associated with that section.
    This information collection consists of amendments to covered QFCs 
and, in some cases, approval requests prepared and submitted to the 
FDIC regarding modifications to enhanced creditor protection provisions 
(in lieu of adherence to the ISDA Protocol). Section 382.5(b) of the 
proposed rule would require a covered banking entity to request the 
FDIC to approve as compliant with the requirements of section 382.4 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. A covered FSI making a request must provide (1) 
an analysis of the proposal under each consideration of paragraph 
382.5(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 FDIC requests.
    Covered FSIs would also have recordkeeping associated with proposed 
amendments to their covered QFCs. However, much of the recordkeeping 
associated with amending the covered QFCs is already expected from a 
covered FSI. Therefore, the FDIC would expect minimal additional burden 
to accompany the initial efforts to bring all covered QFCs into 
compliance. The existing burden estimates for the information 
collection associated with section 382.5 are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                     Hours per     Total burden
                 Title                         Times/year           Respondents      response          hours
----------------------------------------------------------------------------------------------------------------
Paperwork for proposed revisions......  On occasion.............               6              40             240
    Total Burden......................  ........................  ..............  ..............             240
----------------------------------------------------------------------------------------------------------------

    Question 13: The FDIC invites comments on:
    (a) Whether the collections of information are necessary for the 
proper performance of the FDIC's functions, including whether the 
information has practical utility;
    (b) The accuracy of the FDIC'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 for the FDIC 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, or by email to 
[email protected], Attention, Federal Banking Agency Desk 
Officer.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that each federal agency either certify that a proposed rule 
will not, if promulgated, have a significant economic impact on a 
substantial number of small entities or prepare and make available for 
public comment an initial regulatory flexibility analysis of the 
proposal.\105\ For the reasons provided below, the FDIC certifies that 
the proposed rule will not have a significant economic impact on a 
substantial number of small entities. Nevertheless, the FDIC is 
publishing and inviting comment on this initial regulatory flexibility 
analysis.
---------------------------------------------------------------------------

    \105\ See 5 U.S.C. 603, 605.
---------------------------------------------------------------------------

    The proposed rule would only apply to FSIs that form part of GSIB 
organizations, which include the largest, most systemically important 
banking organizations and certain of their subsidiaries. More 
specifically, the proposed rule would apply to any covered FSI that is 
a subsidiary of a U.S. GSIB or foreign GSIB--regardless of 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 FDIC estimates that the proposed rule would apply to 
approximately twelve FSIs. As of March 31, 2016, only six of the twelve 
covered FSIs have derivatives portfolios that could be affected. None 
of these six banking organizations would qualify as a small entity for 
the purposes of the RFA.\106\ In

[[Page 74341]]

addition, the FDIC anticipates that any small subsidiary of a GSIB that 
could be affected by this proposed rule would not bear significant 
additional costs as it is likely to rely on its parent GSIB, or a large 
affiliate, that will be subject to similar reporting, recordkeeping, 
and compliance requirements.\107\ The proposed rule complements the FRB 
NPRM and OCC NPRM. It is not designed to duplicate, overlap with, or 
conflict with any other federal regulation.
---------------------------------------------------------------------------

    \106\ Under regulations issued by the Small Business 
Administration, small entities include banking organizations with 
total assets of $550 million or less.
    \107\ See FRB NPRM, 81 FR 29169 (May 11, 2016) and OCC NPRM, 81 
FR 55381 (August 19, 2016).
---------------------------------------------------------------------------

    This initial regulatory flexibility analysis demonstrates that the 
proposed rule would not, if promulgated, have a significant economic 
impact on a substantial number of small entities, and the FDIC so 
certifies.\108\
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 605.
---------------------------------------------------------------------------

    Question 14: The FDIC 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), 12 U.S.C. 4701, 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 FDIC has invited comment on these matters in other sections of 
this proposal and will continue to consider them as part of the overall 
rulemaking process.
    Question 15: The FDIC invites comment on this section, including 
any additional comments that will inform the FDIC'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, 12 U.S.C. 4809, requires 
the FDIC to use plain language in all proposed and final rules 
published after January 1, 2000. The FDIC invites comment on how to 
make this proposed rule easier to understand.
    Question 16: Has the FDIC organized the material to inform your 
needs? If not, how could the FDIC present the rule more clearly?
    Question 17: Are the requirements of the proposed rule clearly 
stated? If not, how could they be stated more clearly?
    Question 18: Does the proposal contain unclear technical language 
or jargon? If so, which language requires clarification?
    Question 19: 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 20: What else could the FDIC do to make the proposal 
clearer and easier to understand?

List of Subjects

12 CFR Part 324

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Reporting and recordkeeping requirements, Securities, State 
savings associations, State non-member banks.

12 CFR Part 329

    Administrative practice and procedure, Banks, banking, Federal 
Deposit Insurance Corporation, FDIC, Liquidity, Reporting and 
recordkeeping requirements.

12 CFR Part 382

    Administrative practice and procedure, Banks, banking, Federal 
Deposit Insurance Corporation, FDIC, Qualified financial contracts, 
Reporting and recordkeeping requirements, State savings associations, 
State non-member banks.

    For the reasons stated in the supplementary information, the 
Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter 
III, parts 324, 329 and 382 as follows:

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

0
1. The authority citation for part 324 continues to read as follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

0
2. Section 324.2 is amended by revising the definitions of ``Collateral 
agreement,'' ``Eligible margin loan,'' ``Qualifying master netting 
agreement,'' and ``Repo-style transaction'' to read as follows:


Sec.  324.2  Definitions.

* * * * *
    Collateral agreement means a legal contract that specifies the time 
when, and circumstances under which, a counterparty is required to 
pledge collateral to an FDIC-supervised institution for a single 
financial contract or for all financial contracts in a netting set and 
confers upon the FDIC-supervised 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 FDIC-supervised 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 FDIC-supervised 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; or
---------------------------------------------------------------------------

    \4\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.

---------------------------------------------------------------------------

[[Page 74342]]

    (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 
part 382 of this title or any similar requirements of another U.S. 
federal banking agency, as applicable.
* * * * *
    Eligible margin loan means:
    (1) An extension of credit where:
    (i) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, or gold;
    (ii) The collateral is marked to fair value daily, and the 
transaction is subject to daily margin maintenance requirements; and
    (iii) The extension of credit is conducted under an agreement that 
provides the FDIC-supervised 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 FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC 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 
part 382 of this title or any similar requirements of another U.S. 
federal banking agency, as applicable.
    (2) In order to recognize an exposure as an eligible margin loan 
for purposes of this subpart, an FDIC-supervised institution must 
comply with the requirements of Sec.  324.3(b) with respect to that 
exposure.
* * * * *
    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, insolvency, 
conservatorship, liquidation, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the FDIC-supervised 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 \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 FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC 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 
part 382 of this title or any similar requirements of another U.S. 
federal banking agency, as applicable;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, an FDIC-supervised 
institution must comply with the requirements of Sec.  324.3(d) of this 
chapter with respect to that agreement.
* * * * *
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the FDIC-supervised 
institution acts as agent for a customer and indemnifies the customer 
against loss, provided that:
    (1) The transaction is based solely on liquid and readily 
marketable securities, cash, or gold;
    (2) The transaction is marked-to-fair value daily and subject to 
daily margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (11 U.S.C. 555 or 559), a qualified financial contract under 
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting 
contract between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act or the 
Federal Reserve's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides 
the FDIC-supervised 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

[[Page 74343]]

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 part 382 of this title or any 
similar requirements of another U.S. federal banking agency, as 
applicable; or
---------------------------------------------------------------------------

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

    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the FDIC-supervised institution; and
    (2) Executed under an agreement that provides the FDIC-supervised 
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 counterparty default; and
    (4) In order to recognize an exposure as a repo-style transaction 
for purposes of this subpart, an FDIC-supervised institution must 
comply with the requirements of Sec.  324.3(e) with respect to that 
exposure.
* * * * *

PART 329--LIQUIDITY RISK MEASUREMENT STANDARDS

0
3. The authority citation for part 329 continues to read as follows:

    Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1, 
5412.

0
4. Section 329.3 is amended by revising the definition of ``Qualifying 
master netting agreement'' to read as follows:


Sec.  329.3  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 FDIC-supervised 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 \109\ to the U.S. laws 
referenced in this paragraph (2)(i) in order to facilitate the orderly 
resolution of the defaulting counterparty;
---------------------------------------------------------------------------

    \109\ The FDIC expects to evaluate jointly with the Federal 
Reserve and the OCC whether foreign special resolution regimes meet 
the requirements of this paragraph.
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    (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 
part 382 of this title or any similar requirements of another U.S. 
federal banking agency, as applicable;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this subpart, an FDIC-supervised 
institution must comply with the requirements of Sec.  329.4(a) with 
respect to that agreement.
* * * * *

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the supplementary information, the 
Federal Deposit Insurance Corporation proposes to amend 12 CFR Chapter 
III of the Code of Federal Regulations as follows:
0
8. Add part 382 to read as follows:

PART 382--RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS

Sec.
382.1 Definitions.
382.2 Applicability.
382.3 U.S. Special resolution regimes.
382.4 Insolvency proceedings.
382.5 Approval of enhanced creditor protection conditions.
382.6 [Reserved.]
382.7 Exclusion of certain QFCs.

    Authority: 12 U.S.C. 1816, 1818, 1819, 1820(g) 1828, 1828(m), 
1831n, 1831o, 1831p-l, 1831(u), 1831w.

PART 382--RESTRICTIONS ON QUALIFIED FINANCIAL CONTRACTS


Sec.  382.1  Definitions.

    Affiliate has the same meaning as in section 12 U.S.C. 1813(w).
    Central counterparty (CCP) has the same meaning as in Part 324.2 of 
the FDIC's Regulations (12 CFR 324.2).
    Chapter 11 proceeding means a proceeding under Chapter 11 of Title 
11, United States Code (11 U.S.C. 1101-74).
    Control has the same meaning as in section 12 U.S.C. 1813(w).
    Covered bank has the same meaning as in Part 47.3 of the Office of 
the Comptroller's Regulations (12 CFR 47.3).
    Covered entity has the same meaning as in section 252.82(a) of the 
Federal Reserve Board's Regulation YY (12 CFR 252.82).
    Covered QFC means a QFC as defined in sections 382.3 and 382.4 of 
this part.
    Covered FSI means any state savings association or state non-member 
bank (as defined in the Federal Deposit Insurance Act, 12 U.S.C. 
1813(e)(2)) that is a direct or indirect subsidiary of (i) a global 
systemically important bank holding company that has been designated 
pursuant to section 252.82(a)(1) of the Federal Reserve Board's 
Regulation YY (12 CFR part 252.82); or (ii) a global systemically 
important foreign banking organization that has been designated 
pursuant to Subpart I of 12 CFR part 252 (FRB Regulation YY), and any 
subsidiary of a covered FSI.
    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, rule or order 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 74344]]

    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 382.4, 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 means the Federal Deposit Insurance Act (12 U.S.C. 1811 et 
seq.).
    FDI Act proceeding means a proceeding that commences upon the 
Federal Deposit Insurance Corporation being 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.
    Global systemically important foreign banking organization means a 
global systemically important foreign banking organization that has 
been designated pursuant to Subpart I of 12 CFR part 252 (FRB 
Regulation YY).
    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)).
    Subsidiary of a covered FSI means any subsidiary of a covered FSI 
as defined in 12 U.S.C. 1813(w).
    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.  382.2  Applicability.

    (a) Scope of applicability. This part applies to a ``covered FSI,'' 
which means any state savings association or state non-member bank (as 
defined in the Federal Deposit Insurance Act, 12 U.S.C. 1813(e)(2)) 
that is a direct or indirect subsidiary of (i) a global systemically 
important bank holding company that has been designated pursuant to 
section 252.82(a)(1) of the Federal Reserve Board's Regulation YY (12 
CFR part 252.82); or (ii) a global systemically important foreign 
banking organization that has been designated pursuant to Subpart I of 
12 CFR part 252 (FRB Regulation YY), and any subsidiary of a covered 
FSI.
    (b) Initial applicability of requirements for covered QFCs. A 
covered FSI must comply with the requirements of Sec. Sec.  382.3 and 
382.4 beginning on the later of
    (1) The first day of the calendar quarter immediately following 365 
days (1 year) after becoming a covered FSI; 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.
    (d) Rights of receiver unaffected. Nothing in this subpart shall in 
any manner limit or modify the rights and powers of the FDIC as 
receiver under the FDI Act or Title II of the Dodd-Frank Act, 
including, without limitation, the rights of the receiver to enforce 
provisions of the FDI Act or Title II of the Dodd-Frank Act that limit 
the enforceability of certain contractual provisions.


Sec.  382.3  U.S. Special resolution regimes.

    (a) QFCs required to be conformed. (1) A covered FSI must ensure 
that each covered QFC conforms to the requirements of this section 
382.3.
    (2) For purposes of this Sec.  382.3, a covered QFC means a QFC 
that the covered FSI:
    (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 FSI or any 
affiliate that is a covered entity, covered bank, or covered FSI 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 FSI 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 FSI or the default 
rights relate to the covered FSI or an affiliate of the covered FSI.
    (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 FSI 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 FSI 
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 FSI 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

[[Page 74345]]

governed by the laws of the United States or a state of the United 
States and (A) the covered FSI were under the U.S. special resolution 
regime; or (B) an affiliate of the covered FSI is subject to a U.S. 
special resolution regime.
    (c) Relevance of creditor protection provisions. The requirements 
of this section apply notwithstanding paragraphs Sec. Sec.  382.4 and 
382.5.


Sec.  382.4  Insolvency proceedings.

    This section 382.4 does not apply to proceedings under Title II of 
the Dodd-Frank Act. For purposes of this section:
    (a) QFCs required to be conformed. (1) A covered FSI must ensure 
that each covered QFC conforms to the requirements of this Sec.  382.4.
    (2) For purposes of this Sec.  382.4, a covered QFC has the same 
definition as in paragraph (a)(2) of Sec.  382.3.
    (3) To the extent that the covered FSI 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 FSI or the default 
rights relate to an affiliate of the covered FSI.
    (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 or after 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, covered 
bank, or covered FSI referenced in paragraph (a) of Sec.  382.2, 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 FSI solely because the covered FSI is 
acting as agent under the QFC, the covered FSI 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, covered bank, or covered FSI referenced in 
paragraph (a) of 382.2, is a party.
    (2) Covered affiliate credit enhancement. Covered affiliate credit 
enhancement means an affiliate credit enhancement in which a covered 
entity, covered bank, or covered FSI referenced in paragraph (a) of 
Sec.  382.2, 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.

[[Page 74346]]

    (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 or following 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 paragraphs (e) and (g) of this section, which are 
inapplicable to FDI Act proceedings, and 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.  382.5  Approval of enhanced creditor protection conditions.

    (a) Protocol compliance. Notwithstanding paragraph (b) of section 
382.4, 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 FSI may request that the FDIC approve as compliant with the 
requirements of Sec.  382.4 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.  382.4(b) of this subpart that 
are different than that of paragraphs (e), (g), and (i) of Sec.  382.4.
    (3) A covered FSI 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 FDIC requests.
    (c) FDIC approval. The FDIC may approve, subject to any conditions 
or commitments the FDIC may set, a proposal by a covered FSI 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.  382.4 or that is amended as provided under 
paragraph (a) of this section, would promote the safety and soundness 
of covered FSIs by mitigating the potential destabilizing effects of 
the resolution of a global significantly important banking entity that 
is an affiliate of the covered FSI to at least the same extent.
    (d) Considerations. In reviewing a proposal under this section, the 
FDIC 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 FSIs during distress or increase the impact 
on U.S. financial stability were one or more of the covered FSIs to 
fail;
    (2) Whether, and the extent to which, the proposal would materially 
decrease the ability of a covered FSI, or an affiliate of a covered 
FSI, 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 FSIs;
    (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 FSIs;
    (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

[[Page 74347]]

    (10) Whether the proposal provides the counterparty with additional 
default rights or other rights.


Sec.  382.6   [Reserved.]


Sec.  382.7  Exclusion of certain QFCs.

    (a) Exclusion of CCP-cleared QFCs. A covered FSI is not required to 
conform a covered QFC to which a CCP is party to the requirements of 
Sec. Sec.  382.3 or 382.4.
    (b) Exclusion of covered entity or covered bank QFCs. A covered FSI 
is not required to conform a covered QFC to the requirements of 
Sec. Sec.  382.3 or 382.4 to the extent that a covered entity or 
covered bank is required to conform the covered QFC to similar 
requirements of the Federal Reserve Board or Office of the Comptroller 
of the Currency if the QFC is either (A) a direct QFC to which a 
covered entity or a covered bank is a direct party or (B) an affiliate 
credit enhancement to which a covered entity or a covered bank is the 
obligor.

    Dated at Washington, DC, this 20th day of September, 2016.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2016-25605 Filed 10-25-16; 8:45 am]
 BILLING CODE P