[Federal Register Volume 81, Number 210 (Monday, October 31, 2016)]
[Rules and Regulations]
[Pages 75624-75670]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-25329]
[[Page 75623]]
Vol. 81
Monday,
No. 210
October 31, 2016
Part III
Department of the Treasury
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31 CFR Part 148
Qualified Financial Contracts Recordkeeping Related to Orderly
Liquidation Authority; Final Rule
Federal Register / Vol. 81 , No. 210 / Monday, October 31, 2016 /
Rules and Regulations
[[Page 75624]]
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DEPARTMENT OF THE TREASURY
31 CFR Part 148
RIN 1505-AC46
Qualified Financial Contracts Recordkeeping Related to Orderly
Liquidation Authority
AGENCY: Department of the Treasury.
ACTION: Final rule.
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SUMMARY: The Secretary of the Treasury (the ``Secretary''), as
Chairperson of the Financial Stability Oversight Council (the
``Council''), is adopting final rules (the ``Final Rules'') in
consultation with the Federal Deposit Insurance Corporation (the
``FDIC'') to implement the qualified financial contract (``QFC'')
recordkeeping requirements of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act'' or the ``Act''). The
Final Rules require recordkeeping with respect to positions,
counterparties, legal documentation, and collateral. This information
is necessary and appropriate to assist the FDIC as receiver to: Fulfill
its obligations under the Dodd-Frank Act in deciding whether to
transfer QFCs; assess the consequences of decisions to transfer,
disaffirm or repudiate, or allow the termination of, QFCs with one or
more counterparties; determine if any risks to financial stability are
posed by the transfer, disaffirmance or repudiation, or termination of
such QFCs; and otherwise exercise its rights under the Act and fulfill
its obligations under sections 210(c)(8), (9), or (10) of the Act.
DATES: The Final Rules are effective December 30, 2016.
FOR FURTHER INFORMATION CONTACT: Monique Y.S. Rollins, Deputy Assistant
Secretary for Capital Markets, (202) 622-1745; Jacob Liebschutz,
Director, Office of Capital Markets, (202) 622-8954; Peter Nickoloff,
Financial Economist, Office of Capital Markets, (202) 622-1692; Steven
D. Laughton, Assistant General Counsel (Banking & Finance), (202) 622-
8413; or Stephen T. Milligan, Attorney-Advisor, (202) 622-4051.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Description of the Final Rules
A. Scope, Purpose, Effective Date, and Compliance Dates
1. Scope
2. Purpose
3. Effective Date and Compliance Dates
B. General Definitions
C. Form, Availability, and Maintenance of Records
1. Form and Availability
2. Maintenance and Updating
3. Exemptions
D. Content of Records
1. General Information
2. Appendix Information
III. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Orders 12866 and 13563
1. Description of the Need for the Regulatory Action
2. Literature Review
3. Baseline
4. Evaluation of Alternatives
5. Affected Population
6. Assessment of Potential Costs and Benefits
7. Retrospective Analysis
IV. Text of the Final Rules
I. Introduction
Title II of the Dodd-Frank Act (``Title II'') \1\ generally
establishes a mechanism for the orderly resolution of a financial
company whose failure and resolution under otherwise applicable federal
or state law would have serious adverse effects on financial stability
in the United States.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
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Section 210(c)(8)(H) of the Act requires the Federal primary
financial regulatory agencies, as defined in the Act \2\ (the
``PFRAs''), to jointly prescribe, by July 21, 2012, final or interim
final regulations that require financial companies to maintain such
records with respect to QFCs that the PFRAs determine to be necessary
or appropriate to assist the FDIC as receiver for a covered financial
company in being able to exercise its rights under the Act and fulfill
its obligations under sections 210(c)(8), (9), or (10).\3\ Section
210(c)(8)(H) also requires the regulations to, as appropriate,
differentiate among financial companies by taking into consideration
their size, risk, complexity, leverage, frequency and dollar amount of
QFCs, interconnectedness to the financial system, and any other factors
deemed appropriate.
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\2\ 12 U.S.C. 5301(12). See the term ``primary financial
regulatory agency.''
\3\ 12 U.S.C. 5390(c)(8)(H).
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Section 210(c)(8)(H) provides that if the PFRAs do not so prescribe
such joint regulations by July 21, 2012, the Secretary, as Chairperson
of the Council, shall prescribe such regulations in consultation with
the FDIC. As the PFRAs did not prescribe such regulations by the
statutory deadline, on January 7, 2015, the Secretary, as Chairperson
of the Council, in consultation with the FDIC, requested public comment
on proposed rules that would implement section 210(c)(8)(H) (the
``Proposed Rules'').\4\ The Secretary received comments on the Proposed
Rules from trade associations, asset managers, insurance companies,
clearing organizations, a nonprofit organization, and a private
individual. In general, commenters acknowledged the need for the FDIC
to have access to appropriate QFC records in order to exercise its role
as a receiver under Title II of the Dodd-Frank Act but also requested
relief from aspects of the Proposed Rules that they argued were unduly
burdensome.\5\ As discussed below, the Secretary has, in consultation
with the FDIC, made substantial changes in the Final Rules in response
to the comments received. In making these changes, the Secretary has
sought to reduce the burden of the rules while still assuring that the
FDIC will have the records it needs to exercise its rights under the
Act and fulfill its obligations under sections 210(c)(8), (9), and
(10).
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\4\ 80 FR 966 (Jan. 7, 2015).
\5\ See, e.g., comment letters from The Clearing House
Association L.L.C., the Securities Industry and Financial Markets
Association, the American Bankers Association, the Financial
Services Roundtable, and the Int'l Swaps and Derivatives
Association, Inc. (April 7, 2015) (the ``TCH et al. letter''), p. 2;
The Depository Trust & Clearing Corporation (April 7, 2015) (``DTCC
letter''), pp. 1-2; Sutherland Asbill & Brennan LLP on behalf of The
Commercial Energy Working Group (April 7, 2015) (``CEWG letter), p.
2; the Asset Management Group of the Securities Industry and
Financial Markets Association (April 7, 2015) (``SIFMA AMG
letter''), p. 1.
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The substantial constraints imposed by Title II on the FDIC's
exercise of its rights with respect to QFCs necessitate the detailed,
standardized recordkeeping requirements adopted in the Final Rules. As
discussed in greater detail in the Supplementary Information to the
Proposed Rules,\6\ Title II provides the FDIC as receiver of a covered
financial company with the authority to (i) transfer the QFCs of the
covered financial company to another financial institution, including a
bridge financial company established by the FDIC or (ii) retain the
QFCs within the receivership, disaffirm or repudiate the QFCs, and pay
compensatory damages.\7\ The FDIC may also retain the QFCs within the
receivership and allow the counterparties to terminate the QFCs. In
deciding whether to transfer, disaffirm or repudiate, or allow
counterparties to terminate the QFCs of the covered financial company,
the FDIC must take
[[Page 75625]]
into consideration the requirements of Title II, including those
discussed below.
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\6\ A more general summary of the treatment of QFCs under Title
II and the rights and obligations of the FDIC under the Act was
provided in section II of the Supplementary Information to the
Proposed Rules. See 80 FR 966, 968-70.
\7\ 12 U.S.C. 5390(c)(11).
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As referenced throughout this Supplementary Information to the
Final Rules, Title II requires that the FDIC as receiver treat the QFCs
of a covered financial company with a particular counterparty and that
counterparty's affiliates consistently. Within certain constraints, the
FDIC may take different approaches with respect to QFCs with different
counterparties. However, if the FDIC as receiver desires to transfer
any QFC with a particular counterparty, it must transfer all QFCs
between the covered financial company and such counterparty and any
affiliate of such counterparty to a single financial institution.
Similarly, if the FDIC desires to disaffirm or repudiate any QFC with a
particular counterparty, it must disaffirm or repudiate all QFCs
between the covered financial company and such counterparty and any
affiliate of such counterparty.\8\
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\8\ For transfer, see 12 U.S.C. 5390(c)(9)(A); for disaffirmance
or repudiation, see 12 U.S.C. 5390(c)(11).
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Furthermore, the FDIC is required to confirm that the aggregate
amount of liabilities, including QFCs, of the covered financial company
that are transferred to, or assumed by, the bridge financial company
from the covered financial company do not exceed the aggregate amount
of the assets of the covered financial company that are transferred to,
or purchased by, the bridge financial company from the covered
financial company.\9\ In addition, in order to repudiate any QFCs of
the covered financial company, the receiver must first determine that
the performance of such QFCs would be burdensome and that such
repudiation will promote the orderly administration of the affairs of
the covered financial company.\10\ More generally, Title II provides
that with respect to the disposition of assets of a covered financial
company, including a repudiation or transfer of QFCs, the FDIC shall,
to the greatest extent practicable, do so in a way that maximizes value
and minimizes losses and mitigates the potential for serious adverse
effects to the financial system.\11\ Finally, the FDIC must make its
decision as to how to treat the QFCs of the covered financial company
within a very limited time frame because the stay that prevents
termination based on the appointment of the receiver lasts only for the
period between the appointment of the FDIC as receiver and 5 p.m.
(eastern time) on the business day following the date of the
appointment.\12\
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\9\ See 12 U.S.C. 5390(h)(5)(F).
\10\ See 12 U.S.C. 5390(c)(1).
\11\ See 12 U.S.C. 5390(a)(9)(E). See also 12 U.S.C.
5390(a)(1)(B)(iv).
\12\ See 12 U.S.C. 5390(c)(10)(B)(i).
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The Secretary has determined that, given these statutory
constraints, it is necessary and appropriate for the FDIC as receiver
to have access to detailed, standardized records from the financial
companies that potentially would be the most likely to be considered
for orderly liquidation under Title II. Nonetheless, having considered
the comments received, the Secretary has determined that it is possible
to reduce the scope of financial companies subject to the rules and the
extent of recordkeeping required while still requiring the records the
FDIC would need as receiver in order to exercise its rights under the
Act and fulfill its obligations under sections 210(c)(8), (9), or (10).
In particular, the Secretary has made changes in the Final Rules that
provide for further differentiation among financial companies by:
Adding to the definition of ``records entity'' new
thresholds based on the level of a financial company's derivatives
activity;
providing an exclusion for insurance companies;
providing a conditional exemption for clearing
organizations; and
providing a de minimis exemption from the recordkeeping
requirements, other than the requirement to maintain copies of the
documents that govern QFC transactions, for entities that are party to
50 or fewer open QFC positions.
The Final Rules also significantly reduce the burden of the
required recordkeeping by, among other things:
Revising the definition of ``records entity'' to identify
which members of a corporate group are records entities by reference to
whether they are consolidated under accounting standards;
replacing the requirement to maintain organizational
charts of counterparties with a requirement to identify only certain
information as to each counterparty, such as the ultimate and immediate
parent entities of the counterparty;
eliminating the requirement to maintain risk metrics
information;
eliminating the requirement to maintain copies of
additional information with respect to QFCs provided by the records
entity to other regulators, swap data repositories, and security-based
swap data repositories;
eliminating the requirement that copies of QFC agreements
be searchable;
eliminating several fields from the required data tables;
and
providing for tiered initial compliance dates based on the
size of the corporate group, with all records entities having
additional time to comply with the rules.
The Final Rules also provide for additional fields in the required
data tables that are not anticipated to impose a significant additional
burden on records entities, and the proposed requirement that records
of affiliated records entities be maintained in a form that allows for
aggregation has been replaced in the Final Rules with the requirement
that the top-tier parent financial company be capable of aggregating
such records.
II. Description of the Final Rules
The following discussion provides a summary of the Proposed Rules,
the comments received, and the Secretary's responses to those comments,
including modifications made in the Final Rules. In addition to the
considerations discussed in this section, the Secretary, in adopting
these Final Rules, has taken into account the potential costs and
benefits of the rules discussed in Section III below.
A. Scope, Purpose, Effective Date, and Compliance Dates
Section 148.1(a) of the Final Rules defines the scope of the rules.
Section 148.1(b) explains the purpose of the rules. Sections 148.1(c)
and (d) set forth the rules' effective and compliance dates.
1. Scope
a. Key Definitions
The scope of the Final Rules is established by certain key
definitions that determine the entities that would be subject to the
rules. Specifically, section 148.1(a) of the Final Rules provides that
the rules apply to any ``financial company'' that is a ``records
entity'' and, with respect to section 148.3(a), to the ``top-tier
financial company'' of a ``corporate group,'' as those terms are
defined in the Final Rules.
Financial Company: The Final Rules, as did the Proposed Rules,
incorporate the definition of ``financial company'' set forth in
section 201(a)(11) of the Dodd-Frank Act.\13\ Entities that are not
included in the section 201(a)(11) definition of ``financial company''
are not included in the definition of ``records entity'' and,
therefore, are not subject to the rules. Entities that are included in
the section 201(a)(11) definition of ``financial company'' are subject
to the rules if they also meet the
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other criteria in the definition of ``records entity.'' In addition,
the definition of ``covered financial company'' in section 201(a)(8) of
the Dodd-Frank Act excludes insured depository institutions,\14\ which
as a result are ineligible for a Title II orderly liquidation. Thus,
based on the section 201(a)(11) definition of ``financial company'' and
the section 201(a)(8) definition of ``covered financial company,'' the
following entities are not required to maintain records under the Final
Rules:
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\13\ 12 U.S.C. 5381(a)(11)
\14\ 12 U.S.C. 5381(a)(8)(B).
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Financial companies that are not incorporated or organized
under U.S. federal or state law;
Farm Credit System institutions;
Governmental entities, and regulated entities under the
Federal Housing Enterprises Financial Safety and Soundness Act of 1992;
\15\ and
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\15\ 12 U.S.C. 4502(20).
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Insured depository institutions.
Records Entity: Each records entity is required to maintain records
with respect to all of its QFCs unless such records entity receives an
exemption under the rules. The Proposed Rules would have defined
``records entity'' as a financial company that: Is not an exempt
entity; is a party to an open QFC, or guarantees, supports, or is
linked to an open QFC; and meets one of the following requirements: (a)
Is determined pursuant to section 113 of the Dodd-Frank Act \16\ to be
an entity that could pose a threat to the financial stability of the
United States; (b) is designated pursuant to section 804 of the Dodd-
Frank Act \17\ as a financial market utility that is, or is likely to
become, systemically important; (c) has total assets equal to or
greater than $50 billion; or (d) is a party to an open QFC or
guarantees, supports, or is linked to an open QFC of an affiliate and
is a member of a corporate group within which at least one affiliate
meets one of the criteria in (a), (b), or (c).
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\16\ 12 U.S.C. 5323.
\17\ 12 U.S.C. 5463.
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As described below, the Secretary has modified the definition of
``records entity'' in order to further differentiate financial
companies by reference to certain factors listed in section
210(c)(8)(H)(iv) and to reduce the costs of complying with the rules.
This has the effect of substantially narrowing the scope of entities
subject to the recordkeeping requirements of the Final Rules, as
discussed more fully below, and thereby reducing the costs imposed by
the rules. Furthermore, as discussed below, the Secretary has
eliminated the phrase ``guarantees, supports, or is linked to an open
QFC'' from the definition of ``records entity'' in the Final Rules.
Designated nonbank financial companies and financial market
utilities. The Secretary continues to believe that nonbank financial
companies subject to a determination by the Council under section 113
of the Act and financial market utilities designated by the Council
under section 804 of the Act as, or as likely to become, systemically
important should be included as records entities. As was noted in the
Supplementary Information to the Proposed Rules, certain of the factors
relevant to a designation under both section 113 and section 804 are
similar to the factors listed in section 210(c)(8)(H)(iv). The Council
may make a determination under section 113 if it determines that
material financial distress at the nonbank financial company, or the
nature, scope, size, scale, concentration, interconnectedness, or mix
of the activities of the nonbank financial company could pose a threat
to the financial stability of the United States.\18\ Similarly, in
making a determination that a financial market utility is or is likely
to become systemically important, the Council is required to consider
the effect that the failure of or a disruption to the financial market
utility would have on critical markets, financial institutions, or the
broader financial system.\19\ In light of the factors the Council must
consider in making a determination regarding a nonbank financial
company under section 113 or a designation of a financial market
utility under section 804, the Secretary has concluded that these are
the types of financial companies that potentially would be the most
likely to be considered for orderly liquidation under Title II \20\ and
that it is therefore appropriate that they be deemed to be records
entities. Therefore, the Secretary has retained the inclusion of such
nonbank financial companies and financial market utilities in the
definition of ``records entity'' in the Final Rules. However, the
Secretary has provided a conditional exemption applicable to certain
financial market utilities as described below.
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\18\ A determination under section 113 subjects the nonbank
financial company to supervision by the Board of Governors of the
Federal Reserve System and to enhanced prudential standards
established in accordance with Title I of the Act. See 12 U.S.C.
5365.
\19\ See 12 U.S.C. 5463(a)(2)(D).
\20\ In making a determination under section 113, the Council
may take into consideration each of the factors expressly referenced
in section 210(c)(8)(H)(iv), including as follows: Leverage of a
company may be considered under sections 113(a)(2)(A) or
113(b)(2)(A); complexity may be considered under sections
113(a)(2)(B) or 113(b)(2)(B); interconnectedness to the financial
system may be considered under sections 113(a)(2) (C), (G), and (I)
or 113(b)(2)(C), (G), and (I); size may be considered under sections
113(a)(2)(B), (D), (E), (G), (I), and (J) or 113(b)(2) (B), (D),
(E), (G), (I) and (J); frequency and dollar amount of QFCs may be
considered under sections 113(a)(2)(I) and (J) or 113(b)(2)(I) and
(J); and risk may be considered throughout sections 113(a)(2) and
113(b)(2). See also 12 CFR 1310.11 (setting forth the Council's
considerations in making proposed and final determinations, which
correspond to the considerations provided in section 113) and 77 FR
21637 (April 11, 2012) (adopting 12 CFR part 1310 and related
interpretive guidance). In making a determination under section 804,
the Council takes into consideration various factors under section
804(a)(2) and 12 CFR 1320.10 that correspond to the factors
referenced in section 210(c)(8)(H)(iv). See also 76 FR 44763 (July
27, 2011) (adopting 12 CFR part 1320).
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Financial Companies with $50 Billion in Assets; Additional Factors.
The Proposed Rules would have included as a records entity any
financial company that is not an exempt entity; is a party to an open
QFC, or guarantees, supports, or is linked to an open QFC; and has
total assets equal to or greater than $50 billion. The Secretary
proposed the $50 billion threshold as a useful means of identifying
entities that are of a sufficient size that they could potentially be
considered for orderly liquidation under Title II. In proposing the $50
billion asset threshold, the Secretary took into consideration the fact
that it corresponds to the threshold that was established for
determining which bank holding companies would be subject to enhanced
supervision and prudential standards under Title I of the Dodd-Frank
Act \21\ and was also adopted by the Council as an initial threshold
for identifying nonbank financial companies that merit further
evaluation as to whether they should be designated under section 113 of
the Act.\22\
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\21\ See 12 U.S.C. 5365(a).
\22\ See Financial Stability Oversight Council Guidance for
Nonbank Financial Company Determinations, 12 CFR part 1310, app. A.,
III.a.
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The proposed $50 billion asset threshold received substantial
attention from commenters. Several commenters stated that reliance on
this threshold would lead to an overbroad application of the
recordkeeping requirements and argued for a more tailored approach that
would focus on those institutions that are more likely to be resolved
under Title II.\23\ One commenter proposed $250 billion as a more
appropriate level for an asset threshold.\24\ Several commenters
recommended that the
[[Page 75627]]
Secretary adopt a multi-factor approach, citing the use of multi-factor
approaches in other contexts, including the Council's nonbank financial
holding company determinations process and the methodology used by the
Board of Governors of the Federal Reserve System (``Federal Reserve'')
for identifying U.S. global systemically important bank holding
companies (``G-SIBs'').\25\ One commenter stated that the scope of
entities subject to the Proposed Rules was too narrow.\26\
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\23\ See, e.g., TCH et al. letter, p. 7; IIB letter, pp. 5-6;
ICI letter, pp. 7-9; SIFMA AMG letter, pp. 3-5. The specific
concerns raised with respect to the application of the $50 billion
asset threshold to investment companies and investment advisers are
discussed below.
\24\ See IIB letter, p. 7.
\25\ See IIB letter, pp. 3, 11; TCH et al. letter, p. 11; letter
from Capital One Financial Corporation, Fifth Third Bancorp, The PNC
Financial Services Group, Inc., Regional Financial Corporation and
SunTrust Banks, Inc. (April 7, 2015) (the ``Regional Banks
letter'').
\26\ See Letter from Better Markets, Inc. (April 7, 2015)
(``Better Markets letter''), p. 6-10.
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The Secretary is making two changes to the definition of ``records
entity'' in the Final Rules that will, by incorporating additional
factors, substantially reduce the number of entities that will be
subject to recordkeeping requirements. These measures relate to several
of the factors specifically enumerated in section 210(c)(8)(H) of the
Act and allow the Secretary to better limit the financial companies
included within the scope of records entities to those companies that
potentially would be the most likely to be considered for orderly
liquidation under Title II.
First, the Final Rules specifically include in the definition of
``records entity'' those entities that are identified as G-SIBs.\27\
Since the Proposed Rules were issued, the Federal Reserve has adopted
rules specifying the criteria by which U.S. bank holding companies are
identified as G-SIBs.\28\ G-SIBs are required to hold additional
capital to increase their resiliency in light of the greater threat
they pose to the financial stability of the United States.\29\ An
entity is identified as a G-SIB pursuant to the Federal Reserve's rules
based on its level of twelve systemic indicators as compared to the
aggregate indicator amounts across other large, global banking
organizations. These twelve systemic indicators correspond to five
categories--size, interconnectedness, cross-jurisdictional activity,
substitutability, and complexity--that correlate with systemic
importance and overlap with the factors specifically enumerated in
section 210(c)(8)(H) of the Act, listed above.\30\ Because the G-SIBs
have been deemed to be the top-tier U.S. bank holding companies with
the greatest systemic importance, the Secretary has determined that it
is appropriate that they be included within the definition of ``records
entity'' under the Final Rules. By incorporating the Federal Reserve's
multi-factor framework into the definition of ``records entity,'' the
Secretary has responded to comments to reflect the use of additional
factors in the definition of ``records entity.''
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\27\ Sec. 148.2(n)(1)(iii)(C).
\28\ See 12 CFR part 217, subpart H.
\29\ See 12 CFR part 217, subpart H; Federal Reserve, Regulatory
Capital Rules: Implementation of Risk-Based Capital Surcharges for
Global Systemically Important Bank Holding Companies, 80 FR 49082,
83 (Aug. 14, 2015).
\30\ See 12 CFR 217.404. See also 80 FR at 49095-97.
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However, the Secretary believes that to include only the G-SIBs
identified by the Federal Reserve, along with designated financial
market utilities and nonbank financial companies subject to a Council
determination, within the definition of ``records entity'' would unduly
limit the entities that would be subject to the recordkeeping rules.
The G-SIBs identified under the Federal Reserve's rules by definition
only include U.S. top-tier bank holding companies, whereas other types
of financial companies potentially would also be among the most likely
financial companies to be considered for orderly liquidation under
Title II. Therefore, in addition to adding the G-SIBs to the definition
of ``records entity,'' the Secretary has chosen to maintain the $50
billion threshold but supplement it with an additional factor tied to a
financial company's level of derivatives activity. Specifically,
section 148.2(n)(iii)(D) of the Final Rules provides that in addition
to having total consolidated assets equal to or greater than $50
billion, an entity must on a consolidated basis have either (i) total
gross notional derivatives outstanding equal to or greater than $250
billion or (ii) derivative liabilities equal to or greater than $3.5
billion in order to be deemed a records entity under that prong of the
definition. As explained below, this approach incorporates the most
relevant factors into the definition of ``records entity'' by reference
to metrics that are already generally calculated by financial
companies.
Gross notional derivatives outstanding relates directly to three of
the factors enumerated in section 210(c)(8)(H)(iv)--complexity,
interconnectedness, and the dollar amount of QFCs. Gross notional
derivatives outstanding is used in the Federal Reserve's methodology
for identifying G-SIBs as an indicator of complexity.\31\ Gross
derivatives exposure is also one metric the Council has taken into
consideration when assessing the interconnectedness of a nonbank
financial company under review for a potential determination under
section 113.\32\ In addition, because derivatives reflected in the
total gross notional derivatives outstanding metric are all QFCs as
defined in Title II, this metric relates directly to the importance of
an institution's maintaining QFC records. Derivatives are among the
most complex QFCs, and thus the inclusion in the definition of
``records entity'' of measures of derivatives activity relates directly
to the objective of the rules, which is to allow the FDIC to make
informed judgments about complex portfolios of QFCs in a timely manner.
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\31\ Id.
\32\ See 12 CFR part 1310, appx. A.II.d.2.
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Unlike some other potential measures of complexity and
interconnectedness and unlike the measures of the volume of QFCs
generally, gross notional derivatives outstanding is a measure that the
Secretary understands is generally already calculated, and in most
cases reported or disclosed, by financial companies with assets of $50
billion or more. Bank holding companies with assets of $50 billion or
more are required to report to the Federal Reserve the amount of gross
notional derivatives outstanding quarterly on Schedule H-CL of Form Y-
9C and annually on Schedule D of Form Y-15. Financial companies often
satisfy the requirement to disclose in their financial statements the
volume of their derivatives activity by disclosing the amount of gross
notional derivatives outstanding; \33\ disclosure of gross notional
derivatives outstanding is also frequently provided by large financial
companies filing annual and quarterly reports under sections 13 and
15(d) of the Securities Exchange Act of 1934 (``Exchange Act'') to
satisfy the requirement of the Securities and Exchange Commission
(``SEC'') to provide quantitative disclosures about the market risk of
their derivatives portfolio.\34\ In addition, registered investment
companies typically disclose notional amounts with respect to certain
derivatives. The Final Rules define ``total gross notional derivatives
outstanding'' as the gross notional value of all derivative instruments
that are outstanding as of the end of the most recent fiscal year as
recognized and measured in accordance with U.S. generally accepted
accounting
[[Page 75628]]
principles (``GAAP'') or other applicable accounting standards.
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\33\ See FASB Accounting Standards Codification Topic 815,
Derivatives and Hedging ] 10-50-1A.
\34\ See Item 305 of Regulation S-K, 17 CFR 229.305.
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Referring to gross notional derivatives outstanding alone, however,
would not be sufficient to identify financial companies with large
exposures to derivatives. The Final Rules include the amount of a
financial company's derivative liabilities as an alternative measure by
which a financial company may be deemed a records entity. The Final
Rules define ``derivative liabilities'' as the fair value of derivative
instruments in a negative position that are outstanding as of the end
of the most recent fiscal year as recognized and measured in accordance
with GAAP or other applicable accounting standards, taking into account
the effects of master netting agreements and cash collateral held with
the same counterparty on a net basis to the extent reflected on the
financial company's financial statements. This metric, like total gross
notional derivatives outstanding, serves as a proxy for
interconnectedness, as a company that has a greater level of derivative
liabilities would have higher counterparty exposure throughout the
financial system. For this reason, derivative liabilities is one of the
metrics used by the Council for identifying nonbank financial companies
that may merit further evaluation for a potential determination under
section 113.\35\ Bank holding companies with assets of $50 billion or
more are required to report quarterly to the Federal Reserve the net
negative fair value of their derivatives contracts classified as
trading liabilities on Schedule HC-D of Form Y-9C. Moreover, large
financial companies filing annual and quarterly reports under the
Exchange Act generally disclose the amount of their derivative
liabilities in the footnotes to their financial statements in
accordance with GAAP.
---------------------------------------------------------------------------
\35\ See 12 CFR part 1310, appx. A.III.a.
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The inclusion of both the total gross notional amount of
derivatives outstanding and derivative liabilities thresholds in the
definition of ``records entity'' will better capture entities that are
using substantial amounts of derivatives. The amount of total gross
notional derivatives outstanding is an amount that may not, by itself,
be fully representative of the interconnection and complexity of an
entity and its QFC activities. For example, the notional amount of
interest rate derivatives tends to be significantly larger than the
notional amount of credit derivatives representing comparable levels of
fair value risk, yet both types of derivatives are indicative of the
interconnection and complexity of an entity. In turn, reference to
derivative liabilities alone could obscure entities' level of
derivatives activity to the extent a financial company's financial
statements take into account the effects of netting agreements and cash
collateral held with the same counterparty on a net basis. Although
such netting may reduce the risk to the entity from engaging in such
derivatives, even a derivatives portfolio with a low negative fair
value after accounting for the effects of master netting agreements and
cash collateral held with the same counterparty is indicative of
interconnection and complexity if it is sufficiently large on a gross
notional basis.
By including reference to total assets, notional amount of
derivatives, and derivative liabilities, the Secretary has
incorporated, as explained above, consideration of size, complexity,
interconnectedness to the financial system, and the dollar amount of
QFCs into the definition of ``records entity.'' Size, complexity, and
interconnectedness to the financial system are, in turn, all indicators
of risk, particularly risk to financial stability.\36\ The Secretary,
in adopting the definition of ``records entity,'' also considered the
other factors listed in section 210(c)(8)(H), i.e., frequency of QFCs
and leverage. To the extent that the inclusion of frequency of QFCs
among these factors is intended to serve as a proxy for the extent to
which QFCs are utilized by a financial company, the Secretary believes
that the inclusion of the total gross notional amount of derivatives
outstanding and derivative liabilities achieves the same purpose. In
addition, the Secretary has considered the frequency of QFCs in
providing in the Final Rules for the de minimis exemption pursuant to
which a records entity of any size that is a party to 50 or fewer open
QFC positions is not required to maintain the records required under
the rules other than to maintain copies of the documents governing its
QFC transactions. The Secretary has decided not to reference leverage
in the definition of ``records entity,'' because the appropriate
methodology for calculating leverage may vary depending on the type of
financial company, which would make incorporation of a specific measure
of leverage difficult, particularly given the wide variety of entities
that fall within the definition of ``financial company.''
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\36\ See, e.g., 80 FR at 49095-49097.
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The Final Rules provide for thresholds of $250 billion of total
gross notional derivatives outstanding and $3.5 billion of total
derivative liabilities. As noted above, bank holding companies with $50
billion or more in total consolidated assets report both total gross
notional derivatives outstanding and derivative liabilities in
regulatory filings. As of December 31, 2015, all of the G-SIBs were
above the thresholds for total gross notional amount of derivatives
outstanding and derivative liabilities and in most cases were
significantly above the thresholds.\37\ Conversely, most other bank
holding companies were well below both of these thresholds. In
addition, calibrating the derivatives thresholds as provided for in the
Final Rules includes within their scope large, complex, and
interconnected U.S. subsidiaries of foreign bank organizations that
have been identified as global systemically important banks in their
home countries.
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\37\ Although each of the eight bank holding companies that
currently are identified as G-SIBs pursuant to 12 CFR part 217 would
also qualify as records entities pursuant to Sec. 148.2(n)(iii)(D)
of the Final Rules because they each have total consolidated assets
in excess of $50 billion and total gross notional derivatives
outstanding equal to or greater than $250 billion or derivative
liabilities equal to or greater than $3.5 billion, it is possible
that in the future, an entity could be deemed a G-SIB without being
a records entity under Sec. 148.2(n)(iii)(D) of the Final Rules if
it does not maintain a large portfolio of derivatives but does have
comparatively high levels of the other systemic indicators set forth
in the G-SIB rules. The Secretary has determined that the G-SIBs,
having been identified as the bank holding companies with the
greatest systemic importance, should be subject to the recordkeeping
requirements of the Final Rules regardless of whether they meet the
other thresholds provided for in the definition of ``records
entity.''
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Another reason for setting the thresholds at these levels is to
provide for some degree of stability in the set of financial companies
that are deemed to be records entities. In looking back across the
previous eight quarters, the bank holding companies with derivative
liabilities currently at or above the $3.5 billion threshold were at or
above the threshold in nearly every quarter, while those with total
derivative liabilities currently below the threshold were below the
threshold in each quarter. Similarly, for total gross notional
derivatives outstanding, bank holding companies at or above the $250
billion threshold were at or above the threshold in nearly every
quarter over the last eight quarters, while those with total gross
notional derivatives outstanding currently below the threshold were
below the threshold in nearly every quarter over the last eight
quarters.
Similar trends are evidenced among other public financial companies
reporting derivative liabilities and total gross notional derivatives
outstanding
[[Page 75629]]
in their financial statements filed with the SEC. Among the nonbank
financial companies with greater than $50 billion in total consolidated
assets that publicly disclose their derivative liabilities or total
gross notional derivatives outstanding, as of December 31, 2015,
several reported amounts significantly above one or both thresholds
while the majority were well below both thresholds. In looking back
across the previous eight quarters, those with total derivative
liabilities currently at or above the $3.5 billion threshold were above
the threshold in every quarter, while those with total derivative
liabilities currently below the threshold were below the threshold in
nearly every quarter. Similarly, for total gross notional derivatives
outstanding, those at or above the $250 billion threshold were above
the threshold in nearly every quarter over the last eight quarters,
while those below were below in every quarter over the last eight
quarters.
Members of Corporate Groups. The Proposed Rules included within the
definition of ``records entity'' those financial companies that (i) are
members of a corporate group in which at least one financial company is
a nonbank financial company subject to a Council determination or
financial market utility designated by the Council, is a U.S. G-SIB, or
meets the $50 billion asset threshold, (ii) are a party to or support a
QFC, and (iii) are not excluded entities. The Proposed Rules defined
``corporate group'' of an entity to include all affiliates of that
entity and ``affiliate'' to include any entity that controls, is
controlled by, or is under common control with another entity.
Several commenters stated that the use of the definition of
``affiliate,'' discussed further below, had the effect of including too
broad a scope of affiliates within the definition of ``records
entity.'' \38\ Several commenters argued that only the affiliates that
reasonably might be subject to resolution under the orderly liquidation
authority of Title II should be included as records entities.\39\ Other
commenters proposed that only those affiliates that meet threshold
minimum asset, QFC activity, and complexity criteria should be
considered records entities.\40\ One commenter proposed including as
records entities only entities that are identified as being significant
to a critical operation or core business line, which, in the case of
bank holding companies, would be the ``material entities'' identified
in the resolution plans they are required to prepare.\41\ Another
commenter proposed that the definition of ``records entity'' only
include entities that are consolidated for financial reporting purposes
either on the Federal Reserve's Form FR Y-9C (regarding the financial
condition of bank holding companies, savings and loan holding
companies, and securities holding companies) or under any other
generally applicable reporting rules or regulations applicable to the
records entity.\42\
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\38\ See TCH et al. letter, pp. 8-10; ACLI letter, p. 11-13; ICI
Letter, pp. 9-10; TIAA-CREF letter, pp. 5-6.
\39\ See TCH et al. letter, p. 2-3, 8-10, and 13-15; ACLI
letter, p. 12; CEWG letter, p. 2.
\40\ See ACLI letter, p. 11; TIAA-CREF letter, p. 7.
\41\ See TCH et al. letter, p. 15. See also Dodd-Frank Act Sec.
165(d) (12 U.S.C. 5365); 12 CFR parts 243, 381.
\42\ See Letter from The Clearing House Association L.L.C. and
the Asset Management Group of the Securities Industry and Financial
Markets Association (Nov. 13, 2015) (``TCH/SIFMA letter'').
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As discussed further below, the Secretary has adopted the
suggestion of commenters, noted above, to revise the definition of
``records entity'' to identify which members of a corporate group are
records entities by reference to whether they are consolidated under
accounting standards. This change should have the effect of reducing
the number of records entities. The Final Rules do not otherwise revise
the scope of members of a corporate group that are included as records
entities because the Secretary has decided that it is not possible to
describe, ex ante, the precise characteristics of a financial company
that could be placed into receivership under Title II. In particular,
an entity could be resolved under Title II without the Secretary making
the determination required under section 203(b) with respect to a
covered financial company. Title II provides that the FDIC may appoint
itself as receiver of an entity if it is a ``covered subsidiary'' of a
covered financial company of which the FDIC has been appointed as
receiver and it is jointly determined by the FDIC and the Secretary
that (i) the covered subsidiary is in default or in danger of default,
(ii) the FDIC's appointment as receiver would avoid or mitigate serious
adverse effects on the financial stability or economic conditions of
the United States, and (iii) the FDIC's appointment as receiver would
facilitate the orderly liquidation of the covered financial
company.\43\ If the FDIC appoints itself receiver of a covered
subsidiary, that subsidiary is treated as a covered financial company
for purposes of Title II, and the FDIC as receiver would have the same
rights under the Act and the same obligations under sections 210(c)(8),
(9), or (10) of the Act as it does for other covered financial
companies.\44\
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\43\ See 12 U.S.C. 5390(a)(1)(E)(i). ``Covered subsidiary'' is
defined as any subsidiary of a covered financial company, other than
an insured depository institution, an insurance company, or a
covered broker or dealer. See 12 U.S.C. 5381(a)(9).
\44\ See 12 U.S.C. 5390(a)(1)(E)(ii).
---------------------------------------------------------------------------
Moreover, information about QFCs of each of the members of the
corporate group could be of assistance to the FDIC as receiver in
deciding whether to transfer the QFCs to a bridge financial company by
giving the FDIC a full understanding of the impact of any transfer of
the QFCs on the records entity's corporate group. For example, in the
case of certain QFCs that the FDIC might otherwise determine to retain
in the receivership rather than transfer to a bridge financial company
(to which the equity in all of the records entity's subsidiaries have
been transferred), if, by reference to a subsidiary's QFC records, the
FDIC determines that the QFCs are offset by QFCs of the subsidiary with
another counterparty, the FDIC as receiver may decide to transfer the
records entity's QFCs to the bridge financial company in order to
maintain a matched book at the corporate group level with the QFCs of
the subsidiary.
The Secretary has, instead of excluding certain types or sizes of
members of a corporate group from the definition of ``records entity,''
differentiated among financial companies by providing the de minimis
exemption discussed below for records entities that are a party to 50
or fewer QFCs. As discussed below, the FDIC has advised the Secretary
that it would be able to review the terms of that number of QFCs on a
manual basis within the time frame provided by Title II. The de minimis
exemption included in the Final Rules will, unlike commenters' proposed
exclusions based on the materiality of the records entity, avoid a
situation in which the FDIC as receiver will not have the records it
may need for a particular records entity.
Requested additional limitations on definition of ``records
entity.'' Referring to the FDIC's rules at 12 CFR part 371 (``Part
371''), which require recordkeeping by insured depository institutions
that are ``in a troubled condition,'' commenters suggested that the
recordkeeping requirements should apply only to financial companies
``in a troubled condition'' \45\ or that meet an analogous
threshold.\46\ Unlike the
[[Page 75630]]
Federal Deposit Insurance Act (the ``FDIA''), which restricts the
authority of the FDIC to require QFC recordkeeping by insured
depository institutions to those that are ``in a troubled condition,''
\47\ Title II contains no such limitation, and the Secretary believes
that adding such a limitation to the Final Rules would not be
appropriate. There is no statutory or other established definition of
``in a troubled condition'' or of an analogous concept for a financial
company as there is for an insured depository institution. Although one
commenter proposed adoption of a condition based on the amount of risk-
based capital at an insurance company,\48\ such a condition would have
to be appropriately calibrated for each type of financial company
subject to the rules. More important, the amount of time that records
entities are anticipated to need in order to come into compliance with
the rules is such that to allow companies to wait until such a
condition is met would not provide sufficient time to ensure that the
relevant records would be available to the FDIC if needed. Several
commenters requested two years to establish the recordkeeping systems
required by the Proposed Rules,\49\ and, as discussed below, the
Secretary has provided for two or more years for all but the largest
corporate groups to comply with the rules.
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\45\ See letter from The Capital Group Companies, Inc. (April 7,
2015) (the ``Capital Group letter''), p. 3, ICI letter, p. 9.
\46\ See ACLI letter, p. 17.
\47\ See section 11(e)(8)(H) of the FDIA (12 U.S.C.
1821(e)(8)(H)).
\48\ See ACLI letter, p. 17.
\49\ See AMG letter, p. 13; Regional Banks letter, p. 4.
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Excluded Entity: The Proposed Rules provided that the following
entities would be exempt from the definition of ``records entity'' and,
therefore, the scope of the rules:
(1) An insured depository institution as defined in 12 U.S.C.
1813(c)(2);
(2) A subsidiary of an insured depository institution that is not a
functionally regulated subsidiary as defined in 12 U.S.C. 1844(c)(5), a
security-based swap dealer as defined in 15 U.S.C. 78c(a)(71), or a
major security-based swap participant as defined in 15 U.S.C.
78c(a)(67); or
(3) A financial company that is not a party to a QFC and controls
only exempt entities as defined in clause (1) of this definition.
The Final Rules use the term ``excluded entity'' rather than
``exempt entity,'' as used in the Proposed Rules, in order to avoid
confusion with the Secretary's authority to grant exemptive relief from
the requirements of the Final Rules. Several commenters requested the
addition of other types of entities to the list of excluded entities,
as discussed below.
Insurance companies. Several commenters recommended that the
Proposed Rules be revised to exclude insurance companies from the
definition of ``records entity.'' These commenters pointed to section
203(e) of the Dodd-Frank Act, which requires that the liquidation or
rehabilitation of an insurance company, as defined in Title II, would
be conducted as provided under applicable state law, rather than under
the orderly liquidation authority otherwise provided for under Title
II.\50\ Citing this provision, these commenters argued that subjecting
insurance companies to the rules' recordkeeping requirements would not
be sufficiently justified.\51\
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\50\ 12 U.S.C. 5383(e).
\51\ See ACLI letter, pp. 4-6; letter from New York Life
Insurance Company, The Northwestern Mutual Life Insurance Company,
Massachusetts Mutual Life Insurance Company, and The Guardian Life
Insurance Company of America (April 7, 2015) (the ``Mutual Insurance
Companies letter''), pp. 3-4; TIAA-CREF letter, p. 4.
---------------------------------------------------------------------------
Having considered these comments and the requirements of section
203(e) of the Act, the Secretary is excluding insurance companies from
the definition of ``records entity'' in the Final Rules. Given that the
liquidation or rehabilitation of an insurance company under Title II
would be conducted under state law, to subject insurance companies to
the requirements of the rules would not assist the FDIC as receiver in
exercising its rights under the Act or fulfilling its obligations under
sections 210(c)(8), (9), or (10). As discussed below, a definition of
``insurance company'' has been added in the Final Rules to ensure
consistency with the application of section 203(e) of the Act.
Commenters also requested that certain non-insurance affiliates of
insurance companies be excluded from the scope of the rules,
specifically, that non-insurance affiliates within a holding company
structure that is predominantly engaged in insurance activities be
excluded from the rules.\52\ Section 203(e) of the Act, however,
excludes non-insurance company subsidiaries and affiliates from the
requirement, referenced above, that the liquidation or rehabilitation
of insurance companies be conducted under state law. Such non-insurance
company subsidiaries and affiliates could themselves be determined to
be a covered financial company or covered subsidiary. As these entities
would be subject to the orderly liquidation authority of Title II, the
records that would be required to be generated by these entities under
the rules would assist the FDIC in being able to exercise its rights
under the Act and fulfill its obligations under sections 210(c)(8),
(9), or (10) of the Act. The Secretary is therefore not excluding such
insurance company affiliates from the definition of ``records entity''
under the Final Rules. However, the changes to the definition of
``records entity'' discussed above will reduce the number of corporate
groups, including those predominantly engaged in insurance activities,
that are subject to the rules, and the de minimis exemption discussed
below will substantially eliminate recordkeeping requirements for those
records entities with minimal QFC activity. A commenter proposed that
QFCs that are entered into for the benefit of or on behalf of
affiliated insurance companies be excluded from the rules.\53\ However,
it is unclear how such QFCs would be distinguished from other QFCs of
non-insurance company affiliates, and the FDIC has advised that it
would not necessarily treat such QFCs any differently than the way it
would treat other QFCs of non-insurance company affiliates.
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\52\ See ACLI letter, p. 3; Mutual Insurance Companies letter,
p. 5.
\53\ See ACLI letter, p. 10.
---------------------------------------------------------------------------
Investment companies and investment advisers. A number of
commenters argued that investment companies and investment advisers
should not be included as records entities subject to the rules'
recordkeeping requirements.\54\ Commenters outlined the manner in which
investment advisers and funds are typically resolved outside the scope
of Title II \55\ and argued that it would be very unlikely for an
investment adviser or the funds it manages either to be resolved under
Title II or be important to the FDIC's consideration of a resolution
under Title II of a financial company of which the adviser is an
affiliate.\56\ Commenters argued that regulatory constraints applied to
registered investment companies, particularly leverage requirements and
structural features, such as the ability to limit redemptions, mitigate
the potential use of the orderly liquidation authority of Title II.\57\
Additionally, they contended that because each investment adviser and
investment company is highly substitutable, their assets under
[[Page 75631]]
management could be liquidated or transferred to other managers without
threatening financial stability.\58\
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\54\ See SIFMA AMG letter, pp. 3-4; ICI letter, pp. 7-12
\55\ See SIFMA AMG letter, p. 7; ICI letter, pp. 4-5.
\56\ See SIFMA AMG letter, p. 4; ICI letter, pp. 3-4
\57\ See TIAA-CREF letter, p. 5; ICI letter, p. 4.
\58\ See SIFMA AMG letter, p. 6.
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The definition of ``records entity'' in the Final Rules would
include only extremely large and interconnected asset management firms,
and, for the reasons discussed above, investment advisers that are
members of a corporate group that is subject to the rules. Although
commenters cited examples of mergers and closures of funds and advisers
that were conducted in an orderly fashion as demonstrating the
unlikelihood of the need to resolve such entities under Title II, these
examples did not address the potential effects of the rapid failure of
a fund or of an asset management firm or other corporate group of the
size and complexity that would be subject to the Final Rules.
The Secretary has made certain other changes in the Final Rules
that will further reduce their impact on asset management firms. In
response to the proposal of a commenter that noted that an investment
adviser may be party to a QFC of one of its funds or clients for the
limited purpose of providing a representation,\59\ the Secretary
confirms that an entity will not be considered to be a party to a QFC
for purposes of the rules if it is only a party to such QFC for the
limited purpose of providing a representation. In addition, the
Secretary notes that individual investment funds, including mutual
funds, would not be deemed to be affiliates of an investment adviser or
other funds managed by that investment adviser solely by virtue of the
investment adviser serving in such capacity with respect to the funds.
Further, the Secretary confirms that, as stated in the Supplementary
Information to the Proposed Rules,\60\ each series of a series company
(as defined in Rule 18f-2 under the Investment Company Act) \61\ will
be deemed to be a separate financial company, which means that an
individual series would itself have to meet the asset and derivatives
thresholds in order to be subject to the rules as a ``records entity''
and that such an individual series would be able to avail itself of the
de minimis exemption if it alone was a party to 50 or fewer QFCs.
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\59\ Id., p. 10.
\60\ See 80 FR 966, 975, n. 66.
\61\ 17 CFR 270.18f-2.
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Clearing Organizations. The Proposed Rules' inclusion of designated
financial market utilities within the definition of ``records entity''
would have subjected certain clearing organizations to the
recordkeeping requirements of the rules. Three commenters recommended
either excluding or exempting clearing organizations from the scope of
the Final Rules.\62\ Commenters stated that the requirements of the
Proposed Rules were not appropriate for clearing organizations because
they were designed to collect information relevant to bilateral trades
and that such information is generally irrelevant to, and not collected
by, clearing organizations.\63\ Commenters stated that there is no need
to require maintenance of copies of legal agreements as contemplated by
the Proposed Rules, as a clearing organization's legal relationships
with its clearing members are governed by its rulebook and not by
individual contracts with its clearing members.\64\ More generally,
commenters stated that the recordkeeping requirements under the
Proposed Rules were not tailored in a manner that would best facilitate
resolution of a clearing organization.\65\
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\62\ See DTCC letter, p. 11, letter from the Options Clearing
Corporation (April 7, 2015) (``OCC letter''), pp. 6-8; letter from
the Clearing Division of CME Mercantile Exchange Inc. (April 7,
2015) (``CME letter''), pp. 5-6.
\63\ See Letter from the Futures Industry Association (April 10,
2015), p. 2; DTCC letter, p. 9; OCC letter, p. 8.
\64\ See DTCC letter, p. 9; OCC letter pp. 11-12. See also CME
letter, pp. 6-7.
\65\ See DTCC letter, p. 7; CME letter, p. 6; OCC letter, pp. 8-
13.
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Commenters stated that the FDIC should coordinate with the clearing
organizations' primary regulators (the Commodity Futures Trading
Commission (``CFTC'') or SEC, as applicable) and utilize to the maximum
extent practicable the existing reporting regulations, mechanisms, and
formats already applicable to clearing organizations.\66\ Commenters
submitted that the records required to be provided under existing
regulations should be sufficient to allow the FDIC as receiver to
decide whether to transfer, disaffirm or repudiate, or allow the
termination of a clearing organization's QFCs.\67\ For example, one
commenter indicated that a clearing organization can be expected to
maintain trade records; aggregated trade data by clearing member;
records of the amount of margin posted by or through clearing members;
detail on the amount, type, and location of collateral; records of
variation margin payments; and the terms of each QFC cleared by the
derivatives clearing organization as provided in its rulebook.\68\
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\66\ See DTCC letter, p. 7; OCC letter, pp. 7-8; CME letter, p.
5.
\67\ See OCC letter, p. 7.
\68\ See CME letter, p. 7.
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The Secretary acknowledges that all derivatives clearing
organizations are required by the CFTC to maintain extensive
records.\69\ In addition, systemically important derivatives clearing
organizations are required by CFTC rules to have procedures for
providing the CFTC and FDIC with ``information needed for purposes of
resolution planning.'' \70\ Likewise, clearing agencies registered with
the SEC are required to maintain extensive records,\71\ and
systemically important or covered clearing agencies for which the SEC
is the supervisory agency under the Dodd-Frank Act are required to
adopt recovery and wind-down plans.\72\
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\69\ See 17 CFR 39.14(e), 39.20.
\70\ See 17 CFR 39.39(c)(2).
\71\ See 17 CFR 240.17a-1.
\72\ See 17 CFR 240.17Ad-22 (e)(3)(ii).
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In addition, as commenters noted, the unique nature of derivatives
clearing organizations make it possible that their existing
recordkeeping practices would be sufficient to meet the needs of the
FDIC. The unique characteristics include the following: (i) A clearing
organization's only counterparties are its clearing members; (ii) it
enters into, or clears, a prescribed set of QFCs; (iii) it maintains a
consolidated recordkeeping system to calculate aggregate exposures and
margin requirements of its clearing members; and (iv) all transactions
are governed by the rulebook of the clearing organization rather than
individual legal agreements. The data requirements of the tables
included in the Proposed Rules and the Final Rules were created with
the expectation that the FDIC as receiver might need to make decisions
as to whether to transfer, disaffirm or repudiate, or allow the
termination of QFCs with a specific counterparty and its affiliates. In
the case of a clearing organization, in contrast, a significant focus
of the FDIC would be maintaining the clearing organization's matched
book of QFCs. In these cases, the most relevant data would be the type
of data that would be of value to a transferee in managing the
transferred QFC portfolio, and this is the type of data that clearing
organizations are required by their primary regulators to maintain and
report.
Having considered the foregoing, the Secretary has determined,
after consulting with the FDIC, that the FDIC would be able to exercise
its rights under the Act and fulfill its obligations under sections
210(c)(8), (9), or (10) of the Act if it has access to the records
currently required to be maintained by clearing organizations.
Accordingly, the Final Rules provide that a clearing
[[Page 75632]]
organization is exempt from complying with the recordkeeping
requirements of the Final Rules other than the requirement to designate
a point of contact if it is (i) in compliance with the recordkeeping
requirements of the CFTC and the SEC, as applicable, including its
maintenance of records pertaining to all QFCs cleared by the clearing
organization and (ii) capable of and not restricted from, whether by
law, regulation, or agreement, such as the clearing organization's
rulebook, transmitting electronically directly to the FDIC the records
maintained under such recordkeeping requirements within 24 hours of
request of the SEC or CFTC, as applicable, as PFRA for the clearing
organization. The Secretary has determined that this approach should
eliminate the burden of duplicative and unnecessary data collection for
such entities.
Guaranteed, Supported, or Linked: The Proposed Rules provided
definitions for ``guaranteed or supported'' and ``linked.'' Under
section 210(c)(16) of the Act, the FDIC as receiver has additional
powers with respect to contracts of subsidiaries or affiliates of a
covered financial company that are guaranteed or otherwise supported by
or linked to such covered financial company.\73\ Such contracts can be
enforced by the FDIC as receiver of the covered financial company
notwithstanding the insolvency, financial condition, or receivership of
the covered financial company. The terms ``guarantees or supports'' and
``linked'' in the Proposed Rules were defined in the same way as they
are defined in the FDIC's regulations implementing section 210(c)(16)
of the Act. Under the Proposed Rules, a financial company would have
had to be a party to or have guaranteed or supported or been linked to
an open QFC in order to be deemed a records entity, and a records
entity would have been required to have maintained records with respect
to QFCs that it guaranteed or supported.
---------------------------------------------------------------------------
\73\ See 12 U.S.C. 5390(c)(16).
---------------------------------------------------------------------------
The Secretary has decided to simplify the rules by omitting
references to ``guaranteed or supported'' and ``linked.'' Under the
Final Rules, a financial company would, in addition to meeting the
other criteria discussed above, have to be a party to an open QFC in
order to be a ``records entity,'' and such a records entity would only
be required to maintain records with respect to its QFCs. This change
reduces the complexity of the rules but generally would not be expected
to change significantly which entities would be records entities
because guarantees and other credit enhancements of QFCs are themselves
QFCs.\74\ Further, given that the FDIC has adopted regulations
clarifying that no special action will be required of the receiver to
preserve enforceability of QFCs that are merely ``linked'' to the
entity in receivership,\75\ the Secretary has removed all references to
``linked'' from the Final Rules.
---------------------------------------------------------------------------
\74\ See 12 U.S.C. 5390(c)(8)(D).
\75\ See 12 CFR 380.12
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Affiliate, Subsidiary, and Control: The Proposed Rules defined the
terms ``affiliate'' and ``subsidiary'' consistently with the
definitions given to such terms in the Dodd-Frank Act. Sections 2(1)
\76\ and 2(18) \77\ of the Dodd-Frank Act provide that these terms will
have the same meanings as in section 3 of the FDIA. Under section
3(w)(4) of the FDIA, the term ``subsidiary'' is defined as ``any
company which is owned or controlled directly or indirectly by another
company.'' Similarly, the term ``affiliate'' is defined in section
3(w)(6) of the FDIA by reference to section 2(k) of the Bank Holding
Company Act of 1956, as amended (``BHC Act'') \78\ as ``any company
that controls, is controlled by, or is under common control with
another company.''
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\76\ 12 U.S.C. 5301(1).
\77\ 12 U.S.C. 5301(18).
\78\ 12 U.S.C. 1841(k).
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The FDIA, by reference to section 2 of the BHC Act, provides that
any company has control over another company if the company directly or
indirectly or acting through one or more persons owns, controls, or has
the power to vote 25 percent or more of any class of voting securities
of the company; the company controls in any manner the election of a
majority of the directors or trustees of the company; or the Federal
Reserve determines, after notice and opportunity for hearing, that the
company directly or indirectly exercises a controlling influence over
the management or policies of the company. The first two prongs of the
definition of ``control'' in the Proposed Rules are consistent with the
BHC Act definition. The third prong of the definition of ``control'' in
the Proposed Rules, that an entity controls another entity if it must
consolidate another entity for financial or regulatory purposes, was
proposed to reflect the fact that, in certain situations, a controlling
interest may be achieved through arrangements that do not involve
voting interests and to provide an objective test that does not require
a determination by the Federal Reserve. In the Proposed Rules, the
definitions of ``affiliate'' and ``control'' related both to (1) the
determination of which members of a corporate group would be records
entities and (2) the information that would be required to be
maintained by records entities as to the identities of affiliates of
counterparties.
One commenter stated that existing recordkeeping and operational
controls with respect to QFCs are customarily maintained by parent
companies or other entities that have majority ownership of or are
otherwise required to consolidate the entities engaging in QFC activity
for financial and regulatory purposes.\79\ Commenters stated that, in
contrast, the proposed definition of ``control'' would result in
records entity status for legal entities, such as joint ventures and
companies in which other members of the corporate group only have a
minority interest, that might not be subject to actual governing
control by the other members of the corporate group. These commenters
indicated that this would pose difficulties for corporate groups
attempting to coordinate the compliance of all of their member records
entities.\80\ This concern would apply in particular to the requirement
that affiliated records entities use the same unique counterparty
identifier for each counterparty and the proposed requirement that
records of affiliated records entities be maintained in a form that
allows for aggregation, which has been replaced in the Final Rules with
the requirement that the top-tier parent financial company be capable
of aggregating such records. As to the Proposed Rules' requirement to
identify the affiliates of counterparties, one commenter argued that
non-financial company counterparties' lack of familiarity with the BHC
Act definition of ``control'' would make it difficult for records
entities to maintain records as to the identity of such affiliates.\81\
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\79\ See ACLI letter, p. 14.
\80\ See ACLI letter, pp. 13-14; TIAA-CREF letter, p. 6.
\81\ See TCH et al. letter, p. 16.
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The Secretary has determined that the FDIC as receiver in a Title
II resolution would need to know the identities of the affiliates, as
defined by reference to the BHC Act definition of ``control,'' of the
records entity's counterparties. Specifically, as referenced above,
section 210(c)(9)(A) of the Act provides the FDIC as receiver shall
transfer to one transferee either all or none of the QFCs of a
counterparty and the counterparty's ``affiliates,'' as defined by
reference to the BHC Act definition of ``control.'' \82\ In addition,
this provision requires that in making any such transfer, the FDIC
[[Page 75633]]
as receiver must also transfer (i) all claims of the counterparty or
any of its affiliates against the covered financial company under any
such QFC, (ii) all claims of the covered financial company against the
counterparty and any of its affiliates under any such QFC, and (iii)
all property securing or any other credit enhancement for any such QFC.
In order for the FDIC to comply with these requirements, the FDIC must
have available to it the information as to affiliates, as defined in
Title II, of counterparties that is specified in the tables in the
appendix to the rules.
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\82\ See 12 U.S.C. 5390(c)(9)(A).
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As discussed below, the Proposed Rules would have required a
records entity to identify each affiliate of a counterparty by
maintaining full organizational charts of the corporate group of a QFC
counterparty. This has been replaced in the Final Rules with a
requirement in the tables in the appendix to the rules to maintain
records as to the identity of the immediate and ultimate parent entity
of each counterparty, which will allow the FDIC to identify affiliated
counterparties based on their common parent and ultimate parent
entities. A new term, ``parent entity,'' has been defined for this
purpose as an entity that controls another entity.
In addition, the Final Rules have been revised to conform the third
prong in the definition of ``control'' to that provided in the BHC Act,
i.e., that control exists if the Federal Reserve has determined, after
notice and opportunity for hearing, that the company directly or
indirectly exercises a controlling influence over the management or
policies of the company.\83\ Including this prong will ensure that in
the case in which the Federal Reserve has made such a determination,
the FDIC would have the relevant records with respect to QFCs with that
entity. Likewise, eliminating the proposed consolidation prong of the
definition of ``control,'' i.e., that an entity controls another entity
if it must consolidate another entity for financial or regulatory
purposes, will avoid the possibility of capturing entities that are not
affiliates of the counterparty for purposes of Title II.
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\83\ See 12 U.S.C. 1841(a)(2)(C).
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As to the determination of which members of a corporate group would
be records entities, the Secretary has adopted the request of
commenters, referenced above, to define ``records entity'' by reference
to whether an entity is consolidated under accounting standards.
Specifically, under the Final Rules, ``records entity'' is defined to
include a member of a corporate group that consolidates, is
consolidated with, or is consolidated by the financial company member
of the corporate group that meets the other criteria of the definition
of ``records entity,'' e.g., the asset and derivatives thresholds. The
rules provide that with respect to financial companies that are not
subject to such accounting principles or standards, for instance
because they are not required to prepare financial statements, such
member of the corporate group would be a ``records entity'' if it would
consolidate, be consolidated by, or be consolidated with such financial
company if such principles or standards applied.
This change addresses the concerns identified by commenters that
members of a corporate group would not have access to the records of a
minority-owned entity or joint venture and is intended to better align
the identification of records entities in a way that comports with
existing recordkeeping practices by corporate groups. The modification
of the definition of ``records entity'' is also responsive to concerns
from commenters that the scope of the Proposed Rules would have been
too broad, given that reference to accounting consolidation generally
requires a higher level of an affiliation relationship than the 25
percent voting interest standard of the BHC Act definition of
``control.''
Two commenters stated that the definition of ``affiliate'' could
deem investment companies that are ``seeded'' with an initial capital
investment by the fund's sponsor to be affiliates of that sponsor
during the period before such a fund attracted third party
investors.\84\ The changes made to the definition of ``records entity''
in the Final Rules should greatly limit the circumstances in which this
is likely to arise. In the event that such a seeded fund were to be
deemed a records entity under the rules, the fund would be able to
request an exemption from the recordkeeping requirements of the rules
for the duration of the seeding period.
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\84\ See TIAA-CREF letter, p. 6; ICI letter, p. 10.
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Non-U.S. Entities: Because the Proposed Rules incorporated the
Title II definition of ``financial company,'' the Proposed Rules
applied only to entities incorporated or organized in the United
States.\85\ One commenter argued that the records of foreign affiliates
of U.S. broker-dealers should be subject to the recordkeeping
requirements.\86\ However, the Secretary's authority to adopt
recordkeeping rules under section 210(c)(8)(H) only extends to
financial companies as defined in Title II of the Act; therefore,
entities that are not incorporated or organized within the United
States, including foreign affiliates of records entities, are not
subject to the Final Rules.
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\85\ See 12 U.S.C. 5381(a)(11)(A).
\86\ See Better Markets letter, pp. 16-19.
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b. Scope of Final Rules
Section 148.1(a) of the Final Rules provides that the recordkeeping
requirements apply to each financial company that qualifies as a
records entity and, with respect to section 148.3(a), to the top-tier
financial company of a corporate group. As discussed above, the
Secretary received numerous comments on the Proposed Rules pertaining
to the definition of ``records entity.'' Section 210(c)(8)(H) of the
Dodd-Frank Act gives the Secretary broad flexibility in determining the
scope of the recordkeeping requirements as necessary or appropriate in
order to assist the FDIC as a receiver for a covered financial company
in being able to exercise its rights under the Act and fulfill its
obligations under sections 210(c)(8), (9), or (10) of the Act. Section
210(c)(8)(H) also requires the regulations to differentiate among
financial companies, as appropriate, by taking into consideration their
size, risk, complexity, leverage, frequency and dollar amount of QFCs,
interconnectedness to the financial system, and any other factors
deemed appropriate. As discussed earlier, the Secretary has complied
with these requirements and consulted extensively with the FDIC.
The Secretary anticipates that records entities may include the
following types of financial companies: \87\ (i) Broker-dealers,
investment advisers, investment companies, swap dealers, security-based
swap dealers, major swap participants, major security-based swap
participants, derivatives clearing organizations, and clearing
agencies; (ii) bank holding companies or bank holding company
subsidiaries (that are not insured depository institutions or other
types of excluded entities); savings and loan
[[Page 75634]]
holding companies or savings and loan holding company subsidiaries
(that are not insured depository institutions or other types of
excluded entity); U.S. affiliates of a foreign bank; noninsured state
member banks; agencies or commercial lending companies other than a
federal agency; organizations organized and operated under section 25A
of the Federal Reserve Act or operating under section 25 of the Federal
Reserve Act; (iii) (A) nonbank financial companies that the Council has
determined shall be subject to Federal Reserve supervision and enhanced
prudential standards under section 113 or (B) financial market
utilities that the Council has designated as, or as likely to become,
systemically important under section 804; (iv) subsidiaries of State
non-member insured banks that are not supervised on a consolidated
basis with the State non-member insured bank, or financial companies
that are not supervised by a PFRA; and (v) other non-bank financial
companies satisfying criteria set forth in the Final Rules.
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\87\ Not all of these entities would qualify as records entities
subject to the Final Rules because of conditions in the definition
of records entity related to asset size and level of derivatives
activity. ``Financial company'' includes any company that is
incorporated or organized under any provision of federal law or the
laws of any state and is predominantly engaged in activities that
the Board of Governors has determined are financial in nature for
purposes of section 4(k) of the BHC Act. 12 U.S.C. 5381(a)(11).
Activities that are ``financial in nature'' include ``providing
financial, investment, or economic advisory services, including
advising an investment company'' and ``issuing or selling
instruments representing interests in pools of assets . . .'' and
``underwriting, dealing in, or making a market in securities.'' 12
U.S.C. 1843(k)(4).
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2. Purpose
Section 148.1(b) of the Proposed Rules provided that the purpose of
the rules is to establish QFC recordkeeping requirements for a records
entity in order to assist the FDIC as receiver for a covered financial
company. The Secretary did not receive any comments requesting changes
to this section and has not modified it from the Proposed Rules.
3. Effective Date and Compliance Dates
a. Initial Compliance Dates
Section 148.1(c) of the Proposed Rules provided that the rules
would become effective 60 days after publication of the Final Rules in
the Federal Register. Section 148.1(d)(1) of the Proposed Rules
provided that each entity that constitutes a records entity on the date
the rules become effective would be required to provide each of its
PFRAs and the FDIC a point of contact responsible for recordkeeping
under the rules and to comply with all the other requirements of the
rules within 270 days of the effective date. For a records entity that
becomes subject to the rules after they become effective, compliance
with the point of contact requirement would have been required within
60 days after such entity becomes subject to the rules and compliance
with all the other requirements of the rules would have been required
within 270 days after such entity becomes subject to the rules.
Several commenters submitted that the proposed compliance period
would be an inadequate amount of time for implementation because of the
significant information systems upgrades and changes in recordkeeping
practices that commenters said would be required for
implementation.\88\ Some commenters suggested that the initial
compliance period should be extended to two years.\89\ Other commenters
suggested that compliance should be phased in in stages, with staggered
compliance dates for various types of QFCs \90\ or for entities based
on the size of their QFC portfolios, with entities with the largest QFC
portfolios required to comply first under the assumption that they
would be more likely to have the infrastructure in place to comply with
the recordkeeping requirements.\91\
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\88\ See ACLI letter, pp. 19-20; OCC letter, p. 12; SIFMA AMG
letter, pp. 13, 22-23.
\89\ See Regional Banks letter, p. 4; SIFMA AMG letter, p. 13.
\90\ See TCH et al. letter, p. 23.
\91\ See ACLI letter, pp. 15-16.
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In response to these comments, the Final Rules provide additional
time to all records entities to comply with the requirements of the
rules. All records entities will have 90 days after the effective date
of the rules to comply with the requirement to provide point of contact
information to their PFRAs and the FDIC; this extension will provide
additional time to financial companies to determine whether they are
records entities under the rules. As to the remainder of the
requirements of the rules, the Final Rules provide staggered compliance
dates that will provide all records entities with additional time to
comply with the recordkeeping requirements. The Final Rules provide
that records entities with $1 trillion or more in total consolidated
assets and the financial company members of their corporate group will
have 540 days (approximately 18 months) after the effective date to
comply with the rules. The Secretary understands that only the four
largest G-SIBs would meet this threshold on the effective date. The
Secretary has determined that it is important for data on the largest,
most systemically important entities to be available as soon as
reasonably possible. The FDIC has advised that, in general, large
insured depository institutions subject to the Part 371 recordkeeping
requirements have been able to comply with those requirements within
270 days. Although the recordkeeping requirements under the Final Rules
are more detailed in many respects than those under Part 371, the
Secretary believes that the extra time allotted for compliance should
be sufficient to allow the largest financial companies to adapt the
processes, procedures, and systems to comply with the Final Rules.
Under the Final Rules, all other records entities will have at
least two years to comply with the rules' recordkeeping requirements.
Records entities with total assets equal to or greater than $500
billion (but less than $1 trillion) and financial company members of
the corporate group of such entities will have two years from the
effective date to comply. Records entities with total assets equal to
or greater than $250 billion (but less than $500 billion) and financial
company members of the corporate group of such entities will have three
years from the effective date to comply. All other records entities
will have four years from the effective date to comply.
The Final Rules provide for a staggered schedule based on the total
consolidated assets of the records entities (or other members of their
corporate group) on the understanding that larger entities will
generally have greater capacity to apply to the task of coming into
initial compliance with the rules. In addition, because the Department
of the Treasury and the FDIC anticipate providing guidance to records
entities as they work to come into compliance with the rules, the
staggered compliance schedule will permit staff of the Department of
the Treasury and the FDIC to allocate their resources to address more
efficiently requests for guidance from each tier of records entities in
turn. The commenter's proposal to provide for staggered compliance
based on type of QFC would mean that the FDIC would not have records
that would be of meaningful usefulness under Title II until the final
compliance deadline had been met, given the requirement, discussed
above, that if the FDIC as receiver decides to (i) transfer any QFC
with a particular counterparty, it must transfer all QFCs between the
covered financial company and such counterparty and any affiliate of
such counterparty to a single financial institution and (ii) disaffirm
or repudiate any QFC with a particular counterparty, it must disaffirm
or repudiate all QFCs between the covered financial company and such
counterparty and any affiliate of such counterparty. In contrast, the
compliance schedule provided for in the Final Rules would provide the
FDIC with complete records for a successively larger set of companies.
The Final Rules provide that a financial company that becomes a
records entity after the effective date
[[Page 75635]]
must provide point of contact information within 90 days of becoming a
records entity and must comply with all other applicable requirements
of the rules within 540 days of becoming a records entity or within the
remainder of the applicable initial compliance period if it has not yet
expired, whichever period is longer. The Secretary believes that this
amount of time will be sufficient given that financial companies
generally should be able to anticipate meeting the criteria for being
deemed a records entity in advance of crossing the total assets and
derivatives thresholds.
b. Subsequent Compliance Dates
Under Section 148.1(d)(2) of the Proposed Rules, a financial
company that no longer qualifies as a records entity would have been
permitted to cease maintaining records one year after it ceases to
qualify as a records entity. The definition of ``records entity'' in
section 148.2(n) of the Final Rules provides that a company that is a
records entity by virtue of exceeding the total assets and derivatives
exposure thresholds shall remain a records entity until one year after
it ceases to meet the total assets and derivatives exposure thresholds.
Financial companies that are members of such a corporate group would be
subject to the same provision. However, in a change from the Proposed
Rules, any company that is a records entity because it meets the other
criteria of the definition shall cease to be a records entity and thus
shall cease to be subject to the rules immediately upon ceasing to meet
such criteria. For example, a nonbank financial company with respect to
which the Council rescinds a determination under section 113 would no
longer be a records entity upon such rescission.
The Proposed Rules provided that a financial company that becomes
subject to the rules again after it had ceased recordkeeping would be
required to comply with the requirements of the rules within 90 days of
the date it again becomes subject to the rules. The Final Rules extend
that period to 365 days, but if a longer period still remains under the
applicable initial compliance period discussed above, the entity has
until the end of that longer period to comply with the rules.
c. Extensions of Compliance Dates
Section 148.1(d)(3) of the Final Rules, consistent with section
148.3(c)(3) of the Proposed Rules, authorizes the Secretary, in
consultation with the FDIC, to grant extensions of time with respect to
compliance with the recordkeeping requirements. As discussed in the
Supplemental Information to the Proposed Rules, it is anticipated that
such extensions of time would apply when records entities first become
subject to the rules and likely would not be used to adjust the time
periods specified in the maintenance and updating requirements of
section 148.3(b) of the Final Rules. Extensions of time may also be
appropriate on a limited basis with respect to a records entity that is
temporarily incapable of generating records due to unforeseen technical
issues.
d. Compliance by Top-Tier Financial Company
Finally, section 148.1(d)(4) of the Final Rules provides that a
top-tier financial company must comply with the requirement, discussed
below, to be capable of generating a single, compiled set of records of
all the members of its corporate group on the same date as the date on
which the records entity members of the corporate group of which it is
a member are required to comply with this part.
B. General Definitions
In addition to the definitions described in detail above in
reference to the scope of the Proposed Rules, certain additional terms
were defined in the Proposed Rules to describe a records entity's
recordkeeping obligations. The Secretary did not receive any comments
on these definitions.
The definition of ``primary financial regulatory agency'' has been
revised to include, with respect to a financial market utility that is
subject to a designation pursuant to section 804 of the Act, the
Supervisory Agency for that financial market utility, as defined in
section 803(8) of the Act, if such financial market utility would not
otherwise have a PFRA.\92\
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\92\ 12 U.S.C. 5462(8).
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The term ``total assets,'' which is used both in the definition of
``records entity'' and for determining a particular records entity's
compliance date, is defined in the Final Rules by reference to the
audited consolidated statement of financial condition submitted to the
financial company's PFRAs or, if no such statement is submitted, to the
financial company's consolidated balance sheet for the most recent
fiscal year end, as prepared in accordance with GAAP or other
applicable accounting standards. This definition is unchanged from the
Proposed Rules other than the addition of the reference to GAAP or
other applicable accounting standards. One commenter proposed excluding
from the definition of ``total assets'' any assets under management,
even if those assets are included on a balance sheet under applicable
accounting standards.\93\ The Secretary has decided, for the sake of
consistency and to allow for ease of determination as to what a
financial company's total assets are, not to provide such an exclusion.
However, to the extent assets under management are not reflected on a
financial company's consolidated statement of financial condition or
consolidated balance sheet, as applicable, such assets would not be
included within the definition of ``total assets.''
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\93\ See SIFMA AMG letter, p. 10.
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The Final Rules also include several additional definitions. A
definition of ``legal entity identifier,'' previously provided in the
appendix, has been added to section 148.2. In addition, a definition of
``parent entity'' has been added because, as discussed below, the
appendix has been revised in the Final Rules to require information
regarding the immediate and ultimate parent entity of a counterparty to
a QFC rather than a full organizational chart for each counterparty. In
order to align with the definition of ``affiliate'' in Title II, as
discussed above, ``parent entity'' is defined in the Final Rules as
``an entity that controls another entity.''
Because, as discussed above, the Final Rules exclude insurance
companies from the definition of ``records entity,'' a definition of
``insurance company'' has been added. In addition to incorporating the
definition of ``insurance company'' provided in Title II, the
definition in the Final Rules includes mutual insurance holding
companies that meet the conditions, specified by the FDIC in part 380
of its rules, for being treated as an insurance company for the purpose
of section 203(e) of the Act.\94\ The Final Rules also
[[Page 75636]]
include definitions of ``gross notional amount of derivatives
outstanding'' and ``derivative liabilities,'' as discussed above, and a
definition of ``top-tier financial company,'' as discussed below.
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\94\ A mutual insurance holding company is created through the
restructuring of a mutual insurance company into two entities, a
mutual insurance holding company and a stock insurance company that
is converted from the original mutual insurance company. The FDIC
excluded mutual insurance holding companies that meet the conditions
specified in its rules in order to address concerns that, because,
under applicable state laws, a mutual insurance holding company
generally is prohibited from selling policies of insurance, it might
not fit squarely within a literal reading of the statutory
definition of insurance company under the Dodd-Frank Act. The FDIC
also noted that state law generally subjects a mutual insurance
holding company to liquidation or rehabilitation under the state
regime if the converted mutual insurance company is placed in
liquidation or rehabilitation and that in the liquidation of a
converted mutual insurance company, the assets of the mutual
insurance holding company generally are included in the estate of
the converted mutual insurance company being liquidated. See 77 FR
25349, 25349-50 (April 30, 2012).
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C. Form, Availability, and Maintenance of Records
1. Form and Availability
Generally applicable requirements. Section 148.3(a)(1) of the
Proposed Rules provided that a records entity must maintain all records
in electronic form in the format set forth in the appendix to the
Proposed Rules. The Proposed Rules further provided that all affiliated
records entities in a corporate group must be able to generate data in
the same data format and use the same unique counterparty identifiers
to enable the aggregation of data. As explained in the Supplemental
Information to the Proposed Rules, the FDIC would use the aggregation
of counterparty positions to determine the effects of termination or
transfer of QFCs. The Secretary requested comments on whether the rules
should require that the parent company of a corporate group aggregate
the records of the records entities of the corporate group.\95\ The
Secretary, after consulting with the FDIC, has determined that it is
important that the FDIC be able to receive a single set of compiled
records from a corporate group in order to allow it to exercise its
rights under the Act and fulfill its obligations under sections
210(c)(8), (9), or (10) of the Act under the short time frame provided
in Title II.
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\95\ See 80 FR 966, 975.
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Accordingly, section 148.3(a)(1) has been revised in the Final
Rules to provide that a top-tier financial company, defined as a
financial company that is a member of a corporate group consisting of
multiple records entities and that is not itself controlled by another
financial company, must be able to generate a single, compiled set of
the records, in electronic form, for all records entities in the
corporate group that it consolidates or are consolidated with it, in a
format that allows for aggregation and disaggregation of such data by
records entity and counterparty. By limiting this requirement to
records of records entities that are consolidated by or with the top-
tier financial company, the Secretary has sought to avoid circumstances
in which the top-tier financial company might not have access to the
records it is required to compile. The top-tier financial company may
comply with this requirement by providing that any of its affiliates or
any third-party service provider maintains the capability of generating
the single, compiled set of the records, in electronic form, for all
records entities in the corporate group; provided, however, that the
top-tier financial company shall itself maintain records under this
part in the event that such affiliate or service provider shall fail to
maintain such records.\96\ Given that the Proposed Rules would have
required each records entity in a corporate group to generate data in
the same format, the Secretary does not anticipate that this will place
a significant additional burden on records entities. Section
148.3(a)(2) of the Proposed Rules has been consolidated in the Final
Rules with section 148.4, as discussed below under section II.D.1.
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\96\ It is possible that there could be more than one top-tier
financial company in a corporate group, particularly in the
circumstance in which the top-tier parent entity of the group is not
itself a financial company; in such a case, the top-tier financial
companies would presumably provide that only one of them, or an
affiliate or service provider, would maintain the capability of
generating the single, compiled set of the records for all records
entities in the corporate group.
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Section 148.3(a)(3) of the Proposed Rules provided that each
records entity designate a point of contact to enable its PFRA and the
FDIC to contact the records entity with respect to the rules and to
update this information within 30 days of any change. The Secretary did
not receive any comments on this subsection, which in the Final Rules
appears as section 148.3(a)(2), and has not modified it from the
Proposed Rules, other than by subjecting the top-tier financial company
of a corporate group to this requirement and by making certain
technical changes.
Section 148.3(a)(4) of the Proposed Rules provided that each
records entity that is regulated by a PFRA be capable of providing all
QFC records specified in the rules to its PFRA within 24 hours of
request. This provision has been revised as section 148.3(a)(3) of the
Final Rules to provide that the records entity is required to be
capable of providing electronically, within 24 hours of the request of
the PFRA, all QFC records specified in the rules to both its PFRA and
the FDIC. This change has been made to ensure that the records will be
maintained in a format that is compatible with the FDIC's systems and
to avoid any delay resulting from the records having to be transmitted
from the PFRA to the FDIC.\97\ This provision also provides that the
top-tier financial company of a corporate group be required to be
capable of providing, upon the request of the PFRA, the compiled set of
records for all records entities of the corporate group to both its
PFRA and the FDIC.
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\97\ One commenter requested that the Secretary provide
clarification that, given the global nature of many financial
companies that would be records entities under the rule, a request
for records made before 5:00 p.m., eastern time on a given day must
be satisfied by 5:00 p.m. eastern time on the following day. See TCH
et al. letter, p. 23. This is not the intention of Secretary in
adopting the 24 hour requirement.
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Request for reliance on existing recordkeeping requirements.
Commenters suggested that the records required under the Proposed Rules
be made consistent with supervisory recordkeeping or reporting
requirements for derivatives imposed by other federal regulatory
agencies.\98\ However, the types of financial contracts included within
the scope of other derivatives recordkeeping and reporting requirements
is not as broad as the definition of QFCs under the Dodd-Frank Act.\99\
Further, the scope of entities required to maintain records under such
other recordkeeping and reporting rules is different from that under
the Final Rules, given their differing purposes. Finally, reliance on a
collection of records maintained under different recordkeeping and
reporting regimes would not permit the aggregation of data that will be
necessary for the receiver to comply with the time frame under which
the FDIC as receiver must take action with respect to the covered
financial company's QFCs under the statutory constraints discussed
above.
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\98\ See SIFMA AMG letter, pp. 12-13; DTCC letter, p. 7; ACLI
letter, p. 20; Capital Group letter, pp. 3-4.
\99\ For example the CFTC's swap data recordkeeping requirement
at 17 CFR part 46 covers ``swaps,'' which does not include certain
contracts such as commodity contracts and margin loans that are
included in the definition of QFCs under the Dodd-Frank Act.
---------------------------------------------------------------------------
Request for exclusion of certain types of transactions. One
commenter proposed that the recordkeeping requirements of the Final
Rules not apply to QFCs that are for the purchase and sale of
securities such as typical cash transactions that settle on a delivery-
versus-payment basis or settle within a fixed number of days following
the transaction date.\100\ The commenter argued that (i) these short-
term transactions are not relevant to the FDIC for the purposes of its
decision making under Title II, (ii) the significant volume of these
transactions that would be reported on any given day would overwhelm
and obscure otherwise relevant data, and (iii) for those transactions
that are exchange traded, only the settlement system and the
[[Page 75637]]
clearing agency would be listed as direct counterparties, which should
simplify the FDIC's decisions with respect to such transactions. The
commenter offered similar arguments with respect to QFCs entered into
with retail customers or as part of a records entity's retail or
brokerage account activities.
---------------------------------------------------------------------------
\100\ See TCH/SIFMA letter.
---------------------------------------------------------------------------
All QFCs, regardless of their tenor, their volume, and how they are
settled, are subject to the requirement, discussed above, that if the
FDIC as receiver determines (i) to transfer any QFC with a particular
counterparty, it must transfer all QFCs between the covered financial
company and such counterparty and any affiliate of such counterparty to
a single financial institution or (ii) to disaffirm or repudiate any
QFC with a particular counterparty, it must disaffirm or repudiate all
QFCs between the covered financial company and such counterparty and
any affiliate of such counterparty. The large volume of these short-
term transactions supports the determination that the QFC information
required to be provided must be maintained in the standard format
specified in the rules to ensure rapid aggregation and evaluation of
the information by the receiver. Whether these transactions are
exchange traded will not necessarily affect the FDIC's decision as to
whether to transfer the QFCs in question; rather, the FDIC's decision
as to whether to transfer a particular counterparty's QFCs will be
based on an evaluation of the other information required to be
collected under the Final Rules and on an evaluation of the impact of
such transfer on the receivership and U.S. financial stability.
Furthermore, for corporate groups that include members that are subject
to different recordkeeping regimes, permitting entities to rely on
their existing records would not be consistent with the requirement for
the top-tier financial company to be capable of generating a single,
compiled set of QFC records in a format that allows for aggregation and
disaggregation of such data. The Secretary notes, however, that under
the exemptive process provided in the rules and discussed below, a
records entity may apply for relief from particular requirements as to
the information to be maintained by a records entity for a particular
type of QFC or counterparty. Any exemptive relief requested with
respect to a particular type of QFC or counterparty would need to be
defined in such a way as to ensure consistency of treatment by each
records entity.
2. Maintenance and Updating
Section 148.3(b) of the Proposed Rules would have required that
each records entity maintain the capacity to produce QFC records on a
daily basis based on previous end-of-day records and values. The
Secretary has clarified in the Final Rules that, if records are
maintained on behalf of a records entity by an affiliate or service
provider, such records entity shall itself maintain records under this
part in the event that such affiliate or service provider fails to
maintain such records. The Secretary confirms that, as was suggested by
a commenter, the information required to be capable of being provided
shall be with respect to QFCs as of the end of the day on the date the
request is provided.\101\
---------------------------------------------------------------------------
\101\ See TCH et al. letter, p. 23.
---------------------------------------------------------------------------
3. Exemptions
a. Requests for Exemptions
Section 148.3(c) of the Proposed Rules provided that upon written
request by a records entity, the FDIC, in consultation with the PFRAs
for the records entity, may recommend that the Secretary grant a
specific exemption from compliance with one or more of the requirements
of the rules. In addition, under the Proposed Rules, the Secretary
would also have been permitted to issue exemptions that have general
applicability upon receipt of a recommendation from the FDIC, in
consultation with the PFRAs for the applicable records entities.
One commenter suggested that exemptions should be granted by the
PFRAs for a records entity rather than by the Secretary.\102\ Another
commenter suggested that exemption recommendations should be made by
the PFRAs rather than by the FDIC.\103\ A third commenter suggested
that the exemption process should be streamlined to involve only one
agency.\104\ After considering these comments, the Secretary is
adopting the provision for granting exemptions substantially as
proposed, with certain modifications as described below. The Secretary
believes that the Act does not authorize the Secretary, as Chairperson
of the Council, to delegate decision making authority with respect to
these rules to other agencies. In making any decision regarding
exemptions, the Secretary continues to believe that it is appropriate
to obtain a recommendation from the FDIC, prepared in consultation with
the PFRAs for the relevant records entities. The provision for a
recommendation from the FDIC is consistent with the requirement that
the Secretary consult with the FDIC in adopting these rules and
reflects the fact that the FDIC is the intended user of the QFC
records. Including the PFRAs for the relevant records entities in the
exemption process recognizes their familiarity with the operations of
the records entities. The Final Rules have been modified to clarify
that, even if the FDIC does not make a recommendation, the Secretary
nevertheless may make a determination to grant or deny an exemption
request.
---------------------------------------------------------------------------
\102\ See Capital Group letter, p. 4.
\103\ See ICI letter, p. 10.
\104\ See OCC letter, p. 8.
---------------------------------------------------------------------------
In addition, the Secretary has simplified the exemption provision
by consolidating the separate provisions for general and specific
exemptions and has specified in the Final Rules what a request for an
exemption must contain. In determining whether to grant any requests
from records entities for exemptions, the Secretary may take into
consideration their size, risk, complexity, leverage, frequency and
dollar amount of QFCs, interconnectedness to the financial system, and
any other factors deemed appropriate, including whether the application
of one or more requirements of the rules is not necessary or
appropriate to achieve the purpose of the rules.
b. De Minimis Exemption
Several commenters argued that the requirements of the Proposed
Rules should not apply to records entities that have a minimal level of
QFC activity. Commenters noted that a financial company might be
subject to the recordkeeping requirements of the Proposed Rules even if
it is a party to only a single QFC.\105\ One commenter suggested that
the definition of ``records entity'' exclude any financial company
that, over the immediately preceding 12 months, (i) had fewer than 50
unaffiliated counterparties or entered into fewer than 100 QFC
transactions with non-affiliates and (ii) entered into QFCs having a
gross notional value equal to or less than $2.5 billion.\106\ Another
commenter proposed providing varying de minimis thresholds for each
type of QFC, with different levels set to reflect the different risks
associated with each type of QFC.\107\
---------------------------------------------------------------------------
\105\ See ACLI letter, p. 15; TCH et al. letter, p. 11; TIAA-
CREF letter, p. 7; CWEG letter, pp. 4-5.
\106\ See TCH/SIFMA letter.
\107\ See ACLI letter, p. 15.
---------------------------------------------------------------------------
After consideration of these comments, the Secretary has determined
that an exemption from the preponderance of the recordkeeping
[[Page 75638]]
requirements of the rules is appropriate for records entities that have
a minimal level of QFC activity such that if the FDIC were appointed as
receiver for any such records entity, the FDIC would be in a position
to make the requisite determinations with respect to the treatment of
QFCs during the stay period even in the absence of the records required
to be maintained under the rules. The Secretary considered a number of
different approaches to setting the threshold for the de minimis
exemption, including the gross notional value of a records entity's QFC
portfolio over a defined period, the number of discrete unaffiliated
QFC counterparties, and the number of open positions. The Secretary
determined that gross notional value would not be an appropriate metric
because the gross notional amount of a QFC portfolio is not a good
proxy for the difficulty the receiver would have in assessing the QFC
portfolio and in making the requisite determinations with speed and
accuracy. For instance, a single interest rate swap that exceeds a
specified threshold may easily be reviewed by the receiver without
standardized recordkeeping. By contrast, a records entity may have a
QFC portfolio that falls below the threshold but is comprised of
hundreds of open positions, such that the portfolio would pose
challenges for the receiver to review and act upon during the one
business day stay period and thus would necessitate the advance
recordkeeping required by the rules. Likewise, the Secretary determined
that neither the risk each type of QFC might pose, even if that were
something that could be distinguished for purposes of these rules, nor
any of the other factors listed in section 210(c)(8)(H)(iv) would be
relevant to the question of how many QFCs a receiver will be able to
review during the one business day stay period.
The recordkeeping requirements of Part 371 of the FDIC's rules
relax the recordkeeping requirements for institutions with fewer than
twenty open QFC positions. Based on its experience with Part 371, the
FDIC advised that a receiver should be able to exercise its statutory
rights and duties under the Dodd-Frank Act relating to QFCs without
having access to standardized records for any records entity that is a
party to no more than 50 open QFC positions. Having considered the
comments received and the FDIC's experience with evaluating QFC
portfolios, the Secretary has provided in the Final Rules that any
records entity that is a party to no more than 50 open QFC positions is
not required to maintain the records described in section 148.4 other
than the copies of the documents governing QFC transactions between the
records entity and each counterparty as provided in section 148.4(i).
This exemption provides further differentiation among financial
companies and reduces the burden of the rules without compromising the
ability of the FDIC to exercise its rights under the Act and fulfill
its obligations under sections 210(c)(8), (9), and (10).
D. Content of Records
1. General Information
Section 148.4 of the Final Rules requires each records entity to
maintain the data listed in the appendix tables, copies of the
documents that govern QFCs, and lists of vendors directly supporting
the QFC-related activities of the records entity and the vendors'
contact information with respect to each QFC to which it is a party. As
discussed above, the Final Rules have been simplified so as not to
separately require that a full set of records be maintained with
respect to the underlying QFCs for which a records entity provides a
guarantee or other credit enhancement. Instead, as discussed below,
certain fields specific to the provision by a records entity of a
guarantee of a QFC or of another type of credit enhancement of a QFC
have been added to the tables in the Final Rules.
The Proposed Rules would have also required that records entities
maintain any written data or information that is not listed in the
appendix tables that the records entity is required to provide to a
swap data repository, security-based swap data repository, the CFTC,
the SEC, or any non-U.S. regulator with respect to any QFC, for any
period that such data or information is required to be maintained by
its PFRA. Having considered a comment received indicating that this
would be unduly burdensome,\108\ the Secretary has chosen to eliminate
these requirements as not sufficiently significant to the receiver to
justify the burden they would place on records entities.
---------------------------------------------------------------------------
\108\ See TCH et al. letter, p. 17.
---------------------------------------------------------------------------
The Proposed Rules provided that a records entity also would be
required to maintain electronic, full-text searchable copies of all
agreements that govern the QFC transactions subject to the rules, as
well as credit support documents related to such QFC transactions.
Having considered the comments received indicating that the requirement
that such electronic documents be full-text searchable would be unduly
burdensome,\109\ the Secretary has decided to omit this requirement as
not sufficiently significant to the receiver to justify the burden it
would place on records entities. No comments were received on the
proposed requirement that each records entity maintain a list of
vendors directly supporting the QFC-related activities and the contact
information for such vendors, and this provision has been retained
without change in the Final Rules. The Proposed Rules also provided
that each records entity would be required to maintain information
about the risk metrics used to monitor the QFC portfolios and contact
information for each risk manager. The Secretary has decided to
eliminate this requirement as not sufficiently significant to the
receiver to justify its burden on records entities.
---------------------------------------------------------------------------
\109\ See TCH et al. letter, pp. 18-19; ACLI letter, pp. 18-19.
---------------------------------------------------------------------------
2. Appendix Information
For the receiver to make a well-informed decision that complies
with the requirements of Title II discussed in section I, the receiver
must have sufficient information to fully evaluate and model various
QFC transfer or termination scenarios as well as the potential impact
of its transfer or retention decisions. To perform this analysis in the
extremely limited time frame provided by Title II, the receiver must
have access to data on the QFC positions of the records entity, net QFC
exposures under applicable netting agreements, detailed and aggregated
collateral positions of the records entity and of its counterparties,
and information regarding certain key provisions of the legal
agreements governing the QFC transactions. Many commenters recognized
the importance of maintaining detailed records of QFCs for use by the
FDIC if it were appointed as receiver under Title II; however, several
commenters expressed concern that the requirements of Tables A-1
through A-4, as proposed, were overly burdensome and would require
maintenance of data that is different in content or format from that
currently tracked or collected in the ordinary course of business or
for other regulatory purposes.\110\
---------------------------------------------------------------------------
\110\ See TCH et al. letter, pp. 15, 20; ACLI letter, pp. 17-18;
SIFMA AMG letter, pp. 12-13; TIAA-CREF letter, p. 2.
---------------------------------------------------------------------------
The appendix to the Final Rules preserves the basic structure and
content of the data tables included in the Proposed Rules. However, the
Secretary has eliminated data fields that the Secretary decided would
not provide a sufficiently significant benefit to the FDIC as receiver
to justify the
[[Page 75639]]
burden they would place on records entities. Further, the Final Rules
add four master data lookup tables, composed largely of requirements
that previously appeared in the four data tables of the Proposed Rules,
in order to reduce the burden on records entities and improve the
tables' functionality for the receiver. These include: (1) A corporate
organization master data lookup table; (2) a counterparty master data
lookup table; (3) a booking location master data lookup table; and (4)
a safekeeping agent master data lookup table.
The master data lookup tables are cross-referenced to one or more
of Tables A-1 through A-4 and provide a centralized site for records of
affiliate, counterparty, booking location, and safekeeping agent data,
which eliminates the need for a records entity to include duplicative
data in Tables A-1 through A-4 and thereby makes it easier for a
records entity to enter and update the data included in those Tables.
In particular, the records entity members of a corporate group, which
are required to utilize common identifiers for shared counterparties,
will be able to use the same counterparty consolidated corporate master
lookup table for a given counterparty. For example, if there were
several records entities in a corporate group and each was a party to
one or more QFCs with a particular counterparty, use of the
counterparty master lookup table would enable the information as to
that counterparty to be entered only once. The lookup table format,
which conforms to customary information technology practices, will also
allow for smaller file sizes by eliminating repetitive entries, thereby
reducing the burden of maintaining the records and maintaining the
capability of transmitting them to the FDIC and the records entity's
PFRA.
Each table contains examples and, as relevant, instructions for
recording the required information and an indication of how the FDIC as
receiver would apply the required information. A records entity may
leave an entry blank for any data fields that do not apply to a given
QFC transaction, agreement, collateral item, or counterparty. For
example, if a QFC is not collateralized, the data fields that relate to
collateral may be left blank (in the case of character fields) or given
a zero value (in the case of numerical fields).
Several commenters noted that the scope of the recordkeeping
requirements in the appendix is more extensive than that of the
recordkeeping requirements in the appendix to Part 371.\111\ As noted
in the Supplementary Information to the Proposed Rules, the
recordkeeping requirements of the rules have been informed by the
FDIC's experience in evaluating multiple QFC portfolios of insured
depository institutions.
---------------------------------------------------------------------------
\111\ See TCH et al. letter, p. 20; Capital Group letter, p. 3.
---------------------------------------------------------------------------
a. Table A-1--Position-Level Data
Table A-1 requires each records entity to maintain detailed
position-level data to enable the FDIC as receiver to evaluate a
records entity's QFC exposure to each of its counterparties on a
position-by-position basis. The records required by the table include
critical information about the type, terms, and value of each of the
records entity's QFCs. Position-level information must be available for
each counterparty, affiliate, and governing netting agreement to allow
the FDIC as receiver to model the potential impacts of its decisions
relating to the transfer or retention of positions. This information
will also enable the FDIC to confirm that the netting-set level data
provided in Table A-2, such as the market value of all positions in the
netting set (A2.6), based on the aggregated data from Table A-1, is
accurate and can be validated across different tables. In addition,
position-level information will assist the receiver or any transferee
in complying with the terms of the records entity's QFCs and thereby
reduce the likelihood of inadvertent defaults.
In response to comments received, the Secretary has made several
changes to Table A-1 that will reduce the recordkeeping burden. One
commenter recommended elimination of the requirement to identify the
purpose of a QFC position, stating that this could involve a
complicated analysis and impose a substantial burden on records
entities. The commenter stated that a QFC position may have multiple
purposes that may change over time such that any identified purpose
would be of minimal value to the receiver.\112\ In response to this
comment, the Secretary has eliminated from Table A-1 the requirement to
identify the purpose of each QFC.
---------------------------------------------------------------------------
\112\ See TCH et al. letter, pp. 20-21.
---------------------------------------------------------------------------
One commenter also recommended eliminating the requirement to
maintain operational and business-level details relating to QFC
positions, such as the identification of related inter-affiliate
positions, trading desk identifiers, and points of contact. The
commenter stated that such operational and business-level details are
subject to frequent change that would require frequent updates by
records entities and submitted that this information would likely be of
limited value to the receiver.\113\ In consideration of this comment,
the Secretary has decided to eliminate both the requirement to maintain
data on related inter-affiliate positions and the requirement to
maintain contact information for the person at the records entity
responsible for each position. The Secretary has replaced the inter-
affiliate fields of the Proposed Rules with a narrower requirement to
link only related positions, if any, to which the records entity itself
is a party (A1.22). All positions of a particular records entity that
are reported on Table A-1 and that are related to one another should
have the same designation in this field. The requirement to identify
loans related to a QFC position has also been retained (A1.23-24). In
addition, in recognition that it may be necessary for the FDIC, in
determining whether to transfer a QFC, to locate the personnel at a
records entity who are familiar with a particular position and can
provide the receiver with additional information on the position, the
Final Rules require a records entity to provide, in the booking
location master table, identifiers for the booking unit or desk, a
description of the booking location, and contact information for the
desk associated with a QFC (BL.3-BL.7).
---------------------------------------------------------------------------
\113\ See TCH et al. letter, p. 19.
---------------------------------------------------------------------------
One commenter stated that the requirement to provide information
based on a classification under GAAP or IFRS may not be appropriate if
the records entity follows a different accounting standard.\114\ In
response to this comment, the Secretary has decided to require that
each records entity maintain the asset classification available under
any accounting principles or standards used by the records entity
(A1.18). If no asset classification scheme is available under any
accounting principles or standards used by a records entity, the
records entity may leave the entry blank.
---------------------------------------------------------------------------
\114\ See ACLI letter, p. 18.
---------------------------------------------------------------------------
To further reduce the burden of Table A-1, the Secretary has
eliminated the following proposed data fields in the Final Rules:
Industry code (GIC or SIC code); position standardized contract type;
and documentation status of the position.
The Final Rules include two additional fields to Table A-1 based on
the FDIC's experience with implementing Part 371. The Secretary
believes that the addition of these fields should impose minimal, if
any, additional burden on a records entity. The first addition is a
data field for the
[[Page 75640]]
date that the data maintained in the table was extracted from the
records of the records entity (A1.1). Because records entities may
derive data from multiple systems in multiple locations, information on
the date that data was extracted is necessary to enable the receiver to
assess whether all recorded information is current. The data extraction
date field has been included in each of the tables of the appendix.
A netting agreement counterparty identifier field (A1.10) has also
been added to the table. Based on the FDIC's experience with the
implementation of Part 371, the FDIC has advised that it is necessary
for the rules to address circumstances in which the counterparty to a
QFC is different from the counterparty securing the QFC (for example,
if an affiliate of the QFC counterparty is providing collateral for the
position). In such cases, the netting agreement counterparty identifier
is necessary to enable the receiver to link certain position-level data
from Table A-1 to the applicable netting-set level data under Table A-
2.
In addition certain fields specific to guarantees of QFCs provided
by the records entity and other credit enhancements of QFCs provided by
the records entity have been added to the table, including the type of
QFC covered by the guarantee or other third party credit enhancement
(A1.7.1) and the underlying QFC obligor identifier (A1.7.2). Further,
the Final Rules include fields requiring identification of any credit
enhancement that has been provided by a third party with respect to a
QFC of the records entity (A1.21.1-.5).
As in the Proposed Rules, Table A-1 under the Final Rules requires
that a records entity be identified by its legal entity identifier
(``LEI''). In order for an LEI to be properly maintained, it must be
kept current and up to date according to the standards established by
the Global LEI Foundation. In addition, to the extent a records entity
uses a global standard unique transaction identifier or unique product
identifier to identify a QFC for which records are kept under these
rules, the records entity should use such identifiers in completing
fields A1.3 and A1.7, respectively. The Secretary has made this change
in recognition of the ongoing work of the Committee on Payments and
Market Infrastructures and the Board of the International Organization
of Securities Commissions to establish such global identifiers.
b. Table A-2--Counterparty Netting Set Data
Table A-2, which specifies the information to be maintained
regarding aggregated QFC exposure and collateral data by counterparty,
has been adopted in the Final Rules substantially as proposed, with
certain changes discussed below.
Table A-2 requires a records entity to maintain records of the
aggregated QFC exposures under each netting agreement between the
records entity and its counterparty. Table A-2 also requires
comprehensive information on the collateral exchanged to secure net
exposures under each netting agreement. Information on collateral
required by the table includes the market value of collateral, any
collateral excess or deficiency positions, the identification of the
collateral safekeeping agent, a notation as to whether the collateral
posted by a counterparty or a records entity is subject to
rehypothecation, and the market value of any collateral subject to
rehypothecation. The information required by Table A-2 must be
maintained at each level of netting under the relevant governing
agreement. For example, if a master agreement includes an annex for
repurchase agreements and an annex for forward exchange transactions
and requires separate netting under each annex, the information
required by Table A-2 with respect to the net exposures under each
annex would need to be maintained separately.
In evaluating whether to transfer or retain QFCs between a records
entity and a counterparty, the receiver must be able to assess the
records entity's net exposure to the counterparty (and the
counterparty's affiliates), the counterparty's net exposure to the
records entity, and the amount of collateral securing those exposures.
Net QFC exposure data will also assist the receiver in aggregating
exposures under netting agreements with a counterparty and its
affiliates based on the netting rights of the entire group, in order to
determine relative concentrations of risk under each applicable netting
agreement. This information will assist the receiver in modeling
various transfer or termination scenarios and evaluating the effects
and potential impact of the FDIC's decision to transfer the covered
financial company's QFCs, retain and disaffirm or repudiate them, or
retain them and allow the counterparty to terminate them. Information
on collateral also ensures that the FDIC as receiver is able to comply
with its statutory obligation to transfer all collateral securing the
QFC obligations that it elects to transfer.\115\ In addition, the
records required to be maintained under Table A-2 will assist the
receiver in identifying any excess collateral posted by a counterparty
for possible return to the counterparty should the contracts be
terminated after the one business day stay period.
---------------------------------------------------------------------------
\115\ See 12 U.S.C. 5390(c)(9)(A)(i)(IV).
---------------------------------------------------------------------------
As discussed above, one commenter recommended eliminating the
requirement to maintain operational and business-level details relating
to QFC positions, including points of contact and the risk or
relationship manager for each counterparty.\116\ In addition to the
changes made to Table A-1 in response to this comment, the Final Rules
eliminate from Table A-2 the requirement to provide information on a
counterparty risk or relationship manager at the records entity.
However, the receiver may need contact information for the counterparty
to fulfill its statutory notice requirements under section 210(c)(10)
of the Act. Accordingly, the Final Rules retain the requirement, now in
Table A-3, to identify a point of contact at the counterparty, but
provide that the information to be maintained by the records entity is
limited to the information provided by the counterparty pursuant to the
notification section of the relevant QFC documentation. Accordingly, a
records entity is not required to update the counterparty contact
information unless the counterparty has provided to the records entity
a notice of a change to this information.
---------------------------------------------------------------------------
\116\ See TCH et al. letter, p. 19.
---------------------------------------------------------------------------
The burden of Table A-2 has been further reduced in the Final Rules
by elimination of the following fields: Industry code (GIC or SIC
code); master netting agreement for counterparty corporate group; name
of each master agreement, master netting agreement or other governing
documentation related to netting among affiliates in a counterparty's
corporate group; current market value of all inter-affiliate positions
with the records entity; master netting agreement for records entity's
corporate group; and name of each master agreement, master netting
agreement or governing documentation related to netting among records
entities.
An additional change was made to Table A-2 relating to the
requirement in the Proposed Rules for the maintenance of records on the
current market value of all positions netted under the applicable
netting agreement. Table A-2 in the Final Rules retains this
[[Page 75641]]
requirement (A2.6) and adds a related requirement to maintain records
of the aggregate current market values of all positive positions (A2.7)
and, separately, of all negative positions under the netting agreement
(A2.8). Providing such valuations should not pose a significant
additional burden, given that the records entity is required to
calculate the aggregate current market value of all positions under the
netting agreement. Such aggregate positive and aggregate negative
positions can be calculated by summing the applicable position-level
values provided in Table A-1; however, the FDIC has advised, based on
its experience implementing Part 371, that inclusion of this
information in summary format will make this information more useful to
the receiver in making the determinations necessary to exercise its
rights and fulfill its obligations within the one business day stay
period.
The Proposed Rules would have required that the amount of pending
margin calls be included in the calculation of collateral positions.
The Final Rules instead require information on the next margin payment
date (A2.15) and the next margin payment amount (A2.16) in Table A-2.
This information will assist the receiver in avoiding any failure to
make a pending margin call during the one business day stay. Since the
amount of pending margin calls was required to be calculated under
Table A-2 as proposed to determine collateral excess or deficiency,
requiring such information to be capable of being separately provided
should not impose a significant additional burden.
In place of the data fields in the Proposed Rules for the legal
name of any master agreement guarantor and the unique counterparty
identifier of guarantor, Table A-2 includes a field for third-party
credit enhancement agreement identifiers (A2.5), which clarifies that
it covers unaffiliated providers of credit support and encompasses
forms of support in addition to guarantees. The Final Rules also add
new fields to Table A-2 (A2.4.1 and A2.5.1-.5) to provide additional
information as to third-party credit enhancements. The Final Rules also
add to Table A-2 certain fields necessary to link the data in Table A-2
to one or more of the other data tables or lookup tables. Finally, the
Final Rules add to Table A-2 the data extraction date field discussed
above.
c. Table A-3--Legal Agreement Data
Table A-3 as adopted is intended to ensure that the FDIC as
receiver has available to it the legal agreements governing and setting
forth the terms and conditions of each of the QFCs subject to the
rules. Table A-3 requires each legal agreement to be identified by name
and unique identifier (A3.3-A3.4) and requires the maintenance of
records on key legal terms of the agreement, such as relevant governing
law (A3.7) and information about any third-party credit enhancement
agreement (A3.10-12.3).
In response to comments received on the Proposed Rules, the Final
Rules include several changes to Table A-3 to reduce the recordkeeping
burden. Commenters suggested eliminating the proposed requirement in
Table A-3 to maintain records containing descriptions or excerpts of
certain cross-default provisions, transfer restrictions, events of
default, and termination events set forth in each QFC agreement or
master agreement, arguing that providing this information would be
extremely burdensome and of limited value to the receiver.\117\ In
response to this comment, the Secretary has eliminated from Table A-3
the requirements to provide any information on transfer restrictions
and substantially reduced the information required as to default
provisions. As to cross-defaults, the Final Rules require only that a
records entity indicate whether a QFC contains a default or other
termination event provision that references another entity that is not
a party to the QFC and, if so, the identity of such entity (A3.8-A3.9).
---------------------------------------------------------------------------
\117\ See TCH letter, p. 19; ACLI letter, p. 17.
---------------------------------------------------------------------------
To further reduce the burden of Table A-3, the Final Rules
eliminate the following proposed data fields: Basic form of agreement;
legal name of guarantor of records entity obligations; industry code
(GIC or SIC code); and legal name of counterparty obligations.
Other changes to Table A-3 conform to those discussed above with
respect to other tables, i.e., inclusion of the data extraction date
field (A3.1), a field for the records entity identifier (A3.2, to link
the data in Table A-3 to other data tables or look-up tables), an
agreement date field (A3.5) and a field to identify the underlying QFC
obligation for QFCs that are guarantees or credit enhancements
(A3.6.1). In addition, as noted above in the discussion of Table A-2,
the counterparty contact information that was required under Table A-2
in the Proposed Rules has been moved to fields A3.13-A3.16.
d. Table A-4--Collateral Detail Data
Table A-4 requires detailed information, on a counterparty by
counterparty basis, relating to the collateral received by and the
collateral posted by the records entity as reported in Table A-2. This
information includes, for each collateral item, the unique collateral
identifier (A4.6), information about the value of the collateral (A4.7-
9), a description of the collateral (A4.10), the fair value asset
classification (A4.11), the collateral segregation status (A4.12), the
collateral location and jurisdiction (A4.13-14), and whether the
collateral is subject to rehypothecation (A4.15). This collateral
detail data, together with the netting-set level collateral data in
Table A-2, will enable the receiver to more fully assess the type,
nature, value, and location of the collateral and to model various QFC
transfer or termination scenarios. Collateral detail information will
also enable the receiver to ensure that collateral is transferred
together with any QFCs that it secures, as required by the Act.\118\
For cross-border transactions, the comprehensive information on
collateral will assist the receiver in determining the sufficiency and
availability of collateral posted outside the United States, as well as
any close-out risk if the receiver does not arrange for the transfer of
QFC positions.
---------------------------------------------------------------------------
\118\ See 12 U.S.C. 5390(c)(9)(A)(i)(IV).
---------------------------------------------------------------------------
The Secretary did not receive any comments requesting specific
changes to the requirements of Table A-4. Nevertheless, to reduce the
burden of Table A-4, the following data fields have been eliminated in
the Final Rules: Original face amount of collateral item in U.S.
dollars; current end of day market value amount of collateral item in
local currency; and collateral code. The Final Rules also eliminate the
requirement to describe the scope of collateral segregation.
A collateral posted or received flag has been added to Table A-4 to
clearly indicate to the receiver whether the collateral was posted or
received by the records entity (A4.3). This field should impose minimal
additional burden because a records entity will already need to
identify all collateral as posted or received in Table A-2, which
requires separate collateral information for collateral posted and
collateral received. The Final Rules also adds the data extraction date
field (A4.1), as discussed above, to Table A-4 as well as certain other
fields necessary to link the data in Table A-4 to the data maintained
in one or more of the other data tables or look-up tables (A4.2, A4.4,
A4.5).
[[Page 75642]]
e. Corporate Organization Master Data Lookup Table
In the Proposed Rules, information regarding a records entity's
affiliates was required by section 148.4(a)(7) and Tables A-1 and A-2.
The Secretary has determined it is appropriate to provide instead for
the corporate organization information to be maintained in the new
corporate organization master data lookup table, which is cross-
referenced with Tables A-1 through A-4. The Final Rules require this
information to be maintained by a records entity with respect to itself
and all of the members of its corporate group, which includes all of
the records entities' affiliates. Although, as discussed above, the
definition of ``records entity'' has been revised in the Final Rules to
identify which members of a corporate group are records entities by
reference to whether they are consolidated under accounting standards,
in the event of a Title II resolution, the FDIC would need the
information described in the next paragraph for each affiliate,
irrespective of consolidation, to allow it to exercise its rights and
obligations under, and ensure compliance with, section 210(c)(16) of
the Act. As referenced above, under section 210(c)(16) of the Act, the
contracts of subsidiaries or affiliates of a covered financial company
that are guaranteed or otherwise supported by or linked to such covered
financial company can be enforced by the FDIC as receiver of the
covered financial company notwithstanding the insolvency, financial
condition, or receivership of the financial company if the FDIC
transfers the guarantee or other support to a bridge financial company
or other third party.\119\ The FDIC's decision as to whether to
transfer such a guarantee or credit support pursuant to sections
210(c)(9) and (10) of the Act may thus be influenced by the information
required to be maintained as to a records entities' affiliates.
Information about affiliates of the records entity will also, as
discussed below, assist the FDIC with monitoring compliance with the
rules.
---------------------------------------------------------------------------
\119\ 12 U.S.C. 5390(c)(16).
---------------------------------------------------------------------------
The information that each records entity will need to maintain with
respect to itself and each of its affiliates includes its and its
affiliates' identifiers and legal name (CO.2-4), identification of
immediate parent (CO.5-CO.7), the immediate parent's percentage
ownership (CO.8), the entity type (CO.9), domicile (CO.10), and
jurisdiction of incorporation or organization (CO.11). This information
will be easier to provide and to update as part of the corporate
organization master data lookup table rather than as part of the
corporate organization chart provided for under the Proposed Rules. Use
of the corporate organization master data lookup table will also
facilitate the linking of the data provided in Tables A-1 through A-4
to key information about the records entity and its affiliates.
The corporate organization master data lookup table also includes a
recordkeeping status field (CO.12) that was not included in the
Proposed Rules. This field, which requires the records entity to
identify, with respect to each of its affiliates, whether the affiliate
is (i) a records entity, (ii) a non-financial company, (iii) an
excluded entity, (iv) a financial company that is not a party to any
open QFCs, (v) a records entity that is availing itself of the de
minimis exemption, or (vi) a records entity that is availing itself of
another exemption, e.g., the conditional exemption for clearing
organizations provided under the Final Rules. The information provided
in this field will enable the FDIC as receiver to validate that all
affiliates that are records entities have provided records to the
extent appropriate. For example, if an affiliate has not provided QFC
records, the FDIC will be able to ascertain, by reference to this
field, whether the affiliate has not provided records because it is not
a party to any QFCs, has availed itself of the de minimis exemption, or
is not included within the definition of ``records entity.'' The
addition of the de minimis exemption in the Final Rules made the need
for this field more acute; without this information, the FDIC as
receiver will not be alerted to an entity having availed itself of the
de minimis exemption such that the FDIC would need to review the QFC
documentation of that entity manually. Because each member of a
corporate group for which there is a records entity will make its own
determination as to whether it is subject to the recordkeeping
requirements of the rules, the addition of this field should impose
only a minimal burden.
f. Counterparty Master Data Lookup Table
In the Proposed Rules, information regarding a records entity's
non-affiliated QFC counterparties was required by section 148.4(a)(6)
and in Table A-2. Several commenters suggested that the organizational
and affiliate information for counterparties not affiliated with the
records entity that would have been required by the Proposed Rules be
eliminated or significantly reduced.\120\ These commenters stated that
the broad definitions of ``affiliate'' and ``control'' would make this
a complex and difficult analysis.\121\ One commenter noted that most
financial companies do not ask for or maintain records on affiliations
between counterparties (other than parent-subsidiary relationships) and
that these relationships are subject to change, such that even if such
information were maintained, the records entity would not be in a
position to verify the accuracy of the information.\122\
---------------------------------------------------------------------------
\120\ See TCH et al. letter, pp. 16-17; SIFMA AMG letter, p. 11.
\121\ Id.
\122\ See TCH et al. letter, p. 16.
---------------------------------------------------------------------------
Having considered the comments received as to the burden of
collecting, maintaining, and updating this information, the Secretary
has determined that information regarding the identity of the immediate
and ultimate parent of each counterparty is sufficient to enable the
FDIC as receiver to comply with the requirement, discussed above, that
the FDIC either (i) transfer all QFCs between the covered financial
company and a counterparty and any affiliate of such counterparty to a
single financial institution, (ii) disaffirm or repudiate all such
QFCs, or (iii) retain all such QFCs. The data required by the
counterparty master data lookup table includes the counterparty
identifier (CP.2, which must be the current LEI maintained by the
counterparty if the counterparty has obtained an LEI), the legal name
of the counterparty (CP.4), domicile of counterparty (CP.5),
jurisdiction of incorporation (CP.6), identification of the immediate
parent of the counterparty (CP.7-CP.9), and identification of the
ultimate parent of the counterparty (CP.10-CP.12).
g. Booking Location Master Data Lookup Table
In the Proposed Rules, the maintenance of information related to
the booking location of a QFC position was required under Table A-1. To
simplify the tables and facilitate the updating of this information,
the Secretary has decided that some of this information should be
maintained in a separate table. The information required by the booking
location table, which includes the booking location identifier and
booking unit or desk identifier, description and contact information,
will enable the receiver to determine where the trade is booked and
settled and understand the purpose of the position. As noted above,
Table A-1 as
[[Page 75643]]
proposed had also required information pertaining to a point of contact
responsible for the position. Based on consideration of comments
received, the Secretary determined that this information is not
necessary to the FDIC so long as records entities are required to
provide current information on the booking location and the booking
unit or desk pertaining to QFCs.
h. Safekeeping Agent Master Data Lookup Table
In the Proposed Rules, the maintenance of information relating to
the safekeeping agent for collateral securing a QFC position was
required by Table A-2. To simplify the tables and facilitate updating
this information, the Secretary has decided to maintain the detailed
information as to safekeeping agent in a separate table. The data
required by this table includes the safekeeping agent identifier, name,
and point of contact information (SA.2-SA.7). The information in this
table must be capable of being provided with respect to each
safekeeping agent for collateral of QFCs of a records entity, whether
the safekeeping agent is a third party, the counterparty to the QFC
secured by such collateral, or the records entity itself.
III. Administrative Law Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.)
requires an agency to consider whether the rules it promulgates will
have a significant economic impact on a substantial number of small
entities. Congress enacted the RFA to address concerns related to the
effects of agency rules on small entities, and the Secretary is
sensitive to the impact the Final Rules may impose on small entities.
The RFA defines a ``small business'' as having the same meaning as
``small business concern'' under section 3 of the Small Business
Act,\123\ which is defined as an entity that is ``independently owned
and operated'' and is ``not dominant in its field of operation.'' \124\
In this case, the Secretary believes that the Final Rules likely would
not have a ``significant economic impact on a substantial number of
small entities.'' The Dodd-Frank Act mandates that the Secretary
prescribe regulations requiring financial companies to maintain records
with respect to QFCs to assist the FDIC as receiver of a covered
financial company in being able to exercise its rights under the Act
and to fulfill its obligations under sections 210(c)(8), (9), or (10)
of the Dodd-Frank Act. As a result, the economic impact on financial
companies, including any impact on small entities, flows directly from
the Dodd-Frank Act, and not the Final Rules.
---------------------------------------------------------------------------
\123\ See 5 U.S.C. 601(3).
\124\ See 15 U.S.C. 632(a)(1).
---------------------------------------------------------------------------
The RFA requires agencies either to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. As described in the Proposed
Rules, the Secretary, in accordance with section 3(a) of the RFA,
reviewed the Proposed Rules and preliminarily concluded that the
Proposed Rules likely would not have a significant economic impact on a
substantial number of small entities.\125\ However, because the
Secretary did not have complete data at that time to certify this
determination, particularly with regard to affiliated financial
companies, an Initial Regulatory Flexibility Analysis was prepared in
accordance with 5 U.S.C. 603.
---------------------------------------------------------------------------
\125\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The Secretary certifies, pursuant to 5 U.S.C. 605(b), that the
Final Rules will not have a significant economic impact on a
substantial number of small entities under the Small Business
Administration's (``SBA'') most recently revised standards for small
entities, which went into effect on February 26, 2016. As discussed
below, the Secretary has made various changes to reduce the scope and
burden of the rules. However, even apart from these considerations, the
Final Rules are not expected to have a significant economic effect on
any small entities because any entities that would be subject to the
rules as ``records entities'' that would otherwise meet the standards
for small entities would be subsidiaries of large corporate groups and
would therefore not be ``independently owned and operated.''
In the Initial Regulatory Flexibility Analysis, the Secretary
requested comment on whether the Proposed Rules would have a
significant economic impact on a substantial number of small entities
and whether the costs are the result of the Act itself, and not the
Proposed Rules. Specifically, the Secretary requested that commenters
quantify the number of small entities, if any, that would be subject to
the Proposed Rules, describe the nature of any impact on small
entities, and provide empirical and other data to illustrate and
support the number of small entities subject to the Proposed Rules and
the extent of any impact.
The Secretary received comments on the Proposed Rules from trade
associations, asset managers, insurance companies, clearing
organizations, nonprofit organizations, and a private individual. In
general, commenters acknowledged the need for the FDIC to have
appropriate information in order to exercise its role as a receiver
under Title II of the Dodd-Frank Act.\126\ However, while commenters
also requested various modifications to or relief from aspects of the
Proposed Rules that they stated would entail burdens that outweighed
the benefits to the FDIC, none provided comments, empirical data, or
other analyses in response to the Initial Regulatory Flexibility
Analysis or in response to the questions posed by the Secretary
regarding the economic impact on small entities.\127\ As discussed in
detail in section II above, after carefully considering all of the
comments received and consulting with the FDIC, Treasury has adopted
these Final Rules.
---------------------------------------------------------------------------
\126\ See, e.g., Better Markets letter, p. 1; TCH et al. letter,
p. 2; DTCC letter, p. 1-2; CEWG letter, p. 2; SIFMA AMG letter, p.
1.
\127\ See, e.g., TIAA-CREF letter, p. 1; ACLI letter, p. 9; TCH
et al. letter, p. 2. Several commenters also commented on the
potential impact of the Proposed Rules on affiliates of a corporate
group, though such affiliates were not identified as small entities.
See discussion under ``Members of Corporate Groups'' in section
II.A.1.a above.
---------------------------------------------------------------------------
The Proposed Rules, rather than requiring all financial companies
to maintain records with respect to QFCs, would have applied to a
narrower subset of financial companies. Specifically, the Secretary
proposed to exclude from the scope of the Proposed Rules financial
companies that did not meet one of the following three criteria: (1) A
nonbank financial company subject to a determination by the Council
pursuant to section 113 of the Act (12 U.S.C. 5323); (2) a financial
market utility designated pursuant to Section 804 of the Act (12 U.S.C.
5463) as, or as likely to become, systemically important; or (3) have
total assets equal to or greater than $50 billion. At the time the
Proposed Rules were published, each of the financial companies expected
to be subject to the rules under these criteria had revenues in excess
of the SBA's revised standards for small entities that went into effect
on July 22, 2013. The Proposed Rules would also have applied to these
large financial companies' affiliated financial companies if an
affiliated financial company otherwise qualified as a ``records
entity'' and was not an ``exempt entity'' under the Proposed Rules.
However, such affiliated financial
[[Page 75644]]
companies are not independently owned and operated.
As discussed in section II.A.1 above, the Secretary, in response to
comments, determined to make several changes to the definition of
``records entity'' in the Final Rules in order to substantially reduce
the number of entities that will be subject to recordkeeping
requirements. Further, as discussed in section II.C.3 above, the
Secretary determined to include in the Final Rules a de minimis
exemption from the preponderance of the recordkeeping requirements for
certain records entities that have a minimal level of QFC activity.
These changes have the effect of further reducing the likelihood that
the rules would affect a substantial number of small entities. In
addition, the definition of ``records entity'' has been revised in the
Final Rules to refer to members of a corporate group that are
consolidated under accounting standards, which should reduce the number
of entities that would be included as records entities and ensure that
records entities that are members of a corporate group are able to
coordinate their compliance with the recordkeeping requirements of the
rules. The addition in the Final Rules of the requirement that a top-
tier financial company of a corporate group that has multiple records
entities must be able to generate a single, compiled set of the records
for all records entities in the corporate group that it consolidates or
are consolidated with it would not affect the number of small entities
that are subject to the rule as no such top-tier financial company
would be a small entity.
As discussed above, the Final Rules would only affect large
financial companies and certain of their affiliates that meet the
definition of a records entity. Previously, the Secretary proposed that
the recordkeeping requirements in the Proposed Rules would be
applicable to all affiliated financial companies in a large corporate
group that meet the definition of ``records entity,'' regardless of
their size, because excluding records entities, including small
entities, could significantly impair the FDIC's right to enforce
certain QFCs of affiliates of covered financial companies under section
210(c)(16) of the Act. The Secretary has been advised by the FDIC that,
based on its experience with Part 371, the FDIC as receiver should be
able to exercise its statutory rights and duties under the Dodd-Frank
Act relating to QFCs without having access to standardized records for
any records entity that is a party to 50 or fewer open QFC positions.
Thus the Secretary has determined that a de minimis exemption from
maintaining the records described in section 148.4 of the Final Rules,
other than the records described in section 148.4(i), is appropriate
for records entities that have such a minimal level of QFC activity.
This change has the effect of further reducing the likelihood that the
Final Rules would affect a substantial number of small entities.
Although it is unlikely that any small entities would be affected
because affiliated members generally do not meet the definition of
``small entity,'' this revision will minimize the burden faced by
affiliated members of a corporate group.
Based on current information and discussions with staff of several
of the PFRAs who are familiar with financial company operations and
have experience supervising financial companies with QFC portfolios,
the Secretary believes that the large corporate groups that would be
subject to the Final Rules would likely comply with the rules by
utilizing a centralized recordkeeping system, whether by adapting an
existing system or establishing a new system, that would obviate the
need for each member of such corporate group, including small entity
members of the corporate group, to maintain its own recordkeeping
system in order to comply with the rules. This is expected to have the
effect of substantially reducing the burden of compliance with the
rules on particular small entity members, if any, of a corporate group
subject to the rules. The Secretary requested information and comment
in the Initial Regulatory Flexibility Analysis on the role of entities
responsible for the centralized recordkeeping systems and whether such
entities are small entities to which the Proposed Rules would apply.
While several commenters addressed the impact of the Proposed Rules in
general on information recordkeeping systems,\128\ none specifically
addressed the role of entities responsible for such systems and whether
any such entities are small entities.
---------------------------------------------------------------------------
\128\ See DTCC letter, p. 10; OCC letter, p. 12; TCH et al.
letter, pp. 22-23; TIAA letter, p. 2
---------------------------------------------------------------------------
As discussed in more detail above, the Final Rules impose certain
recordkeeping requirements on records entities. A records entity is
required to maintain all records described in section 148.4 of the
Final Rules, be able to generate data in the format set forth in the
appendix to the Final Rules, and be capable of transmitting those
records electronically to the records entity's PFRA and the FDIC. The
Final Rules include recordkeeping requirements with respect to
position-level data, counterparty-level data, legal documentation data,
collateral detail data, corporate organization data, and a list of
vendors directly supporting QFC-related activities of the records
entity and the vendors' contact information.
As discussed in the Initial Regulatory Flexibility Analysis, based
on discussions with several of the PFRAs that are familiar with
financial company operations and have experience supervising financial
companies with QFCs portfolios, the Secretary believes that records
entities are already maintaining, as part of their ordinary course of
business, most of the QFC information required to be maintained under
the Final Rules, which minimizes the potential economic impact.\129\
However, the Secretary acknowledges that the Final Rules' form and
availability requirements may impose additional costs and burdens on
records entities.
---------------------------------------------------------------------------
\129\ Registered derivatives clearing organizations and clearing
agencies, given the nature of their business, do not currently
maintain much of the required records and have been provided a
conditional exemption under the Final Rules for the reasons
discussed under ``Clearing Organizations'' in section II.A.1.a
above.
---------------------------------------------------------------------------
The Secretary recognizes that there may be particular types of QFCs
or counterparties for which more limited information may be sufficient
to enable the FDIC to exercise its rights under the Act and fulfill its
obligations under sections 210(c)(8), (9), or (10) of the Act. The
Final Rules provide the Secretary with the discretion to grant
conditional or unconditional exemptions from one or more of the
requirements of the Final Rules, which could include exemptions from
the recordkeeping requirements regarding particular types of QFCs or
counterparties. In addition, section 148.1(d)(3) of the Final Rules
provides the Secretary with the authority to grant extensions of time
for compliance purposes.
The Secretary requested in the Initial Regulatory Flexibility
Analysis information and comment on any costs, compliance requirements,
or changes in operating procedures arising from application of the
Proposed Rules on small entities.\130\ Most commenters offered general
comments on the costs of compliance requirements and changes in
operating procedures.\131\ These comments have been addressed by the
Secretary in section II, above. However, none of these commenters
quantified the costs of compliance by small entities or otherwise
provided
[[Page 75645]]
empirical data regarding the costs of compliance by small
entities.\132\ Moreover, the Secretary received no comments on its
discussion of the impact on small entities in the Initial Regulatory
Flexibility Analysis. In light of the foregoing and the considerations
discussed above, the Secretary certifies the Final Rules will not have
a significant economic effect on a substantial number of small
entities.
---------------------------------------------------------------------------
\130\ See 80 FR 966, 986.
\131\ See, e.g., ACLI letter, pp. 17-19; SIFMA AMG letter, pp.
11-14.
\132\ One commenter stated that the Secretary's estimate of the
cost of initial compliance for most financial groups subject to the
rules will, on an individual basis, far exceed the Secretary's
estimation of the total industry-wide compliance cost included in
the Secretary's Paperwork Reduction Act analysis of the Proposed
Rules; however, the commenter did not otherwise offer an estimate of
compliance costs or estimate the costs of compliance by small
entities specifically. See TCH et al. letter, pp. 3-4.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
Certain provisions of the Final Rules contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''). An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid control number. The collection of
information requirements in the Final Rules have been submitted by the
Secretary to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA, 44 U.S.C. 3507(d). The title of this
collection is ``Qualified Financial Contracts Recordkeeping Related to
Orderly Liquidation Authority.'' The collection of information has been
assigned OMB Control No. 1505-0256.
Previously, the Secretary requested comments on the collection of
information burdens associated with the Proposed Rules. Specifically,
the Secretary asked for comment concerning:
(1) Whether the proposed information collection is necessary for
the proper performance of agency functions, including whether the
information will have practical utility;
(2) The accuracy of the estimated burden associated with the
proposed collection of information, including the validity of the
methodology and assumptions used;
(3) How to enhance the quality, utility, and clarity of the
information required to be maintained;
(4) How to minimize the burden of complying with the proposed
information collection, including the application of automated
collection techniques or other forms of information technology;
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to maintain the information; and
(6) Estimates of (i) the number of financial companies subject to
the Proposed Rules, (ii) the number of records entities that are
parties to an open QFC or guarantee, support, or are linked to an open
QFC, and (iii) the number of affiliated financial companies that are
parties to an open QFC or guarantee, support, or are linked to an open
QFC of an affiliate.
Commenters on the Proposed Rules generally acknowledged the need
for the FDIC to have appropriate information in order to exercise its
role as a receiver under Title II of the Act. Commenters also requested
various modifications to or relief from aspects of the Proposed Rules
that they stated would entail burdens that outweighed the benefits to
the FDIC. This included recommendations that the records required to be
maintained under the Proposed Rules be tailored more narrowly to
require only data that is critical to the FDIC's QFC transfer
determinations under section 210 of the Act. Several commenters also
remarked generally that the Proposed Rules would entail significant
information technology and systems development challenges.\133\
However, none of the commenters provided comments, empirical data,
estimates of costs or benefits, or other analyses directly addressing
matters pertaining to the PRA discussion.
---------------------------------------------------------------------------
\133\ See DTCC letter, p. 3, 8-11; OCC letter, p. 12; TCH et al.
letter, pp. 19, 22; TIAA-CREF letter, p. 2.
---------------------------------------------------------------------------
The collection of information is required by section 210(c)(8)(H)
of the Act, which mandates that the Secretary prescribe regulations
requiring financial companies to maintain records with respect to QFCs
to assist the FDIC as receiver for a covered financial company in being
able to exercise its rights under the Act and fulfill its obligations
under sections 210(c)(8), (9), or (10) of the Act. The Final Rules
implement these requirements by requiring that a records entity
maintain records with respect to, among other things, position-level
data, counterparty data, legal agreement data (including copies of
agreements governing QFC transactions and open confirmations),
collateral detail data, corporate organization information, and a list
of vendors directly supporting QFC-related activities of the records
entity and the vendors' contact information. The Final Rules require
that a records entity be capable of providing QFC records to its PFRA
and the FDIC within 24 hours of the request of such PFRA. For corporate
groups that have multiple records entities, the top-tier financial
company of the corporate group must be able to generate a single,
compiled set of the records specified in the Final Rules for all
records entities in the corporate group that it consolidates or are
consolidated with it and provide such set of records to its PFRA and
the FDIC within 24 hours of the request of such PFRA and in a format
that allows for aggregation and disaggregation of such data by records
entity and counterparty.
The Final Rules also provide that a records entity may request in
writing an extension of time with respect to the compliance dates
associated with the recordkeeping requirements. The Final Rules further
provide that one or more records entities may request in writing an
exemption from one or more of the recordkeeping requirements. Finally,
the Final Rules provide a de minimis exemption from maintaining the
records described in section 148.4 of the Final Rules, other than the
records described in section 148.4(i), for a records entity that is a
party to 50 or fewer open QFC positions.
Respondents
In the PRA discussion in the Proposed Rules, the Secretary
estimated that approximately 140 large corporate groups and each of
their respective affiliated financial companies that is a party to an
open QFC or guarantees, supports or is linked to an open QFC of an
affiliate and is not an ``exempt entity,'' would meet the proposed
definition of ``records entity.'' The estimate of 140 large corporate
groups includes the four nonbank financial companies subject to a
determination by the Council under section 113 of the Dodd-Frank Act
and the eight financial market utilities designated by the Council
under section 804 of the Dodd-Frank Act as systemically important. The
Proposed Rules also included within the definition of ``records
entity'' financial companies with assets greater than or equal to $50
billion. The Federal Financial Institutions Examination Council
(``FFIEC'') maintains on its public Web site a list of bank holding
companies with total assets of greater than $10 billion, which was used
to identify bank holding companies with assets greater than or equal to
$50 billion. For corporate groups that are not bank holding companies,
SNL Financial, a private vendor that provides a subscription-access
database that aggregates publicly available financial information on
insurance, securities and investment, specialty
[[Page 75646]]
finance, and financial technology companies, as well as financial
statements filed with the SEC and, for broker-dealers, with the
Financial Industry Regulatory Authority, were used to identify
corporate groups with assets greater than or equal to $50 billion as of
December 31, 2013. By reference to these sources, as well as
conversations with the PFRAs, 128 additional corporate groups were
estimated to be subject to the rules.
For purposes of the PRA discussion in the Proposed Rules, the
Secretary estimated that each large corporate group was comprised of
approximately 168 affiliates, resulting in an estimate of 23,325
affiliated financial companies. As noted above, commenters generally
did not provide comments, empirical data, or other analyses directly
addressing the Secretary's estimates in the PRA discussion. As
discussed in detail in section II above, the Final Rules, as adopted,
incorporate several changes to the Proposed Rules, including the
addition to the definition of ``records entity'' of criteria based on
the level of a financial company's derivatives activity, the exclusion
of insurance companies, a conditional exemption for derivatives
clearing organizations, and the inclusion of a de minimis exemption.
Taken together, these changes substantially reduce the scope of
financial companies subject to the recordkeeping requirements of the
Final Rules.
The Secretary estimates that approximately 30 large corporate
groups, and each of their respective affiliated financial companies
that is a party to an open QFC and is not an ``excluded entity,'' will
meet the definition of ``records entity'' in section 148.2(n) upon the
effective date of the Final Rules, compared to the estimate in the
Proposed Rules of 140 large corporate groups. The Secretary estimates
that collectively these 30 corporate groups had approximately $15
trillion in total assets, compared to an estimated $25 trillion in
total assets of the 140 corporate groups that were expected to meet the
definition of ``records entity'' in the Proposed Rules. These estimates
were based on the publicly disclosed financial statements of such
corporate groups as of December 31, 2015 and December 31, 2013,
respectively.
The estimate of 30 large corporate groups was calculated as
follows. There are three categories of financial companies that are
included within the definition of ``records entity'' in the Final Rules
without regard to whether they meet the asset or derivatives
thresholds. The estimate includes the eight U.S. top-tier bank holding
companies currently identified as G-SIBs. Likewise, the estimate
includes the two nonbank financial companies currently subject to a
determination by the Council under section 113 of the Dodd-Frank Act.
There are currently eight financial market utilities designated by the
Council under section 804 of the Dodd-Frank Act as systemically
important. Six of these entities are registered clearing agencies or
derivatives clearing organizations, for which a conditional exemption
has been provided under the Final Rules, though their affiliates may be
subject to the recordkeeping requirements if they are party to open
QFCs.
The estimate also includes large corporate groups that would be
subject to the rules by virtue of the amount of their total
consolidated assets and level of derivatives activity. For bank holding
companies, the FFIEC-maintained list, referenced above, of bank holding
companies with total assets of greater than $10 billion was used to
identify bank holding companies with assets greater than or equal to
$50 billion. The amount of total gross notional derivatives outstanding
and the amount of derivatives liabilities of these bank holding
companies was obtained by reference to the consolidated financial
statements filed with the Federal Reserve by such bank holding
companies on the Federal Reserve's Form FR Y-9C, which are publicly
available on the Federal Reserve's Web site. For corporate groups that
are not bank holding companies, the SNL Financial database referenced
above, as well as financial statements filed with the SEC and, for
broker-dealers, with the Financial Industry Regulatory Authority were
used to identify corporate groups having total assets greater than or
equal to $50 billion and having either greater than or equal to $3.5
billion in derivatives liabilities or greater than or equal to $250
billion in total gross notional derivatives outstanding as of December
31, 2015. By reference to these sources, as well as conversations with
the PFRAs, twelve additional corporate groups were estimated to be
subject to the rules. While the number of corporate groups having total
assets greater than or equal to $50 billion was similar to that
estimated at the time of the issuance of the Proposed Rules, the
addition to the definition of ``records entity'' of criteria based on
the level of a financial company's derivatives activity and the
exclusion of insurance companies significantly reduced the number of
corporate groups estimated to be subject to the rules.
The following table summarizes the calculation of the estimates of
the number and aggregate size of large corporate groups subject to the
Proposed Rules and the Final Rules.
Large Corporate Groups Subject to the Rules
------------------------------------------------------------------------
Proposed rules Final rules
------------------------------------------------------------------------
Subject to a determination that the 8 8
company shall be subject to Federal
Reserve supervision and enhanced
prudential standards pursuant to 12
U.S.C. 5323............................
Subject to a designation as, or as 4 2
likely to become, systemically
important pursuant to 12 U.S.C. 5463...
Identified as a global systemically N/A 8
important bank holding company pursuant
to 12 CFR Part 217.....................
Corporate group (excluding the above) 128 N/A
that has, on a consolidated basis,
greater than $50 billion in total
assets *...............................
Corporate group (excluding the above) N/A 12
that has, on a consolidated basis (1)
greater than $50 billion in total
assets and (2)(i) total gross notional
derivatives outstanding equal to or
greater than $250 billion or (ii)
derivative liabilities equal to or
greater than $3.5 billion *............
-------------------------------
Total corporate groups.............. 140 30
Aggregate total assets *............ ** $25 ** $15
------------------------------------------------------------------------
* Based on data obtained from FFIEC public Web site; SNL Financial, a
private vendor that provides a subscription-access database that
aggregates publicly available financial information on insurance,
securities and investment, specialty finance, and financial technology
companies; financial statements filed with the SEC, Financial Industry
Regulatory Authority, and the Federal Reserve; and conversations with
the PFRAs.
** Trillion.
[[Page 75647]]
The Final Rules would also apply to these large corporate groups'
affiliated financial companies (regardless of their size) if an
affiliated financial company otherwise qualifies as a ``records
entity,'' and is not an ``excluded entity.'' In addition, as referenced
above, the Final Rules will also require the top-tier financial company
of the corporate group to be capable of generating a single, compiled
set of the records specified in the Final Rules for all records
entities in the corporate group that it consolidates or are
consolidated with it and to be capable of providing such a set of
records to its PFRA and the FDIC.
The Secretary estimates that the large corporate groups that will
be subject to the rules collectively have 5,010 affiliated financial
companies that may qualify as records entities. The Secretary
recognizes that, based on a number of factors, the actual total number
of respondents may differ significantly from this estimate. One such
factor is that there is no information available to determine how many
of the affiliated financial companies of a large corporate group are a
party to an open QFC and thus would qualify as records entities. At the
same time, the inclusion and availability of the de minimis exemption
in the Final Rules will have the effect of reducing the number of
affiliated financial companies in many corporate groups subject to the
recordkeeping requirements. Finally, as previously noted, commenters
did not provide requested comments, empirical data, or other analyses
directly addressing the Secretary's estimates of the total number of
respondents for purposes of the PRA discussion. For the foregoing
reasons, the Secretary has concluded it is reasonable to maintain the
estimate of affiliates per corporate group used in the PRA discussion
in the Proposed Rules and therefore to assume that a total of 5,010
affiliated financial companies would qualify as record entities.
The Secretary's recordkeeping, reporting, data retention, and
records generation burden estimates are based on discussions with the
PFRAs regarding their prior experience with initial burden estimates
for other recordkeeping systems. The Secretary also considered the
burden estimates in rulemakings with similar recordkeeping and
reporting requirements.\134\ As noted above, some commenters stated
that certain aspects of the Proposed Rules entailed burdens that
outweighed the benefits to the FDIC. Several commenters also provided
general comments that the recordkeeping requirements of the Proposed
Rules would involve significant information technology and systems
development challenges. In general, commenters did not directly address
the Secretary's estimates and analysis in the PRA discussion.
Nevertheless, the Secretary has taken all comments into consideration
and made certain modifications and adjustments to this PRA discussion
in the Final Rules to reflect those comments. As discussed in section
II above, the Final Rules incorporate numerous changes in response to
commenters' concerns, and this PRA discussion reflects those changes.
---------------------------------------------------------------------------
\134\ See 80 FR 14563 (Mar. 19, 2015); 77 FR 2136 (Jan. 13,
2012); 76 FR 46960 (Aug. 3, 2011); 76 FR 43851 (July 22, 2011); 73
FR 78162 (Dec. 22, 2008).
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In order to comply with the Final Rules, each of the large
corporate group respondents will need to set up its network
infrastructure to collect data in the required format. This will likely
impose a one-time initial burden on the large corporate group
respondents in connection with the necessary updates to their
recordkeeping systems, such as systems development or modifications.
This initial burden is mitigated to some extent because QFC data is
likely already retained in some form by each large corporate group
respondent in the ordinary course of business, but large corporate
group respondents may need to amend internal procedures, reprogram
systems, reconfigure data tables, and implement compliance processes.
Moreover, they may need to standardize the data and create records
tables to match the format required by the Final Rules. In recognition
of this, as discussed in section II.A.3 above, the Final Rules provide
for staggered compliance dates that will provide all records entities
with additional time to comply with the recordkeeping requirements.
Under the Final Rules, all but the very largest institutions will have
at least two years to comply with the rules' requirements.\135\
---------------------------------------------------------------------------
\135\ All records entities and top-tier financial companies will
be required to provide point of contact information to their PFRAs
and the FDIC on the effective date of the rules.
---------------------------------------------------------------------------
As discussed above, the Final Rules also apply to affiliated
financial companies of the large corporate group respondents. The Final
Rules will likely impose a one-time initial burden on the affiliated
financial companies in connection with necessary updates to their
recordkeeping systems, such as systems development or modifications.
These burdens will vary widely among affiliated financial companies. As
noted herein and as discussed in section II.C.3 above, the Final Rules
provide a de minimis exemption from the recordkeeping and reporting
requirements for certain records entities that have a minimal level of
QFC activity, which the Secretary believes will significantly reduce
the number of affiliated financial companies subject to the
recordkeeping and reporting requirements of the Final Rules.
The Secretary believes that the large corporate groups subject to
the Final Rules are likely to rely on centralized systems to comply
with most of the recordkeeping requirements, as set forth herein, for
the QFC activities of all affiliated members of the corporate group.
The entity responsible for each large corporate group's centralized
system will likely operate and maintain a technology shared services
model with the majority of the technology applications, systems, and
data shared by the multiple affiliated financial companies within the
corporate group. Therefore, the majority of the recordkeeping burden
stemming from the Final Rules will be borne by the entity responsible
for each large corporate group's centralized systems, while relatively
little initial and ongoing recordkeeping burden will be imposed on
their affiliated financial companies. The affiliated financial
companies will likely have a much lower burden because they can utilize
the technology and network infrastructure operated and maintained by
the entity responsible for the centralized system at their respective
large corporate group. Similarly, the Secretary believes that the
affiliated financial companies will rely on the entities responsible
for the centralized systems to perform the requirements under section
148.3(a)(1)(ii).
Similarly, the Secretary believes that affiliated financial
companies will rely on large corporate group respondents to submit any
requests for extensions of time under section 148.1(d)(3) or requests
for exemption from one or more requirements of the Final Rules under
section 148.3(c)(3).
Estimated Paperwork Burden
Recordkeeping
Estimated number of respondents
Estimated number of large corporate groups: 30.
Estimated number of affiliated financial companies: 5,010.
Total estimated initial recordkeeping burden
Estimated average initial burden hours per respondent: 7,200 hours
for large corporate groups, 0.5 hours for affiliated financial
companies.
[[Page 75648]]
Estimated frequency: One-time, spread over applicable compliance
period.
Estimated total initial recordkeeping burden: 216,000 hours for
large corporate groups and 2,505 hours for affiliated financial
companies.
Total estimated annual recordkeeping burden
Estimated average annual burden hours per respondent: 240 hours for
large corporate groups, 0.5 hours for affiliated financial companies.
Estimated frequency: Annually.
Estimated total annual recordkeeping burden: 7,200 hours per year
for large corporate groups and 2,505 hours per year for affiliated
financial companies.
The initial and annual recordkeeping burden is imposed by the Dodd-
Frank Act, which requires that the Secretary prescribe regulations
requiring financial companies to maintain records with respect to QFCs
to assist the FDIC as receiver of a covered financial company in being
able to exercise its rights under the Act and fulfill its obligations
under sections 210(c)(8), (9), or (10) of the Act.
Reporting
Estimated number of respondents: 30.
Total estimated annual reporting burden
Estimated average annual burden hours per respondent: 50 hours.
Estimated frequency: Annually.
Estimated total annual reporting burden: 1,500 hours per year.
As discussed in more detail in section III.C.6.a below, the
Secretary estimates the potential total costs of the initial
recordkeeping burden associated with the Final Rules, including the
burden hours estimated above plus estimated technology and systems
development and modification costs, to be $36,631,995. The potential
total costs of annual recordkeeping and reporting burdens associated
with the Final Rules, including the burden hours estimated above, are
estimated to be $1,248,795.\136\
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\136\ All cost and wage estimates are in nominal dollars and
have not been adjusted for inflation.
---------------------------------------------------------------------------
C. Executive Orders 12866 and 13563
It has been determined that the Final Rules are a significant
regulation as defined in section 3(f)(1) of Executive Order 12866, as
amended. Accordingly, the Final Rules have been reviewed by OMB. The
Regulatory Assessment prepared by the Secretary for the Final Rules is
provided below.
1. Description of the Need for the Regulatory Action
The rulemaking is required by the Dodd-Frank Act to implement the
QFC recordkeeping requirements of section 210(c)(8)(H) of the Act.
Section 210(c)(8)(H) generally provides that if the PFRAs do not
prescribe joint final or interim final regulations requiring financial
companies to maintain records with respect to QFCs within 24 months
from the date of enactment of the Act, the Chairperson of the Council
shall prescribe such regulations in consultation with the FDIC. The
Secretary, as Chairperson of the Council, is adopting the Final Rules
in consultation with the FDIC because the PFRAs did not prescribe such
joint final or interim final regulations. The recordkeeping required in
the Final Rules is necessary and appropriate to assist the FDIC as
receiver to exercise its rights and fulfill its obligations under
sections 210(c)(8), (9), and (10) of the Dodd-Frank Act, by enabling it
to assess the consequences of decisions to transfer, disaffirm or
repudiate, or allow the termination of QFCs with one or more
counterparties.
The recent financial crisis has demonstrated that management of QFC
positions, including steps undertaken to close out such positions, can
be an important element of a resolution strategy which, if not handled
properly, may magnify market instability. Large, interconnected
financial companies may hold very large positions in QFCs involving
numerous counterparties. A disorderly unwinding of these QFCs,
including the mass exercise of QFC default rights and the rapid
liquidation of collateral, could cause severe negative consequences for
not only the counterparties themselves but also U.S. financial
stability. A disorderly unwind could result in rapid liquidations, or
``fire sales,'' of large volumes of financial assets, such as the
collateral that secures the contracts, which can in turn weaken and
cause stress for other firms by lowering the value of similar assets
that they hold or have pledged as collateral to other counterparties.
In order for the FDIC to effectuate an orderly liquidation of a
covered financial company under Title II, the FDIC would need to make
appropriate decisions regarding whether to transfer QFCs to a bridge
financial company or other solvent financial institution or leave QFCs
of the covered financial company in receivership. Determining whether
to transfer QFCs in a manner that complies with the requirements of
Title II and ensuring continued performance on any QFCs transferred
requires detailed and standardized records. It would not be possible
for the FDIC to fully analyze a large amount of QFC information in the
short time frame afforded by Title II unless such information is
readily available to the FDIC in a standardized format designed to
enable the FDIC to conduct the analysis in an expeditious manner.
As referenced in section I above, Title II requires the FDIC as
receiver to exercise its authorities, to the greatest extent
practicable, in a manner that maximizes value, minimizes losses, and
mitigates the potential for serious adverse effects to the financial
system. Title II also requires that the aggregate amount of liabilities
of a covered financial company that are transferred to a bridge
financial company from a covered financial company not exceed the
aggregate amount of the assets of the covered financial company that
are transferred to the bridge financial company from the covered
financial company. If it does not have the records required by the
rules, the FDIC may be unable to assess the financial position
associated with certain QFCs and thus may not be able to determine how
the transfers would affect the financial viability of a bridge
financial company or other transferee institution, how the transfers
would affect financial stability, whether the transfers would serve to
maximize value and minimize losses in the disposition of assets of the
receivership, and whether the transfers would cause the amount of
aggregate transferred liabilities of the bridge financial company to
exceed the amount of aggregate transferred assets.
Furthermore, as discussed in sections I and II above, if the FDIC
as receiver decides to transfer any QFC with a particular counterparty,
Title II requires that it must transfer all QFCs between the covered
financial company and such counterparty and any affiliate of such
counterparty to a single financial institution, and if the FDIC as
receiver decides to disaffirm or repudiate any QFC with a particular
counterparty, it must disaffirm or repudiate all QFCs between the
covered financial company and such counterparty and any affiliate of
such counterparty. If the FDIC were to lack information about the
affiliates of the counterparties to the QFCs of the covered financial
company, it might not be able to transfer the QFCs given its
uncertainty as to whether such a transfer would violate this
requirement.
The FDIC's inability to effect the transfer of QFCs for any of the
above reasons could have significant adverse effects on financial
stability in circumstances in which transferring such QFCs may have
prevented the unnecessary termination of QFCs and fire sales of
collateral securing these QFCs. Even after a transfer decision is made,
the records required by the rule are necessary to ensure that the
bridge
[[Page 75649]]
financial company and its subsidiaries continue to perform their
obligations on any QFCs that are transferred. The inadvertent failure
to perform their obligations under the QFCs, including meeting margin
requirements and other obligations, could result in counterparties
terminating QFCs, asset fire sales, and the failure of the bridge
financial company.
2. Literature Review
In assessing the need for these recordkeeping requirements, we have
reviewed two categories of academic literature. As highlighted above,
one of the potential channels through which the disorderly unwinding of
QFCs could cause severe negative consequences for both the
counterparties themselves and U.S. financial stability is through the
rapid liquidation of collateral. The disorderly failure of a financial
company with a large QFC portfolio may lead QFC counterparties to
exercise their contractual remedies and rights by closing out positions
and liquidating collateral, while also potentially increasing
uncertainty in both derivatives and asset markets. This could lead to
lower asset prices, decrease the availability of funding, and increase
the likelihood that other financial companies also are forced to
liquidate assets. To assess the potential impact of rapid liquidations,
we have reviewed economic studies of fire sales among financial
companies. Second, while there is limited academic literature
specifically focused on the cost of a disorderly unwinding of a large,
complex financial company's QFC portfolio, there has been recent
literature analyzing the cost of the Lehman Brothers bankruptcy in
2008, which may be illustrative of the potential costs.\137\
---------------------------------------------------------------------------
\137\ Lehman Brothers Holdings, Inc. (``Lehman Brothers''),
Lehman Brothers Inc. (the U.S. registered broker-dealer), and Lehman
Brothers International (Europe) (the UK registered broker-dealer)
were subject to separate liquidation proceedings.
---------------------------------------------------------------------------
a. Fire Sales Among Financial Institutions
The economic literature on financial company fire sales offers
insight into their potential internal and external impacts. While not
directly addressing QFCs, the fire sale literature can be applied to
the potential impact of the rapid liquidation of QFC collateral that
might occur in a disorderly unwinding of a large QFC portfolio. As
noted above, the recordkeeping required by the Final Rules is necessary
to assist the FDIC in being able to make decisions regarding whether to
transfer QFCs of a covered financial company to a bridge financial
company or other solvent financial institution or to retain the QFCs in
the covered financial company in receivership. Transferring QFCs, if
appropriate, may prevent the mass exercise of QFC default rights and a
corresponding fire sale of assets held as collateral for those QFCs.
Principles of Fire Sales among Financial Companies. According to
the literature, a fire sale can occur when a company cannot pay its
creditors without selling assets. During a fire sale, assets sold may
be heavily discounted below their fundamental values, depending on the
market of participating buyers. If buyers are other investors in the
asset class or classes being sold (``specialists''), prices may decline
little. However, if the fire sale occurs during a financial crisis when
uncertainty is higher and many specialists, including financial
companies, may be constrained by solvency or liquidity pressures, they
may not participate in the other side of the market. As a result,
prices may fall substantially, to a level at which buyers who would
only buy the assets in question at a large discount enter the market.
Low sale prices may cause other financial companies to reduce the value
at which they hold similar assets on their books when marking to
market, which may trigger a downward spiral marked by more firms in
distress (Shleifer and Vishny, 2011).\138\ In addition, because many
financial companies rely upon short-term sources of financing, such as
repurchase agreements, the falling asset prices and heightened
uncertainty may contribute to liquidity pressures as these financing
sources withdraw funding or demand more collateral. This may force even
solvent financial companies to sell assets in order to deleverage,
decrease the size of their balance sheets, and reduce risk. This self-
reinforcing cycle can result in additional fire sales, and eventually,
precipitate or magnify a financial crisis.
---------------------------------------------------------------------------
\138\ Shleifer, A, and Vishny, R. (2011). Fire Sales in Finance
and Macroeconomics. Journal of Economic Perspectives 25: 29-48.
---------------------------------------------------------------------------
Shleifer and Vishny (2011) believe that before the September 2008
Lehman Brothers bankruptcy many specialist buyers, including most
financial companies, were active in the market, but after the Lehman
bankruptcy most of them were unwilling to buy assets, causing security
prices to plunge, and prompting fund withdrawals, collateral calls, and
self-reinforcing fire sales. This cycle of price collapses and
deleveraging increased the fragility of the financial system, and
disrupted financial intermediation.
At the time of a fire sale both seller and non-seller financial
companies may curtail their lending, thereby imposing additional social
costs associated with reduced financial intermediation. Shleifer and
Vishny (2010) \139\ use a three-period model of bank lending to
illustrate the dynamics. They show that, in normal times,
securitization can lead to higher lending volumes and earnings, but
market sentiment shocks can quickly reverse these outcomes. When banks
are highly leveraged, they may be more vulnerable to unanticipated
shocks. A severe shock can lead them to liquidate assets in fire sales,
fostering industry-wide asset price declines and weakening the banking
system. In that environment, banks may forego lending, both to meet
capital requirements and to preserve the capacity to purchase deeply
discounted assets in the future. This credit contraction may reduce
economic welfare due to a large number of potentially profitable
investments that do not receive financing. He et al. (2010) \140\ and
Ivashina and Scharfstein (2010) \141\ offer evidence that financial
companies used spare balance sheet capacity to purchase discounted
securities after the financial crisis rather than to increase lending.
Hence, foregone lending during a crisis is a potential social cost.
---------------------------------------------------------------------------
\139\ Shleifer, A. and Vishny, R. (2010). Asset Fire Sales and
Credit Easing. National Bureau of Economic Research working paper
15652.
\140\ He, Z., Khang, I.G., and Krishnamurthy, A. (2010). Balance
Sheet Adjustments During the 2008 Crisis. IMF Economic Review 58:
118-156.
\141\ Ivashina, V. and Scharfstein, D. (2010). Bank Lending
During the Financial Crisis of 2008. Journal of Financial Economics
97: 319-338.
---------------------------------------------------------------------------
Empirical Estimates of the Economic Effects of Fire Sales. The
literature provides empirical estimates of the economic effects of
asset fire sales. Research suggests both the potential direct price
discount effect and the indirect spillover effects of fire sales are
economically substantial. Although this body of work does not
necessarily target financial companies, it provides broadly applicable
insights.
Coval and Stafford (2007) \142\ compare stock transactions by
mutual funds under normal conditions and fire sale conditions from
1980-2004. The study regards high volumes of concurrent capital
outflows from mutual funds as creating stock fire sale conditions when
they force several funds to sell substantial amounts of underlying
stock (the same stocks may be sold by multiple investment funds that
are
[[Page 75650]]
experiencing similar stresses). It finds a negative 7.9 percent average
abnormal stock return in the two quarters preceding and including the
distressed selling of a stock by mutual funds. This stock price dip
tends to rebound after the high sales volumes dissipate, which the
authors point out is consistent with fire sale dynamics, as liquidity
providers earn abnormal positive returns after a crisis period and
stock prices revert to reflect their fundamental values.
---------------------------------------------------------------------------
\142\ Coval, J. and Stafford, E. (2007). ``Asset Fire Sales (and
Purchases) in Equity Markets.'' Journal of Financial Economics 86:
479-512.
---------------------------------------------------------------------------
Dinc, Erel, and Liao (2015) \143\ find industry-adjusted distressed
asset sale discounts of 8 to 9 percent when a firm buys equity shares
of target firms in distressed industries in the 2000-12 period. The
model controls for target firm size, liquidity, leverage, and
profitability, and results are robust to alternative definitions of
distressed firms, analytic periods, and industry classifications. The
authors consider the estimated discounts to be a lower-bound for fire
sale discounts in less liquid assets than equities, such as real assets
or debt securities, which may be more difficult to sell during periods
of distress.
---------------------------------------------------------------------------
\143\ Dinc, S., Erel I., and Liao, R. (2015). ``Fire Sale
Discount: Evidence from the Sale of Minority Equity Stakes.'' Ohio
State University Fisher College of Business working paper 2015-03-
11.
---------------------------------------------------------------------------
While ample research documents the costs of fire sales to
distressed firms selling assets, little analytic emphasis has been
placed on the effect of fire sales on asset buyers. A recent study by
Meier and Servaes (2015) \144\ examines the direct effects of fire sale
purchases on the stock returns of the acquiring firms. Using data for
1982-2012, their model finds abnormal stock price increases of roughly
2 percent among firms buying assets or entire companies under fire sale
conditions, compared to purchasing during normal economic
conditions.\145\ The result is robust to model specifications with
alternative control variables, and buyer returns are inversely
associated with the level of liquidity in the market and the potential
for alternative uses for the assets. The authors conclude that when the
gains to firms buying assets during fire sales are included in the
estimates, the welfare costs of fire sales may be lower than previously
expected. However, the study does not consider the negative spillover
effects of fire sales that may infect other firms in the seller's
industry, and is not intended to be a full welfare analysis.
---------------------------------------------------------------------------
\144\ Meier, J.A. and Servaes, H. (2015). ``The Bright Side of
Fire Sales.'' London Business School working paper.
\145\ The model uses an event study approach to study a three-
day period starting one day before the transaction announcement.
---------------------------------------------------------------------------
In contrast to studies of the direct discounts or stock returns
associated with asset transactions during fire sales, Duarte and
Eisenbach (2015) \146\ assess the indirect spillover costs of fire
sales. They develop a model to assess vulnerability to fire sale
spillovers, and find substantial negative economic effects. Based on
several assumptions developed by the authors, the model estimates that
from July 2008 to March 2014, an exogenous 1 percent decline in the
price of assets financed with repos leads to average fire sale losses
of 8 percent of total equity capital in the broker-dealer sector. The
authors conclude that asset fire sale spillovers are an important part
of overall risk to the financial system.
---------------------------------------------------------------------------
\146\ Duarte, F. and Eisenbach, T.M. (2015). ``Fire Sale
Spillovers and Systemic Risk.'' Federal Reserve Bank of New York
Staff Reports, No. 645.
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Potential Effects on Lending. As predicted by the theoretical
models discussed above, empirical research shows bank lending declined
sharply during the crisis. Ivashina and Scharfstein (2010) show that in
August through December 2008, banks that depended more heavily on
short-term debt (other than insured deposits), reduced their business
lending by significantly more than banks less dependent on short-term
debt financing. At the time of the Lehman bankruptcy, the paper
identifies two channels driving this result that collectively
constituted a ``run'' on financial companies. First, short-term
creditors refused to roll over their unsecured commercial paper loans
and repo lenders increased collateral requirements, which particularly
constrained financial companies dependent on short-term credit for a
significant share of their financing. Second, borrowers substantially
increased draws on their existing credit lines ``to enhance their
liquidity and financial flexibility during the credit crisis.'' In
particular, financial companies that co-syndicated credit lines with
Lehman Brothers were more likely to experience larger credit line
drawdowns after the Lehman failure, and reduced their new lending more
than those without co-syndication relationships with Lehman. Ivashina
and Scharfstein conclude the results are consistent with a decline in
the supply of funding as a result of the run associated with the Lehman
event.
On the borrower side, Campello et al. (2010) \147\ surveyed the
chief financial officers of 1,050 nonfinancial firms in the United
States, Europe, and Asia and found that those that identified their
firms as ``financially constrained'' \148\ during the financial crisis
cut back more on capital and technology investments compared to those
that identified their firms as ``financially unconstrained.'' They also
cut marketing expenditures by significantly greater margins, and shed
far more employees (financially constrained firms planned to cut 10.9
percent of their personnel in 2009, while financially unconstrained
firms planned to shed 2.7 percent). The survey revealed that during the
crisis, 86 percent of constrained firms reported foregoing attractive
investments, compared to 44 percent of unconstrained firms. This
suggests the crisis-related decline in bank credit supply directly
contributed to the reduction in constrained firms' investments, and
imposed associated economic effects.
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\147\ Campello, M., Graham, J., and Harvey, C. (2010). The Real
Effects of Financial Constraints: Evidence from a Financial Crisis.
Journal of Financial Economics 97: 470-487.
\148\ Derived from survey respondents' self-assessments of their
financial condition.
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b. Costs of Lehman Brothers Bankruptcy
Numerous researchers have provided broad estimates of the economic
costs of the 2007-09 financial crisis (see GAO (2013) \149\ for a
useful review). This section focuses more narrowly on the terminations
of derivative contracts associated with the Lehman bankruptcy to help
illustrate the potential costs of unwinding the derivatives portfolio
of a large, complex financial company. While this particular example
occurred under the U.S. Bankruptcy Code rather than as a Title II
orderly liquidation, the disorderly unwind and disruptions that
resulted are indicative of the potential negative consequences that
could result from a situation in which the FDIC as receiver in a Title
II resolution is unable to make informed decisions as to whether to
transfer a QFC because it does not have adequate records.
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\149\ Government Accountability Office, Financial Regulatory
Reform: Financial Crisis Losses and Potential Impacts of the Dodd-
Frank Act, GAO-13-180 (January 16, 2013).
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The net worth of Lehman Brothers derivative positions at the time
of bankruptcy on September 15, 2008 totaled $21 billion, with 96
percent representing over-the-counter (OTC) positions.\150\ The
portfolio consisted of more than 6,000 OTC derivative
[[Page 75651]]
contracts involving over 900,000 transactions. Fleming and Sarkar's
(2014) \151\ detailed assessment of the Lehman Brothers bankruptcy
finds the overall recovery rate of all allowed unsecured claims (not
limited to QFCs) amounted to roughly 28 percent, a rate the authors
describe as low relative to both an estimated 59 percent for other
financial company failures and 40 percent for failures occurring in
recessions.
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\150\ Most derivatives were held in several subsidiaries
specializing in derivatives and related instruments. Since Lehman
had numerous subsidiaries with intermingled interests, we simplify
the discussion by describing them as if they were a single entity,
except when specificity is necessary for descriptive accuracy.
\151\ Fleming, M. and Sarkar, A. (2014). The Failure Resolution
of Lehman Brothers. Economic Policy Review 20(2). Federal Reserve
Bank of New York.
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We use a framework that divides costs associated with derivatives
resolution into private costs and public (external) costs. Private
costs consist of direct losses to derivatives counterparties from
unrecovered claims, indirect costs to derivatives counterparties from
loss of hedged positions, costs to other Lehman Brothers creditors in
the bankruptcy proceeding due to reductions in recovery values
resulting from the termination and settlement of OTC derivatives,
losses to the Lehman estate from excess collateral transfers during
bulk sales of exchange-traded derivatives, and litigation and
administrative expenses. While we find no literature that assesses the
public costs directly attributable to the resolution of Lehman's
derivatives portfolio, below we examine the literature assessing the
public impact of Lehman's failure more broadly.
While rigorous estimates of the value of each cost element listed
above would be ideal, in reality we are constrained by a lack of
publicly available data. Therefore, this section combines qualitative
descriptions of costs with limited quantitative information when
available, in an effort to provide insight on the costs of resolving
Lehman's QFC portfolio under the bankruptcy proceedings.
Private Derivatives Counterparty Costs: Unrecovered Claims.
Estimates of bankruptcy claim recovery rates of OTC derivative
counterparties (excluding Lehman affiliate claims) are reported in the
literature at the Lehman subsidiary level, and vary widely, ranging
from 31 percent for Lehman Brothers Special Financing (the largest
Lehman derivatives entity) to 100 percent each for Lehman Brothers OTC
Derivatives, Lehman Brothers Derivatives Products, and Lehman Brothers
Financial Products, as of March 27, 2014 (Fleming and Sarkar (2014)).
Still the authors emphasize that, ``many counterparties of Lehman's OTC
derivatives suffered substantial losses.''
Private Derivatives Counterparty Costs: Loss of Hedged Positions. A
key reason for many counterparties to acquire derivative positions is
to hedge against potential future market developments. These hedges
reduce uncertainties and serve as valuable risk management instruments.
Fleming and Sarkar (2014) suggest Lehman's abrupt bankruptcy took
counterparties by surprise, and allowed them little time to assess
their derivative positions facing Lehman, decide whether to terminate
contracts, and rehedge their positions as needed.\152\ Therefore, many
counterparties lost their hedged positions within a brief period and
were unexpectedly exposed to risks until new positions could be
established. We find no estimates of the costs of these lost hedges in
the literature.
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\152\ Fleming and Sarkar believe the selection of the
termination date for safe harbor purposes influenced this. They
write (p. 25), ``Although Lehman filed for bankruptcy protection at
about 1:00 a.m. on Monday, September 15, 2008, the termination date
was set as Friday, September 12 for derivatives subject to automatic
termination. Normally, nondefaulting derivatives counterparties of
Lehman would have attempted to hedge their positions on Monday to
mitigate expected losses on their position. However, they could not
do so since their positions were deemed to have terminated two days
earlier.''
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Private Costs to the Entire Lehman Bankruptcy Estate: Settlement of
OTC Derivatives. Fleming and Sarkar (2014) note that the settlement of
Lehman's OTC derivatives claims may have also resulted in significant
losses to the Lehman bankruptcy estate. Derivatives valuation claims
are generally based on replacement costs and they note that due to the
large prevailing bid-ask spreads at the time of Lehman's bankruptcy
filing, replacement costs may have diverged significantly from fair
value. During the settlement process the Lehman estate received $11.85
billion in OTC derivatives receivables by January 10, 2011. It is
unclear how much in additional receivables may have been ``lost'' by
Lehman due to the termination and settlement of contracts following its
bankruptcy filing. The literature notes that the relatively abrupt
timing of the bankruptcy filing may have also influenced the magnitude
of losses. Valukas (2010) suggested that Lehman insufficiently planned
for the possibility of bankruptcy, such that management only began to
plan seriously for bankruptcy a few days before the bankruptcy filing.
A bankruptcy court document \153\ cites a ``turnaround specialist''
advising Lehman, Bryan Marsal, as telling the court-appointed examiner
that the sudden bankruptcy resulted in the loss of 70 percent of $48
billion of receivables from derivatives that could have been unwound.
Yet, the same document notes that Lehman counsel Harvey Miller did not
think the rushed filing had an adverse impact on the estate (Valukas
2010). These accounts appear anecdotal and no information is provided
on the derivation of the figures cited by Marsal.
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\153\ Valukas, A. (2010). ``Report of the Examiner in the
Chapter 11 Proceedings of Lehman Brothers Holdings Inc.'' March 11.
Accessed at: http://jenner.com/lehman/.
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Private Costs to the Entire Lehman Bankruptcy Estate: Settlement of
Exchange-traded Derivatives. Wiggins and Metrick (2015) \154\ report
that three days following the Lehman bankruptcy filing, the derivatives
exchange holding its accounts sold them through a bulk auction to three
buyer entities, who assumed the positions taken in the derivatives
contracts. The transactions included transfer of $2 billion in Lehman
collateral and clearing deposits to the buyers, which exceeded the
market value of the obligations by roughly $1.2 billion. This excess
collateral value was considered a loss to Lehman by the bankruptcy
examiner.
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\154\ Wiggins, R.Z. and Metrick, A. (2015). ``The Lehman
Brothers Bankruptcy G: The Special Case of Derivatives.'' Yale
Program on Financial Stability Case Study 2014-3G-V1.
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Private Costs: Litigation and Administrative. The extended duration
of the OTC derivatives settlement process included multiple court
petitions, procedure approvals, settlement mechanisms, and legal
challenges. While 81 percent of derivative contracts in claims against
Lehman were terminated by November 13, 2008, the final settlement
process moved more deliberately due to the multiple steps involved in
properly addressing the unprecedented scale and complexity of claims
within the bankruptcy process. Only 84 percent of derivatives claims
had been settled by the end of 2012. Estimates of litigation and
administrative expenses for OTC derivatives alone are not available,
but these expense categories for the full Lehman settlement process
were estimated to total $3.2 billion as of May 13, 2011 (Fleming and
Sarkar (2014)).
Public Costs: Externalities. The event study is a common method of
estimating the market impact of a particular event. Measured market
reactions to the Lehman bankruptcy are based on the institution's
failure event as a whole; they are not reactions to the QFC resolution
process alone and therefore overstate the impacts of these
terminations. We may plausibly assume, however, that the market
reactions to the overall Lehman collapse
[[Page 75652]]
announcement included a component associated with potential costs of
settling their derivative contracts.\155\
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\155\ Still, we caution that event study results may produce
``noisy'' signals. For example, attribution is problematic as the
period surrounding the Lehman collapse was a particularly active one
with nearly two dozen significant economic events in September 2008.
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Johnson and Mamun (2012) \156\ apply an event study approach to
assess stock market reactions of a sample of 742 U.S. financial
institutions--divided into banks, savings and loans, brokers, and
primary dealers--on the date of the Lehman bankruptcy filing. While
each group of institutions showed negative abnormal returns, only the
bank (-3 percent) and primary dealer (-6 percent) coefficients were
statistically significant. The data strongly support the notion that
the event had differential impacts by type of financial institution and
abnormal returns across institution groups.
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\156\ Johnson, M.A. and Mamun, A. (2012). The Failure of Lehman
Brothers and its Impact on Other Financial Institutions. Applied
Financial Economics 22: 375-385.
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Dumontaux and Pop (2012) \157\ apply a similar approach to assess
stock market reactions of a sample of 382 U.S. financial companies,
using brief event windows. They report heterogeneous outcomes according
to institution size and business lines. Among the twenty large
companies \158\ (excluding Lehman Brothers), cumulative abnormal stock
price returns were highly significantly negative, ranging from -10
percent to -18 percent over five distinct event windows of up to five
days in duration. However, the effects on the full sample were not
statistically significant, indicating the immediate contagion effect
was limited to large companies. The results of both event studies
suggest the Lehman bankruptcy likely imparted immediate negative
external effects on a subset of financial companies, causing
substantial drops in their market valuations. However, as noted above,
it is not clear from these studies the extent to which the change in
company valuation is driven by the costs of the QFC resolution process.
We did not find event studies specifically assessing market impacts on
non-financial firms.
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\157\ Dumontaux, N. and Pop, A. (2012). ``Contagion Effects in
the Aftermath of Lehman's Collapse: Measuring the Collateral
Damage.'' University of Nantes working paper 2012/27.
\158\ Large financial companies are defined as those with total
assets over $1 billion in their last audited report before the event
date.
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Domestic Public Support: Federal Reserve Facility. The Federal
Reserve provided substantial liquidity to the markets during the 2007-
2009 period. Fleming and Sarkar (2014) consider the support to Lehman
in the first week after the bankruptcy as a critical factor in the
recovery of claims against at least part of Lehman Brothers, which
allowed it to keep operating until it was acquired by Barclays. Between
September 15 and 18, 2008, Lehman Brothers Inc. borrowed $68 billion
from the Primary Dealer Credit Facility (``PDCF''). Because the
borrowed funds were fully collateralized and repaid in full with
interest, the Congressional Budget Office (2010) \159\ estimated that
total lending through the PDCF involved a negligible subsidy value.
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\159\ Congressional Budget Office. (2010). The Budgetary Impact
and Subsidy Costs of the Federal Reserve's Actions During the
Financial Crisis.
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Global Public Costs: Externalities. The economic literature is rich
with event studies of market reactions to policy announcements designed
to alleviate the financial crisis, however, we find no studies focusing
directly on the global market impacts of the Lehman Brothers bankruptcy
as an event. We also acknowledge global spillovers as a potential
public cost; however, we find no studies focusing directly on the
global impacts of the Lehman Brothers bankruptcy as an event.
c. Conclusion
The economic literature on financial asset fire sales maintains
that such events are more systemically harmful when occurring during
industry-wide periods of distress, making mitigating these costs a
public policy concern. The Lehman Brothers bankruptcy and the resulting
QFC terminations occurred during a crisis period, and might have
imposed widespread private and public costs. We do not compare the
Lehman bankruptcy costs to the alternative of potential resolution
costs under a counterfactual case had Title II of the Dodd-Frank Act
been in effect at the time of the Lehman bankruptcy filing.
Nonetheless, Fleming and Sarkar (2014) argue that, ``some of the losses
associated with the failure of Lehman Brothers may have been avoided in
a more orderly liquidation process.''
3. Baseline
The FDIC promulgated 12 CFR part 371, Recordkeeping Requirements
for Qualified Financial Contracts (``Part 371''), pursuant to section
11(e)(8)(H) of the FDIA.\160\ The FDIC's QFC recordkeeping rule, which
applies to insured depository institutions that are in a troubled
condition, was promulgated to enable the FDIC as receiver to make an
informed decision as to whether to transfer or retain QFCs and thereby
reduce losses to the deposit insurance fund and minimize the potential
for market disruptions that could occur with respect to the liquidation
of QFC portfolios of insured depository institutions. The recordkeeping
requirements of the Final Rules, which do not apply to insured
depository institutions, are based, in part, on Part 371. However, the
information requirements of the Final Rules are more extensive,
reflecting the FDIC's experience with portfolios of QFCs of insured
depository institutions subject to Part 371.
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\160\ 12 U.S.C. 1821(e)(8)(H).
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Based on discussions with the staff of the PFRAs who are familiar
with financial company operations and have experience supervising
financial companies with QFC portfolios, the Secretary believes that
the large corporate groups that would be subject to the Final Rules
should already be maintaining much of the QFC information required to
be maintained under the Final Rules as part of their ordinary course of
business. In order for these large corporate groups to effectively
manage their QFC portfolios, they need to have robust recordkeeping
systems in place; for example, large corporate groups that trade
derivatives out of several distinct legal entities need to have
detailed records, including counterparty identification, position-level
data, collateral received and posted, and contractual requirements, in
order to effectively manage their portfolio, perform on contracts, and
monitor risks. As noted by commenters, regulated financial companies
must maintain extensive QFC records pursuant to other regulatory
requirements.\161\ However, the Secretary understands that these large
corporate groups are not currently maintaining the QFC records in the
standardized format prescribed by the Final Rules and as set forth in
the appendix to the Final Rules such that they may have to modify
existing recordkeeping systems with respect to QFCs or build new
systems in order to comply with the rules.
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\161\ See SIFMA AMG letter, pp. 12-13; ACLI letter, pp. 20-21.
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4. Evaluation of Alternatives
The Secretary considered alternatives to implementing the
recordkeeping requirements of the Final Rules but believes that the
adopted form is the best available method of achieving both the
statutory mandate and the regulatory objectives. The assessment of
alternatives below is organized into three subcategories: The scope of
the rules; the content of records; and standardized recordkeeping.
[[Page 75653]]
a. Scope of the Final Rules
The scope of the Final Rules and the reasons for the changes made
to the scope of the rules as compared to the Proposed Rules is provided
in section II.A.1, above. The Secretary considered alternative criteria
in developing the definition of a records entity, such as including
financial companies that have more than $10 billion in assets. This
threshold, which would have captured more financial companies that
potentially might be considered for orderly liquidation under Title II,
has been used in other regulatory requirements. For example, the Dodd-
Frank Act requires certain financial companies with more than $10
billion in total consolidated assets to conduct annual stress
tests.\162\ Additionally, the CFTC's final rule on the end-user
exemption to the clearing requirement for swaps exempts banks, savings
associations, farm credit system institutions, and credit unions with
total assets of $10 billion or less from the definition of ``financial
entity,'' making such ``smaller'' financial institutions eligible for
the end-user exception.\163\
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\162\ See 12 U.S.C. 5365(i)(2).
\163\ See 17 CFR 50.50(d).
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However, the Secretary determined that while it is possible that
financial companies with more than $10 billion and less than $50
billion in total assets would be considered for orderly liquidation
under Title II, a more appropriate threshold is the $50 billion in
total consolidated assets, supplemented by the secondary thresholds of
$250 billion of total gross notional derivatives outstanding or $3.5
billion of derivative liabilities. Imposing the $50 billion total
assets threshold by itself or including all financial companies with
over $10 billion in total assets would substantially increase the
number of financial companies subject to recordkeeping requirements,
many of which would likely not be considered for orderly liquidation
under Title II. Financial companies with total assets of $50 billion or
more and with a substantial degree of activity in QFCs as indicated by
total gross notional derivatives outstanding of at least $250 billion
or derivative liabilities of at least $3.5 billion, potentially would
be among the most likely to be considered for orderly liquidation under
Title II. The definition of ``records entity'' in the Final Rules is
thus designed to reduce recordkeeping burdens on smaller financial
company groups by only capturing those financial companies that are
part of a group with a member that it is the type of company for which
the FDIC is most likely to be appointed as receiver.
b. Content of Records
The Secretary determined, after consulting with the FDIC, that
requiring each records entity to maintain the data included in Tables
A-1 through A-4 and the four master data lookup tables of the appendix
to the Final Rules is necessary to assist the FDIC in being able to
effectively exercise its rights under the Act and fulfill its
obligations under sections 210(c)(8), (9), or (10) of the Act. To
facilitate the resolution of QFC portfolios, the FDIC, upon being
appointed as receiver for a covered financial company under Title II,
would need to analyze such data in order to promptly effectuate
decisions. The information must be sufficient to allow the FDIC to
estimate the financial and operational impact on the covered financial
company and its counterparties, affiliated financial companies, and the
financial markets as a whole of the FDIC's decision to transfer, retain
and disaffirm or repudiate, or retain and allow the counterparty to
terminate the covered financial company's QFCs. It must also allow the
FDIC to assess the potential impact that such decisions may have on the
financial markets as a whole, which may inform its transfer decisions.
The need for the information specified by each table is discussed in
further detail in section II.D.2 above.
As indicated above, the recordkeeping requirements of the Final
Rules are similar to the FDIC's Part 371, rules applicable to insured
depository institutions in troubled condition but the information
requirements of the Final Rules (which do not apply to insured
depository institutions) are more extensive. Previously, in developing
the Proposed Rules, the Secretary considered the appropriateness of
reducing the recordkeeping burden by aligning the requirements more
closely with those of the FDIC's Part 371, but determined, in
consultation with the FDIC, that additional recordkeeping beyond that
required by Part 371 would be needed for the FDIC to resolve a
financial company with significant QFC positions under Title II. The
Secretary reaffirms in the Final Rules that this determination is
appropriate and that, in a Title II resolution scenario, the FDIC will
need the additional information required by the Final Rules to analyze
the QFC portfolio, decide how to manage the QFCs, and perform their
obligations under the QFCs, including meeting collateral requirements.
Furthermore, although applying the Part 371 requirements to records
entities instead of the requirements of the Final Rules would have
imposed less of a burden on records entities, even the Part 371
requirements would require records entities to update their
recordkeeping systems, including by amending internal procedures,
reprogramming systems, reconfiguring data tables, and implementing
compliance processes in similar ways as are expected to be required for
records entities complying with the Final Rules.
As an example of the additional information required to be
maintained under the Final Rules as compared to Part 371, the
counterparty-level data required in Table A-2 to the appendix of the
Final Rules includes the next margin payment date and payment amount.
This will assist the FDIC in ensuring that a covered financial company
and its subsidiaries perform their QFC obligations, including meeting
clearing organization margin calls. The Table A-3 legal agreement
information, which is not included in Part 371, is necessary to enable
the FDIC as receiver to evaluate the likely treatment of QFCs under
such contracts, and to inform the FDIC of any third-party credit
enhancement and the identification of any default or other termination
event provisions that reference an entity. Table A-4 includes
additional collateral detail data, such as the location of collateral,
the collateral segregation status, and whether the collateral may be
subject to re-hypothecation by the counterparty. These additional data
are necessary to enable the FDIC to assess risks associated with the
collateral and improve the FDIC's ability to analyze various QFC
transfer or termination scenarios. For example, for cross-border
transactions, this information would help the FDIC evaluate the
availability of collateral in different jurisdictions and the related
close-out risks under local law if the receiver cannot arrange for the
transfer of QFC positions. As noted above, we believe in many cases
records entities are maintaining the additional information required
under the rules due to existing business practices or other regulatory
requirements. However, the Secretary understands that these large
corporate groups are not currently maintaining the QFC records in the
standardized format prescribed by the Final Rules and as set forth in
the appendix to the Final Rules such that the additional information
required will impose additional burden associated with amending
internal procedures, reconfiguring data tables,
[[Page 75654]]
and implementing compliance processes.
c. Standardized Recordkeeping
The Secretary determined that requiring records entities to have
the capacity to maintain and generate QFC records in the uniform,
standardized format set forth in the appendix to the Final Rules is
necessary to assist the FDIC in being able to effectively exercise its
rights under the Act and fulfill its obligations under sections
210(c)(8), (9), or (10) of the Act. Specifically, when the FDIC is
appointed as receiver of a covered financial company, the covered
financial company's QFC counterparties are prohibited from exercising
their contractual right of termination until 5 p.m. (eastern time) on
the first business day following the date of appointment. After its
appointment as receiver and prior to the close of the aforementioned 5
p.m. deadline, the FDIC has three options in managing a covered
financial company's QFC portfolio. Specifically, with respect to all of
the covered financial company's QFCs with a particular counterparty and
all its affiliates, the FDIC may: (1) Transfer the QFCs to a financial
institution, including a bridge financial company established by the
FDIC; (2) retain the QFCs within the receivership and allow the
counterparty to exercise contractual remedies to terminate the QFCs; or
(3) retain the QFCs within the receivership, disaffirm or repudiate the
QFCs, and pay compensatory damages. If the FDIC transfers the QFCs to a
financial institution, the counterparty may not terminate the QFCs
solely because the QFCs were transferred, or by reason of the covered
financial company's financial condition or insolvency or the
appointment of the FDIC as receiver. If the FDIC does not transfer the
QFCs and does not disaffirm or repudiate such QFCs within the one
business day stay period, the counterparty may exercise contractual
remedies to terminate the QFCs and assert claims for payment from the
covered financial company and may have rights to liquidate the
collateral pledged by the covered financial company.
Previously, in developing the Proposed Rules, the Secretary
considered reducing the recordkeeping burden by permitting the
maintenance of QFC records in non-standardized formats, but determined,
after consulting with the FDIC, that this alternative would compromise
the FDIC's flexibility as receiver in managing the QFC portfolio and
impair its ability as receiver to maximize the value of the assets of
the covered financial company in the context of orderly
liquidation.\164\ The Secretary reaffirms in the Final Rules that this
determination is appropriate in order to ensure that the FDIC, in a
Title II resolution scenario, has the maximum potential to execute a
prompt and effective decision regarding the disposition of the QFC
portfolio of a covered financial company.
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\164\ See 12 U.S.C. 5390(a)(1)(B)(iv).
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However, while the Final Rules specify a standardized recordkeeping
format, the Secretary also recognizes that there may be particular
types of QFC or counterparties for which more limited information may
be sufficient to enable the FDIC to exercise its rights under the Act
and fulfill its obligations under sections 210(c)(8), (9), or (10) of
the Act. The Final Rules provide the Secretary with the discretion to
grant conditional or unconditional exemptions from compliance with one
or more of the requirements of the Final Rules, which could include
exemptions with respect to the information required regarding
particular types of QFCs or counterparties.
5. Affected Population
Instead of requiring all financial companies to maintain records
with respect to QFCs, the Secretary is limiting the scope of the Final
Rules to a narrow subset of financial companies. Discretion to do so is
afforded under section 210(c)(8)(H)(iv) of the Act, which requires the
recordkeeping requirements to differentiate among financial companies
by taking into consideration, among other things, their size and risk.
The Secretary is exercising this discretion to define the term
``records entity'' and thereby include within the scope of the Final
Rules only those financial companies that: (1) Are identified as U.S.
G-SIBs; (2) the Council determines could pose a threat to U.S.
financial stability; (3) the Council designates as systemically
important financial market utilities; (4) have total consolidated
assets equal to or greater than $50 billion and either (i) total gross
notional derivatives outstanding equal to or greater than $250 billion
or (ii) derivative liabilities equal to or greater than $3.5 billion;
or (5) are part of the same corporate group in which at least one
financial company satisfies one or more of the other foregoing
criteria. The Final Rules would only apply to large corporate groups
(including a large corporate group's affiliated financial companies,
regardless of their size, if the affiliated financial company is a
party to an open QFC and is not an ``excluded entity'' under the Final
Rules). The types of financial companies that would qualify as records
entities under the Final Rules include those listed in section
II.A.1.b, above. The Secretary estimates that 30 large corporate groups
would be subject to the recordkeeping requirements.
6. Assessment of Potential Costs and Benefits
a. Potential Costs
Based on discussions with the PFRAs who are familiar with financial
company operations and have experience supervising financial companies
with QFC portfolios, the Secretary believes that the costs of
implementing the Final Rules may be mitigated by the fact that records
entities should be maintaining most of the QFC information required by
the Final Rules as part of their ordinary course of business. However,
the Secretary recognizes that the requirement in the Final Rules for
records to be maintained in a standardized format, among other
requirements, may impose costs and burdens on records entities. In
order to comply with the Final Rules, each of the approximately 30
large corporate groups that the Secretary estimates would be subject to
the recordkeeping requirements will need to have network infrastructure
to maintain data in the required format. The Secretary expects that
this will likely impose one-time initial costs on each large corporate
group in connection with necessary updates to their recordkeeping
systems, such as systems development or modifications. The initial
costs to set up network infrastructure will depend on whether a large
corporate group already holds and maintains QFC data in an organized
electronic format, and if so, whether the data currently reside on
different systems rather than on one centralized system. Large
corporate groups may need to amend internal procedures, reprogram
systems, reconfigure data tables, and implement compliance processes.
Moreover, they may need to standardize the data and create tables to
match the format required by the Final Rules. However, the Secretary
believes that the large corporate groups that would be subject to the
Final Rules are likely to rely on existing centralized systems for
recording and reporting QFC activities to perform most of the
recordkeeping and reporting requirements set forth herein. The entity
within the corporate group responsible for this centralized system will
likely operate and maintain a technology shared services model with the
majority of technology applications,
[[Page 75655]]
systems, and data shared by the affiliated financial companies within
the large corporate group. In addition, as referenced above, the Final
Rules will also require the top-tier financial company of the corporate
group to be capable of generating a single, compiled set of the records
specified in the Final Rules for all records entities in the corporate
group that it consolidates or are consolidated with it and to be
capable of providing such a set of records to its PFRA and the FDIC.
Therefore, the Final Rules will likely impose the most significant
costs on the entity or entities within the large corporate group
responsible for such centralized systems, which is reflected in the
cost estimates for large corporate groups provided herein; most
affiliated financial companies within a large corporate group are not
expected to bear significant costs. The affiliated financial companies
will likely have much lower costs because they can utilize and rely
upon the technology and network infrastructure operated and maintained
by the entity responsible for the centralized system within the large
corporate group.
Previously, the Secretary estimated the costs of the initial and
annual recordkeeping burdens, as well as the annual reporting burden,
associated with the Proposed Rules in both man-hours and dollar terms
and requested comment on whether the cost estimates were reasonable. As
noted above, the Secretary's recordkeeping, reporting, data retention,
and records generation burden estimates were based on discussions with
the PFRAs regarding their prior experience with burden estimates for
other recordkeeping systems. The Secretary also considered the burden
estimates in rulemakings with similar recordkeeping requirements. For
example, the initial non-recurring burden estimates provided in
rulemakings for such recordkeeping requirements varied based on the
scope of requirements and the type of entity subject to the
requirements, but included initial burden estimates ranging from
approximately 100 to 3,300 hours and estimates of required investments
in technology and infrastructure from $50,000 to $250,000. Although the
type and amount of data collected and reported for such reporting
systems are substantively different in both content and format from the
data that would be recorded under the Final Rules, the estimates from
these prior rulemakings nevertheless provide some guidance as to the
scale of system modifications and information technology investments
that would be required for compliance with the Final Rules. Similarly,
the types of information technology professionals that will establish
the recordkeeping and data retention for records entities under the
final rules are expected to be similar to the professionals involved in
establishing the other systems referenced above.
Most commenters offered general comments on the costs associated
with complying with the Proposed Rules, with several stating that the
costs--either in general, or as related to certain proposed
recordkeeping requirements--outweighed the benefits to the FDIC as
receiver.\165\ Some commenters addressed the impact that the Proposed
Rules would have on entities' recordkeeping and information systems.
For example, one commenter stated that the Proposed Rules, if not
modified, would force market participants to rebuild existing
recordkeeping systems and protocols and impose significant
expense.\166\ One commenter directly referenced the Secretary's cost
estimates in the context of such commenter's request for an extension
of the proposed initial compliance period, stating that the Secretary's
estimate of the cost of such work for most financial groups subject to
the rule will far exceed the Secretary's estimation of the total
industry-wide compliance cost.\167\ On this basis, the commenter went
on to request that the initial 270-day compliance period provided for
in the Proposed Rules be extended to two years and that compliance be
phased in over a period of years based on the potential criticality of
QFCs to the FDIC during resolution. However, neither this commenter,
nor any other commenter on the Proposed Rules, offered quantified
costs, estimated or otherwise, or other empirical data in support of
these comments.
---------------------------------------------------------------------------
\165\ See, e.g., ACLI letter, pp. 17-19; SIFMA AMG letter, p. 4.
\166\ See TIAA-CREF letter, p. 2. Two other commenters stated
that the Proposed Rules would have a significant impact on
information technology and systems development, but these comments
arose in the context of clearing organizations not having access to
much of the information required under the Final Rules. See DTCC
letter, p. 10; OCC letter, p. 12. The Secretary has provided a
conditional exemption for registered derivatives clearing
organizations and clearing agencies from the recordkeeping
requirements of the Final Rules as discussed in section II.A.1.a,
above.
\167\ See TCH et al. letter, pp. 3-4.
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As discussed in detail in section II above, after carefully
considering all of the comments received and consulting with the FDIC,
the Secretary is adopting numerous changes from the Proposed Rules.
Many of these changes are being adopted in response to comments and are
intended to limit the scope and mitigate the burdens associated with
complying with the QFC recordkeeping requirements of the Final Rules.
In main part, these changes relate to narrowing the scope of the
definition of ``records entity,'' extending the initial compliance
period for all records entities, eliminating certain proposed
recordkeeping requirements, and providing for a de minimis exemption
from the preponderance of the recordkeeping requirements for certain
records entities that have a minimal level of QFC activity.
Taking into consideration the changes made in the Final Rules and
the comments received as to the burden the rules would place on records
entities, the Secretary has updated the estimated potential costs. It
is estimated that the initial recordkeeping burden for all records
entities (including affiliates) will be approximately 218,505 hours
with a total one-time initial cost of approximately $36,631,995 (in
nominal dollars), representing $1,221,000 per large corporate group on
average. The basis for this estimate, discussed further below, is
necessarily constrained by the limited availability of relevant
information, including the lack of quantitative information from
commenters.
Specifically, based on staff-level discussions with several of the
PFRAs, burden estimates in rulemakings with similar recordkeeping
requirements, and the comments received, it is expected that each of
the approximately 30 large corporate groups will incur on average
approximately $500,000 in systems development and modification costs,
including the purchase of computer software, and that the entity
responsible for maintaining the centralized system within each large
corporate group will incur 7,200 initial burden hours at a cost of
$712,800 to update to their recordkeeping systems. This initial burden
is mitigated to some extent because QFC data is likely already retained
in some form by each large corporate group respondent in the ordinary
course of business, but large corporate group respondents may need to
amend internal procedures, reprogram systems, reconfigure data tables,
and implement compliance processes. Moreover, they may need to
standardize the data and create records tables to match the format
required by the Final Rules. These costs will likely be borne by the
entity responsible for maintaining the centralized system within each
large corporate group. It is expected that the initial burden hours
will require the work of senior programmers, programmer analysts,
[[Page 75656]]
senior system analysts, compliance managers, compliance clerks,
directors of compliance, and compliance attorneys. The Secretary has
estimated that the average hourly wage rate for recordkeepers to comply
with the initial recordkeeping burden is approximately $99 per hour
based in part on average hourly wage rate for these occupations in the
U.S. Department of Labor, Bureau of Labor Statistics' occupational
employment statistics and wage statistics for financial sector
occupations, dated May 2015.\168\
---------------------------------------------------------------------------
\168\ All cost and wage estimates are in nominal dollars and
have not been adjusted for inflation.
---------------------------------------------------------------------------
The total estimated one-time cost for all large corporate group
respondents to comply with the initial recordkeeping burden, is
approximately $36,384,000, of which $21,384,000 is due to the burden
hours and $15,000,000 is for systems development and modification
costs. This is based on the estimated 7,200 initial burden hours for
each of the 30 large corporate groups multiplied by the estimated
average hourly wage rate for recordkeepers (216,000 hours multiplied by
$99/hour) and the $500,000 in systems development and modification
costs for each of the 30 large corporate groups. Finally, the total
estimated one-time initial cost includes the estimated cost for the
5,010 affiliated financial company respondents to comply with the
initial recordkeeping burden, which is approximately $247,995. This is
based on an estimated 0.5 initial burden hour for each affiliated
financial company, 5,010 affiliated financial companies, and the $99
estimated average hourly wage rate for recordkeepers described above
(2,505 hours multiplied by $99/hour).
However, section 148.1(d)(1)(i) of the Final Rules provides for
compliance periods of between 540 days and four years after the
effective date of the Final Rules, depending on the total assets of
records entities. Thus, the initial recordkeeping burden is expected to
occur over multiple years, resulting in a substantial reduction in the
annual cost. Information as to how records entities would spread this
initial cost over the compliance period is not available. However,
assuming the costs would be incurred evenly over the entire compliance
period, this would result in annual one-time, initial recordkeeping
costs ranging from $814,000 for a large corporate group with a 540 day
compliance period to $305,267 for a large corporate group with a four
year compliance period.
Based in part on staff-level discussions with several of the PFRAs,
burden estimates in rulemakings with similar recordkeeping
requirements, and the comments received, it is expected that the total
estimated recurring annual recordkeeping burden necessary to oversee,
maintain, and utilize the recordkeeping system will be approximately
240 hours for each large corporate group and 0.5 hours for each
affiliated financial company. Based on the estimate of 30 large
corporate groups and 168 affiliates of each corporate group that will
be subject to the rules, the total estimated annual recordkeeping
burden for all record entities will be approximately 9,705 hours with a
total annual cost of approximately $960,795 (9,705 hours multiplied by
$99/hour). The estimated average hourly wage rate for recordkeepers to
comply with the annual recordkeeping burden is approximately $99 per
hour, using the same methodology described above for compliance with
the initial recordkeeping burden.
With regard to reporting burdens under the Final Rules, a records
entity may request in writing an extension of time with respect to
compliance with the recordkeeping requirements or an exemption from the
recordkeeping requirements. The annual reporting burden under the Final
Rules associated with such exemption requests is estimated to be
approximately 50 hours per large corporate group. The estimated average
hourly rate for recordkeepers to comply with the annual reporting
burden is approximately $192 per hour based on the U.S. Department of
Labor, Bureau of Labor Statistics' occupational employment statistics
and wage statistics for financial sector occupations, dated May 2015.
The $192 hourly wage rate is based on the average hourly wage rates for
compliance managers, directors of compliance, and compliance attorneys
that will conduct the reporting. The total annual cost of the reporting
burden under the Final Rules is approximately $288,000 (50 hours
multiplied by 30 records entities multiplied by $192/hour).
Based on the total one-time cost (phased in over 540 days to 4
years), the total annual recordkeeping cost, and the total annual cost
of the reporting burden, the estimated net present values of the
estimated potential costs of the Final Rules over the next 10 years are
approximately $42,103,000 using a discount rate of 3 percent and
$38,000,000 using a discount rate of 7 percent.
The estimated potential costs in nominal dollars for the initial
recordkeeping burden, the annual recordkeeping burden, and the annual
reporting burden associated with the Final Rules are summarized in the
following table.
QFC Recordkeeping Requirements Final Rule--Potential Costs
----------------------------------------------------------------------------------------------------------------
Initial Annual Annual
recordkeeping recordkeeping reporting
----------------------------------------------------------------------------------------------------------------
30 Large Corporate Groups:
Estimated Hours per Group................................ 7,200 240 50
Total Hours.............................................. 216,000 7,200 1,500
Total Cost............................................... $21,384,000 $712,800 $288,000
5,010 Affiliates:
Estimated Hours per Affiliate............................ 0.5 0.5 ...............
Total Hours.............................................. 2,505 2,505 ...............
Total Cost............................................... $247,995 $247,995 ...............
IT Costs:
Estimated IT Costs per Corporate Group................... $500,000 ............... ...............
Total Cost............................................... $15,000,000 ............... ...............
Total:
Hours.................................................... 218,505 9,705 1,500
Cost..................................................... $36,631,995 $960,795 $288,000
Memorandum:
[[Page 75657]]
Estimated average hourly wage/rate *..................... $99 $99 $192
----------------------------------------------------------------------------------------------------------------
* Estimated average hourly rate for recordkeepers to comply with the initial and annual recordkeeping and annual
reporting requirements, based on the U.S. Department of Labor, Bureau Labor Statistics' occupational
employment statistics and wage statistics for financial sector occupations, dated May 2015.
b. Potential Benefits
As noted earlier, QFCs tend to increase the interconnectedness of
the financial system, and the recent financial crisis demonstrated that
the management of QFC positions can be an important element of a
resolution strategy which, if not handled properly, may magnify market
instability. The recordkeeping requirements of the Final Rules are
therefore designed to ensure that the FDIC, as receiver of a covered
financial company, will have comprehensive information about the QFC
portfolio of such financial company subject to orderly resolution, and
enable the FDIC to carry out the rapid and orderly resolution of a
financial company's QFC portfolio in the event of insolvency, for
example, by transferring QFCs to a bridge financial company within the
narrow time frame afforded by the Act. Given the short time frame for
FDIC decisions regarding a QFC portfolio of significant size or
complexity, the Final Rules require the use of a regularly updated and
standardized recordkeeping format to allow the FDIC to process the
large amount of QFC information quickly. In the absence of updated and
standardized information, for example, the FDIC could leave QFCs in the
receivership when transferring them to a bridge financial company or
other solvent financial institution would have been the preferred
course of action had better information been available. Specifically,
if the FDIC does not transfer the QFCs and does not disaffirm or
repudiate such QFCs, counterparties may terminate the QFCs and assert
claims for payment from the covered financial company and may have
rights to liquidate the collateral pledged by the covered financial
company. However, a decision by the FDIC not to transfer the QFCs of a
large, interconnected financial company must be calculated and based on
detailed information about the QFC portfolio. Otherwise, the subsequent
unwinding and termination of QFCs involving numerous counterparties
risks becoming disorderly, potentially resulting in the rapid
liquidation of collateral, deterioration in asset values, and severe
negative consequences for U.S. financial stability. The FDIC as
receiver may also wish to make sure that affiliates of the covered
financial company continue to perform their QFC obligations in order to
preserve the critical operations of the covered financial company and
its affiliates. In such cases, the FDIC may need to arrange for
additional liquidity, support, or collateral to the affiliates to
enable them to meet collateral obligations and generally perform their
QFC obligations.
While there could be significant benefits associated with the QFC
recordkeeping requirements of the Final Rules, such benefits are
difficult to quantify. The Final Rules are only one component of the
orderly liquidation authority under Title II of the Act and the
benefits of the Final Rules will only be realized upon such authority
being exercised. Moreover, implementation of additional provisions of
the Dodd-Frank Act has, among other things: (1) Subjected large,
interconnected financial companies to stronger supervision, and, as a
result, reduced the likelihood of their failure; and (2) blunted the
impact of any such failure on U.S. financial stability and the economy.
For example, bank holding companies with total consolidated assets of
$50 billion or more and nonbank financial companies supervised by the
Board are subject to supervisory and company-run stress tests to help
the Board and the company measure the sufficiency of capital available
to support the company's operations throughout periods of stress.\169\
These financial companies also are or will be subject to more stringent
prudential standards, including risk-based capital and liquidity
requirements, which will make their failure less likely. However, if
such a financial company does fail, the implementation of the Dodd-
Frank Act is also intended to ensure that its failure and resolution
under the Bankruptcy Code may occur without adverse effects on U.S.
financial stability. For example, each of these large bank holding
companies and nonbank financial companies supervised by the Board will
have in place resolution plans to facilitate their rapid and orderly
resolution under the Bankruptcy Code in the event of material financial
distress or failure.\170\ The Title II orderly liquidation authority
will only be used to resolve a failing financial company if its
resolution under the Bankruptcy Code would have serious adverse effects
on U.S. financial stability. In addition, there are substantial
procedural safeguards to prevent the unwarranted use of the Title II
orderly liquidation authority.
---------------------------------------------------------------------------
\169\ See 12 U.S.C. 5365(i); 12 CFR part 252.
\170\ See 12 U.S.C. 5365(d).
---------------------------------------------------------------------------
Nevertheless, one way to gauge the potential benefits of the Final
Rules is to examine the effect of the recent financial crisis on the
real economy and how the Title II orderly liquidation authority as a
whole will help reduce the probability or severity of a future
financial crisis. For example, in a 2013 Government Accountability
Office (GAO) report, GAO cited research that suggests that U.S. output
losses associated with the 2007-2009 financial crisis could range from
several trillion dollars to over $10 trillion.\171\ GAO also surveyed
financial market regulators, academics, and industry and public
interest groups who identified, inter alia, the more stringent
prudential standards discussed above and the orderly liquidation
authority as not only enhancing financial stability, at least in
principle, but also helping to reduce the probability or severity of a
future crisis.\172\
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\171\ See Government Accountability Office, Financial Regulatory
Reform: Financial Crisis Losses and Potential Impacts of the Dodd-
Frank Act, GAO-13-180 at 15-16 (Jan. 16, 2013).
\172\ Id. at 33-34. GAO added that the experts it surveyed had
differing views on these provisions but that many expect some or all
of the provisions to improve the financial system's resilience to
shocks.
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However, as discussed above, even if the benefits of preventing
future financial crises are significant, it is difficult to quantify
such benefits and determine what portion would be attributable to any
single provision of the Dodd-Frank Act, let alone those benefits
directly attributable to the Final Rules. In addition, as discussed
above, the benefits associated with the Final Rules would only be
realized if the Title II orderly liquidation authority is
[[Page 75658]]
exercised and, even if utilized, the Final Rules are only one component
of the orderly liquidation authority and the resulting benefits.
7. Retrospective Analysis
Executive Order 13563 also directs the Secretary to develop a plan,
consistent with law and the Department of the Treasury's resources and
regulatory priorities, to conduct a periodic retrospective analysis of
significant regulations to determine whether such regulations should be
modified, streamlined, expanded, or repealed so as to make the
regulations more effective and less burdensome. The Secretary expects
to conduct a retrospective analysis not later than seven years after
the effective date of the Final Rules. This review will consider
whether the QFC recordkeeping requirements are necessary or appropriate
to assist the FDIC as receiver in being able to exercise its rights
under the Act and fulfill its obligations under sections 210(c)(8),
(9), or (10) of the Act and may result in proposed amendments to the
Final Rules. For example, the Secretary will review whether the total
assets and derivatives thresholds of the definition of ``records
entity'' should be adjusted and whether the data set forth in Tables A-
1 through A-4 and the master tables in the appendix of the Final Rules
are necessary or appropriate to assist the FDIC as receiver, and
whether maintaining different data is necessary or appropriate.
List of Subjects in 31 CFR Part 148
Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Department of the
Treasury adds part 148 to 31 CFR chapter I to read as follows:
Part 148--Qualified Financial Contracts Recordkeeping Related to
the FDIC Orderly Liquidation Authority
Sec.
148.1 Scope, purpose, effective date, and compliance dates.
148.2 Definitions.
148.3 Form, availability and maintenance of records.
148.4 Content of records.
Appendix A to Part 148--File Structure for Qualified Financial
Contract Records
Authority: 31 U.S.C. 321(b) and 12 U.S.C. 5390(c)(8)(H).
Sec. 148.1 Scope, purpose, effective date, and compliance dates.
(a) Scope. This part applies to each financial company that is a
records entity and, with respect to Sec. 148.3(a), a top-tier
financial company of a corporate group as defined in Sec. 148.2.
(b) Purpose. This part establishes recordkeeping requirements with
respect to QFCs of records entities in order to assist the Federal
Deposit Insurance Corporation (``FDIC'') as receiver for a covered
financial company (as defined in 12 U.S.C. 5381(a)(8)) in being able to
exercise its rights and fulfill its obligations under 12 U.S.C.
5390(c)(8), (9), or (10).
(c) Effective Date. This part shall become effective December 30,
2016.
(d) Compliance--(1) Initial compliance dates. (i) A records entity
subject to this part on the effective date must comply with Sec.
148.3(a)(2) on the date that is 90 days after the effective date and
with all other applicable requirements of this part on the date that
is:
(A) 540 days after the effective date for a records entity that:
(1) Has total assets equal to or greater than $1 trillion; or
(2) Is a member of the corporate group of any such records entity
described in paragraph (d)(1)(i)(A)(1) of this section;
(B) Two years after the effective date for any records entity that
is not subject to the compliance date set forth in paragraph
(d)(1)(i)(A) of this section and:
(1) Has total assets equal to or greater than $500 billion; or
(2) Is a member of the corporate group of any such records entity
described in paragraph (d)(1)(i)(B)(1) of this section; and
(C) Three years after the effective date for any records entity
that is not subject to the compliance date set forth in paragraphs
(d)(1)(i)(A) or (B) of this section and:
(1) Has total assets equal to or greater than $250 billion; or
(2) Is a member of the corporate group of any such records entity
described in paragraph (d)(1)(i)(C)(1) of this section; and
(D) Four years after the effective date for any records entity that
is not subject to the compliance dates set forth in paragraphs
(d)(1)(i)(A), (B), or (C) of this section.
(ii) A financial company that becomes a records entity after the
effective date must comply with Sec. 148.3(a)(2) within 90 days of
becoming a records entity and with all other applicable requirements of
this part within 540 days of becoming a records entity or within the
remainder of the applicable period provided under paragraph (d)(1)(i)
of this section, whichever period is longer.
(2) Subsequent compliance dates. If a financial company that at one
time met the definition of records entity later ceases to meet the
definition of records entity and thereafter, on any subsequent date,
again meets the definition of a records entity, such financial company
must comply with all applicable requirements of this part within 365
days after such subsequent date, or within the remainder of the
applicable period provided under paragraph (d)(1)(i) of this section,
whichever period is longer.
(3) Extensions of time to comply. The Secretary, in consultation
with the FDIC, may grant one or more extensions of time for compliance
with this part. A records entity may request an extension of time by
submitting a written request to the Department of the Treasury and the
FDIC at least 30 days prior to the deadline for its compliance provided
under paragraph (d)(1) of this section. The written request for an
extension must contain:
(i) A statement of the reasons why the records entity cannot comply
by the deadline; and
(ii) A plan for achieving compliance during the requested extension
period.
(4) Compliance by top-tier financial company. A top-tier financial
company must comply with Sec. 148.3(a)(1)(ii) on the same date as the
date on which the records entity members of the corporate group of
which it is the top-tier financial company are required to comply with
this part.
Sec. 148.2 Definitions.
For purposes of this part:
(a) Affiliate means any entity that controls, is controlled by, or
is under common control with another entity.
(b) Control. An entity ``controls'' another entity if:
(1) The entity directly or indirectly or acting through one or more
other persons owns, controls, or has the power to vote 25 percent or
more of any class of voting securities of the other entity;
(2) The entity controls in any manner the election of a majority of
the directors or trustees of the other entity; or
(3) The Board of Governors of the Federal Reserve System has
determined, after notice and opportunity for hearing in accordance with
12 CFR 225.31, that the entity directly or indirectly exercises a
controlling influence over the management or policies of the other
entity.
(c) Corporate group means an entity and all affiliates of that
entity.
(d) Counterparty means any natural person or entity (or separate
foreign
[[Page 75659]]
branch or division of any entity) that is a party to a QFC with a
records entity.
(e) Derivative liabilities means the fair value of derivative
instruments in a negative position as of the end of the most recent
fiscal year end, as recognized and measured in accordance with U.S.
generally accepted accounting principles or other applicable accounting
standards. Such value shall be adjusted for the effects of master
netting agreements and cash collateral held with the same counterparty
on a net basis to the extent such adjustments are reflected on the
audited consolidated statement of financial condition of the applicable
financial company filed with its primary financial regulatory agency or
agencies or, for financial companies not required to file such
statements, on the consolidated balance sheet of the financial company
prepared in accordance with U.S. generally accepted accounting
principles or other applicable accounting standards.
(f) Excluded entity means:
(1) An insured depository institution as defined in 12 U.S.C.
1813(c)(2);
(2) A subsidiary of an insured depository institution that is not:
(i) A functionally regulated subsidiary as defined in 12 U.S.C.
1844(c)(5);
(ii) A security-based swap dealer as defined in 15 U.S.C.
78c(a)(71); or
(iii) A major security-based swap participant as defined in 15
U.S.C. 78c(a)(67); or
(3) An insurance company.
(g) Financial company has the meaning set forth in 12 U.S.C.
5381(a)(11).
(h) Insurance company means:
(1) An insurance company as defined in 12 U.S.C. 5381(a)(13); and
(2) A mutual insurance holding company that meets the conditions
set forth in 12 CFR 380.11 for being treated as an insurance company
for the purpose of section 203(e) of the Dodd-Frank Act, 12 U.S.C.
5383(e).
(i) Legal Entity Identifier or LEI for an entity shall mean the
global legal entity identifier maintained for such entity by a utility
accredited by the Global LEI Foundation or by a utility endorsed by the
Regulatory Oversight Committee. As used in this definition:
(1) Regulatory Oversight Committee means the Regulatory Oversight
Committee (of the Global LEI System), whose charter was set forth by
the Finance Ministers and Central Bank Governors of the Group of Twenty
and the Financial Stability Board, or any successor thereof; and
(2) Global LEI Foundation means the not-for-profit organization
organized under Swiss law by the Financial Stability Board in 2014, or
any successor thereof.
(j) Parent entity with respect to an entity is an entity that
controls that entity.
(k) Position means an individual transaction under or evidenced by
a QFC and includes the rights and obligations of a party to an
individual transaction under or evidenced by a QFC.
(l) Primary financial regulatory agency means:
(1) With respect to any financial company, the primary financial
regulatory agency as specified for such financial company in
subparagraphs (A), (B), (C), and (E) of 12 U.S.C. 5301(12); and
(2) With respect to a financial market utility that is subject to a
designation pursuant to 12 U.S.C. 5463 for which there is no primary
financial regulatory agency under Sec. 148.2(l)(1), the Supervisory
Agency for that financial market utility as defined in 12 U.S.C.
5462(8).
(m) Qualified financial contract or QFC means any qualified
financial contract defined in 12 U.S.C. 5390(c)(8)(D), including
without limitation, any ``swap'' defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)) and in any rules or
regulations issued by the Commodity Futures Trading Commission pursuant
to such section; any ``security-based swap'' defined in section 3(a) of
the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) and in any rules
or regulations issued by the Securities and Exchange Commission
pursuant to such section; and any securities contract, commodity
contract, forward contract, repurchase agreement, swap agreement, and
any similar agreement that the FDIC determines by regulation,
resolution, or order to be a qualified financial contract as provided
in 12 U.S.C. 5390(c)(8)(D).
(n) Records entity--
(1) Records entity means any financial company that:
(i) Is not an excluded entity as defined in Sec. 148.2(f);
(ii) Is a party to an open QFC; and
(iii) (A) Is subject to a determination that the company shall be
subject to Federal Reserve supervision and enhanced prudential
standards pursuant to 12 U.S.C. 5323;
(B) Is subject to a designation as, or as likely to become,
systemically important pursuant to 12 U.S.C. 5463;
(C) Is identified as a global systemically important bank holding
company pursuant to 12 CFR part 217;
(D)(1) Has total assets on a consolidated basis equal to or greater
than $50 billion; and
(2) On a consolidated basis has:
(i) Total gross notional derivatives outstanding equal to or
greater than $250 billion; or
(ii) Derivative liabilities equal to or greater than $3.5 billion;
or
(E)(1) Is a member of a corporate group in which at least one
financial company meets the criteria under one or more of paragraphs
(n)(1)(iii)(A), (B), (C), or (D) of this section; and
(2)(i) Consolidates, is consolidated by, or is consolidated with
such financial company on financial statements prepared in accordance
with U.S. generally accepted accounting principles or other applicable
accounting standards; or
(ii) For financial companies not subject to such principles or
standards, would consolidate, be consolidated by, or be consolidated
with such financial company if such principles or standards applied.
(2) A financial company that qualifies as a records entity pursuant
to paragraph (n)(1)(iii)(D) will remain a records entity until one year
after it ceases to meet the criteria set forth in paragraph
(n)(1)(iii)(D) of this section.
(o) Secretary means the Secretary of the Treasury or the
Secretary's designee.
(p) Subsidiary means any company that is controlled by another
company.
(q) Top-tier financial company means a financial company that is a
member of a corporate group consisting of multiple records entities and
that is not itself controlled by another financial company.
(r) Total assets means the total assets reported on the audited
consolidated statement of financial condition of the applicable
financial company for the most recent year end filed with its primary
financial regulatory agency or agencies or, for financial companies not
required to file such statements, the total assets shown on the
consolidated balance sheet of the financial company for the most recent
fiscal year end as prepared in accordance with U.S. generally accepted
accounting principles or other applicable accounting standards.
(s) Total gross notional derivatives outstanding means the gross
notional value of all derivative instruments that are outstanding as of
the most recent fiscal year end, as recognized and measured in
accordance with U.S. generally accepted accounting principles or other
applicable accounting standards.
[[Page 75660]]
Sec. 148.3 Form, availability and maintenance of records.
(a) Form and availability--(1) Electronic records. (i) Except to
the extent of any relevant exemption provided under paragraph (c) of
this section, a records entity is required to maintain the records
described in Sec. 148.4 in electronic form and, as applicable, in the
format set forth in the tables in the appendix to this part.
(ii) A top-tier financial company must be capable of generating a
single, compiled set of the records required to be maintained by Sec.
148.4(a)-(h), in a format that allows for aggregation and
disaggregation of such data by records entity and counterparty, for all
records entities in its corporate group that are consolidated by or
consolidated with such top-tier financial company on financial
statements prepared in accordance with U.S. generally accepted
accounting principles or other applicable accounting standards or, for
financial companies not subject to such principles or standards, that
would be consolidated by or consolidated with such financial company if
such principles or standards applied.
(2) Point of contact. Each records entity and top-tier financial
company must provide a point of contact who is responsible for
recordkeeping under this part by written notice to its primary
financial regulatory agency or agencies and the FDIC and must provide
written notice to its primary financial regulatory agency or agencies
and the FDIC within 30 days of any change in its point of contact.
(3) Access to records. Except to the extent of any relevant
exemption provided under paragraph (c) of this section, a records
entity and a top-tier financial company that are regulated by a primary
financial regulatory agency shall be capable of providing
electronically to such primary financial regulatory agency and the
FDIC, within 24 hours of request by the primary financial regulatory
agency:
(i) In the case of a records entity, the records specified in Sec.
148.4, and
(ii) In the case of a top-tier financial company, the set of
records referenced in paragraph (a)(1)(ii) of this section.
(b) Maintenance and updating--(1) Daily updating. Except to the
extent of any relevant exemption provided under paragraph (c) of this
section, the records maintained under Sec. 148.4 shall be based on
values and information that are no less current than previous end-of-
day values and information.
(2) Records maintenance. The records required under Sec. 148.4 and
the capability of generating the set of records required by paragraph
(a)(1)(ii) of this section may be maintained on behalf of the records
entity or top-tier financial company, as applicable, by any affiliate
of such records entity or top-tier financial company, as applicable, or
any third-party service provider; provided that such records entity
shall itself maintain records under this part in the event that such
affiliate or service provider shall fail to maintain such records and
such top-tier financial company shall itself maintain the capability of
generating the set of records required by paragraph (a)(1)(ii) of this
section in the event that such affiliate or service provider shall fail
to maintain the capability of doing so.
(3) Record retention. A records entity shall retain records
maintained under Sec. 148.4 based on end-of-day values and information
for the five preceding business days.
(c) Exemptions--(1) De minimis exemption. A records entity that is
a party to 50 or fewer open QFC positions is not required to maintain
the records described in Sec. 148.4, other than the records described
in Sec. 148.4(i).
(2) Clearing organizations. A records entity that is a derivatives
clearing organization registered with the Commodity Futures Trading
Commission under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-
1) or a clearing agency registered with the Securities and Exchange
Commission under section 17A of the Securities Exchange Act of 1934 (15
U.S.C. 78q-1) is not required to maintain the records described in
Sec. 148.4 if it is:
(i) In compliance with the recordkeeping requirements of the
Commodity Futures Trading Commission or the Securities and Exchange
Commission, as applicable, including its maintenance of records
pertaining to all QFCs cleared by such records entity; and
(ii) Capable of and not restricted from, whether by law,
regulation, or agreement, transmitting electronically to the FDIC the
records maintained under such recordkeeping requirements within 24
hours of request of the Commodity Futures Trading Commission or the
Securities and Exchange Commission, as applicable.
(3) Requests for exemptions. One or more records entities may
request an exemption from one or more of the requirements of this part
by writing to the Department of the Treasury, the FDIC, and its primary
financial regulatory agency or agencies, if any. The written request
for an exemption must:
(i) Identify the records entity or records entities or the types of
records entities to which the exemption should apply;
(ii) Specify the requirement(s) under this part from which the
identified records entities should be exempt;
(iii) Provide details as to the size, risk, complexity, leverage,
frequency and dollar amount of qualified financial contracts, and
interconnectedness to the financial system of each records entity
identified in paragraph (c)(3)(i) of this section, to the extent
appropriate, and any other relevant factors; and
(iv) Specify the reason(s) why granting the exemption will not
impair or impede the FDIC's ability to exercise its rights or fulfill
its statutory obligations under 12 U.S.C. 5390(c)(8), (9), and (10).
(4) Granting exemptions. (i) Upon receipt of a written
recommendation from the FDIC, prepared in consultation with the primary
financial regulatory agency or agencies for the applicable records
entity or entities, that takes into consideration each of the factors
referenced in 12 U.S.C. 5390(c)(8)(H)(iv) and any other factors the
FDIC considers appropriate, the Secretary may grant, in whole or in
part, a conditional or unconditional exemption from compliance with one
or more of the requirements of this part by issuing an exemption to one
or more records entities.
(ii) In determining whether to grant an exemption to one or more
records entities, including whether to grant a conditional or
unconditional exemption, the Secretary will consider any factors deemed
appropriate by the Secretary, including whether application of one or
more requirements of this part is not necessary to achieve the purpose
of this part as described in Sec. 148.1(b).
(iii) If the FDIC does not submit, within 90 days of the date on
which the FDIC and the Department of the Treasury received the
exemption request, a written recommendation to the Secretary as to
whether to grant or deny an exemption request, the Secretary will
nevertheless determine whether to grant or deny the exemption request.
Sec. 148.4 Content of records.
Subject to Sec. 148.3(c), a records entity must maintain the
following records:
(a) The position level data listed in Table A-1 in appendix A to
this part with respect to each QFC to which it is a party.
(b) The counterparty netting set data listed in Table A-2 in
appendix A to this part for each netting set with respect to each QFC
to which it is a party.
[[Page 75661]]
(c) The legal agreements information listed in Table A-3 in
appendix A to this part with respect to each QFC to which it is a
party.
(d) The collateral detail data listed in Table A-4 in appendix A to
this part with respect to each QFC to which it is a party.
(e) The corporate organization master data lookup table in appendix
A to this part for the records entity and each of its affiliates.
(f) The counterparty master data lookup table in appendix A to this
part for each non-affiliated counterparty with respect to QFCs to which
it is a party.
(g) The booking location master data lookup table in appendix A to
this part for each booking location used with respect to QFCs to which
it is a party.
(h) The safekeeping agent master data lookup table in the appendix
to this part for each safekeeping agent used with respect to QFCs to
which it is a party.
(i) All documents that govern QFC transactions between the records
entity and each counterparty, including, without limitation, master
agreements and annexes, schedules, netting agreements, supplements, or
other modifications with respect to the agreements, confirmations for
each open QFC position of the records entity that has been confirmed
and all trade acknowledgments for each open QFC position that has not
been confirmed, all credit support documents including, but not limited
to, credit support annexes, guarantees, keep-well agreements, or net
worth maintenance agreements that are relevant to one or more QFCs, and
all assignment or novation documents, if applicable, including
documents that confirm that all required consents, approvals, or other
conditions precedent for such assignment or novation have been obtained
or satisfied.
(j) A list of vendors directly supporting the QFC-related
activities of the records entity and the vendors' contact information.
Appendix A to Part 148--File Structure for Qualified Financial Contract
Records
Table A-1--Position-Level Data
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
A1.1.......... As of date....... 2015-01-05....... Provide data YYYY-MM-DD.......... .................
extraction date.
A1.2.......... Records entity 999999999........ Provide LEI for Varchar(50)......... Validated against
identifier. records entity. CO.2.
Information
needed to review
position-level
data by records
entity.
A1.3.......... Position 20058953......... Provide a Varchar(100). .................
identifier. position
identifier.
Should be used
consistently
across all
record entities
within the
corporate group.
Use the unique
transaction
identifier if
available.
Information
needed to
readily track
and distinguish
positions.
A1.4.......... Counterparty 888888888........ Provide a Varchar(50)......... Validated against
identifier. counterparty CP.2.
identifier. Use
LEI if
counterparty has
one. Should be
used
consistently by
all record
entities within
the corporate
group.
Information
needed to
identify
counterparty by
reference to
Counterparty
Master Table.
A1.5.......... Internal booking New York, New Provide office Varchar(50)......... Combination A1.2
location York. where the + A1.5 + A1.6
identifier. position is should have a
booked. corresponding
Information unique
needed to combination BL.2
determine system + BL.3 + BL.4
on which the entry in Booking
trade is booked Location Master
and settled. Table.
A1.6.......... Unique booking xxxxxx........... Provide an Varchar(50)......... Combination A1.2
unit or desk identifier for + A1.5 + A1.6
identifier. unit or desk at should have a
which the corresponding
position is unique
booked. combination BL.2
Information + BL.3 + BL.4
needed to help entry in Booking
determine Location Master
purpose of Table.
position.
A1.7.......... Type of QFC...... Credit, equity, Provide type of Varchar (100). .................
foreign QFC. Use unique
exchange, product
interest rate identifier if
(including cross- available.
currency), other Information
commodity, needed to
securities determine the
repurchase nature of the
agreement, QFC.
securities
lending, loan
repurchase
agreement,
guarantee or
other third
party credit
enhancement of a
QFC.
[[Page 75662]]
A1.7.1........ Type of QFC Credit, equity, If QFC type is Varchar(500)........ Only required if
covered by foreign guarantee or QFC type (A1.7)
guarantee or exchange, other third is a guarantee
other third interest rate party credit or other third
party credit (including cross- enhancement, party credit
enhancement. currency), other provide type of enhancement.
commodity, QFC of the QFC
securities that is covered
repurchase by such
agreement, guarantee or
securities other third
lending, or loan party credit
repurchase enhancement. Use
agreement. unique product
identifier if
available. If
multiple asset
classes are
covered by the
guarantee or
credit
enhancement,
enter the asset
classes
separated by
comma. If all
the QFCs of the
underlying QFC
obligor
identifier are
covered by the
guarantee or
other third
party credit
enhancement,
enter ``All''.
A1.7.2........ Underlying QFC 888888888........ If QFC type is Varchar(50)......... Only required if
obligor guarantee or QFC asset type
identifier. other third (A1.7) is a
party credit guarantee or
enhancement, other third
provide an party credit
identifier for enhancement.
the QFC obligor Validated
whose obligation against CO.2 if
is covered by affiliate or
the guarantee or CP.2 if non-
other third affiliate.
party credit
enhancement. Use
LEI if
underlying QFC
obligor has one.
Complete the
counterparty
master table
with respect to
a QFC obligor
that is a non-
affiliate.
A1.8.......... Agreement xxxxxxxxx........ Provide an Varchar(50)......... Validated against
identifier. identifier for A3.3.
the primary
governing
documentation,
e.g., the master
agreement or
guarantee
agreement, as
applicable.
A1.9.......... Netting agreement xxxxxxxxx........ Provide an Varchar(50)......... Validated against
identifier. identifier for A3.3.
netting
agreement. If
this agreement
is the same as
provided in
A1.8, use same
identifier.
Information
needed to
identify unique
netting sets.
A1.10......... Netting agreement xxxxxxxxx........ Provide a netting Varchar(50)......... Validated against
counterparty agreement CP.2.
identifier. counterparty
identifier. Use
same identifier
as provided in
A1.4 if
counterparty and
netting
agreement
counterparty are
the same. Use
LEI if netting
agreement
counterparty has
one. Information
needed to
identify unique
netting sets.
A1.11......... Trade date....... 2014-12-20....... Provide trade or YYYY-MM-DD. .................
other commitment
date for the
QFC. Information
needed to
determine when
the entity's
rights and
obligations
regarding the
position
originated.
A1.12......... Termination date. 2014-03-31....... Provide date the YYYY-MM-DD. .................
QFC terminates
or is expected
to terminate,
expire, mature,
or when final
performance is
required.
Information
needed to
determine when
the entity's
rights and
obligations
regarding the
position are
expected to end.
A1.13......... Next call, put, 2015-01-25....... Provide next YYYY-MM-DD. .................
or cancellation call, put, or
date. cancellation
date.
A1.14......... Next payment date 2015-01-25....... Provide next YYYY-MM-DD. .................
payment date.
A1.15......... Local Currency Of USD.............. Provide currency Char(3). .................
Position. in which QFC is
denominated. Use
ISO currency
code.
[[Page 75663]]
A1.16......... Current market 995000........... Provide current Num (25,5). .................
value of the market value of
position in the position in
local currency. local currency.
In the case of a
guarantee or
other third
party credit
enhancements,
provide the
current mark-to-
market expected
value of the
exposure.
Information
needed to
determine the
current size of
the obligation
or benefit
associated with
the QFC.
A1.17......... Current market 995000........... In the case of a Num (25,5). .................
value of the guarantee or
position in U.S. other third
dollars. party credit
enhancements,
provide the
current mark-to-
market expected
value of the
exposure.
Information
needed to
determine the
current size of
the obligation/
benefit
associated with
the QFC.
A1.18......... Asset 1................ Provide fair Char(1). .................
Classification. value asset
classification
under GAAP,
IFRS, or other
accounting
principles or
standards used
by records
entity. Provide
``1'' for Level
1, ``2'' for
Level 2, or
``3'' for Level
3. Information
needed to assess
fair value of
the position.
A1.19......... Notional or 1000000.......... Provide the Num (25,5). .................
principal amount notional or
of the position principal
in local amount, as
currency. applicable, in
local currency.
In the case of a
guarantee or
other third
party credit
enhancement,
provide the
maximum possible
exposure.
Information
needed to help
evaluate the
position.
A1.20......... Notional or 1000000.......... Provide the Num (25,5). .................
principal amount notional or
of the position principal
In U.S. dollars. amount, as
applicable, in
U.S. dollars. In
the case of a
guarantee or
other third
party credit
enhancements,
provide the
maximum possible
exposure.
Information
needed to help
evaluate the
position.
A1.21......... Covered by third- Y/N.............. Indicate whether Char(1)............. Should be ``Y''
party credit QFC is covered or ``N.
enhancement by a guarantee
agreement (for or other third-
the benefit of party credit
the records enhancement.
entity)? Information
needed to
determine credit
enhancement.
A1.21.1....... Third-party 999999999........ If QFC is covered Varchar(50)......... Required if A1.21
credit by a guarantee is ``Y''.
enhancement or other third- Validated
provider party credit against CP.2.
identifier (for enhancement,
the benefit of provide an
the records identifier for
entity). provider. Use
LEI if
available.
Complete the
counterparty
master table
with respect to
a provider that
is a non-
affiliate.
A1.21.2....... Third-party 4444444.......... If QFC is covered Varchar(50)......... Required if A1.21
credit by a guarantee is ``Y.''
enhancement or other third- Validated
agreement party credit against A3.3.
identifier (for enhancement,
the benefit of provide an
the records identifier for
entity). the agreement.
A1.21.3....... Covered by third- Y/N.............. Indicate whether Char(1)............. Should be ``Y''
party credit QFC is covered or ``N.
enhancement by a guarantee
agreement (for or other third-
the benefit of party credit
the enhancement.
counterparty)? Information
needed to
determine credit
enhancement.
A1.21.4....... Third-party 999999999........ If QFC is covered Varchar(50)......... Required if
credit by a guarantee A1.21.3 is
enhancement or other third- ``Y''. Validated
provider party credit against CO.2 or
identifier (for enhancement, CP.2.
the benefit of provide an
the identifier for
counterparty). provider. Use
LEI if
available.
Complete the
counterparty
master table
with respect to
a provider that
is a non-
affiliate.
[[Page 75664]]
A1.21.5....... Third-party 4444444.......... If QFC is covered Varchar(50)......... Required if
credit by a guarantee A1.21.3 is
enhancement or other third- ``Y''. Validated
agreement party credit against A3.3.
identifier (for enhancement,
the benefit of provide an
the identifier for
counterparty). agreement.
A1.22......... Related position 3333333.......... Use this field to Varchar(100). .................
of records link any related
entity. positions of the
records entity.
All positions
that are related
to one another
should have same
designation in
this field.
A1.23......... Reference number 9999999.......... Provide a unique Varchar(500). .................
for any related reference number
loan. for any loan
held by the
records entity
or a member of
its corporate
group related to
the position
(with multiple
entries
delimited by
commas).
A1.24......... Identifier of the 999999999........ For any loan Varchar(500). .................
lender of the recorded in
related loan. A1.23, provide
identifier for
records entity
or member of its
corporate group
that holds any
related loan.
Use LEI if
entity has one.
----------------------------------------------------------------------------------------------------------------
Table A-2--Counterparty Netting Set Data
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
A2.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD. .................
date.
A2.2.......... Records entity 999999999........ Provide the LEI Varchar(50)......... Validated against
identifier. for the records CO.2.
entity.
A2.3.......... Netting agreement 888888888........ Provide an Varchar(50)......... Validated against
counterparty identifier for CP.2.
identifier. the netting
agreement
counterparty.
Use LEI if
counterparty has
one.
A2.4.......... Netting agreement xxxxxxxxx........ Provide an Varchar(50)......... Validated against
identifier. identifier for A3.3.
the netting
agreement.
A2.4.1........ Underlying QFC 888888888........ Provide Varchar(50)......... Validated against
obligor identifier for CO.2 or CP.2.
identifier. underlying QFC
obligor if
netting
agreement is
associated with
a guarantee or
other third
party credit
enhancement. Use
LEI if available.
A2.5.......... Covered by third- Y/N.............. Indicate whether Char(1)............. Should be ``Y''
party credit the positions or ``N.``
enhancement subject to the
agreement (for netting set
the benefit of agreement are
the records covered by a
entity)? third-party
credit
enhancement
agreement.
A2.5.1........ Third-party 999999999........ Use LEI if Varchar(50)......... Required if A2.5
credit available. is ``Y''.
enhancement Information Validated
provider needed to against CP.2.
identifier (for identity third-
the benefit of party credit
the records enhancement
entity). provider.
A2.5.2........ Third-party 4444444.......... ................. Varchar(50)......... Required if A2.5
credit is ``Y''.
enhancement Validated
agreement against A3.3.
identifier (for
the benefit of
the records
entity).
A2.5.3........ Covered by third- Y/N.............. Information Char(1)............. Should be ``Y''
party credit needed to or ``N.
enhancement determine credit
agreement (for enhancement.
the benefit of
the
counterparty)?
A2.5.4........ Third-party 999999999........ Use LEI if Varchar(50)......... Required if
credit available. A2.5.3 is ``Y''.
enhancement Information Should be a
provider needed to valid entry in
identifier (for identity third- the Counterparty
the benefit of party credit Master Table.
the enhancement Validated
counterparty). provider. against CP.2.
A2.5.5........ Third-party 4444444.......... Information used Varchar(50)......... Required if
credit to determine A2.5.3 is ``Y''.
enhancement guarantee or Validated
agreement other third- against A3.3.
identifier (for party credit
the benefit of enhancement.
the
counterparty).
A2.6.......... Aggregate current -1000000......... Information Num (25,5).......... Market value of
market value in needed to help all positions in
U.S. dollars of evaluate the A1 for the given
all positions positions netting
under this subject to the agreement
netting netting identifier
agreement. agreement. should be equal
to this value.
A2.6 = A2.7 +
A2.8.
A2.7.......... Current market 3000000.......... Information Num (25,5).......... Market value of
value in U.S. needed to help all positive
dollars of all evaluate the positions in A1
positive positions for the given
positions, as subject to the netting
aggregated under netting agreement
this netting agreement. identifier
agreement. should be equal
to this value.
A2.6 = A2.7 +
A2.8.
[[Page 75665]]
A2.8.......... Current market -4000000......... Information Num (25,5).......... Market value of
value in U.S. needed to help all negative
dollars of all evaluate the positions in A1
negative positions for the given
positions, as subject to the Netting
aggregated under netting Agreement
this netting agreement. Identifier
agreement. should be equal
to this value.
A2.6 = A2.7 +
A2.8.
A2.9.......... Current market 950000........... Information Num (25,5).......... Market value of
value in U.S. needed to all collateral
dollars of all determine the posted by
collateral extent to which records entity
posted by collateral has for the given
records entity, been provided by netting
as aggregated records entity. agreement
under this Identifier
netting should be equal
agreement. to sum of all
A4.9 for the
same netting
agreement
identifier in
A4.
A2.10......... Current market 50000............ Information Num (25,5).......... Market value of
value in U.S. needed to all collateral
dollars of all determine the posted by
collateral extent to which counterparty for
posted by collateral has the given
counterparty, as been provided by netting
aggregated under counterparty. agreement
this netting identifier
agreement. should be equal
to sum of all
A4.9 for the
same netting
agreement
identifier in
A4.
A2.11......... Current market 950000........... Information Num (25,5). .................
value in U.S. needed to
dollar of all determine the
collateral extent to which
posted by collateral has
records entity been provided by
that is subject records entity.
to re-
hypothecation,
as aggregated
under this
netting
agreement.
A2.12......... Current market 950000........... Information Num (25,5). .................
value in U.S. needed to
dollars of all determine the
collateral extent to which
posted by collateral has
counterparty been provided by
that is subject records entity.
to re-
hypothecation,
as aggregated
under this
netting
agreement.
A2.13......... Records entity 950000........... Provide records Num (25,5).......... Should be less
collateral--net. entity's than or equal to
collateral A2.9.
excess or
deficiency with
respect to all
of its
positions, as
determined under
each applicable
agreement,
including
thresholds and
haircuts where
applicable.
A2.14......... Counterparty 950000........... Provide Num (25,5).......... Should be less
collateral--net. counterparty's than or equal to
collateral A2.10.
excess or
deficiency with
respect to all
of its
positions, as
determined under
each applicable
agreement,
including
thresholds and
haircuts where
applicable.
A2.15......... Next margin 2015-11-05....... Provide next YYYY-MM-DD. .................
payment date. margin payment
date for
position.
A2.16......... Next margin 150000........... Use positive Num (25,5). .................
payment amount value if records
in U.S. dollars. entity is due a
payment and use
negative value
if records
entity has to
make the payment.
A2.17......... Safekeeping agent 888888888........ Provide an Varchar(50)......... Validated against
identifier for identifier for SA.2.
records entity. the records
entity's
safekeeping
agent, if any.
Use LEI if
safekeeping
agent has one.
A2.18......... Safekeeping agent 888888888........ Provide an Varchar(50)......... Validated against
identifier for identifier for SA.2.
counterparty. the
counterparty's
safekeeping
agent, if any.
Use LEI if
safekeeping
agent has one.
----------------------------------------------------------------------------------------------------------------
Table A-3--Legal Agreements
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instructions and data
Field Example application Definition Validation
--------------------------------------------------------------------------------------------------------------------------------------------------------
A3.1............................... As Of Date............ 2015-01-05............ Data extraction date. YYYY-MM-DD. .....................
A3.2............................... Records entity 999999999............. Provide LEI for Varchar(50).......... Validated against
identifier. records entity. CO.2.
A3.3............................... Agreement identifier.. xxxxxx................ Provide identifier Varchar(50). .....................
for each master
agreement, governing
document, netting
agreement or third-
party credit
enhancement
agreement.
[[Page 75666]]
A3.4............................... Name of agreement or ISDA Master 1992 or Provide name of Varchar(50). .....................
governing document. Guarantee Agreement agreement or
or Master Netting governing document.
Agreement.
A3.5............................... Agreement date........ 2010-01-25............ Provide the date of YYYY-MM-DD. .....................
the agreement.
A3.6............................... Agreement counterparty 888888888............. Use LEI if Varchar(50).......... Validated against
identifier. counterparty has field CP.2.
one. Information
needed to identify
counterparty.
A3.6.1............................. Underlying QFC obligor 888888888............. Provide underlying Varchar(50).......... Validated against
identifier. QFC obligor CO.2 or CP.2.
identifier if
document identifier
is associated with a
guarantee or other
third party credit
enhancement. Use LEI
if underlying QFC
obligor has one.
A3.7............................... Agreement governing New York.............. Provide law governing Varchar(50). .....................
law. contract disputes.
A3.8............................... Cross-default Y/N................... Specify whether Char(1).............. Should be ``Y'' or
provision? agreement includes ``N.
default or other
termination event
provisions that
reference an entity
not a party to the
agreement (``cross-
default Entity'').
Information needed
to determine
exposure to
affiliates or other
entities.
A3.9............................... Identity of cross- 777777777............. Provide identity of Varchar(500)......... Required if A3.8 is
default entities. any cross-default ``Y''. ID should be
entities referenced a valid entry in
in A3.8. Use LEI if Corporate Org Master
entity has one. Table or
Information needed Counterparty Master
to determine Table, if
exposure to other applicable. Multiple
entities. entries comma
separated.
A3.10.............................. Covered by third-party Y/N................... Information needed to Char(1).............. Should be ``Y'' or
credit enhancement determine credit ``N.''
agreement (for the enhancement.
benefit of the
records entity)?
A3.11.............................. Third-party credit 999999999............. Use LEI if available. Varchar(50).......... Required if A3.10 is
enhancement provider Information needed ``Y''. Should be a
identifier (for the to identity Third- valid entry in the
benefit of the Party Credit Counterparty Master
records entity). Enhancement Provider. Table. Validated
against CP.2.
A3.12.............................. Associated third-party 33333333.............. Information needed to Varchar(50).......... Required if A3.10 is
credit enhancement determine credit ``Y''. Validated
agreement document enhancement. against field A3.3.
identifier (for the
benefit of the
records entity).
A3.12.1............................ Covered by third-party Y/N................... Information needed to Char(1).............. Should be ``Y'' or
credit enhancement determine credit ``N.''
agreement (for the enhancement.
benefit of the
counterparty)?
A3.12.2............................ Third-party credit 999999999............. Use LEI if available. Varchar(50).......... Required if A3.12.1
enhancement provider Information needed is ``Y''. Should be
identifier (for the to identity Third- a valid entry in the
benefit of the Party Credit Counterparty Master.
counterparty). Enhancement Provider. Validated against
CP.2.
[[Page 75667]]
A3.12.3............................ Associated third-party 33333333.............. Information needed to Varchar(50).......... Required if A3.12.1
credit enhancement determine credit is ``Y''. Validated
agreement document enhancement. against field A3.3.
identifier (for the
benefit of the
counterparty).
A3.13.............................. Counterparty contact John Doe & Co......... Provide contact name Varchar(200). .....................
information: name. for counterparty as
provided under
notice section of
agreement.
A3.14.............................. Counterparty contact 123 Main St, City, Provide contact Varchar(100). .....................
information: address. State Zip code. address for
counterparty as
provided under
notice section of
agreement.
A3.15.............................. Counterparty contact 1-999-999-9999........ Provide contact phone Varchar(50). .....................
information: phone. number for
counterparty as
provided under
notice section of
agreement.
A3.16.............................. Counterparty's contact [email protected]...... Provide contact email Varchar(100). .....................
information: email address for
address. counterparty as
provided under
notice section of
agreement.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table A-4--Collateral Detail Data
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
A4.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD. .................
date.
A4.2.......... Records entity 999999999........ Provide LEI for Varchar(50)......... Validated against
identifier. records entity. CO.2.
A4.3.......... Collateral posted/ P/N.............. Enter ``P'' if Char(1). .................
collateral collateral has
received flag. been posted by
the records
entity. Enter
``R'' for
collateral
received by
Records Entity.
A4.4.......... Counterparty 888888888........ Provide Varchar(50)......... Validated against
identifier. identifier for CP.2.
counterparty.
Use LEI if
counterparty has
one.
A4.5.......... Netting agreement xxxxxxxxx........ Provide Varchar(50)......... Validated against
identifier. identifier for field A3.3.
applicable
netting
agreement.
A4.6.......... Unique collateral CUSIP/ISIN....... Provide Varchar(50). .................
item identifier. identifier to
reference
individual
collateral
posted.
A4.7.......... Original face 1500000.......... Information Num (25,5) .................
amount of needed to
collateral item evaluate
in local collateral
currency. sufficiency and
marketability.
A4.8.......... Local currency of USD.............. Use ISO currency Char(3). .................
collateral item. code.
A4.9.......... Market value 850000........... Information Num (25,5).......... Market value of
amount of needed to all collateral
collateral item evaluate posted by
in U.S. dollars. collateral Records Entity
sufficiency and or Counterparty
marketability A2.9 or A2.10
and to permit for the given
aggregation netting
across agreement
currencies. identifier
should be equal
to sum of all
A4.9 for the
same netting
agreement
identifier in
A4.
A4.10......... Description of U.S. Treasury Information Varchar(200). .................
collateral item. Strip, maturity needed to
2020/6/30. evaluate
collateral
sufficiency and
marketability.
A4.11......... Asset 1................ Provide fair Char(1)............. Should be ``1''
classification. value asset or ``2'' or
classification ``3.''
for the
collateral item
under GAAP,
IFRS, or other
accounting
principles or
standards used
by records
entity. Provide
``1'' for Level
1, ``2'' for
Level 2, or
``3'' for Level
3.
A4.12......... Collateral or Y/N.............. Specify whether Char(1)............. Should be ``Y''
portfolio the specific or ``N.''
segregation item of
status. collateral or
the related
collateral
portfolio is
segregated from
assets of the
safekeeping
agent.
[[Page 75668]]
A4.13......... Collateral ABC broker-dealer Provide location Varchar(200). .................
location. (in safekeeping of collateral
account of posted.
counterparty).
A4.14......... Collateral New York, New Provide Varchar(50). .................
jurisdiction. York. jurisdiction of
location of
collateral
posted.
A4.15......... Is collateral re- Y/N.............. Information Char(1)............. Should be ``Y''
hypothecation needed to or ``N.''
allowed? evaluate
exposure of the
records entity
to the
counterparty or
vice-versa for
re-hypothecated
collateral.
----------------------------------------------------------------------------------------------------------------
Corporate Organization Master Table \1\
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
CO.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD. .................
date.
CO.2.......... Entity identifier 888888888........ Provide unique Varchar(50)......... Should be unique
identifier. Use across all
LEI if record entities.
available.
Information
needed to
identify entity.
CO.3.......... Has LEI been used Y/N.............. Specify whether Char(1)............. Should be ``Y''
for entity the entity or ``N.''
identifier? identifier
provided is an
LEI.
CO.4.......... Legal name of John Doe & Co.... Provide legal Varchar(200). .................
entity. name of entity.
CO.5.......... Immediate parent 77777777......... Use LEI if Varchar(50). .................
entity available.
identifier. Information
needed to
complete org
structure.
CO.6.......... Has LEI been used Y/N.............. Specify whether Char(1)............. Should be ``Y''
for immediate the immediate or ``N.''
parent entity parent entity
identifier? identifier
provided is an
LEI.
CO.7.......... Legal name of John Doe & Co.... Information Varchar(200). .................
immediate parent needed to
entity. complete org
structure.
CO.8.......... Percentage 100.00........... Information Num (5,2). .................
ownership of needed to
immediate parent complete org
entity in the structure.
entity.
CO.9.......... Entity type...... Subsidiary, Information Varchar(50). .................
foreign branch,. needed to
foreign division. complete org
structure.
CO.10......... Domicile......... New York, New Enter as city, Varchar(50). .................
York. state or city,
foreign country.
CO.11......... Jurisdiction New York......... Enter as state or Varchar(50). .................
under which foreign
incorporated or jurisdiction.
organized.
CO.12......... Reporting status. REN.............. Indicate one of Char(3)............. Should be ``REN''
the following, or ``NFC'' or
as appropriate, ``EXC'' or
given status of ``DEM'' or
entity under the ``ZER'' or
this part. ``OTH.''
Information
needed to
validate
compliance with
the requirements
of this part.
REN = Records
entity
(reporting)..
NFC= Non-
financial
company (not
reporting).
EXC = Excluded
entity (not
reporting).
ZER = Records
entity with 0
QFCs (not
reporting).
DEM = Records
entity de
minimis
exemption (not
reporting).
OTH = Records
entity using
another
exemption (not
reporting).
----------------------------------------------------------------------------------------------------------------
\1\ Foreign branches and divisions shall be separately identified to the extent they are identified in an
entity's reports to its PFRAs.
Counterparty Master Table
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
CP.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD. .................
date.
[[Page 75669]]
CP.2.......... Counterparty 888888888........ Use LEI if Varchar(50). .................
identifier. counterparty has
one. Should be
used
consistently
across all
records entities
within a
corporate group.
The counterparty
identifier shall
be the global
legal entity
identifier if
one has been
issued to the
entity. If a
counterparty
transacts with
the records
entity through
one or more
separate foreign
branches or
divisions and
any such branch
or division does
not have its own
unique global
legal entity
identifier, the
records entity
must include
additional
identifiers, as
appropriate to
enable the FDIC
to aggregate or
disaggregate the
data for each
counterparty and
for each entity
with the same
ultimate parent
entity as the
counterparty.
CP.3.......... Has LEI been used Y/N.............. Indicate whether Char(1)............. Should be ``Y''
for counterparty the counterparty or ``N.''
identifier? identifier is an
LEI.
CP.4.......... Legal name of John Doe & Co.... Information Varchar(200). .................
counterparty. needed to
identify and, if
necessary,
communicate with
counterparty.
CP.5.......... Domicile......... New York, New Enter as city, Varchar(50). .................
York. state or city,
foreign country.
CP.6.......... Jurisdiction New York......... Enter as state or Varchar(50). .................
under which foreign
incorporated or jurisdiction.
organized.
CP.7.......... Immediate parent 77777777......... Provide an Varchar(50). .................
entity identifier for
identifier. the parent
entity that
directly
controls the
counterparty.
Use LEI if
immediate parent
entity has one.
CP.8.......... Has LEI been used Y/N.............. Indicate whether Char(1)............. Should be ``Y''
for immediate the immediate or ``N.''
parent entity parent entity
identifier? identifier is an
LEI.
CP.9.......... Legal name of John Doe & Co.... Information Varchar(200). .................
immediate parent needed to
entity. identify and, if
necessary,
communicate with
counterparty.
CP.10......... Ultimate parent 666666666........ Provide an Varchar(50)......... .................
entity identifier for
identifier. the parent
entity that is a
member of the
corporate group
of the
counterparty
that is not
controlled by
another entity.
Information
needed to
identify
counterparty.
Use LEI if
ultimate parent
entity has one.
CP.11......... Has LEI been used Y/N.............. Indicate whether Char(1)............. Should be ``Y''
for ultimate the ultimate or ``N.''
parent entity parent entity
identifier? identifier is an
LEI.
CP.12......... Legal name of John Doe & Co.... Information Varchar(100). .................
ultimate parent needed to
entity. identify and, if
necessary,
communicate with
counterparty.
----------------------------------------------------------------------------------------------------------------
Booking Location Master Table
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
BL.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD. .................
date.
BL.2.......... Records entity 999999999........ Provide LEI...... Varchar(50)......... Should be a valid
identifier. entry in the
Corporate Org
Master Table.
BL.3.......... Internal booking New York, New Provide office Varchar(50). .................
location York. where the
identifier. position is
booked.
Information
needed to
determine the
headquarters or
branch where the
position is
booked,
including the
system on which
the trade is
booked, as well
as the system on
which the trade
is settled.
[[Page 75670]]
BL.4.......... Unique booking xxxxxx........... Provide unit or Varchar(50). .................
unit or desk desk at which
identifier. the position is
booked.
Information
needed to help
determine
purpose of
position.
BL.5.......... Unique booking North American Additional Varchar(50). .................
unit or desk trading desk. information to
description. help determine
purpose of
position.
BL.6.......... Booking unit or 1-999-999-9999... Information Varchar(50). .................
desk contact-- needed to
phone. communicate with
the booking unit
or desk.
BL.7.......... Booking unit or [email protected].... Information Varchar(100). .................
desk contact-- needed to
email. communicate with
the booking unit
or desk.
----------------------------------------------------------------------------------------------------------------
Safekeeping Agent Master Table
----------------------------------------------------------------------------------------------------------------
Instructions and
Field Example data application Definition Validation
----------------------------------------------------------------------------------------------------------------
SA.1.......... As of date....... 2015-01-05....... Data extraction YYYY-MM-DD .................
date.
SA.2.......... Safekeeping agent 888888888........ Provide an Varchar(50). .................
identifier. identifier for
the safekeeping
agent. Use LEI
if safekeeping
agent has one.
SA.3.......... Legal name of John Doe & Co.... Information Varchar(200). .................
safekeeping needed to
agent. identify and, if
necessary,
communicate with
the safekeeping
agent.
SA.4.......... Point of contact-- John Doe......... Information Varchar(200). .................
name. needed to
identify and, if
necessary,
communicate with
the safekeeping
agent.
SA.5.......... Point of contact-- 123 Main St, Information Varchar(100). .................
address. City, State Zip needed to
Code. identify and, if
necessary,
communicate with
the safekeeping
agent.
SA.6.......... Point of contact-- 1-999-999-9999... Information Varchar(50). .................
phone. needed to
identify and, if
necessary,
communicate with
the safekeeping
agent.
SA.7.......... Point of contact-- [email protected]. Information Varchar(100). .................
email. needed to
identify and, if
necessary,
communicate with
the safekeeping
agent.
----------------------------------------------------------------------------------------------------------------
Details of Formats
----------------------------------------------------------------------------------------------------------------
Additional
Format Content in brief explanation Examples
----------------------------------------------------------------------------------------------------------------
YYYY-MM-DD.............. Date............... YYYY = four digit 2015-11-12
date, MM = 2 digit
month, DD = 2
digit date.
Num (25,5).............. Up to 25 numerical Up to 20 numerical 1352.67
characters characters before 12345678901234567890.12345
including 5 the decimal point 0
decimals. and up to 5 -20000.25
numerical -0.257
characters after
the decimal point.
The dot character
is used to
separate decimals.
Char(3)................. 3 alphanumeric The length is fixed USD
characters. at 3 alphanumeric X1X
characters. 999
Varchar(25)............. Up to 25 The length is not asgaGEH3268EFdsagtTRCF543
alphanumeric fixed but limited
characters. at up to 25
alphanumeric
characters.
----------------------------------------------------------------------------------------------------------------
Dated: October 13, 2016.
Amias Moore Gerety,
Acting Assistant Secretary for Financial Institutions.
[FR Doc. 2016-25329 Filed 10-28-16; 8:45 am]
BILLING CODE 4810-25-P